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Graincorp (ASX:GNC) share price tumbles 9%. Here’s why it looks like a bargain

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The Graincorp Ltd (ASX: GNC) share price fell sharply today, closing the day down 8.86%.

That’s a far steeper loss than the All Ordinaries Index (ASX: XAO), which finished the day down 2.1%.

Year-to-date, however, Graincorp has handily beaten the index, with a share price gain of 8.7%, even after today’s losses. Meanwhile, the All Ords is still down 11% since 2 January.

What does Graincorp do?

GrainCorp is an Australian agribusiness founded in 1916, when it was administered as a branch of New South Wales’ Department of Agriculture. Today it operates in more than 30 countries, providing a range of products and services with a focus on grains, oilseeds, pulses, edible oils and feeds.

The company has an integrated supply chain, starting from accumulation and storage which links up to road and rail freight options as well as port facilities. GrainCorp’s malt segment was spun-off into a new ASX-listed entity, United Malt Group Ltd (ASX: UMG), in early

Graincorp’s shares first began trading on the ASX in 1998.

Why could the Graincorp share price run higher from here?

A large part of Graincorp’s business stems from the storage and transport of grains. Logically then, if the grain harvest goes up, so too does Graincorp’s business, and potentially its share price.

That’s where the latest Australian crop report – released yesterday by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) – comes in handy. And the report indicates Australia’s agricultural output, overall, is in for a large uptick.

That’s largely due to the solid rainfall and favourable weather patterns most regions experienced in spring, seeing winter crops flourish and offering a good start for the coming summer crops.

ABARES forecasts that Australia’s winter crop production will increase by 64% in 2020–21. If that proves correct, production will be at levels 20% higher than the previous 10-year average.

Wheat is looking particularly strong, with production forecast to increase 91% year-on-year, up 22% from its 10-year average. Barley production is also forecast to swell, up 23% from the 10-year average.

With crops, as a whole, off to a good start in spring, ABARES is also forecasting a 194% increase in Australia’s summer crop output.

With the Graincorp share price down over 11% since Tuesday’s opening bell, investors don’t appear to be pricing in a likely big increase in the demand for its services over the coming months. But if the ABARES forecast pans out, that increase should be coming.

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Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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