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.


Information/strategies/trading ideas in this blog is provided for general information purposes only and is not intended as an offer to enter into any transaction. Information contained in this blog is not necessarily complete and its accuracy cannot be guaranteed. Information/strategies/trading ideas here have been prepared without consideration of the investment objectives, financial situation or particular needs of any individual investor. Before a client/investor/reader makes an investment decision, a client/investor/reader should, with or without RBS Morgans' or the author’s assistance, consider whether any advice contained in this blog is appropriate in light of their particular investment needs, objectives and financial circumstances. It is unreasonable to rely on any recommendation without first having spoken to your adviser for a personal recommendation. The use of options may not be suitable for all investors. Potential investors are recommended to seek professional advice before embarking on any strategies mentioned in this blog. The information/strategies/trading ideas contained in this blog have been taken from sources believed to be reliable. Neither the author nor RBS Morgans Limited represent that the information is accurate or complete nor should it be relied upon as such. Any opinions expressed reflect the author’s judgment at this date and are subject to change and is not necessarily that of RBS Morgans'. RBS Morgans and/or its affiliated companies may make markets in the securities discussed. Further, RBS Morgans and/or its affiliated companies and/or their employees from time to time may hold shares, options, rights and/or warrants on any issue included in this blog and may, as principal or agent, sell such securities. The Directors of RBS Morgans Limited and Grosvenor Sydney office advise that they and persons associated with them may have an interest in the above securities and that they may earn brokerage, commissions, fees and other benefits and advantages, whether pecuniary or not and whether direct or indirect, in connection with the making of a recommendation or a dealing by a client/investor/reader in these securities, and which may reasonably be expected to be capable of having an influence in the making of any recommendation, and that some or all of our representatives may be remunerated wholly or partly by way of commission. Information in this blog is proprietary to its author and may not be copied as your own or used for any other purpose without the prior written consent of the author. RBS Morgans Limited (ABN 49 010 669 726 AFSL 235410) A Participant of ASX Group Principal Office: Level 29, Riverside Centre, 123 Eagle Street, Brisbane QLD 4000

Subscribe to our Daily Newsletter?

Would you like to receive our daily news to your inbox?