China may not need as much of Australia’s iron ore and coal as it used to, but its hunger for food resources will only grow.
China has tried to meet the unstoppable demand for more food by increasing fertiliser usage. That will do it in the short term, but now large volumes of farmland may be over-fertilised and become less productive, according to the Australian Financial Review.
One of China’s largest food producers New Hope Group is on the hunt for new food sources. Australia offers a great amount of arable land, pastoral acreage and quality food supplies.
The company projects to invest $500 million over three years in agriculture here. New Hope Group already entered a deal with Freedom Foods Group Ltd (ASX: FNP) for dairy products last November. The agreement will establish large-scale dairy farms in Victoria to create long-term supplies for China.
Before the agreement Freedom Foods’ share price had already risen greatly since mid-2012, going from about $0.50 to $3.00 in about 16 months.
This heightened Chinese demand will not only push up sales in Australian agriculture companies, but will lead to foreign investment to build up the industry to produce more.
Investors should be looking for food producer stocks like Freedom Foods. I would suggest the two following companies.
Bega Cheese Ltd (ASX: BGA) is a well-known cheese and dairy product company that rose strongly in share price in 2013 when competitor Warrnambool Cheese & Butter Factory Co (ASX: WCB) was in a three-way takeover bid.
Although half-year earnings of Bega’s normalised business were down 32.5% due to the commodity cycle and commissioning of nutritional infrastructure, interim revenue was up 8%. The Bega cheese segment saw export volumes to Asia rise 18% in the half year. The company could see further growth in the near term.
Australian Agricultural Company Ltd (ASX: AAC), a large beef producer and live cattle export company, has gained 28.7% in share price in the last six months. It is building new facilities in the Northern Territory to meet the growing demand in beef and mutton coming from China and Indonesia.
The stock will move up into the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) after 20 March. This may increase institutional investing in the company and definitely bring the company to the attention of more investors.
Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned.
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