Food is a key driver of inflation, and has been a hot topic since the Russia-Ukraine conflict. Food prices have been getting jacked up by trade disruptions, supply chain disruptions and by prices of fertilisers going up.
Nitrogen-based fertilisers (mainly urea) are critical for the growth of any crop, and the Russia-Ukraine conflict has spiked up natural gas prices enormously. Natural gas is the prime source of Nitrogen used in making urea.
While you pay more for your food, is there a way to make money out of the food inflation situation? Welcome to agri-input stocks!
The agri-inputs sector
Agri Input firms supply raw materials and products to the agricultural industry. This includes seeds, fertilisers, pesticides, nutrient products, and crop protection solutions.
The demand and pricing for agri-inputs usually favourably depends on rainfall, expected yield, and demand and price of crop.
War and food
Food inflation has spiked across the globe as key edible commodities run into a short supply.
Russia and Ukraine are the largest and fifth-largest wheat exporters in the world, respectively. Wheat prices increased by 45% as shipments from Black Sea ports used by Ukraine and Russia ceased.
Together they also make up for the largest exports of sunflower oil. The shortage and price increase have led to pressure on other edible oils, which have also consequently seen price increases.
This may look good for farmers, right? Especially for Indian formers, since there are other tailwinds in the backdrop, that are also contributing to a favourable solution.
Farmers' incomes have already been boosted by a bumper rabi crop last year, which is expected to support demand for agri-inputs
Rising minimum support prices (MSPs) in India provide ample income support for farmers
India is set to experience its fourth consecutive spell of normal monsoon which along with good cash flows among farmers is expected to support a good Kharif season
Ideally, this means farmers would have higher buying power. They would be able and willing to pay more for agri-inputs.
Higher demand + higher prices = party!
That’s great news, but
But farmers are facing immense cost pressures too. Seeds, fertilisers and pesticides get more expensive as the cost of production and raw materials are up, labour is getting more expensive as wage demands increase, packaging costs are up, and transportation costs are rising as fuel prices go up.
In this context do they really have the ability to pay a higher price for inputs?
Agri-input companies set for healthy revenue growth
On one hand are farmers in countries other than India.
The price of their output is determined by market forces; they don’t really have government support on prices.
The cost of their inputs are also determined by market forces; they don’t really have government support through subsidies.
Risks and pressures for Indian farmers hence seems protected to a certain extent. They would hence be able to better afford agri-inputs and absorb price increases compared to global peers.
In essence, demand and pricing for agri-inputs has been going up, and healthy volume and revenue growth can be expected.
But this doesn’t necessarily bode well for agri-input companies. After all, their costs too are on the rise. If they aren’t able to increase profitability along with revenue, they may not gain after all.
But what about profitability?
The key ingredients in fertilisers are Nitrogen, Phosphorus and Potassium. The prices for these raw materials have increased enormously over the past two years.
The war has not only impacted food supply, but also the supply of several commodities, some of them which are key in the manufacturing of fertilisers.
10% of Phosphorous and 25% of Potash supply of the world also comes from Russia. 98% of world’s Ammonia (Nitrogen) supply needed comes from Natural Gas. Natural gas prices have risen almost five times as a year ago due to Russian supply concerns.
Moreover, the cost of manufacturing has gone up as there has been an increase in the costs of energy, packaging and transportation.
While, revenue growth may be strong, margins may not see a commensurate increase. There is more likelihood of them remaining stable instead.
Agri-input manufacturers are seeing massive cost pressures. However, because of an overall inflationary scenario, they will be able to pass on cost increases. This will aid volume and pricing growth, which will add to revenue.
However, because of increase in prices of raw materials, energy, packaging and transportation; margins are not likely to increase.
In the overall supply chain, agri-input manufactures are usually better places than branded consumer companies. For the former, farmers are the key market, and they are able to pass costs on since farmers can further pass costs on to wholesalers, governments and large corporations. The latter however, can’t directly pass on costs in the same manner to end consumers since the end consumer would simply consume lesser, go for cheaper substitutes, or switch brands.
With revenue and profits set to increase, and with the ability to pass costs on, agri-input companies look like they’re in a favourable position in the short-medium term.