The years since the emergence of the COVID-19 pandemic have been a rollercoaster for markets, but there are some markets that have performed relatively predictably throughout it all. Grain and fertilizer assets, in particular, seemed unmoving in the early days of the pandemic, but then began a marked rise over the last few years that continues to this day. It may seem counterintuitive to buy in now, with prices at all-time highs, but there's little indication that they'll trend downwards anytime in the near future. Now might just be the perfect time to get into the market before the spring planting season gets fully underway in the northern hemisphere.
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High grain prices aren't just due to war in Eastern Europe
The attempted blitzkrieg by Russia that stalled out as it attempted to seize Ukraine drove an immediate spike in agricultural products, especially wheat and fertilizers. The two nations export almost a third of the world's wheat supply. The ongoing conflict left harvested winter crops on docks with no clear method of export, and the spring planting season in question.
But global supply chain worries, the steadily increasing cost of fertilizer, and labor shortages due to coronavirus drove wheat futures up even before troop movements became apparent in Russia. The price of grains has continually grown over the past few years, with wheat surging by over 50% in the last 12 months, eclipsing the decade-high price set just last year. As nations work to increase their spring planting and secure food supplies for the coming year, the need for fertilizer is likely to continue its accelerated growth on both the domestic and international stage.
You don't need a barn or tractor to reap the benefits
Where there's profit, there's a market, and wheat is no exception. One of the easiest ways to invest in wheat is to pick up shares of the Teucrium Wheat Fund ETF (WEAT 3.56%). This exchange-traded fund pegs its pricing to Chicago Board of Trade wheat futures, trading closely in value with contracts for future delivery produced by that market.
The ETF boasts a moderate expense ratio of 1.14% and hedges against contango (spot prices in the future being lower than the price of the futures contract) by holding contracts with multiple expiration dates. These include one-month rolling, two-month, and year-end (December) contracts. The Teucrium Wheat Fund has outperformed many other commodities' ETF options, including those that include both soybeans and corn alongside wheat. It's up approximately 43% year to date, while Barclays Bank PLC (JJG) delivered roughly 31% year-to-date gains, and Elements MLCX Grains Index (GRU) is up around 34%. Since its second most recent all-time-high in 2017, the Teucrium Wheat Fund has delivered five-year returns of 32.1% overall.
For a top performer in the fertilizer market, The Andersons (ANDE 1.24%), has a variety of competitive advantages that helps it shine. The company enjoys the benefits of not just being a liquid fertilizer producer, but it also hosts its own logistics and transport company. This gives it a major competitive edge in the food distribution and fertilizer markets as global-supply shock continues, one likely to last for years.
The Andersons is also currently seeing high stock prices, trading at values not seen since 2014, when it surged on the heels of rising corn prices. Just as that spike sent the Andersons to all-time-highs, the company seems poised to follow the same trajectory with wheat futures this time. It has recently acquired merchandising opportunities in the southwestern U.S. to bolster its domestic trade profits, and it is also a major player in the grain terminal storage and transport arenas. Its new opportunities have it flirting with 52-week highs just 16.5% below that 2014 price, and though the intervening years saw a substantial dip following the pandemic, the company appears to be in a stronger place overall than it was eight years ago.
Wheat farming may be sustainable, but high prices may not be
Everything isn't always sunny, of course. If prices of wheat remain high, that will encourage more planting worldwide, which could potentially lower global grain prices and the cost of futures on the CBOT. Farmers looking to get in on the higher prices could reopen fallow fields across the globe as they have done in France or switch planting from corn or soybeans.
Similarly, the Andersons could face stiffer competition globally if it fails to properly ship its wares internationally due to supply chain logistics issues or unforeseen events such as a repeat of the Suez canal blockage. Countries could also potentially institute more stringent tariffs or similar protectionist policies to protect their own food supplies and suppliers, resulting in greater expenses for shipping fertilizer and related products overseas, even if overall demand increases.
It seems that, to date, nations have moved against tariffs in favor of free trade in grain markets, however. News of additional planting in other countries has done little to relieve pricing. Prices remain high across all top grains, indicating that the cost to switch crop types may deter massive wheat planting in fields reserved for other grains.
Signs point to continued growth in prices over time
The Teucrium Wheat Fund ETF has traded relatively stable recently over the past month as the shock from the Russian invasion has waned. This may well indicate that elevated pricing in wheat markets is here to stay, especially with strong spring planting in Europe's breadbasket region seeming more and more unlikely.
Agriculture stock investors should remember that any nearing end of the conflict may well likely further showcase the strength of this market, rather than erode it. The Andersons reports earnings soon (May 3), which makes now a smart time to buy into the fertilizer producer. Analysts are expecting the Andersons to deliver almost 50 percent greater earnings per share than this time last year. The need for fertilizer definitely isn't going away anytime soon, and may peak over the next few years as the world continues to recover from the pandemic and a "new normal" in Eastern Europe.
