Six ways to invest in australian agriculture

The Australian agriculture industry is enjoying a remarkable set of circumstances: a combination of record-high crop production, and the highest prices, in real terms, for Australian agricultural produce in 32 years.

The government’s commodities research agency, the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), predicts Australian farm gate output to hit a record $81 billion in 2022, with a record $67 billion worth of agricultural exports.

ABARES expects production to ease to $76 billion, and exports to $62 billion in 2022-23, as pandemic disruption improves and prices retreat, although these would still be the second-highest levels on record.

More recently, the Russia-Ukraine crisis has arrived to turbocharge the lingering effects of disruption coming from the pandemic, supply chain and weather, and this has flowed through to big rises in the prices of grain and fertilisers, and thus, much of the world’s food. The impact is being felt on the ASX.

Because Russia and Ukraine are major wheat producers, their war will curtail global supplies. Combined, the two countries accounted for about half of global wheat and maize exports (about 30% Russia and 20% Ukraine) over the past three years.

Chicago wheat futures started the year at just under US$7.90 a bushel but surged to almost US$13  – a 14-year high – on the back of Russia’s invasion of Ukraine. That has eased back to US$10.58 a bushel, and supply disruptions look likely to continue: according to Trading Economics, Ukrainian wheat production is forecast to drop well below average, with at least 20% of the country’s winter plantations not being harvested because of destroyed farms, constrained access, or lack or recourses to harvest the crop.

In Russia, sweeping sanctions will also slash output, as will financial and shipping problems: Russian wheat exports are already down by 45% since the start of the current July-June marketing season. Industry website world-grain.com says there have been almost no sales of Russian wheat to foreign customers since the conflict commenced.

Although many of Russia’s usual wheat customers – in Southeast Asia, Africa, and the Middle East – have been slow (or reluctant) to apply actual sanctions, industry media says they have started looking for alternative grain suppliers.

For many, that could be Australia – at a time when the La Niña weather pattern has delivered bumper grain yields in many (not all) of Australia’s producing regions. Australia is coming off a record crop, with the company set to export 27.5 million tonnes of wheat in 2021-22. This country has shipping issues that hold back exports, but Australia is one of the few producers capable of lifting its exports to record levels.

1. Let’s talk about GrainCorp (GNC)

On the share market, the grain situation leads naturally to GrainCorp (GNC), Australia’s largest listed grain handler, and is also a canola seed crusher and oil refiner.

GrainCorp has had an interesting few years, since receiving a $10.42 “indicative offer” takeover approach in December 2018 from a company called Long Term Asset Partners Pty Limited (LTAP), which was formed for the sole purpose of taking over GrainCorp. Months of negotiations did not result in a binding bid, and LTAP walked away in May 2019. GNC then slumped as low as $2.95 in the COVID Crash of 2020, but it has put that nadir in the rear-view mirror, surging to $9.19 – GNC is up 30% since the war started.

It has not only been the war – GrainCorp shares were on the rise before the conflict broke out, off the back of a bumper domestic harvest. The Russia-Ukraine war has only strengthened the investment case. In February, GrainCorp issued earnings guidance that pointed to underlying earnings before interest, tax, depreciation and amortisation (EBITDA) in FY22 of $480 million–$540 million and underlying net profit after tax (NPAT) of $235 million–$280 million, which compared well to FY21 underlying EBITDA of $331 million and underlying net profit of $139 million. But earlier this month, the company upgraded its FY22 guidance to expected underlying EBITDA of $590 million–$670 million and underlying net profit in the range of $310 million–$370 million. The floods in eastern Australia may mean that this guidance comes in at the lower end – although GrainCorp’s recent (April 8) update stated that: “Despite recent weather-related supply chain disruptions across (the east coast of Australia), we are continuing to operate our ports at close to full capacity, exporting as much grain as possible to international markets.”

Broker Morgans says GNC is “currently benefiting from near perfect conditions – a big east coast grain crop and high grain/oil prices.” At $9.19, GrainCorp shares are trading well above analysts’ consensus price estimates: Stock Doctor/Thomson Reuters has a consensus target price of $8.18, from nine analysts, while at FN Arena, the consensus target is $8.60, from five analysts – with the most bullish being Morgan Stanley, which sees GNC reaching $10.00. With an estimated FY23 dividend yield of 4.1% fully franked (on FN Arena’s consensus), which equates to 5.8% grossed-up, there is still a bit of attraction in GNC. But the problem, as Morgans points out, is that “eventually these conditions will revert and GNC will be unlikely to cycle these record high earnings again.”

GrainCorp (GNC)

Share price chart of GrainCorp (GNC).

Source: nabtrade

2. Elders (ELD)

Agribusiness heavyweight Elders (ELD), which provides a wide range of products and services to the rural sector, is also a way to invest in Australian agriculture. Elders offers the nation’s farmers services such as farming supplies, fertiliser, crop protection, and animal health chemicals; cattle, sheep, grain and wool broking and agency; rural real estate, business banking and finance, insurance, online auctions, agronomy, and a feed and processing business. It has very deep roots in Australian farming.

Elders’ business is booming on the back of mostly favourable seasonal conditions across Australia, bumper crops, and the fact that cashed-up farmers have wanted to secure their crucial farm inputs in the midst of supply-chain risk. The company has a very bullish outlook, stating last month that it expects to report FY22 underlying EBIT (earnings before interest and tax) in the range of 20%–30% above FY21 underlying EBIT. The company said that outlook exceeded forecast market expectations, as calculated from the mid-point of the earnings expectations of sell-side analysts covering Elders.

At $13.09, Elders is still well under analysts’ consensus price targets, which are $14.50 at Stock Doctor/Thomson Reuters, and $14.46 at FN Arena. There is also a projected FY22 dividend yield of 3.4%, 30% franked (grossed-up, 3.7%), on Stock Doctor/Thomson Reuters’ estimates – which makes ELD a quite attractive opportunity.

Elders (ELD)

Share price chart of Elders (ELD)

Source: nabtrade

3. Two fertiliser businesses: Incitec Pivot (IPL) and Nufarm (NUF)

The ASX’s two big fertiliser businesses – Incitec Pivot (IPL) and Nufarm (NUF) – are also enjoying their time in the sun. Demand for fertilisers was already booming on the back of pandemic-related supply bottlenecks and higher prices for natural gas, a major production input. The war in Ukraine has turbocharged this, because Russia is a major low-cost exporter of crop nutrients, and has suspended exports – and in any case, is facing sanctions from many customers.

With fertiliser prices surging to historically high levels and possibly heading higher, Incitec Pivot and Nufarm have very positive outlooks – but analysts view both stocks as being fully valued.

Incitec Pivot (IPL)

A share price chart of Incitec Pivot (IPL)

Source: nabtrade

Nufarm (NUF)

A share price chart of Nufarm (NUF)

Source: nabtrade

4. Ricegrowers (SGLLV) and almond grower Select Harvests (SHV)

In other crops, Ricegrowers (SGLLV) and almond grower Select Harvests (SHV) appear very well-positioned. Large volumes of rain – especially in New South Wales – have both boosted water allocations and helped rice farmers by pushing water prices lower. As a result, a big rice crop – the largest since 2017 – is expected to be harvested in 2022, with output forecast to increase by about 75% on last year, to 800,000 million tonnes. In March, Ricegrowers told its grower members to expect higher prices for the 2021 and 2022 crops. On the stock market, Stock Doctor/Thomson Reuters’ collation has analysts expecting a 51% lift in Ricegrowers’ earnings per share (EPS), to 57 cents a share, rising a further 16% in FY23, to 66 cents. Ricegrowers is trading at $6.60, but analysts’ consensus has a price target of $8.86. 

At Select Harvests, a market update earlier this month update showed that despite facing adverse weather conditions early in the season, the company was performing in line with expectations. Following the strengthening of global almond prices in the second half of 2021, SHV said that pricing had reduced in recent months – but that Select remains “in a strong position given its lower cost of production and investments in processing and value-adding technology.” Analysts expect strong earnings growth from SHV in FY22 and FY23, and at a share price of $5.35, the stock appears to be excellent value against analysts’ consensus price targets, which are $8.68 at Stock Doctor/Thomson Reuters and $8.80 at FN Arena. There is also an estimated FY23 (September) dividend yield: 3.4%, fully franked (grossed-up, 4.9%).

Ricegrowers (SGLLV)

A share price chart of Ricegrowers (SGLLV)

Source: nabtrade

Select Harvests (SHV)

A share price chart of Select Harvests (SHV)

Source: nabtrade

5. BetaShares Global Agriculture Companies ETF – Currency Hedged (FOOD)

Another interesting play on agriculture and rising food prices is the BetaShares Global Agriculture Companies ETF – Currency Hedged, which trades on the ASX under the code FOOD. It is a simple and cost-effective way to gain exposure to a diversified portfolio of the world’s leading agriculture companies – a sector with strong growth prospects – in a single ASX transaction.

FOOD is an excellent way to tap into the thematic of growing populations and rising global living standards, which are supporting increasing strong demand for agricultural products (food and food production). It also gives you instant diversification away from the Australian share market.

FOOD has generated total return of 24.6% over 12 months, 16.7% a year over three years, and 11.5% a year over five years. The stock has surged 15.5% since Russia invaded Ukraine.

BetaShares Global Agriculture Companies ETF – Currency Hedged (FOOD)

A share price chart of BetaShares Global Agriculture Companies ETF - Currency Hedged (FOOD)

Source: nabtrade

6. Rural real estate investment trust (REIT) Rural Funds Group (RFF)

Rural real estate investment trust (REIT) Rural Funds Group (RFF) is a way to play Australian agriculture as a landlord. The trust is in the great position of having agricultural tenants growing produce on its land on long-term rental contracts – tenants such as Select Harvests. The company’s portfolio is based around almond orchards, vineyards, cattle, cotton and macadamia assets, and water rights. RFF offers a healthy – albeit unfranked – yield, and scope for further price recovery, as confidence increases in the sector. At a unit price of $3.03, analysts think that RFF is fully valued on price terms, but is priced on an expected yield of 3.8% for FY22 and 4% for FY23.

Rural Funds Group (RFF)

A share price chart of Rural Funds Group (RFF)

Source: nabtrade

All prices and analysis at 11 April 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.