Agri sector holds strong despite broader market losses
23 January 2008
Despite recent woes of the S&P/ASX 200, investor confidence in Australia’s listed agribusiness sector remains high, with the consensus outlook for the sector looking strong in 2008.
The Commonwealth Bank Agri Indicators Report1 for January reveals that where the S&P/ASX 200 Index has been heavily weighed down by concerns stemming from the US sub-prime loan crisis, the agri sector has been much more resilient.
Over the last month, the agri sector has significantly outperformed the broader market by 13.5 per cent to deliver investors a total return (including dividends) of 3.2 per cent. This compares to a negative return from the broader market, which has shed 10.3 per cent in the same period.
The Bank’s Agri Indicators Report also shows continued good news for investors in the sector, tipping the consensus forecast returns at around 35 per cent – more than double that of the S&P/ASX 200 Index.
According to Jon Sutton, Executive General Manager Agribusiness, Commonwealth Bank, January’s Agri Indicator’s Report points to growing confidence at the farmgate.
"Agribusinesses have been buoyed by the good summer rains and this sentiment is flowing through to the investor community. The January Agri Indicators Report indicates the resilience of the agribusiness sector in a bear market."
January’s Report further underlines the stellar run of the sector over the last 12 months, which has rewarded investors with a total return (including dividends) of 42.8 per cent year-on-year, compared with a much more modest 6.3 per cent for the S&P/ASX 200.
However, Mr Sutton warns that investors should still be wary of possible market volatility.
"Although the agri sector is looking good for investors, it has experienced a slight increase in volatility over the past month, reinforcing the fact that future returns are never certain.
"Forecast volatility for the sector is now slightly higher than the market at 16 per cent and exuberance is slightly elevated to around four per cent. This trend typically indicates the likelihood of a correction in the not too distant future."
Tobin Gorey, Commodities Strategist, Commonwealth Bank, said the sector’s resilience against that of the broader market can be attributed to its insulation from the slower economic growth anticipated in high income countries such as the UK and US.
"The agricultural sector is reaping the fruits of a growing demand for food and energy produce from emerging markets in Asia. Australian agribusinesses are well placed to take advantage of this and investors are continuing to take a shine to agri stocks here and elsewhere across the globe.
"Good rainfall in summer crop areas of Queensland and New South Wales will probably result in bigger crops, especially for sorghum, and pasture growth can support re-stocking. Added to this, production gains will also boost agribusiness activity," said Mr Gorey.
Mr Gorey also points to the recent launch of PrimeAg as an example of a new type of investor demand.
"Previously, investors have been seeking rural properties largely for capital gains in land values; now, investors are looking to make a bigger chunk of the returns from operating farming businesses on these properties," he said.
"Overall, the January Commonwealth Bank Agri Indicators Report shows that the outlook for listed agribusinesses is overwhelmingly positive and the stellar performance we have been seeing over recent months is set to continue throughout 2008," said Mr Sutton.
The Commonwealth Bank Agri Indicators Report is created by analysing 15 major agribusiness stocks measuring market volatility, exuberance and fundamental shareholder returns.
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Notes to editors:
1 About the Commonwealth Bank Agri Indicator
The Commonwealth Bank Agri Indicators is created around three 12 month forecasting models – Fundamental Return (consensus forecasts of earning and dividends for individual stocks in the sector), Exuberance (proprietary measure of market mis-pricing), and Volatility (derived from proprietary methods of modelling realised volatilities, detecting changes in long-run levels and correcting for switchbacks and other correlation patterns in the data).
The Commonwealth Bank Agri Indicators measures the performance of the Commonwealth Bank defined ‘Agribusiness’ sector over time. The Commonwealth Bank Agribusiness sector currently consists of 15 rural-dependent companies: Australian Agricultural Company Limited (AAC), ABB Grain Limited (ABB), AWB Limited (AWB), Futuris Corporation Limited (FCL), Forest Enterprises Australia Limited (FEA), GrainCorp Limited (GNC), Gunns Limited (GNS), Great Southern Limited (GTP), Incitec Pivot Limited (IPL), Nufarm Limited (NUF), Ruralco Holdings Limited (RHL), Ridley Corporation Limited (RIC), Select Harvests Limited (SHV), Tassal Group Limited (TGR), Timbercorp Limited (TIM). Companies previously included in the sector but since removed due to delisting or exiting the All Ordinaries index include Queensland Cotton Holdings Limited (QCH) and Auspine Limited (ANE).
The Commonwealth Bank Agri Indicators is a non-float adjusted, market-cap weighted index constructed using the same methodology as the S&P index series. To be considered for inclusion in the index, each stock must be in the All Ordinaries index. The Commonwealth Bank Agribusiness Indicators begins on 3 April 2000 which is the same date as the launch of the S&P/ASX index series in Australia. At inception there were eight stocks included in the index. Currently, there are 15.
The Commonwealth Bank Agri Indicators should be used as a guide only to the performance of the Agribusiness sector, as a way to measure its performance and potential return over the coming months and year.
The Commonwealth Bank Agri Indicators report is attached.
About the Commonwealth Bank
With a market capitalisation in excess of $AUD 64 billion, the Commonwealth Bank (Group) is Australia largest financial institution, providing convenient and accessible banking and financial services for all Australians.
With more branches, agencies, ATMs, EFTPOS outlets and 24/7 call centres than any Australian banking and finance competitor, and offering Australia’s leading internet banking service, the Commonwealth Bank is a diverse organisation with a long history in the Australian banking industry.
This report has been prepared without taking account the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual's objectives, financial situation and needs and, if necessary, seek appropriate professional advice. Past performance is not a reliable indicator of future performance. Commonwealth Bank of Australia ABN 48 123 123 124, AFSL 234945. A full copy of the Agri Indicators Report can be obtained by contacting our AgriLine on 1300 245 463 7am to 7pm (AEST time), Monday to Friday.
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