Investing in agriculture seems logical as economic growth in Asia and globally cranks demand for Australian food products. Agriculture may overtake the declining manufacturing sector as a proportion of Australia’s gross domestic product in the not-too-distant future, with companies able to meet and capitalise on this demand set to outperform the market.
What’s more is that agricultural stocks look cheap after unusually poor climatic conditions and the potential bottoming of an economic cycle combined to hit volume, demand, and margins through lower prices for core products such as fertilisers, grain, and livestock.
Some think the best returns over the next decade will come from agriculture investing, here are some ideas to position your portfolio appropriately.
As people gets richer they eat more meat and cattle and other livestock require huge amounts of grain to feed them, indeed it has been estimated that it takes around five kilos of grain to produce half-a-kilo of meat. Graincorp Ltd (ASX: GNC) is a grain processor and supplier with turnaround potential for bargain hunting investors.
Poor climatic conditions and a blocked takeover by U.S. agribusiness giant Archer Daniels Midland Company (NYSE: ADM) contributed to a big sell off recently, but Graincorp may be a great opportunity for long-term investors looking for agricultural exposure.
The Australian Agricultural Company Ltd (ASX: AAC) posted a loss of $31.6 million for the six months to September 2013. As the country’s largest beef cattle farmer it suffered from declining domestic cattle prices, which contributed to a $20.4 million drop in cattle sale revenues during the period.
The ongoing after effects of the Federal Government’s suspension of live cattle exports to Indonesia and dry climatic conditions were also blamed for the loss. In January the group appointed a new chief executive and has turnaround potential if supported by a cyclical upturn and good management.
Nufarm Limited (ASX: NUF) is perfectly positioned to profit from agricultural growth with its crop protection products like herbicides, insecticides and fungicides sold across most of the world’s agricultural regions. This week the company announced a structural reorganisation to slash costs and boost profits.
Selling at $4.08 and based on forecast FY 2014 earnings it trades on a price-earnings under 13 and fully franked yield around 2.23%.
Incitec Pivot Limited (ASX: IPL) is an explosives and fertiliser business that is a key supplier of products to Australian farmers. Valued at $4.9 billion it owns and operates manufacturing plants in Australia, USA, Canada, Turkey, Mexico, Chile and Indonesia. With targeted markets like China and India seeing rapid rises in living standards, Incitec aims to leverage off the continued industrialisation and urbanisation of the developing world.
Selling at $2.91 the forward price-earnings is 14 based on analyst forecasts with a partly franked dividend yield around 3.57%.
Punters looking for a real turnaround could consider the once mighty Australian farming icon Elders Ltd (ASX: ELD). Its had a disastrous few years which culminated in the sudden departure of the CEO in November 2013 and a spectacular half-a-billion-dollar loss in the last financial year, which included revelations of accounting discrepancies. The business is amidst a strategic restructure aimed at restoring its former rural glory, but remains a highly-speculative long-term punt.
The agricultural industry remains challenging on a commercial and practical level, with companies requiring a mix of excellent commercial management, beneficial climatic conditions and cyclical support to succeed. Join these factors together and the best companies should make hay for astute investors.
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Motley Fool contributor Tom Richardson has no financial interest in any company mentioned in this article. You can find him on twitter @tommyr345
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