The stock market has had an uneven start to 2022. Shares dipped sharply in January and February, thanks to concerns about inflation, interest rate hikes and the conflict in Ukraine. The market recovered meaningfully in March, but the flagship S&P 500 index is still down approximately 4% year to date.
It’s not been a slow start for the whole market, though. There are many hot stocks right now that can profit from higher inflation and potential shortages in commodities and food products. In particular, the agriculture industry is having a boom year. The crisis in Ukraine will likely cause a sharp decline in grain production there, leading to a lack of supply internationally. The prices of both corn and wheat have advanced more than 20% year to date, and that’s leading to strong upswings in related agriculture stocks.
Some investors might fear that the advance in grains will be fleeting. However, Walter Kunisch, senior commodities strategist with HTS Commodities, sees the corn market having a favorable outlook in 2022. “As Ukraine is the world’s fourth largest corn exporter, global exportable supplies of corn have been falling,” Kunisch says. “The demand for corn, however, has not changed. Global end users of corn are concerned about futures supplies and are buying and securing U.S. corn for the 2022-23 marketing year.”
There is a significant substitution effect in grains. In other words, farmers can plant more corn, wheat, soybeans or other alternatives depending on market prices. With shortages possible in several major grains, pricing should be favorable across the board. “Overall, we view the combination of higher global demand for U.S. agricultural commodities, record farm inflation and the potential for below-trend national crop yields of corn, hard red winter wheat and soybeans as supporting prices and providing support for the domestic agri-economy,” Kunisch says.
So which companies are set to benefit from these trends? Investors have been buying up various companies in the industry, including these three hot stocks to buy now:
— Nutrien Ltd. (ticker: NTR)
— Archer-Daniels-Midland Co. (ADM)
— Deere & Co. (DE)
Nutrien Ltd. (NTR)
Nutrien was formed in 2018 thanks to the merger of PotashCorp with Agrium. The combined entity is one of Canada’s largest natural resources companies. It is the world’s largest producer of potash and the third-largest player in nitrogen fertilizer. With grain prices soaring, it should lead to strong demand for fertilizer as farmers seek to get the highest possible crop yields out of their fields.
Curt Covington, the senior director of institutional credit at AgAmerica, offers the following assessment of the situation: “There are two main factors that are impacting farmers. First, Russia is a major fertilizer supplier, and the recent events have caused the price of fertilizer, and therefore the total price of inputs, to increase. Secondly, American farmers, particularly in the Pacific Northwest and California, are preparing for another drought. These two factors will increase the price of grain-based goods and feed for livestock,” Covington says.
Analysts see Nutrien having a massive 2022, then they see earnings declining in 2023 following this year’s boom. Even so, NTR trades for less than 12 times next year’s estimated earnings, which is hardly expensive in today’s market.
With strong momentum behind it, NTR was up more than 40% for the year through March 28 before hitting an industry-wide bump in the road March 29.
Archer-Daniels-Midland Co. (ADM)
Archer-Daniels-Midland, commonly known as ADM, is the largest company in America when it comes to managing, processing and trading various farm goods and food products. The company has hundreds of plants and crop procurement facilities worldwide, making it an unmatched way to gain exposure to the global food market.
Naturally, with the potential shortages that are setting up in markets such as wheat and corn, this is a pivotal moment for ADM. The company grew earnings in the fourth quarter of 2021 by more than 20% versus the same period of 2020. And the company sees a strong outlook for 2022. In addition to the obvious headlines around rising grain prices, the company sees strength in areas such as the ethanol market, soy crush margins and ADM’s nutrition business.
Investors might expect ADM to be a boom-bust company, given the cyclical nature of the agriculture market. Despite that fact, ADM has rewarded investors with annual dividend hikes for 47 consecutive years, making it one of the few dividend aristocrats in the natural resources sector. Shares are also a reasonable value even after their rally over the past six months; ADM stock is selling for about 18 times forward earnings.
ADM takes the cake as one of the best hot stocks to buy now for a reason: Shares were up 37% for year through March 28.
Deere & Co. (DE)
Deere is one of the world’s largest producers of agricultural equipment such as tractors. It’s been a stunning reversal of fortunes for the company. Deere appeared to be a big loser in the COVID-19 environment as commodity prices slumped. Fast forward to today, however, and farm equipment is now in high demand.
That should be reflected in Deere’s upcoming 2022 earnings. “Last year, farmers were not in the position to purchase new equipment due to lower margins,” Covington says. “This year is a different story. Farmers have a stronger interest in purchasing new equipment but now struggle to obtain equipment due to supply chain bottlenecks and shortages.”
The supply chain concerns and potential scarce availability of labor could be a drag for Deere, like with many other industrial companies right now. However, prices are simply so high for crops that farmers will find a way to get new equipment one way or another. The price of wheat, for example, is up from $500 to $1,050 per 5,000-bushel contract since mid-2020. In the face of that sort of move, demand for Deere products should be off the charts. For now, Deere shares are trading at about 18 times estimated 2022 earnings and 17 times estimated 2023 earnings.
DE stock was up about 26% for the year through March 28.
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