Elevated food prices set to drive sector growth and diversification opportunity
The Australian agriculture sector is looking forward to bumper crops at a time of rising global prices and offering an enticing opportunity for investors looking for growth opportunities and diversification. Even though short-term risks remain, structural changes mean the opportunities may be around for the longer term.
Exceptional growing conditions and high world prices have combined to give the Australian farm sector one if its brightest outlooks.
Even though rising input costs due to inflation and supply chain disruptions, along with the potential for disease in the livestock sector mean that risks are never far away, there is a growing view that the long-term outlook for the food and agriculture industry is bright.
The Federal Department of Agriculture, Fisheries and Forestry (ABARES) has recently released its latest estimate for agricultural export earnings showing it is on track to hit a record A$70.3 billion in the 2022-23 financial year1 – almost 50% more than the level 10 years ago after allowing for inflation.
“It’s the first time our exports are expected to exceed $70 billion, showing the ability of our farmers to navigate considerable global economic uncertainty and to make a strong contribution to global food supplies,” ABARES Executive Director Dr Jared Greenville said.
ABARES did point out in its report that future growth expectations had been lowered due to the impact of higher interest rates and a sluggish Chinese economy. It also noted that if any outbreak of foot-and-mouth disease or Lumpy Skin Disease, currently in Indonesia, were to occur in Australia, the economic consequences for livestock production and exports could be severe. Nevertheless, the positive outlook is expected to last for some years to come.
Longer term perspective sees change
Agriculture has generally been thought of as a conservative, long-term investment which does not have super high returns, but also does not have the level of risk as many other types of investment.
However, given rising population growth and global supply chain issues, this may be starting to change.
It is a shift already acknowledged by the ASX, which at the end of May launched the S&P/ASX Agribusiness (AgBiz) Index.
Ken Chapman, Head of Strategic Delivery, Capital Markets at the ASX said at the time of launch of the new index, that the exchange had noted five key megatrends shaping the primary industry sector in Australia and globally:
Accelerating planetary climate risks. More volatile climate patterns are seeing commodity prices also become more volatile, while emerging markets for carbon and ecosystem services could transform landscapes and business models.
Booming consumer growth and demand. The growing, empowered middle class in Asia is demanding higher volumes and quality of food and fibre, including more protein – with rising expectations for health, provenance, sustainability, and ethics.
Conflict, complexity and competition. International trade and geo-political relations, along with food and fibre markets, supply chains and relationships, will all become more complex as nations compete for dominance and security.
Exponential advances in technology. Exponential advances in digital technology, automation, genetics, and synthetics will disrupt and change how food and fibre products are made, marketed, and delivered. E.g. cellular meat, source-to-table tracking.
Demand for capital. Maintaining profitable and competitive food and fibre enterprises will require innovation and change, leading to increased demand for capital at all stages in the value chain.
Higher profile sector
By introducing its new AgBiz index (XAG), the ASX sought to highlight the companies well placed to benefit from these emerging trends. The index includes sectors such as brewers, packaged foods, meat producers, paper product makers, fertiliser and agricultural chemical firms, and distillers and vintners.
Among the companies featured in the index are the likes of Penfolds owner Treasury Wines (ASX: TWE), Vegemite owner Bega Cheese (ASX: BGA), as well as A2 Milk (ASX: A2M), Nufarm Ltd (ASX: NUF) and Elders Ltd (ASX: ELD).
“By raising the profile of the sector, the AgBiz Index will increase investor understanding and interest, and be a critical ingredient in priming the market for the next phase of agricultural innovation,” Mr. Chapman said.
Direct investments mixed
Investing directly in agricultural companies listed on the ASX is, of course, the main option for investors given the current strength of Australia's farm sector.
The top five agriculture share performers in the 2022 fiscal year, based on market capitalisation from high to low, were: Nufarm Ltd (ASX: NUF); GrainCorp Ltd (ASX: GNC); Elders Ltd (ASX: ELD); Costa Group Holdings Ltd (ASX: CGC) and Ridley Corp (ASX: RIC).
However, year to date, these stocks have had mixed fortunes with only Ridley Corp performing strongly, posting a 70% jump in net profits for the year to June 30, 2022.
Another stock seen as attractive, in which two well-known billionaires have been building stakes, is the 198-year-old Australian Agricultural Company (ASX: AAC), which is Australia’s biggest cattle empire and the world’s biggest Wagyu producer. British businessman Joe Lewis, owner of Tottenham Hotspur soccer club, reached a 50.07% ownership stake in September while mining magnate Andrew Forrest has purchased a 17.4% shareholding in June.
Year to date, the company’s shares are up 22.6 % boosted in part by speculation about a possible takeover bid from Mr Forrest, who some see as being motivated by the unutilised potential to build a carbon revenue stream out of the company’s land assets, which cover around one percent of Australia.
Domestic ETF awaited
On the ETF front, shortly after the ASX launched its new index, BetaShares unveiled a Future of Food ETF (ASX: IEAT), which highlighted similar trends in the global agricultural sector. However, the ETF does not track the AgBiz index but follows index provider Foxberry’s Next Generation Foods index.
The IEAT ETF is aimed at giving investors exposure to companies that are at the forefront of the tech revolution that is changing the way that food is produced, distributed, and consumed. These include smart farming, plant-based and cell cultured foods, and sustainable packaging.
According to Jessica Leung, assistant portfolio manager at BetaShares, the methodology behind IEAT identifies global companies that are innovating across the food value chain with the goal of building a more sustainable, secure, and equitable food system.
“BetaShares continues to see strong demand for its leading suite of innovative and well-constructed ETFs, including IEAT. Most pleasingly, investors are continuing to take a long-term view when it comes wealth creation – even in the face of recent market volatility,” Ms. Leung said.
Meanwhile, Betashares does offer another food themed fund in the BetaShares Global Agriculture ETF (ASX: FOOD) though it too focuses on global companies involved in the food sector with holdings overwhelmingly domiciled in the US.
Land boom set for growth
Agricultural land prices are another way for investors to tap the growth in the farming sector.
Due to the strong commodity prices and a second year of favourable weather conditions, Australian farmland values accelerated their growth in 2021. The median price for farmland increased to new record highs in every state, except for the Northern Territory, according to research by the Rural Bank, a division of Bendigo and Adelaide Bank.
It found the median price per hectare of Australian farmland was up 20% in 2021 to $7,087 per hectare. This was the largest year-on-year increase in dollar terms in the last 27 years and the largest rise in percentage terms since 2005. The supply of land on the market had also increased, but the strength of demand exceeded this rise in supply to drive prices higher.
One way to tap this market is through buying units in Real Estate Investment Trusts (REITs) which include a lot of agricultural land along with agricultural providers, such as the buildings of things like processing plants. Rural Funds Group (ASX: RFF) was Australia’s first ASX listed diversified agricultural Real Estate Investment Trust (REIT). RFF is included in the S&P/ASX 300 index.
Agriculture is in a boom period phase and many of its commodities have a good outlook for at least the next decade. The addition of new trade agreements with the UK and India are also expected to open further opportunities for Australian farmers.
Together with a shift to more sustainable production techniques and better supply chains, there is growing confidence the sector is on a long-term growth path.
1 The ABARES September quarter Agricultural Commodities Report. Published on September 6, 2022 https://www.agriculture.gov.au/abares/research-topics/agricultural-outlook