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Why the Costa Group share price is jumping higher this morning

Brendon Lau
Costa Group shares

Talk about a welcomed change! The embattled Costa Group Holdings Ltd (ASX: CGC) share price is staging a big turnaround this morning.

Shares in the fruit and vegetable grower surged 2.4% to $2.57 in early trade to become the best performing stock on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index at the time of writing.

In case you are wondering, the Altium Limited (ASX: ALU) share price is in second spot with a 2.2% jump to $37.37. The Magellan Financial Group Ltd (ASX: MFG) share price is following behind with a 1.8% gain at $63.88.

Fresh food prices set to jump

Coming back to Costa Group, the stock is probably running higher on reports that fresh fruit and vegetable prices could surge 50% as the devastating bushfires in New South Wales and Victoria will further constrict supply of fresh produce. Farmers were already struggling with the impact of the drought.

Most of Costa Group’s facilities are believed to be away from the bushfire areas and this means the group could benefit from any price rise.

Vitalharvest Freehold Trust (ASX: VTH), which is the landlord to Costa Group’s berry and citrus farms, reported earlier this month that its Tumbarumba farm in NSW was largely spared from the fire. The farm accounts for around 6% of its berry production.

Surviving the fires

The fire damaged the packing shed but the plants have not been materially impacted, according to the update. The fires aren’t over, but shareholders can at least take some comfort from that fact.      

It’s also worth pointing out that there are only two Vitalharvest properties in NSW with the rest located in South Australia and Tasmania.

If Costa Group’s production is largely unaffected and prices for its produce surges as some are forecasting, it would mark a significant turnaround for the struggling stock. Despite this morning’s bounce, the Costa Group share price is still down a whopping 44% over the past 12 months.

Shareholders will be hoping that 2020 will mark a sustainable turning point for the group, which issued a string of profit downgrades last year.

Other food stocks finding favour

Costa Group isn’t the only one agri-business that’s enjoying a comeback. The Elders Ltd (ASX: ELD) share price is also finding favour with some after Bell Potter reiterated its “buy” recommendation on the stock.

Looking at past weather cycles, the broker reckons this is the right time to be buying the drought affected stock. You can find out more by clicking here.

Higher food prices are also likely to benefit our supermarket giants Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL). Demand for food is relatively inelastic (we all have to eat even if prices go up) and any increase in food inflation will bolster their like-for-like sales figures.

The post Why the Costa Group share price is jumping higher this morning appeared first on Motley Fool Australia.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of Altium. The Motley Fool Australia has recommended Elders Limited. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020