Low Volume Bunge Plunge Presents an Opportunity

Bunge stock price

On March 14th, oilseeds processor Bunge Ltd. (NYSE:BG) jumped 14%. The nearly 40 million shares that traded that day were 25-times the stock’s normal volume — and the highest the stock has seen in over five years. 

That wasn’t even the best part. The surge had little to do with farming. 

St. Louis-based Bunge announced a collaboration with energy giant Chevron and agriculture industry peer Corteva to harvest winter canola plants as a source of renewable fuel. The crop, which is slated to be planted in the southern U.S., is intended to address the growing demand for low-carbon renewable energy. In conjunction with domestic investments in wind, solar and water, the project is expected to support the nation’s push toward clean energy alternatives for electricity.

No, this isn’t your grandmother’s vegetable oil.

What Is Winter Canola?

Each year, some 2 million acres of canola are grown in the U.S. in spring and winter variants. Winter canola is planted in September and harvested in June.   Although it accounts for the minority of domestic canola production, yields on winter canola are 20% to 30% greater than those of spring canola. Seeds produced in canola pods are crushed to make canola oil and meal. More recently, the crop has been targeted as a valuable source of renewable energy.

The Bunge-Chevron-Corteva collaboration aims to produce plant-based oil from winter canola that has lower carbon content than traditional fossil fuels. The idea is that an increased supply of vegetable oil feedstocks would help grow the U.S. renewable fuels market and reduce a dependence on overseas oil. It could also introduce a new revenue stream for farmers committed to sustainable crop production. 

What Does the Project Mean for Bunge’s Financials?

The new initiative is an extension to Bunge’s existing joint venture (JV) with Chevron called Bunge Chevron Ag Renewables. The JV is planning to set up contracts with farmers in southern states to buy the winter canola crop for the purpose of producing renewable fuel. This could, however, take time before it has a meaningful impact on Bunge’s financial statements.

The companies expect to launch a pilot program to refine best practices during the 2022-2023 crop season. Since this runs from the spring’s last killing frost to the fall’s first killing frost, the project won’t likely get into full swing until the 2023-2024 growing season. Based on next year’s farming outlook, the timing could benefit Bunge revenues. 

The USDA’s initial outlook for the 2023-2024 crop season calls for increased corn production and flat soybean production — but lower prices for both. This suggests that Bunge will face growth challenges heading into next year due to muted demand from farmers. If the renewable fuels project gains traction by then, it could provide a much-needed revenue boost for Bunge.  

What Is Bunge’s Earnings Outlook?

In 2022, Bunge’s adjusted earnings per share (EPS) were up 7.6%. The result was particularly impressive for two reasons: 1) it followed a record performance in 2021, and 2) the company finished the year strong despite declining commodity prices in the back half of the year.

As far as this year’s results, management is braced for a downturn. Due to lower futures prices on commodities and a tighter margin environment, Bunge’s full-year adjusted EPS guidance of $11 implies a 21% dip in profits versus last year.

Does This Make Bunge a Good Investment?

This means that Bunge is trading around 8x this year’s earnings estimate. After a string of record results, the market may not like seeing negative year-over-year comparisons — but this will be a reset year for the company after a prolonged period of abnormally high pricing. 

However, Bunge’s leading role in the agriculture industry won't change. Given the secular tailwinds around safer, more efficient food production, the stock remains a solid long-term play — especially at a P/E ratio of 8x.

In theory, the Chevron partnership could be a game changer, and that’s why the stock reacted as it did. As southern farmers look to rediscover growth in the face of normalized pricing, winter canola production could become a popular avenue. Whether or not this ultimately moves the needle on Bunge’s financials remains to be seen. 

What makes Bunge intriguing is the low volume pullback that has unfolded since last week’s ‘superspike.’ Profit taking by weak hands may present a more compelling entry point for patient long-term investors. 

The consensus price target on Bunge implies approximately 30% upside. Add in a 2.7% forward dividend yield and shareholders could be harvesting a nice total return.