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Temperature swings, shifts in rainfall patterns, and other extreme weather events are expected to intensify as climate change accelerates, prompting some equity investors to look to agricultural commodity-exposed companies to generate returns. Recent weather and climate driven commodity volatility is also starting to push other investors to incorporate climate risk data into their earnings per share analysis (EPS) of agricultural commodity-exposed companies.
While extreme weather events are not the sole cause of agricultural commodity-exposed companies’ recent price volatility, understanding these events can offer investors an information advantage intra quarter that can enhance confidence in their EPS estimates.
This summer was the hottest this century in the US, according to Gro’s US land surface temperature data for all June 21 to September 21. And already, extreme weather is starting to emerge as a factor in companies’ quarterly reports.
Earlier this month, for example, the CEO of Lamb Weston, one of the largest users of potatoes in the US, said that he expects the potato crops in his company’s growing regions to be at the lower end of historical averages - with good overall quality but below average yields - due to this summer’s significant late-season heat waves.
The company also reported that it is still dealing with the fallout from last summer’s extreme heat, which negatively affected the yields and quality of potato crops in California and the Pacific Northwest.
Because of higher input cost and fears that last year’s drought would continue, many farmers in Idaho, the US’ top potato producing state, planted fewer acres, and 2022 US planted potato acres fell 2.5% to 902,200 acres. As the US’ number of acres of potatoes harvested has been on a downward trajectory for years, near-perfect growing conditions - or a notable increase in acres - are now needed to ensure sufficient domestic supplies and pull down prices for major users and consumers.
As neither of these things have happened, US potato imports have been near or above their typical seasonal levels all year and per carton prices are unusually high. Per carton potato prices, based on an average of all seven potato sizes, are now 122% higher than the same time last year, and the three largest potato sizes have seen the biggest price increases this year because farmers have been harvesting potatoes that are slightly smaller than usual.
Using a combination of Gro’s Portal and Climate Risk Navigator for Agriculture, equity investors can add to their understanding of margins and EPS for agricultural commodity-exposed companies. In this instance, it would have been possible to identify the risk to the company’s key input (potatoes) and its EPS which, over the course of 2021, went from over $2.50 per share to $1.50 per share. The stock price followed suit, declining over 40% from its peak early in 2021. Additionally, investors could have observed relatively improved growing conditions and owned shares for nearly that same 40% return on the long side into 2022.