For those who don’t follow the commodity markets, it may come as a surprise that despite elevated food prices on the retail level, futures prices for key agricultural commodities have actually been in the doldrums for the last couple of years.
For instance, from the peak prices of 2022, corn prices are down 34% while soybeans and wheat are down 40% and 60%, respectively. Bumper crops and oversupplies in key growing regions of the world have largely contributed to the downward price pressures.
Underscoring the extent to which the poor fundamentals of the last two years have impacted the entire food growing sector, agriculture giant Cargill laid off 5% of its total workforce last month—a whopping 8,000 workers—in the wake of slumping corn and soybean prices.
However, it’s worth pointing out that such an extraordinary layoff announcement within a high-profile enterprise like Cargill often serves as a contrarian signal of an upcoming trend reversal. And on that score, the prices for all three of the abovementioned food commodities have begun heating up in recent weeks, while the fundamentals behind them suggest a rebound of potentially major proportions lies ahead.
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As a case in point, consider the extent to which ag-related companies have drastically underperformed the S&P 500 Index over the last few years. The relative strength chart shown here suggests a contrarian opportunity for value-focused investors—similar to the one that existed in 2020. This chart compares the trend of the iShares Global Agriculture Index Fund (COW), which contains numerous corporate shareholdings within the overall ag sector, with the S&P.
For the corn market in particular, driving the anticipated price increases this year will be tighter supplies and potential weather-related challenges, while higher demand for ethanol production is further expected to contribute to the bullish trend.
Global soybean production, meanwhile, is expected to be lower this year even as demand increases for soybean-based biofuels, as well as a potential re-commencement of a U.S.-China trade war under the new White House. For wheat, growing worldwide food demand, along with increased use of wheat in animal feed and geopolitical issues impacting Black Sea exports, are expected to contribute to higher prices.
From a contrarian perspective—and assuming this scenario plays out—each of these factors should pave the way for a revival of the bullish prospects for companies that serve the agriculture sector. Included in this list are fertilizer and ag chemical producers, farm equipment makers, food distributors/processors and seed providers.
One reason for believing 2025 will witness the start of a sector-wide reversal is the growing consensus among analysts that the downturn in the farm equipment spending cycle is likely bottoming out. Indeed, spending on new tractors, harvesters and other equipment has been trending lower in the last few years, with a corresponding oversupply of used equipment complicating matters.
But as commodity prices improve, farm incomes will increase which, in turn, typically raises demand for equipment investment among growers. Moreover, there are indications that older equipment needs replacing on many smaller and mid-sized farms, which will further serve as a stimulus to new equipment spending if the ag commodity rebound gains traction.
Also, with the prices for many commonly used nitrogen- and phosphate-based fertilizers stabilizing, farmers should have a lower input cost burden this year, further making allowance for more of their budgets to be spent on new equipment.
For investors interested in participating in a potential ag sector rebound, one stock in particular is worth looking at. By market cap, it happens to be one of the world’s largest diversified agriculture and food companies, namely Bunge Global (BG).
Bunge engages in commodity trading (including purchasing and storage of crops from farmers) and processing (into protein meals and other products), as well as producing biodiesel and ethanol (through joint ventures with other companies). It’s also the world’s largest oilseed processor and the world’s number one seller of bottled vegetable oil to consumers, making its exposure to corn and soybeans particularly important.
The company just made headlines with Canada’s approval of the firm’s proposed takeover of Viterra, the world’s largest agriculture network that connects producers and consumers of agricultural products. The merged company would create a global ag-trading and processing giant worth $34 billion, putting Bunge closer in scale to its main competitors Cargill and Archer Daniels Midland (ADM).
BG is down by about 40% from its peak price (around three years ago), and it compares exceptionally well in terms of valuation against most of its industry peers. What’s more, its revenues are projected to steadily accelerate over the next few years as global food demand increases. A generous dividend (current yield 3.5%) is an added consideration.
If you agree with my assessment that this year will witness an ag sector revival, BG is worth keeping high on your watchlist—and likely worth a nibble if soybean prices begin perking up in the coming weeks and months.
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