CEO Eric Hansotia of the agricultural machinery manufacturer Agco told CNBC’s Jim Cramer on Friday that high grain prices — and high food costs — will persist, even if Russia’s invasion of Ukraine ends tomorrow.
Both Russia and Ukraine are the world’s largest grain suppliers, with the latter often referred to as “Europe’s breadbasket”. So when war broke out in February 2022, it threw the global food supply chain into turmoil.
When Hansotia spoke with “Mad Money” last March, he told Cramer that “13% of global calories went out of production” when Russian and Ukrainian borders were closed.
Coupled with climate issues — namely droughts in Europe and North America — the food supply chain disaster wrought by the Russian invasion isn’t likely to fade any time soon, according to Hansotia.
“Even if [the war] were to end tomorrow, there is a long-standing degradation in this region’s ability to grow crops, and so it’s going to be with the market for some time,” he said.
Despite grain supply chain issues, Agco – which sells expensive farm equipment like tractors and combines – recently reported a successful quarter. The company significantly raised its full-year guidance and net sales reached $3.3 billion, beating the consensus estimate of $3.16 billion.
Even so, Agco’s sales fell about 15% from their post-quarter peak.
But Hansotia reaffirmed strong demand for Agco’s products through to next year, pointing to falling grain stock-to-use ratios coupled with lower production costs for farmers.
“The inventory-to-use ratio — essentially the amount of grain on the market — has declined for six straight years,” Hansotia told Cramer.
“It’s one of the best indicators of the magnitude of demand, it’s a buoy for grain prices. At the same time, the cost of inputs for our farmers, diesel, fertilizer and other things – is coming down, and those are costs that can be locked in for next year.”