Macquarie Group is one of the leading banks with their finger on the pulse of the commodity markets through financing, trading, and investment banking operations.
They also know what areas are attracting new capital…
Being up close and personal with global commodity companies gives them a big edge when it comes to the future of the sector.
So, a recent interview with Macquarie Group’s CEO Shemara Wikramanayake caught my attention…
During the interview, she mentioned other areas the bank is interested in (besides the popular blockchain-based technologies), which gave me even more conviction about an industry that may just be getting started…
Growth Prospects Are Just Beginning for This Sector
Wikramanayake went on to say, “We’re doing a lot of investing in digital infrastructure, hyper-scale data centers, fiber optic networks, precision agriculture, and in terms of real estate, we’re investing in logistics from online shopping and digital twinning.”
I covered precision agriculture back in late June after CNHI acquired Raven Technologies, where I stated:
“These days, most investors are actively searching for the perfect inflation hedge… and precision agriculture not only provides the hedge but has the growth.
The industry is at the epicenter of all the factors driving inflationary trends forward, such as limited land, declining labor availability, and rising crop prices…
Investors may want to take advantage of this pullback by considering stocks like CNH Industrial (CNHI), Deere (DE), AGCO Corporation (AGCO), and Trimble (TRMB) for large-cap precision agriculture exposure.”
Since then, Deere is up 9%, AGCO is up 11%, and Trimble is up 16%…
We dubbed it as a perfect inflation play because of its growth prospects.
But the growth prospects for this sector may be just beginning…
For example, a small robotics startup called TartanSense just raised $5 million in Series A funding. TartanSense builds agricultural robots that come with AI-assisted computer vision.
But, how does this help farmers?
Well, simply by reducing expenses and improving incomes, TartanSense addresses two problems for farmers – poor chemical spraying techniques and unreliable farm labor.
Their latest robot BladeRunner can “…identify, precisely locate, and mechanically uproot undesirable weeds as well as spot spray on the desired crop – reducing chemical usage by 45% as well as increasing weeding efficiency by seven times.”
This is just one example from a small startup, but this is where the industry is going…
And the fact that venture and private equity capital are funding small companies in this space is a good sign for bigger, more established publicly traded companies that operate in this space.
That’s because when venture capital takes an interest, valuations start to rise, and trickle up into the stock prices of companies like Deere, AGCO, and Trimble.
Companies like Deere are focusing heavily on growing their precision agriculture business. This focus will ensure that investors will pay high premiums for the stock going forward… especially with a prevailing view that Deere is a precision agriculture leader.
Aside from the market just beginning to notice this industry, the macro supply-demand picture for the agriculture sector continues to be very bullish right now.
Last week, we introduced the concept of “roll yields” to track the supply-demand picture of commodity markets. Most agricultural products right now have positive roll yield, whether it’s soybeans, corn, or the lean hog market… demand is outpacing supply.
A major source of that demand is coming from China, which is key since China has usually focused heavily on the U.S. soybean markets.
Precision Agriculture Is a “Growth Frontier”
Companies like Deere, AGCO, and Trimble are serving markets that are in the middle of going digital… and under the radar of most investors.
Trimble continues to see this industry as a “growth frontier,” especially with high commodity prices continuing to fuel positive farmer income and sentiment.
As I mentioned before, CNHI paid about 50 times the estimated 2021 earnings for Raven.
Although that metric can’t be solely used to put a price target on a company like Deere, AGCO, or Trimble by itself because these companies operate in different business segments. But it gives a good look at how valuable agricultural tech is becoming.
Even though Trimble is making all-time highs, it only trades at its median price target of $97.25. However, recent upgrades call for this company to trade at around $107.50.
AGCO has a ton of room for upside… with the median estimate at $162.50 and upside potential around $200. It’s currently trading at $140 per share.
And Deere has a median estimate of $402.74, but that doesn’t tell the whole story. A lot of these estimates need to be followed closely for when price adjustments were made. ALL of the new price target updates from August 20 were updated with a range of $425-$480.
So, I think that all of these companies will hit their upside target potential as the market begins noticing that the future of agriculture is digital.
Contributing editor, Market Minute