​Nufarm, and more broadly the agriculture sector is going through a notable purple patch. Inventories of grain and seed are at their lowest relative levels in decades due to an unusual combination of poor growing conditions, supply chain bottlenecks and labour constraints. As a result, demand for Nufarm’s crop protection and seed technology has risen rapidly, with the business increasing underlying earnings by 41% in the first half of FY22.

Any short-term reprieve to the supply glut looks unlikely. Protectionist rhetoric has ramped up, particularly in developing nations where food security is a key priority. India, which holds 10% of global grain reserves, recently banned exports of wheat. Meanwhile, Russia’s invasion of Ukraine has led to gridlock in the Black Sea, placing further upward pressure on prices.

The long-term thesis for Nufarm is also positive. Per the United Nations, the world will need to feed on average an extra 60 million mouths per year until 2060. With negligible cropland growth, farmers will rely on double planting and herbicide improvements to increase yields. While still nascent in its adoption, the company has developed the first plant-based Omega-3 which is expected to be a major growth opportunity.

Despite the favourable tailwinds supporting Nufarm, investors should be cautious over-extrapolating current market conditions. Agriculture remains a cyclical industry prone to peaks and troughs. Corn, soybean and wheat futures curves are in backwardation (when the current price is higher than prices in the futures market), implying an eventual return to normalcy as weather extremities and logistic constraints abate. Subsequently, management has flagged a weaker second-half after buoyant grain prices pulled forward first half sales.

Trading on an earnings multiple of 15, Nufarm is neither cheap nor expensive. If the current market tightness persists, Nufarm will continue to outperform. However, investors need to be cognisant of initiating a position at the top of the cycle.

Nufarm (NUF.ASX) is an agricultural chemicals company headquartered in Australia. As the Ukraine/Russia crisis seemingly continues with no end in sight and with Western sanctions likely to continue over the long-run, Nufarm is a security that potentially stands to benefit from the turbulence.

The Ukraine invasion has placed immense pressure upon agricultural commodities worldwide. Given the centrality of both nations to the global supply of wheat and canola as well as broadbased agricultural commodities, this scenario has had a twofold impact. The first, forcing cultivation of those essentials and, secondly, a resultant increase in demand for fertilizer and biofuels (given the higher oil price) to levels not seen since the early to late 2000s post-Iraq invasion. Assuming this scenario and the associated increases to the Food Price Index (FPI) drags on, Nufarm is one company that stands to benefit.

Broadly speaking, the company operates in two categories: crop protection (i.e. herbicides etc) and crop/seed technology. Across both these categories we have seen immense global demand. Revenue was up to AU $2.16bn in 1H22 (+31% compared to 1H21) while EBIDTA showed an increase of +41% to AU $330m. The business has been prudent in taking advantage of a lower interest rate environment over the last year, saving 9% in interest expense while decreasing net debt by 6%. The numbers reveal another important consideration: the differential in the increase in revenue vs EBIDTA indicates an expanding margin despite a challenging environment for logistics costs. Dividends have also been reinstated at 4c/s, the overall yield to be approx. 2.3% p.a.
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Could this be a buy? Across every category the business operates in we see potential for expanded margins. This includes canola (Russia is the 5th largest producer globally), sunflower (Ukraine being the worlds largest producer) and carinata (an effective biofuel, important given the price of Brent). The associated expansion of margins should more than offset any disruptions and increases to supply chain costs. This is a dividend growth story and, using the 2000s as a model (when the oil price and FPI increased along a similar trajectory), we could see high double digit growth in both earnings and dividends over the next decade.