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Video: What's in store for the food and water industry in 2024?

Inflation and higher interest rates continue to prove challenging for the global food and water system. Felix Odey looks at the recent trends in the space and what to expect for 2024.

15/11/2023

Authors

Felix Odey
Portfolio Manager, Global Resource Equities

What trends have emerged across the food and water system in Q3 2023?

The food and water industry is grappling with economic uncertainty and more persistent inflation, causing weaker consumer demand and high volatility at a company and subsector level.

Rising interest rates have also driven the cost of capital higher, hitting those subsectors with higher valuations, and companies with more stretched balance sheets.

This was a complete reverse from the optimism seen in the first half of the year, where prices and demand remained strong despite market challenges.

Looking at sectors, the weakest performers were in the food technology, water management and agricultural equipment space. Food technology and ingredients companies are now expecting slower volume growth. Water equipment companies are also facing pressure, and food processors, agricultural equipment, and agricultural inputs companies are facing the effects of falling crop prices.

We now think that valuations are reflecting the market view of the end of the agricultural cycle and it’s not fully accounting the tightness caused by the Ukraine conflict and the disruption to agricultural equipment deliveries of last year.

What are your expectations for the industry in 2024?

Looking forward, we still see challenging quarters ahead for earnings momentum across the space, but the sharp reset in valuations presents investment opportunities, especially for companies where the structural improvements don’t appear to be priced in.

We believe companies with stretched balance sheets will continue to be disproportionately penalised in an environment where rates stay higher for longer. We would not be surprised if we saw some high-profile bankruptcies in the food consumer space at some point next year.

Near term, we expect macro headwinds from higher rates and increasing unemployment to continue to impact the subsectors that are the most consumer facing and exposed to general economic activity.

While we recognize the long-term value in the space based on our projections for next year and 2025, there is still a risk that consensus estimates may need to be revised downward. Additionally, the uncertainty around demand could lead to destocking trends continuing into Q4.

Due to the attractive returns offered by government treasuries, companies with flat or declining earnings may face share price pressure, even if multiples and free cash flow yields have reset.

In the agricultural complex, we expect food prices to continue to drift lower into the end of the year.

However, we increasingly see risk to the upside for agricultural crop prices next season, given low channel inventories of fertilizers and pesticides, and farmers' reluctance to buy yield-enhancing technology, given the volatility in their prices.

Equally, extreme weather is becoming more regular, and this increases the risk of unexpected downward revisions to crop yields globally, which would likely push crop prices back up.

We expect farm equipment prices to remain fairly flat next year. Likewise, barring further disruption to supply from global conflicts, we expect fertilizer prices to stabilise around current levels.

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Authors

Felix Odey
Portfolio Manager, Global Resource Equities

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