World Hunger Is on the Rise. These Companies Have Solutions.

Scorching heat and drought shrivelling up crops in the Midwest and eastern Africa. A continued pandemic. War in Ukraine. Rarely has the world seen such a confluence of disasters, threatening the ability of nations to feed the hungry, this year and beyond.

Food prices were rising even before the war in Ukraine, hurt by pandemic-related disruptions on top of devastation from more frequent and severe weather catastrophes. Nearly one in three people worldwide—or 2.3 billion people—didn’t have access to adequate food in 2021, up 350 million from prepandemic levels, according to the United Nations. An estimated 702 million to 828 million people in the world faced hunger, up 150 million from pre-Covid levels.

Russia’s invasion of Ukraine compounded the problem by cutting the world off, at least temporarily, from a breadbasket that supplied roughly a quarter of the globe’s wheat, plus sunflower oil—a major cooking oil. Sanctions on Russia, which accounts for roughly a fifth of the world’s potash—drove prices of that key fertilizer higher, threatening yields for next year’s crop.

The result is “an unprecedented global hunger crisis,” according to United Nations Secretary-General António Guterres. The UN’s Food Price Index for a basket of commodities hit records this year, rising 62% in June from, 2019 levels. In the U.S., food prices rose 10.4% in June from a year earlier, the biggest increase in 40 years.

Some commodity prices have eased, and Russia and Ukraine recently agreed to a deal to resume exports of Ukrainian grain, though its successful execution is anything but certain. “There are signs that the momentum is turning, but food security is a problem that won’t go away next year,” says Joyce Chang, chair of global research at JPMorgan, which sees global food inflation easing in the fourth quarter.

Into the breach are stepping agricultural equipment, seed and fertilizer companies that hope to boost food production. Like vaccine makers Pfizer and Moderna, they could ease the fallout from a global crisis—by helping get more food out of less land—and also boost their profits along the way.

Whereas Pfizer and Moderna used revolutionary vaccine technology to counter the Covid-19 virus, the farm and food companies are harnessing new technology to make food production more efficient. For example, Deere (ticker: DE) and CNH Industrial (CNHI) are using drones, robotics and navigation systems, along with data analytics, to make farmers more productive. Agriculture technology has become a growing hotbed of innovation, attracting $10.5 billion from venture capital last year, according to PitchBook.

The pandemic, war in Ukraine and climate change illustrate the vulnerability of food supplies, threatening to keep prices elevated for years to come. That inflicts more pain on those already battling hunger in the U.S. and around the world. It also complicates central bankers’ inflation fights by raising the risk of recession, and strains the finances of nations in Latin America, Africa, and Asia.

According to the U.N., 52% of all agricultural land is degraded—or suffering from soil erosion that results in declining crop yields and loss of biodiversity. If current practices continue, the U.N. has warned that an additional area equal to the size of South America will suffer the same fate by 2050.

Haim Israel, who heads the Global Thematic Research team at Bank of America, says the world is now using nature 1.7 times faster than Earth’s biocapacity can regenerate. He says that by 2030, based on current trends, that will increase to 2 times.

As people scramble for food and the cost of living soars, the financial pressure is turning into political unrest in places like Sri Lanka and Peru. “The risk of unrest from food inflation is higher than it’s been in a decade,” says Peter Ceretti, a senior analyst at Eurasia Group.

Higher food prices are already straining food banks in the U.S. as more people line up for help. Food price spikes are even more painful for low-income countries, where food makes up roughly 45% of household income, on average. U.S. households, on average, spend 10.3% of their budgets on food, according to the USDA.

Policy makers are scrambling to respond. Tunisia rolled out food subsidies. India reintroduced fertilizer subsidies, and Egypt capped prices on a common wheat-based pita while Mexico tried to freeze some food prices. While such measures might help quell social unrest, they threaten countries’ already strained fiscal situations.

Shoring up domestic food supply is a priority, but in some cases it’s coming at the expense of free trade, exacerbating shortages and price spikes. India, which banned wheat exports and limited export of sugar after a heat wave, is among roughly 34 countries that have imposed some sort of food and fertilizer export restrictions—a level last seen during the 2008 to 2012 food crisis, according to the World Bank.

“Events like these remind countries of their own vulnerability, and you see immediate reactions,” says Caitlin Welsh, director of the global food security program at the Center for Strategic and International Studies, who previously worked for the U.S. State Department on food security issues.

About 60% of global food production comes from five countries: China, the U.S., India, Brazil and Argentina. Simultaneous shocks to grain production are becoming increasingly likely in decades ahead because of extreme weather events, according to modelling by McKinsey, the consulting firm. McKinsey says that between 1998 and 2017, the chance of a 15% shock to grain production was one in 100. But the probability doubles by 2030 because of risks to corn, rice and soy production. These crops are hurt more by the more extreme weather patterns created by climate change.

Addressing these issues will take a concerted effort by nations and their leaders around the globe: Roughly 60% more food from 2010 levels will be needed to feed the world’s projected population of 9.7 billion by the year 2050, says the U.N. Part of the solution lies in more efficient farming. A renewed focus on global food supply increases demand for companies like farm equipment giants Deere and CNH Industrial. Their challenge: Boost efficiency by radically changing agriculture as arable land is depleted by more frequent droughts, wildfires and floods.

Deere’s dominance with more than 6,000 dealers in over 100 countries has made the company more profitable than its rivals, allowing it to spend US$1.5 billion a year on research and development and gain a technological edge. Investments in precision spraying and planting enables farmers to identify which weeds need to be killed, saving money on chemicals. Robotic tractors reduce soil compression, which makes crops more vulnerable and requires more irrigation and fertilizer.

The stock is a top holding for Dmitry Khaykin, co-manager of the ClearBridge Large Cap Value Fund. He says the prospect of self-driving trucks in the fields by the end of this year should help Deere recruit talent from the likes of Google’s Waymo.

“Google dominates search because more people use Google search than others,” he says. “It can be the same for Deere, giving them more data to train their algorithms to give farmers better results.” The company is pushing a subscription service around the data harvested from the company’s tractors and tools. Subscriptions make up less than 1% of sales now, but Chief Executive John May says it could grow to 10% by decade-end, making the business less cyclical.

Khaykin sees Deere increasing earnings 10% to 15% over the next few years—an attractive opportunity for a stock trading at 12 times next fiscal year’s earnings ending in October.

Deere rival CNH Industrial is an even cheaper option. The company, which sells brands such as Case and New Holland, has gone through several incarnations, merging with Fiat Industrial in 2013. In January, the company’s agriculture and construction equipment business was separated from its on-road trucking business.

The market hasn’t fully appreciated the shift, says David Herro, co-manager of the Oakmark Global Select fund, which owns CNH Industrial. With shares down about 30% since a March 25 high of $16.80, the company is undervalued, he says. It has made successful investments in precision agriculture important for productivity, he adds.

CNH Chief Executive Scott Wine tells Barron’s the company is “rapidly catching up” to Deere, helped by CNH’s $2.1 billion acquisition of precision agriculture technology company Raven Industries late last year. “Within a few years, we will be as good or not better.”

Analysts expect the company’s net income to fall 4% this year from a year ago to US$1.8 billion but recover next year, with net income expected to rise 11% to US$2 billion. Analysts are relatively upbeat, with the average price target among those polled by FactSet at $15.81, representing 33% upside from current levels.

Corteva (CTVA) has also been investing heavily, with about 8% of sales allocated to researching and developing next generation crop productivity technology that helps farmers improve crop yields, boost output and reduce the variability in output from year to year, no matter the weather.

The company was spun out from DowDuPont in 2019. It’s the combination of DuPont’s Pioneer seed business, which sells genetically modified and conventional seed to farmers around the globe, and Dow’s crop chemical business.

Corteva has leveraged that investment and its strong market position to generate steady sales and earnings growth. Wall Street expects sales to rise 5% a year on average between 2022 and 2025, with earnings expected to increase about 13% a year on average over the same span.

Since its spinoff, Corteva shares have earned investors about 25% a year on average, compared with 12% for the S&P 500 over the same period. Fermium Research analyst Frank Mitsch recently raised his price target to $62, about 10% higher than current levels.

We “love its positioning against competitors Bayer and Syngenta,” Mitsch says. Corteva is also launching new products in coming years, and Mitsch expects CEO Chuck Magro, who came to Corteva in late 2021 from fertilizer giant Nutrien, to improve profit margins.

In the near-term, fertilizer prices are one of the major worries looming over farmers. Unlike some rivals, ICL Group (ICL) produces phosphate and potash fertilizers, rather than natural gas-dependent nitrogen that can be subject to the volatility of gas prices, especially in the wake of the war in Ukraine.

Analysts expect ICL’s sales to hit US$10.3 billion this year, up from $7 billion last year, boosted by soaring fertilizer prices. Benchmark potash prices are up 150% this year, in part due to sanctions on Russia, which along with Belarus, accounts for 38% of global production.

Wall Street expects the company to earn $1.82 a share in 2022, up from about 60 cents in 2021. Shares are trading at 5 times estimated 2022 earrings.

Buying commodity-related stocks when commodity prices are peaking can be risky. Shares of ICL Group soared 25% in the first quarter along with the surge in potash prices, but reversed those gains in the second quarter as commodity prices declined. Wheat prices are down almost 40% from their 52-week high of almost $13 a bushel.

“I would normally say this is a cyclical business and high prices would induce more supply, but the deficit because of Ukraine is substantial enough that this price environment can last for some time,” says Abhay Deshpande, chief investment officer of value-oriented Centerstone Investors. Deshpande sees the company as attractively priced, with a hefty dividend yield of 10%. The company’s free cash flow has comfortably covered the dividend for the past few years and should in 2023 as well.

The average analyst price target for ICL stock is about $11.52 a share, up about 25% from recent levels. At $11.52, shares would be trading for about 14 times estimated 2024 earnings of about 80 cents a share.

For investors looking for a one-stop shop to a diverse group of companies benefiting from some of these trends, one option is the $262 million iShares MSCI Global Agriculture Producers exchange-traded fund (VEGI). In April, BlackRock (BLK) launched the iShares Emergent Food & AgTech Multisector ETF (IVEG). It invests in companies that enhance agricultural yield, improve efficiency or reduce waste in food production, create alternative proteins that use less land and water, and sustainable food and packaging producers.

Finally, a new group of earlier-stage companies is also drawing investor attention. In the near term, rising interest rates and inflationary pressures pose a challenge for some of these companies but money managers are keeping an eye on newer ways to tackle the food security issue.

For example, Bioceres Crop Solutions (BIOX) produces biological alternatives to synthetic chemicals and drought-tolerant seeds. Vertical and indoor farming increases the density of production—think endless stacks of lettuce—is less vulnerable to climate change, and often uses automation, addressing the labor shortage created by an aging farm population, says Robbie Miles, London-based manager of AllianzGI’s Food Security fund, which invests in companies focusing on sustainable food production. Local Bounti (LOCL) grows leafy greens using a hybrid of vertical and greenhouse farming while Kalera (KAL) uses big data and automation to improve yields of the lettuce it grows for customers including restaurants, resorts and cruise lines. These three companies aren’t attractive enough to buy right now, but money managers are keeping an eye on their technologies.

“Longer-term, climate change is going to exacerbate the volatility within food and food security, creating a more secular inflationary force than in the last 30 to 40 years,” says Matt Kadnar, partner and portfolio manager at GMO. “Food security will create secular growth opportunities for agriculture-related investments that should be around for years.”

Reprinted by permission of Barron’s. Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: July 29, 2022.