Latte with Ray – Australian Agricultural Sector | Raymond Chan | Finance News Network

Latte with Ray – Australian Agricultural Sector

by Raymond Chan

The end of Commodity Boom sent all hard commodity prices to depressed levels (Iron Ore, Oil, Gold fell over 50% from their respective highs). While most believe agricultural commodities should avoid the selloff given the structural demand from a growing Asian population, the agricultural commodities have almost halved from 2010 high. There are three key reasons we should re-visit the agricultural sector:
 
Firstly, the Australian agricultural sector (i.e. farm and related sectors) is economically significant to us with gross production of A$155 billion per annum (or 12.1% of GDP). The three biggest industries are: 1) Cattle; 2) Wheat and 3) Dairy. There are 140,000 farmers plus 1.6m people employed in agriculture and its related industries (17.2% of national workforce).Secondly, Australian farmers not only produce almost 93% of Australia’s domestic food supply, they are also the 4thbiggest exporter of production in global agricultural markets. (#1 wool and goat meats, #2 beef, #3 wheat and sugar).
 
Last but not least, Australia is the food bowl to Asia.
 
Recently, Latte with Ray found the Australian cattle price trend was the most constructive, as shown in Chart 2. The domestic cattle price traded at a lower level between 2012 and 2013 due to a relatively high AUD, the Indonesian life stock ban and poor seasonal conditions. This is set to change now with a lower AUD, the lowest cattle herd in many years and the China / Australia Free Trade Agreement.Our Analyst Belinda Moore commented,
 
“The Australian agricultural industry is a key beneficiary of the Free Trade Agreement (FTA) with China which will result in the elimination of tariffs over the medium to longer term. The deal follows FTA agreements earlier in the year with Japan and South Korea. The China deal is the most important given China is our major trading partner with Australian farm exports doubling in the five years to 2013 and were valued at over A$7bn in 2013. As many commentators have said, the future in Australia is about the "dining boom". The National Farmers Federation (NFF) said the three FTA agreements pave the way for the golden age of Australian agriculture in the Asian century.”To play this theme, there are a number of ASX listed stocks with leverage to the upside (and downside) on Cattle Price trend. The most obvious one is AAC (Australian Agricultural Co). Having said that, we found another ASX company which will indirectly benefit from trend - ELD (Elders).
 
Elders (ELD) is an iconic brand in rural Australia with a 175 year history. It has a national distribution network with 370 points of presence and relationships with 40,000 active customers. In the past 5 years, the business was poorly managed with high level of debts. Now, with the right management team (ex Wesfarmers executive), a recapitalised balance sheet (interest coverage exceeding 4 times) and a strategy in place (agency model vs old capital intensive model) which aims to deliver A$60m of EBIT and a ROC of 20% by 2017, we believe that now is the time to re-look at ELD.














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