Agri feels the pressure as fear grips the market
27 October 2008
The extreme volatility in global financial markets has finally caught up with Australia’s listed agribusiness sector, causing it to experience a sudden drop in value over the past month. However, looking longer-term it has continued to outperform the S&P/ASX 200 accumulation index.
According to the October Commonwealth Bank Agri Indicators Report, the agri sector declined 22 per cent during the month to 15 October, while the broader S&P/ASX 200 accumulation index shed around 11.4 per cent of its value.
While the weak performance of the sector over the past few months has magnified its fall, it has not actually suffered more than the broader market. Both indices have fallen similar amounts from their peaks, but the drop in the agri sector has been more rapid over a shorter period of time.
Jon Sutton, Executive General Manager, Commonwealth Bank Agribusiness, said, “The agri sector’s initial immunity to the troubles plaguing the broader market mean that despite its recent woes, year-on-year it has still outperformed the S&P/ASX 200 by nearly 17 per cent.”
Although earnings prospects remain very strong for the agri sector at around 30 per cent and the sector is still significantly underpriced, the current economic environment means the market is placing very little value on fundamentals.
“Investors are trading on sheer fear at the moment. The last 12 months have been particularly difficult and few sectors have been spared by broader market woes. While the outlook for agri may look encouraging fundamentally, current sentiment suggests investors need to be mindful of other influencing forces,” said Mr Sutton.
The recent fall in the AUD has however provided some comfort at the farmgate. Despite rising input prices, the AUD’s fall against the USD has helped to cushion the impact of lower returns for farmers, particularly for grain growers.
“In the last two months, wheat prices in USD have fallen way back by about 40 per cent, primarily driven by the liquidation by funds of commodity positions. Over the same period the AUD has dropped by 25 per cent, so the AUD price of wheat has only fallen by 20 per cent – which provides some relief for our growers,” said Mr Sutton.
He also provided further comment on the opportunities for other agricultural exports.
“Despite the effects of the global economic slowdown filtering through to emerging Asian markets, we do still expect to see an increased consumption of protein due to demographic shifts.
“Our agriculture industry is well placed to capitalise on this trend and this is helping to keep confidence up at the farmgate,” he concluded.
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Notes to editors:
i. About the Commonwealth Bank Agri Indicators Report
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 Agribusiness index measures the performance of the Commonwealth Bank defined ‘Agribusiness’ sector over time. The Commonwealth Bank Agribusiness sector currently consists of 16 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), Primeag Australia Limited (PAG), 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 Agribusiness index 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 a in the All Ordinaries index. The Commonwealth Bank Agribusiness index 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 8 stocks included in the index. This number is currently 16.
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.
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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