At present, almost all major world economies are heading toward globalization and trade liberalization. Escalation in the domestic and national product levels in each country is driven by the respective industrial growth rate. Economic development of a country is directly related to its comprehensive energy supply.
Oil comprises nearly 40% of the global energy consumption, and is the primordial energy resource for almost all types of transportation fuels. Thus, normal functioning of the contemporary global economy depends on the availability of crude oil to a considerable extent. However, oil prices are subjected to several fluctuations on numerous uncertain external factors in the global economy.
Energy Intensive Agricultural Sector
Fiscal authorities of several countries are highly concerned about food price inflation. A research study conducted by The World Bank revealed that in 2011, worldwide food prices had increased by 10%. Rising oil prices, coming in the wake of higher demand and supply disruptions, were considered to be a major reason for food price escalation.
Higher oil prices increased the cost of agricultural product marketing and eventually raised the marked prices of food and other agricultural items. A dollar's worth of output from the manufacturing sector historically consumes significantly less energy than a dollar's worth of the agricultural sectors’ yield.
Investment in Agricultural Stocks
After keeping a close watch on the current oil price trend and examining its impacts, investors can pick the correct agricultural stocks with minimal risk. This is largely due to the fact that oil price volatility significantly affects the global agricultural industry.
Oil prices have gone downhill since June this year due to an over-supply from non-OPEC countries and lower demand from some developed economies. Also, the 12-member OPEC has decided to keep its output target unchanged, leading to further fall in oil prices. A fall in oil prices is benefiting the energy-intensive agricultural sector. Agricultural companies (that use products derived from oil consumption as inputs), are expected to earn greater revenue and margins in the upcoming quarters.
Stocks to Buy
Based on the contemporary market scenario, we have picked two agricultural stocks that are expected to beat earnings in the upcoming quarters.
Syngenta AG (SYT)
The Basel, Switzerland-based company is involved in the manufacturing, marketing and research of seeds and pesticides, in order to enhance crop yields and food quality. The company generated sales worth $3.0 billion in the last reported quarter.
With no estimate revisions, the company currently carries a Zacks Rank #3 (Hold). A fall in current oil prices would lower the operating expenses of Syngenta and hence may improve its earnings in the upcoming quarters.
Bunge Ltd. (BG)
The company is engaged in the food and agricultural business. Conducting its trade through five segments, Bunge has a wide global network of branches with its headquarters in White Plains, NY. The company currently has a Zacks Rank #3 (Hold) and has decent long-term earnings growth expectations of 10.8%.
Moving Forward
Investors are expected to reap sufficient surplus from the above agricultural stocks in the near future. With an excess supply over demand, oil prices are expected to dip, reducing the operational expenses for numerous agricultural companies.
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