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Growing Chinese demand for Aussie beef could drive these stocks’ earnings

Along with the recent free trade agreements with South Korea and Japan comes the news that China may want to increase its importation of beef and lamb. This could revitalise the cattle and sheep industry if it occurs on the level talked about. Large pastoral areas in WA and Northern Territory could be developed to satisfy this demand.

At a time when Australian agriculture is weak and foreign interest in high quality food sources is growing, related companies could be looking forward to growth.

One such company is Ridley Corporation Ltd (ASX: RIC), which produces and markets animal nutrients and livestock feed as well as conducts property investment. Revenue has trended down since 2007 and underlying earnings usually are around $20-$29 million annually.

In 2013, underlying net profit fell to $12 million, yet in the first half of FY2014 net operating profit resulted in $9.9 million, up over 100% from the previous corresponding period.

Its share price is still trending down from a $1.10 peak in February 2013, but is in a trading range of about $0.80 – $0.90. It didn’t pay a dividend in 2013, but announced an interim 1.5 cent per share dividend for the FY2014 first half.

The company also is developing land in its portfolio, which could benefit earnings over the short to mid-term.

If beef and lamb exports to China and other Asian countries increase, livestock feed products should be in more demand.

Australia’s largest beef producer and live cattle exporter, Australian Agricultural Company Ltd (ASX: AAC), will be kicking off production at its new Darwin meat packing facilities in September 2014. In addition to its live trade to Asia, this will allow it to make processed meat for the local market and make another income stream for the company.

If there is a great increase in live export and meat demand from Asia, the company will be better equipped to supply both needs.

In 2012 and 2013, the company had annual net losses, partly due to the ban on live export trade in 2011 by the previous Labor government, and its continuing effects on the market.

The stock was down to about $1 a share 12 months ago and has risen 29% to $1.29.

Foolish takeaway

The increase in Chinese demand for beef and other meat products will require a build-up of the cattle industry, which has suffered through different problems like drought and under investment.

The changes needed to expand pastoral lands and put together export trade deals will take some time, allowing investors time to study developments.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.