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Further decline for listed Agribusiness sector yet weakness to be short-lived

3 August 2011: The listed Agribusiness sector has suffered another fall in performance in Q2 2011 as seasonal and market shocks continue to impact the sector, according to the latest Commonwealth Bank Agribusiness Index, released today.

Listed Agribusinesses were not spared from the negative sentiment affecting the broader market following overseas and domestic economic concerns, with the Index underperforming the S&P/ASX 200 Index by 10.3%, delivering -14.0% for the quarter compared to -3.7% respectively.

The latest results follow the originally anticipated performance decline in Q1 of this year, where the natural disasters of late 2010 and early 2011 began to take effect on a number of companies operating in regional and rural Australia.

The Index comprises 15 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. Although the gap has narrowed, the Index has continued to outperform the S&P/ASX 200 Index on an annualised basis, delivering 18.4% compared to 11.7% respectively.

According to Brendan White, the Bank’s Executive General Manager of Regional and Agribusiness Banking, although the latest results were another short-term setback, the longer-term outlook for the sector remained strong.

"We're still seeing a lag from events occurring earlier in the year and more recent unexpected market shocks present in the second quarter including the live cattle export ban," said Mr White.

“The weakness here is therefore narrowly based, highlighted by the fact that a small number of stocks in the Index were impacted heavily in the last quarter by shorter-term events which has affected the broader Index. Companies such as Gunns Limited, Elders Limited and Australian Agricultural Company Limited have all had their own unique issues to deal with that look likely to be resolved in the coming months."

"We therefore expect the underperformance currently being experienced to be limited to the short-term, with brighter prospects ahead thanks to continued stronger commodity prices and increased levels of confidence amongst Australia's rural producers."

The Forecast Fundamental Return indicator for the Agribusiness sector has declined to 16.2% for the year to June 2012, a further fall from the March quarter of 19.2%.

In contrast to the shocks seen over the last quarter, the Index revealed that forecast volatility has continued to decline, reducing from 15.8% to 15.1% for the year to June 2012. On a risk-adjusted return basis, Agribusiness remains in the top five sectors, sitting slightly above Healthcare.

Most notably, the Index's measure for mis-pricing, Exuberance, fell significantly from -1.8% to -15.3%, largely due to the strong negative sentiment in the markets over the last quarter.

"Confidence among our primary producers will be particularly important moving forwards, as it will hopefully lead to greater levels of investment in the sector to take advantage of more favourable moisture profiles and anticipated higher yields, particularly in the cotton industry,” said Mr White.

"Although we see more positive conditions ahead, it is worth noting that colder and drier conditions being experienced in central west NSW and northern NSW may impact negatively on wheat production. We have, however, also seen an improvement in production conditions in WA which is positive and we also expect grain prices to remain above historic averages through 2011/2012 as a result of tight supplies, particularly for US corn.”

* To be considered for inclusion in the Agribusiness Index, the prime source of revenue for the company must be Australian. In Q2 2011, there was one new stock addition of MSF Sugar Limited, a Queensland based integrated sugar grower, manufacturer and marketer.

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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 15 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), MSF Sugar Limited (MSF), 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 15.
  • 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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