Here in Australia many of us think of commodities as those things that can be mined from beneath the earth, and now the sea floor. Australia is blessed with commodities like oil, gas, uranium, and gold, but in today’s frightening economic climate, we should not overlook the soft commodities – those things that are grown from the earth rather than mined from beneath it. Worldwide there is a growing “survivalist” movement, populated by those who believe a global economic calamity is looming on the horizon. Although theirs is an extreme view, hardly anyone who reads the business news does not have concerns about where we are headed. Investors who have not fled to the purported long term safety of gold are looking for safe havens. Soft commodities may be the answer. When times get desperate, countries can stop building bridges and roads but their citizenry has to eat. Short of world chaos, the growing middle classes in emerging market countries like India and China are no longer satisfied with a diet of rice and vegetables. They are increasingly looking to western foods, like beef, lamb, and dairy products. The vast majority of Australians are well aware of the resources boom in hard commodities over the last decade. The following chart compares the commodity price index for food against commodity price index for metals: Note that while food prices collapsed along with metal prices at the onset of the GFC, they did not fall as far and they began to recover quickly, surpassing pre-GFC levels by 2011. There are other factors besides population growth and exploding middle classes in emerging markets that bode well for continued rise in food prices. In a strange twist of fate, agricultural land is now being used to produce foodstocks for biofuels, leading to competition for land use between fuels and food. Regardless of whether you believe in global warming and climate change or not, there is growing evidence of world wide weather related disasters impacting the production of food. Finally there is the growing presence of speculative money in the soft commodity space. In times gone by such speculators were limited to hedge funds and other private equity firms. Today the advent of ETFs and mutual funds in the space mean that little lady next door to you may very well be an unwitting commodities speculator through her retirement fund! While there are not many publicly held agri-business firms in Australia, we are an agriculturally rich nation. Australia, Brazil, and the United States go back and forth over the title of world’s largest beef exporter. The following graph shows the rise in prices of Australian and New Zealand frozen beef exported to the US over the last 25 years: Even though Australia lacks the presence of giant food producers like ConAgra and Dole Foods in the US, there are opportunities in the ASX for investors to cash in on the soft commodities boom. Here are six stocks to consider:
52 Wk Hi
52 Wk Lo
Incitec Pivot Ltd
Australian Agricultural Company Ltd
Ridley Corporation Ltd
Warrnambool Cheese & Butter Company
The first two shares listed are in the Materials sector since they provide products and services to companies actually producing food products, as do the remaining four. In brief, IPL provides fertiliser for agricultural products to grow while NUF makes pesticides, herbicides, and fungicides to keep things healthy and bug free. Incitec Pivot Limited (IPL) had a tough year in terms of share price performance; tougher in fact than the ASX 200 XJO Index. Here’s the chart: IPL is the largest supplier of fertiliser in Australia. They make their products at facilities in Queensland, Victoria, and New South Wales. Their national distribution network supports growers all across eastern Australia. Tropical fruit growers, dairy farmers, and grain growers all rely on IPL’s innovative and constantly improving product line. The company also makes explosives, largely for the US market. Commodity prices can be volatile so this company is not considered suitable for very conservative investors. The company is combining its domestic and international fertiliser operations and opening a new manufacturing facility for the explosives division to better control costs and expand production capability. Despite its share price decline, 5 out of 8 analysts placed a BUY rating on the shares in recommendations released from February through April of 2012. Nufarm (NUF), an Australian based international supplier of pesticides also had an up and down year. Here is their chart: NUF is truly a global company, with manufacturing and distribution facilities all over the world with product sales in more than 100 countries. In 2009 they began acquiring seed companies, with their most recent acquisition in November of 2011, in an effort to broaden their product portfolio. However, in an effort to move towards higher margin products, they have increased costs, and that, coupled with the European slowdown, led to some Broker downgrades following their 27 March 2012 earnings release. However, Japanese chemical giant Sumitomo – which acquired 23% interest in Nufarm in March of 2010, continues to expand their working relationship with the company. Graincorp Limited (GNC) is both an agricultural producer and a major supplier of agricultural services, largely in eastern Australia. . If you tip a brew now and then, you will be pleased to know GNC is the fourth largest producer of malt in the world. In an additional effort to expand their business, they acquired a controlling interest in an Australian flour miller. Their traditional business, however, is providing a variety of services to the grain growers – from logistics to storage to marketing. GNC had a difficult time in 2011 but has recovered well in early 2012. Here is their year over year share price performance chart: Agribusiness internationally is rife with merger and acquisition activity as the big seek to get bigger to take advantage of the potential for a boom in soft commodities. Graincorp plans for the future include both organic grown and continued acquisitions. However, there is speculation they may be among those taken over. One rumor has it that Canadian grain handler Viterra is interested in GNC, while a UK news report has it that someone made a $5.5 Billion dollar offer to acquire Viterra! Some agricultural experts claim the demand for wheat in China will double in the next few years, which would obviously be good for GNC. Australian Agricultural Company (AAC) is Australia’s largest supplier of beef cattle and supplies global markets as well as the domestic market. Droughts and flooding over the last four years have taken their toll on this company and their five year share price performance certainly reflects those troubles: Despite their difficulties, this company has significant assets, including over 600,000 head of cattle and agricultural property across Queensland and the Northern Territory of about 7.2 million hectares. This is a highly volatile stock that is suitable only for risk tolerant investors with a great deal of patience. Australian beef is grass fed, not grain fed, making the meat more marbled and flavourful than beef produced in the US, where the cattle is corn fed. If predictions about rising demand for more and better meat in China prove to be true, AAC may be an investment to consider. The Ridley Corporation (RIC) is another Australian agricultural producer that has suffered recently from bad weather. Ridley provides a variety of animal nutritional supplements so when their customers struggle with bad weather, so do they. The company also makes supplements for laboratory animals and domestic pets. In addition, they are a major supplier of salt for industrial and commercial purposes. At the present time they have no international exposure. Warrnambool Cheese (WCB), the smallest company on our list, is Australia’s only publicly held dairy producer. They make cheese, milk powders, whey concentrate, butter, cream and packaged milk for wholesale customers in domestic and export markets. In addition, here in Australia they market fresh milk with the brand name Sungold and two brands of food supplements, Enprocal and Pro10Active. Despite its size, there are two analysts out there with a STRONG BUY rating on this company and one with a HOLD recommendation. WCB has been in business for 120 years and has rewarded its investors in the past. Here is a ten year share price performance chart for WCB: Note that before the disastrous market downturns beginning in mid 2011, WCB had actually exceeded its pre-GFC share price. While all of these companies will benefit in a soft commodities boom, the share price charts we included tell us which ones market participants are betting on, at least for now. Tiny WCB is showing a 60% year over year increase in share price while giant GNC has share price appreciation of 15%.
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