Natural disasters are mounting as the climate heats up, threatening global crop yields and raising prices. It’s a slow-moving catastrophe—especially for lower- and middle-income countries that are facing some of the worst effects without the financial resources to cope.
It’s also has created an economic opportunity and ways to accelerate growth from the pandemic-induced slowdown. And it could fuel long-term gains for the agriculture sector, including companies such as
While climate change is now weakening global economic growth, it is becoming a bigger source of investment. Decarbonizing the atmosphere is turning into big business. And investing in technologies to mitigate climate change could be a global jobs program that would help ease some of the losses induced by the pandemic.
According to the International Monetary Fund, taking comprehensive measures now to mitigate climate change could add 0.7% annually to global economic output over the next 15 years, including the creation of 12 million jobs. A green global infrastructure package, combined with efforts to reduce carbon emissions, could cut the long-term economic damage from climate change in half, the IMF estimates.
Growing momentum for a Green New Deal in the U.S. has already fueled a surge in clean-tech stocks and related industries. But we could be seeing the start of a spending cycle in agriculture capital expenditures because of a confluence of trends, including higher crop prices, demand for renewable diesel fuel, agriculture data analysis, and seed technology, according to investment bank Jefferies.
Overall, the firm sees a $200 billion opportunity by 2050 “for providers of better, more resilient seeds, more potent crop protection chemistries, and better equipment and analytics for nurturing, harvesting and processing the crops,” according to a report published Wednesday.
Support for agriculture capex isn’t just coming from government policies. It is a consequence of more frequent droughts and weather events; longer growing seasons in northern climates; population increases in developing economies; and global demand for protein as incomes rise in Asia, Africa, and Latin America.
The agriculture industry is also battling a long-term erosion in crop yields that may be arising from climate stresses. While high-tech seed technologies and agriculture techniques have improved, climate stresses appear to be reducing corn and wheat yields by up to 0.2% a year, Jefferies estimates. If current trends persist, crop yields could fall 30% by 2100.
Seed producers, chemical suppliers, biofuel manufacturers, and farm equipment companies could all benefit from more spending to mitigate the impact. And demand is likely to accelerate for alternative proteins derived from plants, partly because conventional agriculture and livestock production (where much of the corn and wheat goes) is such a large contributor to carbon emissions and deforestation.
One way to invest in the theme is with an exchange-traded fund. The
iShares MSCI Global Agriculture Producers
ETF (VEGI) holds Deere, Corteva, and
Archer Daniels Midland
(ADM) among its top holdings. The ETF has gained 78% in the last 52 weeks versus a 53% return for the
Individually, Deere, Agco, and Corteva each look compelling, according to Jefferies, which rates each one a buy.
Deere stock is up 40% this year and 163% over the last 52 weeks. It now trades at 22 times the next 12-month earnings, well above its five-year average of 18 times.
But higher multiples may be warranted if this is the start of an agriculture supercycle. Jefferies estimates the company could add an incremental $19 billion in revenue by 2030 if the market for “precision agriculture” reaches a 50% market penetration. That could add $17 a share to Deere earnings by 2030, implying a 48% gain from recent prices around $377.
Agco, a manufacturer of combines and other farm equipment, could see similar benefits. Jefferies sees 84% upside in the stock from recent prices around $177. Sales of precision agriculture equipment could add $4.8 billion in additional revenue and $15.78 a share in earnings over the next nine years, Jefferies estimates.
Seed and chemical company Corteva—a spinoff of
—isn’t cheap at 21 times estimated 2022 earnings. The stock is up 21% this year and 91% over the last 52 weeks. But Jefferies estimates it could post 14% annualized returns through the end of the decade, without accounting for much crop price increases. Shares recently traded around $47 and yield 1.1%.
Write to Daren Fonda at firstname.lastname@example.org
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