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Can agriculture stocks enjoy a dining boom?

The smart money has moved into Australian agriculture – a sector that hasn’t been particularly kind to investors.

But are the tables turning?

The $50 billion agri-sector could rival the mining boom, reports the Australian Financial Review as emerging economies like China turn their attention to food security from mineral imports.

Even as the rest of us are nursing painful losses in iron ore stocks like Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), mining magnets like Gina Rinehart and Andrew Forrest are already investing big in cattle stations.

The shrewdness of the move is well quantified by the chart below as investors in the industry enjoy high feeder cattle prices at a time when input costs are falling.

Agri

The price for feeder cattle, which are cows and bulls that are big enough to be moved into feeder lots to be fattened for slaughter, has surged close to 50% over the past three years at a time when the cost of fuel and corn/grain (used in feedstock) has fallen.

Australian producers are enjoying an additional tailwind from the falling Australian dollar, which will only help fatten profit margins and make them more competitive on the global stage.

While ASX-listed agriculture related stocks have a patchy record at best of producing returns for investors, they are pulling ahead of resources stocks as tumbling hard commodity prices weigh on the mining sector.

Agristocks

Cattle company Australian Agriculture Company Ltd (ASX: AAC) is up 14%, while rural services group RuralCo Holdings Ltd (ASX: RHL) is 32% ahead over the past five years.

In contrast, our mining giants Rio Tinto and BHP Billiton Limited (ASX: BHP) are sitting on losses of around 30% each.

But before you get too excited, you should know that investing in the agri-sector is a lot harder for mum and dad investors for a number of reasons.

Firstly, there’s simply a lack of choice. There are very few agri-stocks to choose from and the lack of diversity makes it difficult for investors to control risk.

Further, the situation appears to be getting worse, not better. The proposed takeover of cotton and water rights trading company Tandou Limited (ASX: TAN) by walnut and onion company Webster Limited (ASX: WBA), and our propensity to sell agriculture assets to offshore investors are some of the reasons why the pool of investments is getting shallower.

Perhaps Tandou’s justification for recommending the takeover to investors sums it up best. Australian investors just don’t appreciate agri assets enough with Tandou’s shares trading under its tangible asset value for a long time.

Another problem is the lack of coverage in the sector, especially when you compare the attention the mining sector gets – yes, even today when the mining sector has been de-rated.

The poor broker coverage of agri-stocks makes it harder for retail investors to decide when to buy into the sector.

Lastly, most of the action is concentrated on private assets –an area that is out of reach of the everyday investor.

Investing in this space is just as volatile as investing in mining with operations impacted by a range of factors that are outside the control of management. This includes weather, government regulations, trade barriers and volatile global commodity prices.

For those looking to get a toehold in the sector, perhaps the analogy used during the mining boom is the best way to play this thematic – don’t buy the miners, but invest in the ones selling the spades and shovels.

From that perspective, stocks like Ridley Corporation Ltd (ASX: RIC) and RuralCo look appealing if you believe agri-stocks will embark on the same multi-year boom that was enjoyed by the miners.

I for one would love to see initial public offers in this space, but until that happens this is one sector that is hard to take seriously.

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Motley Fool contributor Brendon Lau owns shares in Ridley, BHP and Rio Tinto. Follow me on Twitter - https://twitter.com/brenlau

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 policyThis article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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