Pain recedes for beleaguered export industry
Investor focus seems to have shifted back to the agricultural space following the release of two Government announcements which have highlighted the sector as a profitable era for farmers and potential growth opportunity for investors.
The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) has given an optimistic outlook for the agricultural sector, saying the 2020–21 season is shaping up to be the second-most-profitable ever for Australian farmers.
To add to it, the NSW Government will release its ban on genetically modified (GM) crops. According to the Australian Financial Review, that all amounts to a $70 billion windfall for farmers. Bumper harvests and favourable weather conditions should help lift prices for grains, cotton and sugar.
These conditions have prompted farmers and growers to lock-in prices for the next two to three years for their crops. The increased rainfall has predictions for farm incomes to increase by 37 per cent. The lifting of the GM ban will reduce farmers expenses’ by 35 per cent while increasing production by 10 per cent. With this in mind, let’s look at two companies that stand to benefit from favourable conditions:
Australian Agricultural Co (ASX:AAC)
AAC is Australia’s premier cattle and beef producer, primarily focusing on sales and marketing of beef into overseas markets. It is also involved in breeding, backgrounding and operating feed-lots. Since 2019, the company has been in a cost-cutting drive, reducing seasonal costs in line with lower herd volumes in FY20 and FY21.
The cost base has been focused on creating a simpler and more efficient operation. With favourable conditions predicted, incomes are tipped to rise for beef and dairy farms. AAC has a strong balance sheet with total assets of $1.6 billion, and is well-capitalised with substantial remaining access to capital if required.
A report release by Rabobank shows booming meat prices which have hit a three-year high. This trend is set to continue as we move into Christmas and restaurants starts to open following an easing of lockdown laws.
A2 Milk (ASX:A2M)
It’s been a tough year for A2M, but there may be light at the end of the tunnel. Milk prices are starting to rise, which is good news for dairy farmers. Farm gate milk prices are at near-record levels in Australia, according to the latest Rabobank Global Dairy Quarterly report.
These near-record milk prices together with affordable feed prices and favourable weather conditions have set many farmers up for a bumper trading season ahead. The majority of Australian dairy farmers have locked-in near-record milk pricing for the current season. With most of Australia vaccinated, the impact of the Delta variant has been greatly reduced and that bodes well for demand.
Citi has a Buy recommendation with a target price of $7.20 for A2M, against the current price of $6.25. The broker is confident in the milk producer’s prospects. It is encouraged by the improvement in the inventory position, restructured distributor agreements as well as improved systems for tracking and traceability. In regard to China, Citi says signs are emerging that show the brand is more resilient than previously believed.