It is easy for investors to ignore, or completely overlook, the sharp rise in food prices. But there are opportunities for investors who are paying attention.
That price spike since mid-November has been caused by a variety of factors including non-seasonal weather, surging demand from China, and transportation congestion, equity strategists at Jefferies said in a client report on Monday. “Almost without realizing it, prices for food and broad agriculture have gone up vertically,” they said.
Apart from being caused by what appears to be temporary, it is also easy to overlook a spike in inflation as economists like to look at inflation figures excluding food and energy. Prices for those items are volatile, they say, and thus, pulling them out provides a cleaner reading. But that doesn’t make them any less real, especially for Americans who spend a larger share of their income on food and gas. and companies along the supply chain.
Analysts at Jefferies noted clear inflation concerns linked to higher agricultural and food prices. Investors will see it on Tuesday when the Labor Department reports its March consumer price index. Economists expected a 2.5% increase in overall prices from a year earlier, or a 1.5% increase rate excluding food and energy. As indicated by the producer price index last week, popular reading is not just about the baseline effect, or the idea that year-over-year figures are too high for now as they count against last year’s stress levels reported during the outage.
Until then, total CPI is projected to rise 0.5% in March versus February, with most of the gains coming from food and energy (core prices are expected to rise 0.2%).
Now the good news. Farm equipment makers and fertilizer companies should benefit, said Jefferies, adding that shares of such companies are uncorrelated with other asset classes and less influenced by speculators.
Strategists called the agricultural machine room tightness unprecedented, with prices for large tractors rising by about 20% year-on-year and small tractors up by about 50%, on the back of significantly tighter inventories. They say that anecdotally, nearly all surveyed dealers are describing inventory as too low. That’s good news for
(ticker: DE) and
). Both stocks are up about 40% year over year, but Jefferies sees more room to exercise and rates each share as a Buy.
Analysts are not alone; 10 of the 12 brokers tracked by FactSet and include Deere recommend stocks as Buy or suggest Overweight holdings. As for AGCO, seven out of 10 analysts tracked by FactSet have a Buy rating on the stock.
Outside the US, Jefferies focuses on Australian companies
(IPL Australia). It is based on the idea that one of the beneficiaries of the increasing demand for soft commodities is ammonia, the core ingredient for ammonium nitrate fertilizer. Jefferies said 80% of the ammonia produced is used in agriculture as fertilizer, and the benchmark ammonia price in Tampa increased for the eighth straight month in March. Several similar companies trading in the US include
Ashland Global Holdings
In the long term, Jefferies analysts say climate change presents opportunities because it both threatens global crop yields and supports crop prices. The company estimates about $ 200 billion of opportunities by 2050 to provide better, tougher seeds, stronger crop protection chemicals, and better tools and analysis.
In addition to Deere and AGCO benefiting from the climate change theme, Jefferies recommends ag-product makers
(CTVA). The stock is up 21% this year, although gains have been more subdued than their peers in recent months.
Send a letter to Lisa Beilfuss at [email protected]