Listed Agribusiness growth slows however overall performance remains strong

17 May 2011: As expected, growth in the listed Agribusiness Sector has slowed following the negative climatic and economic events witnessed over the last six months, according to the latest Agribusiness Index released today by the Commonwealth Bank.

The Index performed in line with the S&P/ASX 200 Index, returning 3.1% for Q1 2011 compared to 3.2% for the broader share market. In the previous quarter the Index delivered stronger performance, outperforming the market by 89%.

The Index 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. Despite the reduced growth experienced in the latest quarter, the Index has continued to outperform the S&P/ASX 200 Index on an annualised basis, delivering 11.1% compared to 3.4% respectively.

According to Brendan White, the Bank’s Executive General Manager of Regional and Agribusiness Banking, the latest results were a reflection of the effects of past negative events now being felt in the sector.

“The sector is now experiencing the expected short term slowdown as a result of the devastating flooding witnessed across Australia and the effects of Cyclone Yasi that hit earlier this year,” said Mr White.

“Australian exporters are also continuing to be challenged by the rising Australian dollar which has been trading at historically high levels and recently touching USD110. Whilst demand for agricultural exports and soft commodity prices remain strong, we are also watching fuel prices closely and are waiting to see the effect of the recent disaster in Japan on our export volumes.”

In spite of a slowdown in growth, Mr White pointed towards a silver lining for the sector with stronger future prospects as a result of better moisture profiles and continued high commodity prices.

“Despite these short-term impacts, the overall outlook for Agribusiness remains extremely positive. We are also seeing a number of companies in the sector reviewing their strategies which may lead to future consolidation.”

The Forecast Fundamental Return indicator for the Agribusiness sector remains elevated at 19.2% for the year to March 2012. This marks the third successive decline, with the latest figures slightly down from last quarter’s forecast of 21.7%, which also saw a decline from 33.8% for the September quarter.

Despite the multitude of negative events affecting the sector, the Index shows that forecast volatility has declined dramatically, decreasing from 22.7% to 15.8% for the year to March 2012. On a risk-adjusted return basis the Agribusiness sector is currently towards the front of the pack, performing in line with Utilities and Consumer Discretionary.

While the Agribusiness Index has seen a small rally over the last quarter, the Index’s measure for mis-pricing, Exuberance, also fell slightly from 0.4% to -1.8%.

“The good news is that the Agribusiness sector remains well positioned for growth. Many sectors are still experiencing strong momentum so we are confident that the medium and long term outlook remains strong,” said Mr White.

“Asia’s appetite for agricultural commodities remains robust and we should see companies begin to post more positive results as the recovery in the Eastern states and parts of Western Australia continues. With the winter crop also in the midst of being planted, the remainder of 2011 should reap some good results.”

* 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.

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