Large-cap ag stocks poised to capitalise on higher prices
Higher commodity prices could spell earnings tailwinds for Elders and Incitec
Source: iStock
Mentioned
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.
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.
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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).
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Elders 12-month price chart
