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The ongoing war in Ukraine and an increase in severe weather events worldwide continue to constrain the supply of key agricultural commodities and prop up prices, making the sector attractive to investors willing to stomach the regular market swings.
Last year was particularly volatile. Russia’s invasion of Ukraine in late February disrupted production and supply chains, sending the prices of commodities such as corn, wheat and potash skyrocketing. Russia is a large producer of fertilizers such as potash, for example, while Ukraine, often referred to as the “breadbasket of Europe,” is a major exporter of wheat, barley and corn.
Prices of many agriculture commodities dropped in the second half of 2022 due to a combination of rising costs amid surging inflation and extreme weather including droughts and floods, which reduced the number of acres planted.
The volatility impacted major agriculture companies such as Canada’s Nutrien Ltd. NTR-T, a leading global provider of crop inputs like nitrogen and potash. Nutrien shares hit an all-time record high of $147.93 in April last year as fertilizer prices soared. The stock then dropped to a 52-week low of $93.43 in mid-July. It’s currently trading at around $102 on the Toronto Stock Exchange.
The levelling off of agriculture prices from last year’s record highs presents a good entry point for investors, argues Dennis da Silva, senior portfolio manager with Middlefield Capital Corp. in Toronto.
He says global grain and corn inventories are close to 20-year lows, while spot prices of wheat, corn and soybeans are up by about 25 to 50 per cent from their 10-year averages.
“It’s still a very elevated environment, which provides some good incentives for farmers to boost production in 2023,” says Mr. Da Silva, who co-manages the Middlefield Global Agricultural Class fund. The fund includes agriculture commodity producers like Nutrien, as well as equipment companies like Deere & Co. DE-N and Caterpillar Inc. CAT-N and processing and commodities trading company Archer Daniels Midland Co. ADM-N.
And while agriculture isn’t immune to a broader economic slowdown that’s expected in the coming months, Mr. Da Silva sees agriculture as a good long-term bet given food is a necessity for the world’s rapidly growing population.
“From a secular point of view, we think this is something you own long term,” Mr. Da Silva says.
How to diversify holdings
Brooke Thackray, research analyst with Horizons ETFs (Canada) Inc. of Toronto, expects agriculture commodities to remain relatively stable at current prices in the near term.
“I don’t see them plummeting back down to where we were before COVID because of reduced supply and higher supply costs,” he says.
Mr. Thackray expects the sector to remain volatile in the near term, in part due to the ongoing crisis in Ukraine. Longer-term, he says fertilizer stocks could be under pressure as some governments seek to reduce the use of nitrogen in crop production processes, which is considered a significant source of greenhouse gas emissions (GHG).
Mr. Thackray says investors looking to diversify their holdings across the agriculture sector could consider exchange-traded funds (ETFs), most of which include a mix of agriculture producers, equipment manufacturers, food processors and some more technology-focused companies.
In Canada, that includes the longstanding iShares Global Agriculture Index ETF COW-T, which has a mix of commodities, fertilizers, chemicals, machinery and packaged foods. Some of the ETF’s top holdings include Corteva Inc. CTVA-N, Archer Daniels and The Mosaic Co. MOS-N.
A newer example in Canada is BMO Global Agriculture ETF ZEAT-T, which launched in January. Some of its top holdings include Deere, global animal health company Zoetis Inc. ZTS-N and processed consumer foods company General Mills Inc. GIS-N.
Some U.S.-listed agriculture ETFs include iShares MSCI Agriculture Producers ETF VEGI-A, VanEck Agribusiness ETF MOO-A and the newer Direxion Breakfast Commodities Strategy ETF BRKY-A, as well as the more innovation-focused Global X AgTech & Food Innovation ETF KROP-Q.
‘Farmer economics are still positive’
Christine Poole, chief executive officer and managing director at GlobeInvest Capital Management Inc. in Toronto, believes long-term fundamentals for agriculture commodities remain attractive, also citing lower inventories and commodity prices that are still above pre-Ukraine war prices.
“Farmer economics are still positive,” she says, “and at some point, they will have to return to market.”
Her firm holds Nutrien in its client portfolios for the company’s diversified mix of fertilizer inputs and retail services for farmers. Ms. Poole also likes that the company generates strong free cash flow and is shareholder-friendly with a steadily rising dividend and ongoing move to buyback shares.
And while lower sales in recent months have prompted Nutrien to slow plans to ramp up potash production, Ms. Poole says it shows the company is prudent.
Nutrien said recently it plans to increase potash production to 18 million tonnes by 2026, instead of 2025, which represents an increase of more than five million tonnes, or 40 per cent, compared to 2020 production levels.
“The outlook for our business is strong as we expect global supply issues to persist and demand for crop inputs to increase in 2023,” stated Nutrien chief executive officer Ken Seitz in the company’s latest earnings report in mid-February.
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