Are Indoor Farming Stock Revenues Inflated?

Countries are facing unprecedented inflation rates, fueled by the yet-to-recover pandemic effects and the rising energy costs due to tensions between Russia and Ukraine. The United States just confirmed the highest Consumer Price Index increase since January 1982 (7,9% for the month of February), Germany witnessed a 5.1% increase, the Netherlands registered a 7.6% increase and the UK a 5.4%. These rates not only affect the day-to-day life of citizens but also inflate the revenues of certain companies which may mislead investors…

So What’s In It For The Controlled Environment Agriculture Sector?

For those who are unsure of what the consumer price index (CPI) is, it’s an instrument used to measure inflation. It allows the estimation of the average variation between two given periods in the prices of products consumed by households. It is based on the observation of a fixed basket of goods updated every year. Food & Energy are the two main goods that pushed the CPI to new heights in the past weeks.

In the United States alone, according to the USDA ERS, The level of food price inflation varies depending on whether the food was purchased for consumption away from home or at home:

• The food-away-from-home (restaurant purchases) CPI increased 0.7 per cent in January 2022 and was 6.4 per cent higher than January 2021; and
• The food-at-home (grocery store or supermarket food purchases) CPI increased 1.2 per cent from December 2021 to January 2022 and was 7.4 per cent higher than January 2021.

Food price increases are expected to be between 20-year averages and the rapid increases observed during the pandemic. In 2022, food-at-home prices are predicted to increase between 2.0 and 3.0 per cent, and food-away-from-home prices are predicted to increase between 4.0 and 5.0 per cent.

These inflation rates will increase the retail price of certain crops thus helping CEA operators to increase their revenues, many recent financial results have indicated a sudden increase in revenues for the 4th quarter of 2021 and are expected to further increase in the 1st Quarter 2022. Nonetheless, It is not clear if that is expected to come from increased production, higher market prices, or higher average price per pound due to a greater proportion of 1st quality, or a combination of all of these factors.

Look for operating margins

One of the main talking points for controlled environment agriculture is the heavy reliance on energy to maintain a certain environment to help the plants thrive.

Over half of the electricity produced in the United States comes from Oil & Gas and so does the energy used in most of the CEA facilities. Raising energy prices has sure hit operators and so did their operating margin, in some cases, energy costs in normal times represent over 55-60% of the total operation cost.

Many companies will state increases in revenues and perhaps in some cases in profitability despite not having yet increased their production capacity. Whilst some investors may be attracted to buying their shares or contributing to their funding round, prudence and patience are definitively a virtue to avoid disappointments.

Disclaimer: The content of this webpage is not an investment advice and does not constitute any offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial circumstances.