Food Inflation: the Broad and the Narrow View

The world is now suffering a major price shock as inflation creeps in. This inflation is being felt across multiple sectors – from energy to semiconductors to food & ag. As food prices continue to climb higher, food & ag companies have come under the investment spotlight. Generally speaking, as we’ve seen many times in history, as farmers make more money, they have had the tendency to pour it into equipment, seeds and fertilisers.

The broad view

Farmers are indispensable managers of the natural environment. They understand regional ecosystems and the sustainability challenges of their communities better than anyone, making them vital players in our pathway to global food sustainability. It is imperative, therefore, that our global pursuit to feed the world’s 10 billion people is lined with a mission to protect our farmers and their livelihoods. While new and innovative farming technologies must reduce energy consumption and GHG emissions and improve our soil health by reducing water and chemical inputs, these same technologies must also ensure that our farmers can increase their productivity and yields without compromising on quality and productivity and their business health. Ultimately, farming has to be economical if we want all our sustainability objectives for the food and ag sector to be viable and materialise in the long run. In this piece, we review two ag tech companies that we believe are well positioned to ride not just the current bull market in food and ag but which are also living, breathing examples of companies that are turning our pursuit of greater sustainability in food and ag into an increasingly more probable reality.

AGCO

The first company is AGCO Corporation (“AGCO”). AGCO is a global leader in the design, manufacture and distribution of agricultural machinery and precision ag technology. In a recent interview with CNBC on March 24^th, 2022, the company’s CEO, Eric Hansotia, commented that AGCO is prioritising helping farmers increase their crop without exhausting their limited supply or having to make purchases (read: fertilisers) that could eat into their profits.[1] He also added that the company’s investments in technology firms such as Apex.AI and Greeneye Technology, including its acquisition of Appareo Systems, are contributing to its mission.  

AGCO’s stellar sales volume, robust end-market demand and positive pricing are likely to deliver impressive results for the current year. Increasing replacement demand for aging fleets will also drive its top line. AGCO continues to invest in premium technology and smart farming solutions in a bid to strengthen product offerings. In addition, cost-control actions in response to material cost inflation will likely drive margins.

AGCO delivers value to farmers through its differentiated brand offerings that include Fendt®, Precision Planting® and Valtra®. Fendt®, for example, is a leading German hi-tech brand that manufactures tractors, combine harvesters, balers and telescopic handlers designed to improve performance and efficiency.[2] In January 2020, AGCO launched the latest Fendt® Momentum planter for row crop farmers in North America to establish a new standard for speed placement accuracy and offer technologies to assist farmers in overcoming planting conditions.[3] One of the company’s other brands, Precision Planting®, provides practical and effective precision ag technologies to help farmers continuously improve their operations. Precision Planting® also focuses on developing smart products that improve planting, liquid application, harvest and spraying operations on farms across the world.[4] Valtra®, another AGCO brand, produces easy-to-use, customisable tractors, offering farmers versatility and high-tech smart features that have made it a pace-setting brand in Europe and South America across a wide range of farming applications.[5]

Recent AGCO sustainability initiatives[6]

• The AGCO Acceleration Center at the University of Illinois Research Park, which focuses on developing new-to-market solutions and advanced technologies to help farmers with crops and animals.
• The Fraunhofer Institute, which is working with Fendt equipment to develop agrivoltaic systems that enlist solar panels on farms both to generate electricity and protect crops.
• UniLaSalle Polytechnic Institute’s Chair in Agricultural Machinery, supported in part by Massey Ferguson, and dedicated to cutting-edge research in agricultural solutions.
• A targeted spraying collaboration with Robert Bosch GmbH, BASF Digital Farming GmbH and Raven Industries Inc. is evaluating spraying technology that can reduce crop input costs while advancing sustainability. AGCO also made an equity investment in the precision-spraying company Greeneye Technology.[7]

“Our 2021 Sustainability Report shows AGCO is committed to accelerating progress in sustainability into our design, manufacturing and distribution of smart agricultural solutions across the entire value chain. Moreover, we are committed to helping farmers adopt tools and practices that are as good for the planet as they are for their businesses.”[8]

– Roger Batkin, Chief ESG Officer

Deere

The second company is Deere & Co (“Deere”). Deere is the world’s largest producer of agricultural equipment and technology. The company has been very vocal in their desire to pivot their entire business into a full-fledged ag tech platform. In 2020, they announced a new vision and operating model to accelerate success through the integration of smart technology into their legacy manufacturing.[9] This Smart Industrial strategy focuses on delivering intelligent, connected machines and applications that have the potential to transform production systems in ag and construction. The company wants to, among other things, by 2026, ensure that (i) 100% of its new small ag equipment is digitally connected; (ii) deliver a fully autonomous battery-powered electric ag tractor; and (iii) reach 500 million engaged acres (with 50% highly engaged).[10]

Deere is well-poised to benefit from surging demand for agricultural equipment, driven by higher agricultural commodity prices. Also, the improved scenario in the construction and forestry sector and investments in precision ag will aid growth. Efforts to reduce operating expenses will improve margins. For 2022, analysts expect roughly 20% revenue and earnings growth.[11] Even better, the latter is forecast to climb another 15% in 2023.[12] Farmers are more in demand than ever and with that increase in demand comes an increasing need in tools and machinery. This is going to bode well for Deere and other ag stocks going forward.

John Deere’s sustainable impact by the numbers

It has been said that what you can measure you can change. In their 2021 sustainability report, John Deere put this theory to the test with the example of a cotton field.[13] The world needs cotton, but perhaps the world doesn’t necessarily appreciate what it takes to grow and harvest it. To effectively “manage” a cotton field, growers must apply nutrients and chemicals throughout the growing season including herbicides, plant-growth regulators, insecticides and fertilisers. In total, a typical growing season involves 11 nutrient and chemical passes per field, which is both expensive and environmentally impactful.

Here are some sustainable outcomes delivered annually by John Deere technology on a 3,000-acre model US cotton farm:[14]

$50/ACRE

Saved with Deere technology (ExactApply™ sprayer system, section control, and AutoTrac™ assisted steering system) by reducing inputs and improving yield by delivering the annual total farm savings of the following inputs:

• 30 bags of seed
• 260 gallons of defoliant
• 278 gallons of growth regulator
• 692 gallons of insecticide
• 1,329 gallons of fuel
• 1,402 gallons of contact and residual herbicides
• 6,489 gallons of nitrogen fertiliser
• 45,000 pounds of potassium fertiliser

SEE & SPRAY™ ULTIMATE SYSTEM

Will address contact herbicides, which represent an annual expense for growers of nearly $50 per acre and is expected to reduce the amount applied by more than two-thirds, which means an additional savings of over $30 per acre and more than 2,300 gallons of contact herbicides per year.

C770 HARVESTER IMPACT

• 4.5M pounds of cotton harvested
• 1,942 pounds of plastic wrap savings
• 2,995 gallons of fuel savings

IN TOTAL

• 489 metric tons CO2 emissions reduced per year
• Equivalent of 1.2M passenger vehicle miles driven

OR 6.5 tanker trucks of gasoline.[15]

Related ETF

FOOD: Rize Sustainable Future of Food UCITS ETF

References:

[1] CNBC, “Agco CEO says Russia-Ukraine war’s potential consequences on global food supply is ‘a really big deal’”, March 2022. Available at: https://www.cnbc.com/2022/03/24/agco-ceo-says-russia-ukraine-wars-potential-consequences-on-global-food-supply-is-a-really-big-deal.html

[2] AGCO Corporation, “Sustainability Report 2021”, Page 6, March 2022. Available at: https://www.agcocorp.com/content/dam/agcocorp/ourcommitment/Sustainability/AGCO%202021%20Sustainability%20Report.pdf

[3] Future Farming, “Fendt Momentum planter launched in North America”, February 2020. Available at: https://www.futurefarming.com/tech-in-focus/fendt-momentum-planter-launched-in-north-america/

[4] AGCO Corporation, “Sustainability Report 2021”, Page 6, March 2022. Available at: https://www.agcocorp.com/content/dam/agcocorp/ourcommitment/Sustainability/AGCO%202021%20Sustainability%20Report.pdf

[5] Ibid

[6] AGCO Corporation, “Sustainability Report 2021”, Page 8, March 2022. Available at: https://www.agcocorp.com/content/dam/agcocorp/ourcommitment/Sustainability/AGCO%202021%20Sustainability%20Report.pdf

[7] Ibid

[8] AGCO Corp, “AGCO Releases 2021 Sustainability Report”, March 2022. Available at: https://news.agcocorp.com/news/agco-releases-2021-sustainability-report

[9] Equipment Journal, “Deere announces Smart Industrial operating model”, July 2020. Available at: https://www.equipmentjournal.com/construction-news/john-deere-smart-industrial-construction/

[10] Deere & Co, “Sustainability Report 2021”, Page 11, February 2022. Available at: https://www.deere.com/assets/pdfs/common/our-company/sustainability/sustainability-report-2021.pdf

[11] Nasdaq, “3 Agriculture Stocks to Buy as Global Food Shortage Looms”, April 2022. Available at: https://www.nasdaq.com/articles/3-agriculture-stocks-to-buy-as-global-food-shortage-looms

[12] Ibid

[13] Deere & Co, “Sustainability Report 2021”, Page 16, February 2022. Available at: https://www.deere.com/assets/pdfs/common/our-company/sustainability/sustainability-report-2021.pdf

[14] Ibid

[15] Ibid