The Russian war on Ukraine has not only disrupted life in these two countries but has also triggered turbulence across the globe in the form of higher fuel prices, supply chain bottlenecks and shortages of major commodities. Prices of wheat, corn, and several other staples have spiked since the conflict began in late February.
According to the Food and Agriculture Organization of the United Nations, Russia and Ukraine together accounted for nearly 30% of the global wheat exports in 2021. Further, about 50 countries rely on Russian and Ukraine for at least 30% of their wheat import requirements. Ukraine is also a major exporter of barley, corn, sunflower oil, and rapeseed oil.
Given the magnitude of dependence, Russia’s blockade of Ukraine’s Black Sea ports could result in a major food crisis and particularly impact low-income countries.
The escalating wheat crisis was exacerbated when India recently announced a ban on wheat exports, citing a heat wave in the country. India’s wheat export ban is also an attempt to contain rising domestic prices and ensure its own food security.
Despite appeals from the United Nations, the Russian government has made it clear that it will consider opening access to Ukraine’s Black Sea ports only if economic sanctions against Moscow are reviewed. According to the European Commission, Ukrainian ports accounted for 90% of the country’s grain and oilseed exports prior to the war.
Generally, Archer-Daniels-Midland, Bunge Limited, Cargill Inc., and Louis Dreyfus, often called ABCD’s of the grain industry, tend to benefit when weather or other factors cause a grain shortage and lead to higher prices. We’ll discuss two of these companies here.
Bunge Limited (NYSE: BG)
Bunge sells agricultural commodities and commodity products like oilseeds (primarily soybeans, rapeseed, canola, and sunflower seeds), and grains (mainly wheat and corn). It is also a leading seller of vegetable oils, protein meals, wheat flours, bakery mixes, and dry milled corn products.
Last month, Bunge reported stellar Q1’22 results that crushed analysts’ estimates, thanks to strong demand and tight commodity supplies. Sales grew nearly 23% to $15.9 billion. Adjusted EPS jumped 36% to $4.26 fueled by strong sales and margin expansion.
Bunge raised its full-year adjusted EPS outlook to at least $11.50 from the previous guidance of at least $9.50.
Following the strong Q1 results, Credit Suisse analyst Robert Moskow raised his price target on Bunge to $140 from $120 and reiterated a Buy rating.
Overall, the Street is cautiously optimistic on Bunge, with a Moderate Buy consensus rating based on four Buys and three Holds. At $134.83, the average Bunge price target implies 16.78% upside potential from current levels. Shares of Bunge have risen nearly 24% so far this year.
Archer-Daniels-Midland (NYSE: ADM)
Like Bunge, Chicago-based grain trader and processor Archer-Daniels-Midland is also benefiting from strong demand and constrained global supply.
ADM’s Q1’22 adjusted EPS surged 37% to $1.90 driven by a 25% rise in revenue to $23.7 billion and higher pre-tax margins. ADM expects continued tightness in global grain markets this year and into 2023 “and perhaps beyond.”
Following the robust results, Stifel analyst Vincent Anderson raised the price target on ADM stock to $111 from $100 and maintained a Buy rating.
Anderson significantly increased his 2022 estimates citing “continued strong growth in the company’s Bio-Solutions products, positive global crush and RPO [Refined Products & Other] margins, as well as positive S/D [supply/demand] fundamentals in global grain markets which ADM should be able to capitalize on through its destination marketing initiatives and US-heavy origination footprint.”
The top-rated analyst is also optimistic on the company’s Nutrition portfolio, and highlighted that acquisitions as well as organic growth have continued to support robust operating income growth.
All in all, ADM scores a Moderate Buy consensus rating that breaks down into four Buys and six Holds. The average ADM price target of $98.63 implies 12.39% upside potential from early Wednesday trading levels. Shares have advanced about 30% year-to-date.
Conclusion
Geopolitical tensions have resulted in a supply shortage for wheat and other commodities, causing further pain to consumers who are already burdened with high fuel costs. However, companies like Bunge and Archer-Daniels-Midland are benefiting from robust demand and higher prices amid a supply crunch.
Shares of both these companies have significantly outperformed the broader market so far this year and Wall Street expects further upside potential in the months ahead.
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