- The global agribusiness industry includes the entire spectrum of businesses related to food production.
- Broader secular trends such as population growth and rising income levels, underpin the industry’s long-term growth prospects.
- Additionally, climate change and shortage of arable land means there is a greater need for agricultural innovations and technologies to ensure food and nutritional security.
- Commodity prices, including agricultural commodities, have been rising steadily since last summer. Rising prices of commodities have been a boon to agriculture stocks, with companies supporting production benefitting.
- Investors looking to tap into this megatrend should consider the VanEck Vectors Agribusiness ETF (NYSE: MOO). The ETF invests in companies across the agribusiness industry, from seeds and fertilisers to farming equipment and food processors.
- Our 2023 target price is USD 115, and this offers investors an upside potential of about 27%, based on the closing price of USD 90.45 on 20 August 2021.
The global agribusiness value chain
Agribusiness is the core of most economies around the world. According to the World Bank, the food and agribusiness is a USD 5 trillion industry that represents 10% of global consumer spending.
To better understand the global agribusiness industry, we will be looking at the industry’s value chain. The agribusiness value chain spans across the entire spectrum of businesses related to food production.
In essence, it describes all the activities relating to the different phases of production, from procurement of raw materials to retailing the end product to consumers (Figure 1).
Figure 1: The agribusiness value chain
The sub-industries in this value chain can be broadly categorised into input companies, farmers, traders, food companies and retailers. Huge variety exists within each sub-industry, from generic manufacturers to R&D-based input companies, subsistence farmers to high tech agroholdings, primary processing to secondary processing companies and small and medium-sized enterprises (SMEs) to multinational corporations.
Secular trends are driving the growing demand for food
The agribusiness industry has promising long-term prospects.
One of the most compelling trends underpinning the industry’s growth is the rising global population. With the global population expected to reach 9.8 billion by 2050 (Figure 2), there is a pressing need to figure out how to increase our food supply.
Figure 2: Global population expected to reach 9.8 billion by 2050
Another secular trend driving the demand for food is that of income growth. Income growth in developing countries will shift dietary preferences towards more protein-heavy foods, as increasing disposable incomes open up a range of dining opportunities for consumers.
Asia in particular is experiencing a rapid increase in its middle class population, fuelling the demand for meat consumption over the next decade. For instance, beef consumption across Asia is expected to grow by 2.7 million tonnes carcase weight equivalent (cwe) over the next ten years – the largest gain across any global region (Figure 3).
Vietnam and Indonesia stand out as key import markets, with beef import volumes predicted to grow 24% and 34% respectively.
Figure 3: Global meat consumption expected to grow rapidly in Asia
Moreover, China’s appetite for meat is showing no sign of slowing down, as disposable incomes increase and the middle class continues to expand. In fact, China’s pork consumption is more than double of all the European Union countries combined in 2020.
China is also the world’s largest importer of pork. In 2020, China imported a record 4.4 million tons of pork, which is also double the amount imported in 2019.
As such, global population growth coupled with rising incomes is fuelling the burgeoning demand for food, and the UN estimates that demand for food will be about 60% higher by 2050. Henceforth, these secular trends underpin the industry’s long-term prospects.
While the demand for food is growing, the supply side faces constraints, and this is where innovation comes in.
Innovation is a continuing endeavour among agribusinesses, as the industry seeks more efficient methods of production and processing to increase food supply. Not to mention, innovation is especially crucial in overcoming some of the challenges arising from climate change and the shortage of arable land.
Climate change: To date, increasing environmental pressures,
such as climate change and catastrophic weather events are some of the biggest
risks to global harvests. As a matter of fact, climate change could reduce
global crop yields by 10% by mid-century and 25% by century's end, if
agriculture does not adapt to it.
As such, plant breeders and biotechnologists have been screening thousands of microbes in crops, to develop new ‘climate proof’ varieties. An example of this development can be seen in a drought tolerant rice varieties called ‘Guillemar’, which has boosted crop yields by 10%.
Shortage of arable land: Moreover, there is a shortage of arable land to meet the growing demand for food, as about one-quarter of arable land is degraded and needs significant restoration. Growing urbanisation has further exacerbated this shortage, as more land is set aside for housing.
As such, commercial vertical farming has generated much interest over the years. While commercial vertical farming is still at its infancy stage, it is carving out an increasingly important role, and the industry is expected to be worth as much as USD 12.77 billion globally by 2026, compared to just USD 2.23 billion in 2020 (Figure 4).
Figure 4: Vertical farming is gaining momentum
This is because the technology used in vertical farming can help increase food production while overcoming the shortage of arable land. For example, a single vertical farm can grow four hectares – roughly five Olympic-size swimming pools – worth of food on less than half a hectare of land, making it ideal for urban areas.
All in all, innovation in agribusiness has played a vital role in overcoming some of these challenges faced by farmers worldwide. In doing so, they create efficient agricultural solutions, which help to ensure food and nutritional security moving forward.
Rising agricultural commodity prices are beneficial to companies within the sector
Commodity prices, including agricultural commodities, have been rising steadily since last summer.
For instance, the UN Food and Agriculture world food price index, which tracks a basket of food commodities, jumped to its highest level since 2014 (Figure 5). Moving forward, the agency expects global food prices to remain elevated, partly owing to tight supplies.
Figure 5: Food commodity prices have been increasing
Another significant factor driving the global rally in food prices, is the demand coming from China. China's enormous demand for crops has tightened grain supplies globally and has led to a prolonged rally in food prices. According to the U.S. Department of Agriculture (USDA), U.S. exports of agricultural products to China in 2020 increased by more than 80% to USD 29 billion relative to the prior year.
Moreover, this momentum appears to be well supported as inflation worries resurface. We expect inflation to increase over the next two years, and the commodities sector as a whole tends to benefit from rising inflation.
(Related article: The inevitable reversal in interest rate cycle in the next 2 years)
Thus, with food commodity prices trending higher, agriculture companies that support production would benefit, as rising prices lead to increased production. Consequently, higher production translates to an increase spending on seeds, fertilisers and farm machinery, benefiting companies higher up the agribusiness supply chain.
Henceforth, the growing demand for food coupled with concerns of higher inflation would mean that agricultural commodities and the companies within this sector present an exciting opportunity for investors.
Key investment risks
Despite their many investment merits, agriculture companies also have their fair share of pitfalls that investors should take note of.
Agriculture companies are not insulated from the volatility of agricultural commodities. Agricultural commodities typically perform poorly during global cyclical downturns as consumer demand slows.
The prices of agriculture commodities are also dependent on supply-side factors, many of which are heavily impacted by weather conditions and crop disease, which adds to the price volatility.
Ride on the growth in agribusiness
Investors can gain exposure to the opportunities within the agribusiness sector via the VanEck Agribusiness ETF (NYSE: MOO).
MOO is a diversified agribusiness play that provides exposure to companies in the farm equipment, seed and fertiliser, animal health, and food transport and processing industries (Table 1), and has an expense ratio of 0.56%.
Table 1: Top 10 holdings in MOO
|
Rank |
Holding Name |
Net Assets (%) |
|
1 |
Zoetis Inc |
9.69 |
|
2 |
Deere & Co |
8.52 |
|
3 |
Idexx Laboratories Inc |
8.11 |
|
4 |
Bayer Ag |
6.26 |
|
5 |
Nutrien Ltd |
5.55 |
|
6 |
Archer-Daniels-Midland Co |
4.97 |
|
7 |
Corteva Inc |
4.85 |
|
8 |
Tyson Foods Inc |
4.18 |
|
9 |
Tractor Supply Co |
3.39 |
|
10 |
Kubota Corp |
3.33 |
|
Source: VanEck, iFAST Compilations Data as of 19 August 2021 |
||
Our 2023 target price for this ETF is USD 115, based on a fair PE multiple of 18.0X. This translates to an upside potential of 27%, based on the last closing price of USD 90.45 on 20 August 2021.
Table 2: Earnings growth for the global agribusiness sector
|
MVIS Global Agribusiness Index |
2021E |
2022E |
2023E |
|
PE Ratio (X) |
16.3 |
14.8 |
14.1 |
|
Earnings Growth |
30.0% |
10.0% |
5.0% |
|
EPS (in USD) |
272.1 |
299.3 |
314.3 |
|
Upside potential |
10.4% |
21.6% |
27.7% |
|
Source: Bloomberg Finance L.P., iFAST Estimations Data as of 20 Aug 2021 |
|||
All in all, agribusiness is a critical industry and one that is growing in importance in face of growing food security issues. Agricultural commodities and the companies in that sector thus present an exciting growth area in the coming years, supported by strong underlying growth drivers such as population and income growth.
Figure 6: In the long run, stronger earnings should lead to better share price performance
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