As The World's Population Grows, These Companies Will Benefit From Crop Enhancements

Companies that help farmers boost their crop yields could do well as the world's population grows and arable land shrinks.

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During this period, households in emerging markets are expected to earn more and more, increasing the demand for meat-based products. The world population is expected to grow by more than 20% by 2050 to 9.7 billion people. For livestock to eat, more crops will be required.

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Among the risks and opportunities in the food and agricultural sectors, Diana Radu, an ESG equity analyst at Morningstar Research Services and coauthor of a new report, estimates that crop yields will need to increase by around 50% by 2050. “It is a major challenge for companies.”

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According to the report, agriculture already occupies half of all habitable land, and its rapid expansion has accelerated the loss of biodiversity, scarcity of water, and global warming.

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"It will be crucial to boosting crop yields to achieve more with existing croplands to limit the need to convert more land into agricultural production," the report says. Keeping the soil healthy and fertile will also require environmentally friendly agricultural practices.

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In the report, proponents of fertilizers, crop chemicals, and seed chemicals stand to benefit, because they are shifting their portfolios toward greener options.

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Biotechnology companies like Corteva CTVA –0.66% and FMC FMC +0.09% (FMC), which produce microbes and bacteria that can fight insects and weeds, are heavily investing in these products.

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FMC is a crop protection pure play, while Corteva is a global leader in seeds and crop protection products. Both stocks have economic moats, or competitive advantages, according to the report. Morningstar says companies with economic moats can fend off competitors for many years to come and earn good returns on capital.

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The report was co-authored by Morningstar Research Services' equity strategist for energy and resources, Seth Goldstein, who said Corteva shares, which trade around $62, is undervalued compared to the firm's fair value estimate of $70.

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“We believe the company is positioned for strong, long-term growth both in the seeds and crop protection segments, in comparison with our discounted cash flow model,” he tells Barron's.

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Its patented and differentiated seeds and crop protection products provide Corteva with a wide moat, meaning its competitive advantages should last at least 20 years.

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Despite not having a seeds business, Goldstein says FMC is developing new products and investing heavily in biologicals. In addition to growing volume and profit over time, FMC should continue to develop new, more premium crop protection products.

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Based on its patented and differentiated crop protection products, the company has a narrow moat that allows it to fend off rivals for ten years or more.

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Goldstein says FMC's shares could rise to $140 based on the fair value estimate from Morningstar. "We see some upside to the current price," he says.

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It looks like farmers will still pay for premium products even with slightly lower crop prices, and Corteva and FMC are well positioned to grow," he says.

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Agricultural technology, or AG Tech, is a key theme for Morningstar, with Nutrien NTR –1.55% (NTR) on their watch list as a company well positioned to benefit from it. Nutrien's shares are trading around $70, and Morningstar estimates Nutrien's fair value at $80.

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A recent interview with Barron's Andy Serwer revealed that a challenge remains in global fertilizer supply due to the fact that Russia and Belarus produce and trade 40% of the world's potassium fertilizer. Meanwhile, rising natural gas prices in Europe have made it more costly to produce the crop nutrient nitrogen. 

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A major part of the supply gap has been filled by Nutrien, which will ramp up its potash and nitrogen production.

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