Strong end to the year for Agribusiness in 2010; 2011 to see short-term negativity, long-term gain
EMBARGOED UNTIL: 00.01 Hours 2 February 2011: Against the backdrop of adverse climatic conditions, the listed Agribusiness Sector ended 2010 on a positive note, according to the latest Agribusiness Index released today by the Commonwealth Bank.
The Index, which comprises 14 rural-dependent companies* in the All Ordinaries Index that directly grow food or fibres, produce raw materials and fuels or provide agricultural services in Australia, continued its outperformance of the S&P/ASX 200 Index, returning 8.3% for the quarter compared to 4.4% for the broader share market.
Based on consensus analyst forecasts, the Forecast Fundamental Return indicator for the Agribusiness sector also remains high at 21.7% for the year to December 2011, above the 17.5% Forecast Return for the S&P/ASX 200 Index. Despite this strong performance, however, the forecast return has declined from 33.8% for the September quarter, largely due to earnings downgrades from companies including Gunns Limited.
The Index’s recent positive performance has helped it to improve on an overall annual basis, now delivering -2.7% against 1.6% for the S&P/ASX 200 Index.
According to Brendan White, Executive General Manager of Regional and Agribusiness Banking, Commonwealth Bank, the latest Agribusiness Indicator paints a good picture for the industry as we begin 2011, however with the recent devastation caused by flooding to parts of Australia, he warned to be mindful of the associated short-term impact on businesses in affected areas.
“Although the listed Agribusiness sector saw a strong end to 2010, there’s no doubt that the sector has taken a hit,” said Mr White.
“We can expect to see a negative near-term impact for businesses based in Queensland, Northern New South Wales and Victoria, especially for cotton and grain and also the beef industry, which will be affected by the loss of pasture and disruption to the movement of both fodder and animals. Having said that, it’s important to note that there is also some better news for the sector, with longer-term advantages including better moisture profiles and strong commodity prices.”
The Index shows that forecast volatility has continued to decline, decreasing from 24.2% to 22.7% for the year to December 2011. On a risk-adjusted return basis the Agribusiness sector is currently sitting in the middle of the 12 S&P/ASX 200 sectors, broadly in line with the overall market. This does not, however, take into account the full effect of the recent floods.
While the Agribusiness Index has continued to rally over the last quarter, the Index’s measure for mis-pricing, Exuberance, shows that stocks continue to trade at fair value, remaining largely in line with last quarter’s value and only increasing slightly to 0.4% from -0.7%.
“Whilst it’s clear that there are challenging times ahead and there is no question that many businesses have suffered, the fundamentals for the industry haven’t changed,” said Mr White.
“Agricultural commodity demand, particularly in emerging nations, remained resilient throughout 2010 and strong agricultural commodity prices should persist over the next two years. No doubt, even thought the overall signs for the industry are strong, the next quarter will tell the big story as we continue to measure the impact of recent climatic conditions.”
* To be considered for inclusion in the Agribusiness Index, the prime source of revenue for the company must be Australian.
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About the Commonwealth Bank Agribusiness Index
- The Commonwealth Bank Agribusiness Index 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 Agribusiness stock universe covers any stock in the All Ordinaries index that directly grows food, fibres, raw materials and or fuels in Australia. To be considered for inclusion, the prime source of revenue for the company must be Australian. Agricultural food products include the cultivation of cereals, vegetables, fruit and or meat. Cotton, wool and wood are examples of agricultural fibres and raw materials. Fuels such as methane, ethanol and biodiesels are also considered agricultural products.
- The Commonwealth Bank Agribusiness sector currently consists of 14 rural-dependent companies: Australian Agricultural Company Limited (AAC), Clean Seas Tuna Limited (CSS), Elders Limited (ELD), GrainCorp Limited (GNC), Gunns Limited (GNS), Incitec Pivot Limited (IPL), Nufarm Limited (NUF), Primeag Australia Limited (PAG), Ruralco Holdings Limited (RHL), Ridley Corporation Limited (RIC), Select Harvests Limited (SHV), TFS Corporation Limited (TFC), Tassal Group Limited (TGR) and Warrnambool Cheese & Butter Factory Ltd (WCB). Companies previously included in the sector but since removed due to delisting or exiting the All Ordinaries index include Queensland Cotton Holdings Limited (QCH), Auspine Limited (ANE), Great Southern Limited (GTP), Timbercorp Limited (TIM), ABB Grain Limited (ABB) and Forest Enterprises Australia Limited (FEA).
- 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 commenced 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 14.
- The Commonwealth Bank Agribusiness Index 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.
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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