With autumn being the season of harvest, it’s time to look at the agricultural sector to evaluate trends and see where profits can be made.
The agricultural industry is an often-overlooked sector for investors, yet strong indicators are pointing to an imminent boom in the coming years.
A Quick Note About the Agricultural Industry
This industry, commonly referred to as just “farming,” isn’t exclusive to food items. The ag industry has three main functions:
- Food for human consumption
- Feed for livestock
- Ingredients for biofuels
All three of these functions are forecasted to increase in demand. And, you already know that higher demand means higher prices.
So, let’s dive into the 8 levers that are likely to push agricultural stock prices higher.
- The Global Population is Growing
As of November 2019, the world population tallies at 7.7 billion people. This number is a dramatic increase from the early 1900s, when the planet housed a much smaller 1.6 billion humans. Current projections estimate that we’ll have 10.9 billion people by the end of the century.
Given that population growth is a primary factor driving the demand for agricultural commodities, it’s a logical conclusion that these investments should perform well long-term as humanity continues to grow exponentially.
- Developing Countries Have More Wealth
China and India have seen explosive population growth and a rapid rise in wealth during the past two decades. Combined, these countries have a population of 2.8 billion, which is more than a third of the world’s total population.
Both of these nations have also experienced a rise in GDP. China’s GDP growth sits squarely at 6.2%, while India enjoys a 7.4% growth rate. To put it into perspective, the United States’ GDP growth is 2.5%.
As these countries become more affluent, their demand for food increases. More money in their pockets changes both the quantity and quality of food they can afford to purchase. This, in turn, puts higher demands on the agricultural industry.
- Biofuels are Trending
Green initiatives are changing the way we see fuel. Governments are leading the charge to shift from fossil fuels to biofuels. Fuels like ethanol and biodiesel are produced from agricultural commodities such as corn, sugar, wheat, soybean oil, and canola oil.
There’s little chance of our growing population needing less fuel, and as the shift moves to biofuel sources, these commodities are going to be in even more demand.
- Available Farmland is Shrinking
The combination of growing urban populations, topsoil erosion, and unpredictable weather patterns have created a shortage of available farmland. The amount of land we have available is a finite resource, so companies are actively developing techniques and new technologies to optimize the use of available farmland.
Look for agricultural firms that are evolving their practices and announcing more intelligent ways of feeding the world.
- Crop Yield Growth is Slowing
Over the years, technologies have emerged that increase crop yields dramatically. However, there comes the point where diminishing marginal returns set in. Without a revolutionary shift in practices or the development of new technology, crop yield output will remain stagnant.
Fortunately, there are companies actively working on ways to increase yields. Drought-tolerant soybeans, disease-resistant plants, vertical farming, and hydroponic growing are all being used and perfected to boost agricultural output. If companies are successful in their efforts, the sky’s the limit on how far their stock prices can rise.
- Agriculture is Attractive for Portfolio Diversification
Diversification on its own isn’t necessarily a smart play, but it can be an effective way to hedge against a market crash when it’s done correctly. A mistake that investors often make when they diversify is that they don’t consider their portfolio is still full of correlated stocks. So, when a market correction happens, all of their investments take a hit.
By investing in noncorrelated stocks, one sector can absorb losses while the other may perform better. Because the agricultural industry isn’t highly correlated with other areas, it may still do well while the other sectors flail.
- It’s a Relatively Safe Bet During an Economic Downturn
When the economy is stagnant or declining, people often put off purchases, downsize their homes, cancel vacations, and spend less money in general. What they never stop doing, however, is eating.
Even in the worst of times, we must eat to survive. Having some solid agricultural stocks in your portfolio will allow you to weather a financial storm.
- Rich Investors are Pursuing Agriculture
While we don’t recommend blindly following and mimicking rich investors like Warren Buffet and Carl Icahn, we do think it’s smart to watch they’re doing. Which stocks do they like, and why? One example is Bill Gates’ becoming the largest stockholder of Deere & Company. This organization manufactures machinery for agriculture, construction, and other industries, and they’re the famous maker of the John Deere brand.
When billionaire investors like Bill Gates make a significant play in a sector, it’s worth taking notice. As they say, success leaves clues.
Bottom Line: The increase in the global population combined with a corresponding decrease in available farmland points to an opportunity for explosive growth in the agricultural industry. This sector has the potential to be one of the most lucrative for investors during the next couple of decades. Consider adding agricultural stocks to your watch list, including companies working on radical new developments as well as standard blue-chip stocks.
