Favourable seasonal conditions and strong production over the first half of 2023 provided an advantageous start to the year. Nonetheless, the agricultural industry is not immune from the circling economic headwinds. It also faces dry seasonal conditions with below-median rainfall likely across most of Australia over the second half of the year.
Softening commodity prices are impacting Australian farmers following several seasons of higher prices. On the positive side, input costs (such as labour and fertiliser) have eased, and container shipping rates have returned to pre-pandemic levels. These reduced input costs have supported grower margins amidst a broader decline in commodity prices.
So, how can investors gain exposure to the agriculture sector without buying a farm? One option is to invest in agriculture companies listed on the ASX.
What are ASX agriculture shares?
Companies listed on the ASX in the agriculture sector encompass producers of agricultural commodities such as grains and livestock and companies that provide goods, such as fertiliser, to the industry.
Like resource shares, agriculture share prices can be linked to global commodity prices. In this case, commodities such as wheat, corn, and agricultural products. Competitive advantages such as scale, the use of technology, and branding can aid the performance of agriculture companies.
Why invest in the sector?
The outlook for the Australian agricultural sector in 2023 is mixed. A higher Australian dollar is expected to weigh on the competitiveness of our agricultural exports. In addition, the drier seasonal outlook is weighing on production forecasts across a range of agricultural commodities.
Nonetheless, the ongoing diversification of export markets is expected to hold Australian exporters in good stead.
Investors look to get in on the action via ASX agriculture stocks and exchange-traded funds (EFTs). But investing in agriculture is not without risks — fire, flood, and drought threaten the industry at various times. Increased input prices, such as rising fuel costs, can eat into profit margins, and geopolitical influences can impact the supply-demand equation.
Agriculture has traditionally been seen as a more conservative investment, offering reasonably stable returns over the long term. Although returns may not be as outsized as can occur in other sectors, the risks are lower. This means the agricultural sector can provide valuable portfolio diversification.
Top agriculture stocks on the ASX
There are a limited number of ASX-listed agricultural companies. Agriculture stocks sit within the consumer staples sector of the share market. Most are small-caps, companies with market capitalisations between a few hundred million and $2 billion.
Here are three top ASX companies in the agricultural products category ranked by market capitalisation from high to low.
|Costa Group Holdings Ltd|
|Grower, packer, and marketer of fresh fruit and vegetables. Produce|
includes bananas, berries, grapes, mushrooms, avocados, and citrus fruits
|Elders Ltd |
|Supplies primary producers with farm inputs. These include physical, financial, |
marketing, and advisory solutions required to operate farming enterprises
|Ridley Corporation Ltd|
|Provides animal nutrition solutions. The company produces food and |
supplements to meet the needs of a wide range of species
Started in the early 1900s as a family-owned fruit shop, Costa Group has since grown into a significant produce supplier, listing on the ASX in 2015. It has approximately 7,000 planted hectares of farmland across Australia and strategic foreign interests, including six blueberry farms in Morocco and four berry farms in China.
Costa Group builds its business model on optimising a portfolio of integrated farming, packing, and marketing activities. The company aims to be broad enough to mitigate agricultural and market risks while focusing strategically on high-growth and high-value produce categories. The company is well-placed to capitalise on advances in agricultural technology to make the business more productive and efficient, potentially increasing earnings over the long term.
Elders provides farm inputs to Australian primary producers, supporting their needs throughout the production cycle. The company services include finance, banking, real estate services, and wool, grain, and livestock trading. Products include seeds, fertilisers, agricultural chemicals, and animal health products.
As highlighted in Elder's most recent results, agriculture is a cyclical industry. Net profit fell 42% in the six months ended 31 March 2023. Wet weather disrupted crop planting, and lower cattle and sheep prices dragged on profits. But the company expects profits in the second half to exceed those of the first half.
Ridley provides animal nutrition solutions. It manufactures feeds formulated to maximise animal health and performance. Its products serve a wide range of species, including cows, chickens, horses, sheep, dogs, fish, and native animals.
After posting a strong FY22 result, Ridley Corporation's half-yearly 2023 profits softened, with the bulk stockfeed segment taking a hit from wet weather experienced in the first quarter. The company expects to recover these losses. The CEO has advised of plentiful new season grains and improving margins.
Ridley's FY23-25 growth plan includes implementing projects expected to deliver an annualised earnings benefit of $9 million. It expects additional growth from new product offerings, regional expansion and supply chain rationalisation.
What lies ahead for Australian agriculture shares?
Agricultural investments are increasingly in-demand. Agriculture and food production are fundamental to the functioning of society, and the sector's performance is generally uncorrelated with that of the broader stock market. This means that agricultural shares can provide important diversification benefits to investors.
The short-term performance of agriculture shares in Australia depends on natural factors such as the weather and economic factors such as interest rates. Over the longer term, the world population is growing, so we need to feed more people with less land.
The value of Australian agricultural production was $85 billion in 2022-23, according to the Department of Agriculture, Fisheries, and Forestry.1 The value of exports is expected to reach a record of more than $72 billion over the same period. However, flooding has caused widespread damage on the east coast, and inflation is squeezing demand and producers' incomes.
Benefits of investing in agriculture shares
Major global trends are driving opportunity: The growing global population is expected to require 35% more food by 2030.2 Increasing demand for protein sources and technology change and sustainability concerns are expected to drive growth.
Can act as an inflation hedge: Physical land (including farmland) tends to keep pace with inflation, and investing in the sector can help maximise yields and productivity.
Source of dividends: Farming companies can be a good source of dividends. Commodities such as corn, wheat, and soybeans are priced in United States dollars, so a stronger US currency benefits investors.
And the cons…
Weather dependency: Agriculture stocks are often very exposed to the impacts of weather events, as we saw with flooding in late 2022 and early 2023. This means returns can vary depending on the whims of nature.
Cyclical but don't follow economic cycle: Agricultural companies tend to have booms and busts depending on global production and demand levels. But demand for food and other products does not automatically reduce just because the economy slows down.
Are ASX agriculture stocks a good investment?
Agriculture is not just life-sustaining, it is big business. Many agriculture companies produce essential food goods, so product demand is not greatly impacted by economic cycles. These companies can generate significant income when things go right.
On the other hand, the impact of weather events and variable crop yields can lead to a mismatch between supply and demand. This means income can vary from year to year.
Investing in agriculture shares is an investment in food and crop production, processing, and distribution. With a limited land supply and a growing global population, interest in agricultural production is expanding.
For investors wanting exposure to the sector, the ASX offers a variety of shares for direct investing. Investors seeking diversification or broad exposure to the industry may want to consider an ETF such as BetaShares Global Agriculture Companies ETF Hedged (ASX: FOOD).