As we all know, humans need to eat. Which bodes well for the overall demand of not only food products, but products that are critical to producing that food. And in recent times, we've witnessed food prices skyrocket due to the impacts of inflation. Many are seeking exposure to the industry to potentially offset or take advantage of that.
First, lets look at what Canada is popular for when it comes to agriculture.
What is Canada's Most Common Agricultural Product?
Overall, wheat and canola are some of the largest agricultural products in Canada, and according to Statistics Canada, crop production contributes more than $26B to our GDP.
How can I Invest in Agriculture Stocks in Canada?
In order to invest in agriculture stocks here in Canada, you'll likely have to invest in individual companies. At the time of writing we don't really have enough companies here in Canada to warrant the creation of an exchange traded fund, or in other words a basket of agricultural stocks.
However, Canadian ETFs exist for exposure to the agricultural sector. An added bonus? You'll also be getting a mix of not only the top Canadian agriculture stocks, but the top agricultural stocks in North America as well. Lets take a peek at that ETF.
The iShares Global Agriculture Index ETF (COW.TO)
The iShares Global Agriculture ETF has a unique ticker, COW. However, don't make the mistake of not adding the ".TO" or whatever extension your brokerage requires to designate the Toronto Stock Exchange.
Why? If you end up buying COW in the United States, you'll be buying a livestock ETF instead.
COW.TO has been designed to replicate, to the extent possible, the performance of the Manulife Investment Management Global Agriculture Index, net of expenses. Under normal market conditions, COW will primarily invest in securities of one or more iShares ETFs and/or equity securities issued by international issuers participating in the agriculture sector.
It contains one of the top Canadian agriculture stocks like Nutrien Ltd (TSE:NTR), but also contains a wide variety of exposure south of the border. Archer-Daniels Midland is a major processor of oilseeds, corn, wheat, and other agricultural commodities. It is the top holding in the fund.
But, the fund also has exposure to equipment manufacturers like John Deere, Tractor Supply, and chemical producers like Corteva.
It is something you may want to consider if you're looking for broad based, single click exposure.
However, if you're looking for the top agriculture stocks here in Canada to buy, lets take a look at those.
What are the Best Agricultural Stocks to Invest in?
- Nutrien (TSE:NTR)
- Ag Growth International (TSE:AFN)
- SunOpta (TSE:SOY)
Nutrien is the world’s largest fertilizer producer by capacity (20 million tonnes). It has a market cap in excess of $60B and produces the three main crop nutrients: nitrogen, potash, and phosphate. The company's primary focus is potash, where it is the global leader in installed capacity with roughly 20% share.
The company witnessed a significant surge in price in 2022 due to the skyrocketing prices of potash. This was mostly due to the Ukraine/Russia conflict. For the most part, analysts expect earnings and revenue to dip progressively over the next 3 years.
This is why you'll see a company like Nutrien trading at only 5.7 times forward earnings and near book value. With the inevitable decline in revenue and earnings, investors are paying today for what earnings are expected to be in the future.
However, that doesn't make the company a bad purchase today. In fact, the decline in earnings should be baked into the share price today, and it currently offers strong value.
This is especially true considering the company has a 2.26% dividend yield, one that is well covered. Payout ratios in terms of earnings come in under 20%, and cash flows under 35%. What this means is even in the event of a lull in earnings, Nutrien should be able to maintain and even possibly grow its dividend.
Overall, if there is a blue-chip agriculture stock you'd like to own, its hard to argue with Nutrien.
Ag Growth International (TSE:AFN)
Ag Growth International Inc manufactures portable and stationary grain handling, storage, and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment, and grain drying systems.
It has manufacturing facilities in Canada, the United States, Italy, Brazil, France, United Kingdom, and India.
The pandemic caused some issues with Ag Growth. Revenue flat-lined, and a dividend that was already viewed as high risk was cut in early 2020.
Would the dividend be maintained if the pandemic hadn't of occurred? Possibly. So, we can cut the company a bit of slack.
Ag Growth is definitely a turnaround play. Past operations have been skeptical. As a manufacturer, raw materials are an important part of the business. And in these times of rising inflation and commodity prices, this has impacted the company as well. But, things seem to be settling, and the company is expected to see a surge in demand in 2023 and 2024, and analysts are bullish.
Revenue, earnings, and EBITDA are expected to grow at a double digit pace and if we consider forward looking estimates, the company is relatively cheap, coming in at under 9 times forward earnings.
This is a cheap rate to pay for the growth, and the discounted valuation is likely due to the company's spotty operations in the past. But if you're bullish on the overall growth of the agricultural sector, it's hard not to be at least somewhat bullish on Ag Growth at these price levels.
Most analysts have targets in the mid $50 range, which puts around 50% upside on the stock at today's levels.
SunOpta Inc (TSE:SOY)
SunOpta's operating segments include Plant-Based Foods and Beverages, and Fruit-Based Foods and Beverages. Plant-based beverages and liquid and dry ingredients (utilizing almond, soy) as well as broths, teas, and nutritional beverages are some of the products it offers along with a variety of drinks.
The company generates most of its revenue from the United States. During the market euphoria in early 2021, SunOpta was a hot commodity. The stock traded in the mid $20 range as the narrative of plant-based food being the future caught on in a big way.
Those valuations, at least back then, were likely unjustified. But, don't let that fool you now, the company has big plans for growth. Revenue is expected to grow in the low double digits. As the company becomes profitable in 2023 and beyond, earnings are expected to grow at an extensive pace.
The thesis behind plant-based food alternatives is definitely a strong one. As the population grows and environmental issues are taken into consideration, the alternative food market will no doubt grow. It just depends how much of that market SunOpta can capture. It's had some lulls over the last while. However, it is situated to turn out strong growth in the future.
SunOpta is dual listed, meaning you could buy it on both the NASDAQ and TSX. I would say this company offers the highest risk/reward out of the bunch, as it is still a small cap company susceptible to large swings in price and sentiment.
Overall, These 3 Options Each Provide a Unique Exposure to the Agriculture Sector
With Nutrien being a potash producer, Ag Growth being a manufacturer, and SunOpta being a plant based food producer, there is a nice mix on this list for investors. In terms of "ranking" I wouldn't say any one is higher up than the other. It just depends on what type of exposure you want as an investor.
Long term, I do have the most confidence in Nutrien as a blue-chip, but SunOpta and Ag Growth provide their own unique opportunities.
Canadians may want to look internationally however to reduce their concentration risk. In this situation, the iShares ETF COW is perfect.