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Stock performance not indicative of broader Agribusiness outlook, reveals Commonwealth Bank

EMBARGOED UNTIL 00.01 Hours 10 November 2011: The performance of the listed Agribusiness sector has continued to slide on the back of global economic uncertainty, highlighting a growing divide between stock valuations and the broader industry outlook.

According to the latest Commonwealth Bank Agribusiness Index released today, the listed Australian Agribusiness sector posted a further decline of 11.9% over the third quarter of 2011 underlining the ongoing economic and specific debt issues which continue to plague the US and the Eurozone.

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. Whereas the Index had previously continued to outperform the broader S&P/ASX 200 Index on an annualised basis, the latest result now sees it underperforming by -13.9% to -8.6% respectively.

According to Brendan White, Executive General Manager of Regional and Agribusiness Banking at the Commonwealth Bank, while the latest decline was not unexpected, it was now also clear that performance of the listed sector is not necessarily reflective of the underlying strength of the broader agricultural sector.

“It is becoming increasingly evident that there is a growing divergence between the performance of listed Agribusiness stocks and the strong performance at both farmgate and post farmgate level,” said Mr White.

“The results for the listed sector have been declining since the beginning of the year, largely due to a range of climatic and industry specific issues including the floods of late 2010 / early 2011, Cyclone Yasi and the ban on live cattle exports.”

“Despite these challenges, the outlook for the Agribusiness sector remains strong. Enquiry and activity from global and domestic institutional investors is at record levels reinforcing our view that the stock performance witnessed here is not truly reflective of the broader confidence for the sector.”

The Forecast Fundamental Return indicator for the Agribusiness sector declined to 9.7% for the year to October 2012, falling from the June quarter of 16.2%.

Bucking the previous trend, the Index has also revealed that forecast volatility is now likely to increase from 15.8% to 18.0% for the year to October 2012. The Index's measure for mis-pricing, Exuberance, also fell from -15.3% to -19.4%, again largely due to global factors.

Mr White pointed to the impact of volatility witnessed in markets across the world on a range of industries, reinforcing the fact that the Agribusiness sector was not alone in facing strong headwinds as investor sentiment remained mixed. Unlike other industries, however, he also commented that the sector will remain underpinned by strong medium and longer-term fundamentals.

“Despite the lacklustre performance being witnessed among listed Agribusiness companies, key fundamentals, such as global population growth and food security, remain unchanged.” said Mr White.

“The sustainability and productivity of the Australian agriculture sector will continue to drive strong investment and momentum. Combined with high levels of confidence among rural producers and upbeat projections for the winter crop, the overall outlook is very positive.”

According to Luke Mathews, Commodity Strategist, the Australian wheat crop is forecast to be 25.2 million tonnes, which if realised, would be the third largest crop in history.

Excellent conditions in WA, the largest wheat producing state, means their crop may reach nine million tonnes, up from 2010’s drought-affected crop of just 4.7 million tonnes. Improved conditions across much of eastern Australia have also resulted in the Commonwealth Bank upgrading its east-coast wheat crop forecast to a bulky 12.2 million tonnes.

* To be considered for inclusion in the Agribusiness Index, the prime source of revenue for the company must be Australian.

A full copy of the report is available on request.

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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.

    Unless agreed separately, we do not charge any fees for any information provided in this presentation.  You may be charged fees in relation to the financial products or other services Commonwealth Bank of Australia provides, these are set out in the Commonwealth Bank of Australia's Financial Services Guide (FSG) and relevant Product Disclosure Statements (PDS).  Our employees may be eligible for an annual bonus payment.  Some representatives’ bonus payments may be up to 50% of initial fees, and 10% of ongoing fees and commissions that Commonwealth Bank of Australia receives from the placement of a financial product.  Bonus payments are discretionary and based on objectives that include business outcomes, customer service, people engagement, special tasks and people principals.  Our employees may also receive benefits such as tickets to sporting and cultural events, corporate promotional merchandise and other similar benefits. If you have a complaint, Commonwealth Bank's dispute resolution process can be accessed on 1800 805 605.