Geopolitical crises and soaring food prices over the last few years has put the security of our food supplies high on the global agenda. Strain on food production is not a new phenomenon though – rapid population growth and environmental pressures like climate change are both at play here.
However, the issue became so pressing that last year the World Bank pledged up to $30bn to address food insecurity through things like fertiliser production and enhancing food systems.
Our natural resources are already under incredible pressure. You can see from the chart below that available farmland just hasn’t kept pace with population growth. Simply dedicating more space for food production could be disastrous for biodiversity and climate change, potentially adding more pressure on food supplies.
Arable land per capita - (hectares)
Scroll across to see the full chart.
Scroll across to see the full chart.
Source: Food and Agriculture Organisation of the United Nations (via World Bank) May 2023.
But this is also where investment opportunity comes in.
Here are three companies helping farmers to make the most of the resources they have.
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Genus
Genus is a supplier of breeding stock for pig and cow farmers. But behind this is a deep expertise in genetics, aimed at helping farmers produce better quality and more efficient meat and milk.
It’s one of the largest operators of its kind, and while there are competitors, Genus’s international offering over multiple species leaves it in a good position to ride out problems in individual markets.
Despite a challenging market, underlying revenue grew 10% last year to £690m (excluding the effect of exchange rates).
In the short term, economic headwinds in many of the company’s end markets are keeping a lid on herd growth. The Chinese pork market‘s been particularly challenging due to weak consumer demand and significant outbreaks of African Swine Flu.
But the susceptibility of meat production to disease is also giving Genus’s gene editing operations a significant growth opportunity.
The speed at which Genus has managed to breed pigs resistant to one of the biggest swine diseases, Porcine Reproductive and Respiratory Syndrome (PRRSv), is impressive. Columbia has already given the first regulatory approval and management are comfortable of the same in the United States next year, but there are no guarantees.
It’s an expensive endeavour, with a 29% increase in research and development costs being the main contributor to falling margins last year. However, strong cash conversion and manageable debt levels have enabled Genus to maintain a modest dividend. But as with any shareholder returns there are no guarantees.
The valuation is lower than it’s been for some time, but the mid-twenties price-to-earnings multiple suggests the market expects profits to grow.
We believe Genus’s science-backed proposition can help drive further meaningful gains in market share. The commercialisation of PRRSv-resistant pigs - approvals pending - is also a potential catalyst for growth. However, there could be further ups and downs especially while trading conditions remain tough.
See the latest Genus share price and how to deal
FMC Corp
FMC Corp is a US-based developer and manufacturer of crop protection products. Its broad-based product suite means it’s a one-stop shop for farmers looking to improve yields and protect their harvests from disease and other threats.
We like the growing focus on innovation, particularly biological-based products. This leans nicely into the growing demand for sustainably sourced food supplies, as well as regulatory pressure to reduce the amount of chemicals used.
However, the company is going through a tough time. After a record financial performance in 2022, changes in buying patterns from growers saw second-quarter volumes fall by an unprecedented 31%. Pricing has remained firm, but the volume dip hit sales hard, and profits even harder.
FMC typically enjoys high levels of cash conversion, but the full-year outlook for cash is less than clear. Until trading picks up, the company’s ability to make cash returns to shareholders might be limited.
Unsurprisingly, investors have taken notice, and the valuation has dived below the long-term average, towards the bottom of the peer group.
But we do see reasons to be hopeful, with usage of the company’s products remaining steady, and acreage expanding for certain key crops.
However, there’s no certainty as to when trading conditions will improve and that means more ups and downs are likely.
See the latest FMC Corp share price and how to deal
Deere & Co
Deere & Co is known in rural communities for its iconic green and yellow tractors. While it might not be the first name that comes to mind for electric or self-driving vehicles, it’s a company moving with the times.
The fully autonomous ‘See & Spray Ultimate’ technology uses machine learning to make sure herbicides are accurately targeting weeds and not crops. This can help reduce costs while improving crop yields.
And the drive to connect 1.5 million of its customers' machines by the end of the decade is an opportunity to grow recurring revenue streams through software fees. But it’s still machinery that will dominate sales for some time.
Brand power has helped John Deere become the world's largest farm equipment producer, and it flexes its muscles in adjacent heavy machinery markets like construction and forestry.
This and the opportunities in newer technologies leave it well-placed to continue its long track record of steady organic growth. And multi-billion-dollar commitments by the US government to infrastructure spending and supporting rural communities are providing a tailwind in Deere’s domestic market.
Guidance for 2023 net profit has gone up twice this year, now expected to land between $9.75-$10bn, up from $7.1bn last year. The forward earnings multiple is some way below the market average, so we don’t think the valuation looks too demanding.
There are some risks to be mindful of though.
The El Nino weather phenomenon is back, and that’s been linked to down years for Deere revenues in the past. It’s also facing legal action for anti-competitive practices in the repairs market for agricultural machinery.
Net debt’s expected to more than halve this financial year to $18.8bn, and at under 1.5x forecasted cash profits, we think that’s manageable. For now, it seems well-placed to distribute cash to shareholders. In the last quarter, dividends and share buybacks totalled $5.7bn, but further payouts aren’t guaranteed.
See the latest Deere & Co share price and how to deal
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.
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