Consumer Staples

Large-cap ag stocks poised to capitalise on higher prices

Wed 25 May 22, 3:53pm (AEDT)
An image depicting an individual transferring a seedling from pot to ground
Source: iStock

Key Points

  • Soft commodity prices have remained elevated due to emerging food shortages and supply chain issues
  • Incitec reported a massive discrepancy between realised prices and current spot prices
  • Elders has boosted inventory levels in anticipation of increased winter cropping demand

ASX-listed agriculture stocks are leveraged to benefit from higher prices as more countries begin to impose protectionist policies to support domestic food security. 

Incitec Pivot (ASX: IPL) and Elders (ASX: ELD) both delivered unsurprisingly strong earnings results this week, given the strong commodity pricing backdrop.

What's interesting is that the current commodity price environment, if sustained, could give another kick to near-term earnings.

Let’s take a closer look. 

Incitec: Favourable spot prices

Incitec shares were extremely volatile following the release of its half-year FY22 results on Monday, 23 May. The company’s stock rallied 7.5% as the market opened but closed -3.7% lower to $3.60.

Volatility aside, its table regarding commodity prices sets a very high bar for what to expect in the second-half.

2022-05-25 15 08 36-PowerPoint Presentation
Source: Incitec Half-Year Results Presentation

Current spot prices for Incitec-related commodities used to produce explosives and fertilisers (besides Urea) have a 20-90% tailwind behind them. Assuming spot prices stay consistent, then Incitec is likely positioned for another unsurprisingly strong second-half.

There is however, the possibility that commodity prices collapse and Incitec fails to realise elevated prices. Given the current macroeconomic setting, the downside scenario doesn't seem too far stretched either.

2022-05-25 15 23 05-Incitec Pivot Ltd (ASX IPL) Share Price - Market Index
Incitec 12-month price chart

Elders: Higher inventory to meet demand

The price action for Elders has also been extremely volatile, rallying 8.9% ($14.92) the day of its half-year FY22 results, only to give back most of its days over the next two days.

Elders said it experienced growth across all products areas and geographies due to strong demand for agriculture related products and services.

The strong first-half didn't translate to any meaningful cash flows for the company, as management opted to build inventory levels to "allow us to meet anticipated increases in winter cropping demand."

Cash flow in the first-half was down to -$35.1m, even lower than the -$21.2m a year ago.

High inventory will de-risk any supply chain related issues, but it could also head south if seasonal conditions, weather and commodity prices change.

This may explain why Incitec and Elders are leveraged for both the good (and possibly the bad).

2022-05-25 15 22 48-Elders Ltd (ASX ELD) Share Price - Market Index
Elders 12-month price chart


Written By

Kerry Sun

Content Strategist

Kerry holds a Bachelor of Commerce from Monash University. He is an avid swing trader, focused on technical set ups and breakouts. Outside of writing and trading, Kerry is a big UFC fan, loves poker and training Muay Thai. Connect via LinkedIn or email.

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