With climate change translating from being a topic of discussion to a stark reality, sustainable agriculture is gaining importance, too. Stakeholders are now well aware of the urgent need and ESG (environmental, social and governance) benefits of sustainable agriculture. For investors, it presents a unique opportunity to support a positive societal change while eyeing long-term profitability.
The Impact Of Climate Change On Agricultural Production
Climate change impacts agriculture significantly. Climate change affects crop yields, livestock productivity and the nutritional quality of cereal. High temperatures result in plants getting inadequate moisture, resulting in less grain production. Major food crops that help meet the global demand for and supply of cereal, are highly sensitive to climatic changes. According to the UN’s Financing for Sustainable Development Report 2023 (FSDR 2023), between 2008 and 2018, 26% of the overall effects of climate change loss and damages affected the agriculture sector—including agriculture, forestry and fishery. As it worsens, climate change can also lead to intense droughts, water scarcity, severe fires, rising sea levels, flooding, melting polar ice, catastrophic storms and declining biodiversity–all with dire consequences for agricultural productivity.
The Need For Sustainable Agriculture
Research indicates there is a need to increase food production by about 45% by 2050 to meet the projected increase in population and consequent demand for food grain. This calls for taking steps to ensure the sustainability of agriculture.
Sustainable agriculture is about farming in a way that is able to provide for our present textile and food needs without compromising the society’s future need for the same. There is an evident need to protect the environment, save and expand our natural resource base, and maintain and improve soil fertility. This can be achieved by reducing chemical usage, managing water wisely, reducing reliance on non-renewable energy and promoting biodiversity. According to the Food and Agriculture Organization of the United Nations, “sustainable food and agriculture (SFA) contributes to all four pillars of food security–availability, access, utilization and stability–and the dimensions of sustainability (environmental, social and economic)”.
Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.
Investing In Sustainable Agriculture
Companies across the globe are recognizing this and many have their objectives aligned to this cause. Some are investing in sustainability as part of their ESG initiatives, while others have their business objective aligned with this goal.
Studies also indicate that regenerative agriculture could be profitable in the long run. This has interested capital market investors, and ESG investors are now increasingly including sustainable agriculture stocks in their portfolios eyeing long-term returns.
The products of the companies below serve as inputs in the farming practices employed in the move towards sustainable agriculture.
Deere & Company (DE)
This leading agricultural machinery and equipment manufacturer, commonly known as John Deere, is committed to sustainability. The company’s precision agriculture technology helps farmers increase agricultural productivity while reducing environmental impact. Deere has also been investing in efficient farming equipment and in the reduction of greenhouse gas emissions.
The company has a strong balance sheet, and its revenue growth and profitability are better than its peer Caterpillar. The growth outlook for the company remains positive. The company’s consistent dividend payment record (33 years) coupled with a conservative payout ratio (15%) that is well supported by earnings and cash flow, also make it a great pick for income investors. Trading at 13X earnings currently, moving averages indicate DE stock is currently in the buy zone.
Nutrien (NTR)
The world’s largest provider of crop inputs, produces and distributes fertilizers, crop protection products and seeds. Nutrien has been investing in regenerative farming practices to help farmers improve crop yields with minimal environmental impact. The company intends to help “growers increase food production in a sustainable manner,” according to its website.Nutrien is already on track to increase its fertilizer production to address and capture the demand from an anticipated increase in crop production globally. Additionally, its strategic acquisitions in Brazil are focused on tapping into the high potash demand from the region. World Bank data indicates Brazil is one of the top consumers and the top importer of fertilizers in the world. The study also expects fertilizer prices to stay higher for longer, benefiting producers such as Nutrien. While the stock appears to be trading at an attractive price point (about 5x earnings) as compared to the industry average (11X-12X earnings), NTR stock may take its time to reflect the value generated from cost efficiency and its strategic initiatives.
Mosaic (MOS)
Mosaic is one of the top providers and marketers of concentrated phosphate and potash fertilizers and feed ingredients for the global agriculture industry. Mosaic is committed to encouraging responsible nutrient management, improving soil health and supporting sustainable farming practices.
Revenues and earnings have been rising steadily on an annual basis. Moreover, the company’s cash flow strength allows it to deliver shareholder value via dividend increases and buybacks, despite the volatility in the fertilizer market. The uncertainty caused by the Russia-Ukraine situation, coupled with a renewed drive to source domestically, should benefit U.S.-based Mosaic as a key supplier.
While stocks such as Deere, Nutrien and Mosaic are great picks for agro-ESG-focused stock pickers, exchange-traded funds such as VanEck Future of Food ETF (YUMY), iShares Emergent Food and AgTech Multisector ETF (IVEG), Global X AgTech & Food Innovation ETF (KROP) and VegTech Plant-based Innovation & Climate ETF (EATV) offer broader exposure to the space.
These are ideal for investors who would prefer to diversify their exposure across the space. Among these, EATV has been a star performer in terms of returns over the past year.
However, it does also sport the highest expense ratio (0.75%) among these peers with YUMY at 0.69%, KROP at 0.50% and IVEG at 0.47%.
Conclusion
Sustainable agriculture is poised to open the doors to more innovation and profitability. As awareness rises, and with it sustainable agricultural practices, we should see this space offering more opportunities. Governments and international organizations are already doing their bit in the form of special grants and subsidies for investing in the space. Consequently, businesses are leveraging these incentives to optimize their gains, in turn boosting shareholder returns. ESG-minded investors who have recognized this trend are already tapping into the market early, eyeing long-term profitability.
It’s time capital market investors got the original green sector—agriculture—back on their radar.
Mispriced stocks are hiding in plain sight and present great investment opportunities for the remainder of 2023. Forbes’ top investment experts share 7 overlooked stocks in this exclusive report, 7 Best Stocks To Buy For The Second Half of 2023. Click here to download it now.
