3. Digital agriculture (growth and cash flow)
Advances in data crunching, satellite imagery, and mobile computing power have given rise to digital agriculture. Although this might appear to be a new opportunity, hundreds of millions of acres were covered as of early 2020.
For example, many farmers can now pay a monthly or annual subscription fee for historical and predictive farm-specific data. How many seeds should a farmer place in each row in the northwest corner of their land? When might be the optimal time to apply fertilizer this season? Are corn rootworms likely to be worse than usual?
Deere & Co. (DE -0.79%) has emerged as a leader in the category. The technology, paired with its industry-leading farm equipment, has led to a boom in the stock, which has delivered a total return of more than 10,000% since its debut in 1978.
4. Plant-based meats (growth)
Increased demand for animal-free proteins is driving interest in plant-based meat products. To succeed, consumer brands such as Beyond Meat (BYND -0.54%), Impossible Foods, and others need to deliver on nutrition, taste, texture, and price. Companies focused on plant-based products may benefit by creating partnerships and supply agreements with larger agriculture companies such as Archer-Daniels-Midland, Bunge, and Tyson Foods.
A handful of nontraditional stocks also merit consideration. Precision BioSciences (DTIL +9.43%) is developing a novel gene-editing technology platform focused on human health, but it also owns a subsidiary dedicated to agricultural applications. One focus is engineering high-protein, neutral-tasting chickpeas, which could become a next-generation, plant-based protein source. Beyond Meat relies on yellow pea protein for its products, but it might be tempted to switch at least some supply to chickpeas if the Precision product lives up to the hype.
5. Biologicals (growth)
Chemical-based pesticides and fertilizers are poised to dominate their respective markets for the foreseeable future, but investors should know that living technologies are also in production and may see significant growth in the years ahead. Biologicals are microbe-based treatments of soils or crops designed to boost yields, improve defenses against pests, and reduce dependence on chemical inputs.
Individual investors can gain exposure to the emerging opportunity in a few ways. Bayer, FMC, and Corteva are all leading developers of biologicals. From its acquisition of Monsanto, Bayer now has the leading biologicals brand on the market through a partnership with Novozymes (OTC:NVZM.Y).
6. Vertical farming (growth)
Vertical farming is the latest agricultural technology to sweep the market. Investors are betting big on stocks such as Local Bounti (LOCL -4.17%), a hybrid featuring vertical farming and hydroponics. In vertical farming operations, companies use shelves and artificial light to grow produce, minimizing land and water consumption. By conserving space, vertical farming has the potential to create facilities that are located much closer to consumers than traditional farms.
Local Bounti has fallen short of earlier goals, but the company is still growing. The company counts Cargill as a major investor and partner; the privately owned agriculture giant loaned $200 million to Local Bounti in September 2021 and is considering financing all of its future facilities through 2025.
7. Future markets
There are a number of agribusiness applications on the horizon that investors should watch for in the years ahead.
Flavors and fragrances are high-margin products mostly manufactured through synthetic chemistry, but specialty agriculture has a place in the market as interest increases in items such as natural perfume. Vertical farming also seems to be a good fit here since the amounts of water and land needed are much less than for conventional food production.
Water is a crucial component in agriculture, but it is also a limited resource, and global water consumption is expected to grow significantly over the next generation. Consequently, investors should keep an eye on water treatment and desalination stocks such as Xylem (XYL +1.84%) and Consolidated Water (CWCO +1.04%), which offer exposure to water sustainability.
Benefits of investing in agriculture stocks
Agricultural stocks don't get as much attention as some corners of the stock market, but they have some advantages.
- Agricultural companies provide necessary goods. While commodity prices can fluctuate substantially, there will continue to be demand for seeds, fertilizers, and crop protection chemicals.
- Most of these companies pay a dividend, so investors can earn money without share price appreciation.
- Agriculture stocks can spike during economic or geopolitical shocks, such as the start of the Russia-Ukraine war.
Risks of investing in agriculture stocks
There are also risks to investing in agriculture stocks.
- Commodity prices are difficult to predict and can respond to a wide range of events, including geopolitical events, natural disasters, and economic turmoil. Commodity stocks in agriculture are volatile.
- Overall, agriculture is a mature, slow-growth industry. While there are pockets of faster growth, investors may miss out on higher-growth opportunities by investing in ag stocks.
- Regulations and lawsuits also add to the risk in agriculture stocks. Bayer's Monsanto, for example, has faced a slew of lawsuits, and there's potential for new regulations on chemicals, land use, and environmental preservation in agriculture.
