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Here are the 3 reasons I’m watching Aussie agriculture stocks like a hawk

Australia has the makings of south-east Asia’s prime food source. We have a prime climate for wheat and beef, ample space to grow both, and a rich heritage of agricultural expertise.

Of course our climate is rarely as accommodating to these activities as we would like it to be, but you can’t have everything.

Of our top ten export destinations, seven are in Asia (China, Japan, South Korea, India, Singapore, Taiwan, Malaysia), and a majority of these lack either the climate or space (or both) for growing beef and wheat – which is where we come in.

Australia has two prime agriculture companies, Australian Agricultural Company Ltd. (ASX: AAC) and Graincorp Ltd  (ASX: GNC). The businesses could be described as fraternal twins, both operating a vertically integrated structure responsible for much of their own growing, value-adding, storing, logistics and marketing.

Australian Agricultural Company (AACo) has had some rough times over the past few years thanks to drought and the live export ban, although its branded beef business is beginning to show considerable promise.

Similarly Graincorp has seen its share price halved after a proposed takeover by American company Archer Daniels Midland was blocked by the Federal Government.

Both businesses continue to show considerable promise for the long term however, and here’s why:

1)      Australian agricultural exports are growing organically.

Despite drought conditions over the past couple of years, Australian wheat exports have grown at an average of 11% over the past five years. Beef has been much more modest at 3% as we compete with India in particular for export to south-east Asian nations.

India enjoys a significant cost advantage, while Australian herds are free from endemic disease which allows us to export to Japan, Korea and the US.

2)      Growing material prosperity in Asia.

I’ve been banging this drum for a while now, because it’s information that the long-term investor in export companies needs to know. A majority of Asian nations are enjoying fast-growing economies and growth in their material prosperity, which allows them increased and more varied consumption of many things, not just food.

One of the key markers of a growing economy is an increase in demand for processed foods and protein, which AACo and Graincorp are in a perfect position to provide. Graincorp recently purchased a stake in an Egyptian flour mill which increases that company’s footprint even further west.

3)      Strong leadership in both wheat and beef industries.

You don’t often hear this one mentioned, but when taking a long-term view of Australian agriculture it’s extremely important. CSIRO has been working fairly successfully for years to generate wheat with increased yield, less water use and greater salt resistance among other characteristics.

Meat and Livestock Australia has been working equally hard to improve production through genetics and cost efficiencies for its producers. Australian agriculture is largely unsubsidised and must compete on cost and quality in an international market.

With our comparatively high wages, we rely on efficiency and innovation to deliver an internationally competitive product, and this kind of swim or sink mentality will keep Aussie agriculture razor sharp for years to come.

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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