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This article was written exclusively for Investing.com
Agricultural commodities feed more than 7.872 billion people in the world. As countries address climate change, agricultural products increasingly provide an alternative and renewable energy source.
While farmers worldwide grow crops each year to meet our planet’s ever-growing demand for food and energy, four companies dominate crop processing, servicing and many agricultural sectors. These firms, known as the ABCD companies, include:
In 2020 and 2021, the three top grain and oilseed markets posted impressive gains. Soybean futures rose 39.48% in 2020 and added another 1.03% in 2021. Corn futures moved 24.82% in 2020 and 22.57% in 2021. CBOT soft red winter wheat futures moved 10.81% higher in 2020 and 20.34% higher in 2021. Inflationary pressures have pushed input prices higher, with rising fertilizer, energy, labor, transportation and land values. The agricultural product prices have increased due to rising production costs and inflation.
Meanwhile, the leading agricultural commodity processors have seen their profits soar. Archer Daniels Midland (NYSE:ADM) shares traded at a new high of over $70 in early 2022, and the trend remains higher.
Before early 2021, the all-time high in ADM shares was $53.91, the December 2014 peak. In March 2020, as the pandemic gripped markets across all asset classes, ADM dropped to a low of $28.92 per share. Since then, ADM rose to a new all-time high and kept going on the upside. The price has more than doubled since the March 2020 low.
Source: Barchart
As the chart highlights, ADM reached its most recent high at $71.55 on Jan. 14. ADM has done little more than make higher lows and higher highs since the March 2020 low.
At $71.55 per share, ADM’s market cap was just above $40 billion. The company pays shareholders a $1.48 dividend annually, translating to a yield of 2.22%. ADM’s earnings have consistently beaten analysts’ forecasts.
Source: Yahoo Finance
The chart shows that ADM has delivered earnings above consensus forecasts over the past four consecutive quarters. Analysts expect the company to report $1.32 per share for Q4 2021 next week when it releases earnings on Tuesday, Jan. 25 ahead of the open.
A survey of 15 analysts on Investing.com has an average price target of $70.64, with targets ranging from $63 to $80 per share.
Chart: Investing.com
The consensus call on the stock by the majority of analysts polled was 'outperform.'
Last week, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index rose by 7% in 2021, the highest level in four decades. Core CPI, excluding food and energy, moved 5.5% higher, well above the Federal Reserve’s average 2% target rate. The most recent Producer Price Index data that measures wholesale prices of goods and services rose by nearly 10% in 2021.
The Fed has moved to address rising inflationary pressures by accelerating QE tapering, setting the stage for liftoff from a 0% Fed funds rate at the March FOMC meeting. The central bank will likely shift from quantitative easing to tightening as it moves to reduce its swollen balance sheet by allowing debt securities to roll off and not replacing them at maturity.
Food prices rose in 2020 and got even more expensive in 2021. Soybean, corn and wheat prices rose to multi-year highs last year. Over the past two years, oilseed and grain futures posted double-digit percentage gains, with nearby soybean, corn and CBOT soft red winter wheat futures rising to the highest prices since 2012 during 2021.
Over the period, most other grain prices have posted double-digit percentage gains. Rising agricultural prices are bullish for ADM, a company that is a supermarket to the world, meeting the nutritional requirements of an ever-increasing addressable market because of population growth.
ADM has been in business since 1902, with its headquarters in Chicago—the hub of the agricultural markets.
Addressing climate change via alternative and renewable energy sources increases ADM’s business landscape. The company’s website states:
“Today, biofuels such as ethanol and biodiesel are the leading alternative transportation fuels available to consumers, and ADM is a leading producer of both.”
The bull market in agricultural commodities, rising inflation and addressing climate change create an almost perfect bullish storm for Archer Daniels Midland, and its profits should continue to soar.
ADM is a U.S. company, but its tentacles make it a worldwide leader in agri-business alongside Bunge Limited (NYSE:BG) and privately held Cargill and Louis Dreyfus. The four companies dominate the agricultural sector.
ADM’s market cap at $40 billion as of Jan. 18 was nearly triple BG’s. At the $98.71 per share level, BG’s market cap stood at $13.87 billion.
Rising inflationary pressures should continue to support ADM’s profits over the coming year and likely drive the share price higher. ADM is a core holding for portfolios searching for companies that will outperform the overall stock market in an inflationary environment.
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