Rain on the scarecrow, shares on the rise

As a sector on the stock exchange, agribusiness probably doesn’t get enough love from investors, being so reliant on the seasons. And with persistent drought across much of the country in recent years, it hasn’t been a great time for the nation’s farmers. The drought meant that only one-third of Australia’s usual summer crops were planted this year.

But heavy rain in many parts of Australia since February has changed the picture hugely. While this rain might not have conclusively broken the drought in all affected regions, it has definitely improved the industry’s outlook in many areas.

The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) expects total summer crop production to fall by 66% to just 878,000 tonnes, which would be the first time in more than a decade it had been lower than 2.5 million tonnes.

But the situation looks much better for the winter crops. As of this month, ABARES expects the area planted to winter crops in 2020-21 to increase by 23%, to 22.5 million hectares, 5% above the ten-year average to 2019-20 of 21.4 million hectares. The majority of this increase is expected to be in New South Wales, where seasonal conditions so far are much more favourable than the last two winter crop seasons.

Eastern Australian farmers have not entered a cropping season as generally optimistic for at least three years. Inflows into the Murray-Darling Basin have restored natural flows to parts of the basin that have not seen them since 2016.

ABARES forecasts winter crop production to increase by 53% in 2020-21, to 44.5 million tonnes, which is 11% above the ten-year average to 2019-20.

In individual winter crops, there are some stunning increases projected.

Wheat production is forecast to increase by 76% in 2020-21, to 26.7 million tonnes. Canola production is seen increasing by 40%, to 3.2 million tonnes, while chickpeas production is predicted to increase by 135%, to 661,000 tonnes, and oats production is forecast to increase by 81%, to 1.6 million tonnes. Barley production is forecast to lift by 17%, to 10.6 million tonnes.

This is on top of the big strides that have been made in horticulture, where the industry racked up $2.6 billion in export value in FY19 – half of it from fruit, and 38% from nuts, pushing nuts to a $1 billion export crop for the first time. In total, horticulture is now a $14.4 billion industry, up just under one-third in the last five years.

While stock exchange investors are very familiar with our big miners, agribusiness remains well under the radar for most. But it shouldn’t.

In the first of a two-part series, here’s a look at some of the ASX Agribusiness sector’s main constituents:

Elders (ELD, $9.36)

Market capitalisation: $1.4 billion

3-year total return: 25.2% a year

FY20 (September) projected dividend yield: 2.1%, fully franked (grossed-up, 3%)

Analysts’ consensus target price: $11.50 (Thomson Reuters), $10.20 (FN Arena)

Rural services heavyweight Elders defied drought, bushfires and the early impacts of Covid-19 to record a 90% lift in net profit for the first half (to March 31), to $52 million. Having a first-half that ends in March, Elders was boosted by the rain and the flow-on to winter crop confidence, as well as high prices for both cattle and sheep, and steady earnings in real estate and financial services. Elders said the boost to farmer confidence was driving strong demand for crop inputs. “Subject to any future negative impacts arising from global volatility,” Elders said in its half-year profit release, the company was “on track to deliver a full year result in line with the consensus of analyst views of between $96.5 million-$112.9 million in EBIT (earnings before interest and tax) and $85.8 million-$102.9 million NPAT (net profit after tax).” That would represent a lift in full-year profit of up to 25%.

Analysts see FY21 as potentially strong, too, with consensus estimates of an 11% rise in earnings per share (EPS) and a 19% lift in the fully franked dividend.

Ricegrowers (SGL, $5.25)

Market capitalisation: $314 million

Rice-growing farmers’ co-operative SunRice only came to the ASX in April last year, when it listed its B-class shares – which carry the right to receive dividends, but no vote at general meetings of the co-operative, which are limited to the A-class grower shares. Listing under the name Ricegrowers Limited, the company moved to the ASX from the National Stock Exchange (NSX), where the B-class stock had traded for 12 years. Valued at $6.50 on the NSX, SunRice shares jumped almost $2 in the first day of trading to $8.30, but the stock was hammered by drought and paltry water allocations in the Murray-Darling Basin, and consequent rising water prices. SGL fell as low as $3.50 in December, but has rebounded impressively, to $5.25.

This would be inexplicable if you concentrated solely on the Australian rice harvest figures, which collapsed under the weight of water shortages. The nation’s rice farmers recently completed their second-smallest annual harvest on record, with only 43,000 tonnes produced, compared with an average of 800,000.

Bizarrely, while this was happening, demand for rice surged during the Covid-19 lockdown, and SunRice says Australia will run out of domestically grown rice by the end of the year.

However, SunRice sources rice from around the world, and its international operations will allow it to sell 1.1 million tonnes into its local and export markets. The company has not altered its guidance to the market, meaning that SunRice Group expects full-year FY20 (which ended in April, but has not yet been reported) revenue to be in-line with FY19. Ricegrowers currently intends to maintain a fully franked dividend at similar levels to prior years: if it maintains FY19’s 33-cent dividend, at $5.25, SGL trades on a fairly attractive 6.3% fully franked yield, equivalent to 9% grossed-up. As a bonus, on June 22, Ricegrowers will join the S&P/ASX All Ordinaries index.

Select Harvests (SHV, $6.39)

Market capitalisation: $615 million

3-year total return: 17.1% a year

Estimated FY21 dividend yield: 3.9%, fully franked (grossed-up, 5.6%)

Analysts’ consensus valuation: $8.15 (Thomson Reuters), $8.15 (FN Arena)

The vertically integrated Select Harvests is one of the world’s largest almond growers, and a large-scale manufacturer, processor and marketer of nut products, health snacks and muesli. It supplies the Australian retail and industrial markets and export almonds globally – the company exports almonds and value-added branded food products to China (which takes about 30% of SHV’s crop), India, the rest of Asia, Europe and the Middle East, with about 80% of production exported.

In May, Select Harvests released a weak first-half result, which showed a 13.4% fall in net profit to $17.4 million, and cut its interim dividend from 12 cents last year to 9 cents. The major issues were weaker prices across the industry due to a large US crop – prices slid by 4.7% because of a flood of US almonds – as well as higher water costs, and the early impact of Covid-19 on sales and shipments of its nuts.

Similar to 2019, Select is estimating a large, high-quality crop of 22,600 tonnes in 2020. The company expects the second half to deliver an improved result: the volume and quality of harvests are currently in line with expectations, and more than 70% of Select’s 2020 crop is contracted for sale already. The company expects the almond price to be hurt by Covid-19 supply chain issues and a large estimated 2020 US crop; but it says almond pricing should stabilise once the US harvest commences, in August.

Select’s future growth is underpinned by the fact that about 35% of its 7,700 planted hectares of Australian almond orchards will reach maturity over the next eight years.

GrainCorp (GNC, $4.06)

Market capitalisation: $929 million

3-year total return: -1.1% a year

Estimated FY21 dividend yield: 2.1%, fully franked (grossed-up, 3%)

Analysts’ consensus valuation: $4.62 (Thomson Reuters), $4.565 (FN Arena)

Australia’s largest listed grain handler, GrainCorp has struggled on the market for several years, particularly since receiving a $10.42 “indicative offer” takeover approach in December 2018 from a company called Long Term Asset Partners Pty Limited (LTAP), which was formed for the sole purpose of taking over GrainCorp. Months of negotiations did not result in a binding bid, and LTAP walked away in May 2019. LTAP dodged a bullet, with GNC slumping as low as $2.95 in the Coronavirus Crash.

Drought and the resultant weak harvests have hurt GNC, but the increased optimism surrounding the winter crop has helped the share price rebound.

In FY20, the company will have the benefit of a new insurance “safety net” on crop production: in June last year, GrainCorp struck a deal with Aon subsidiary White Rock Insurance for a series of guaranteed production payments that it says will smooth the volatility of east coast grain harvests, particularly during droughts, and effectively drought-proof the company for a decade.

Under the deal, which takes effect in the current financial year, GrainCorp will pay an annual premium of less than $10 million to guarantee payments in bad years: the contract effectively sets a floor on the harvest. If east coast grain production falls below 15.3 million tonnes, GrainCorp gets a payout; but if the harvest comes in above 19.3 million tonnes, GrainCorp makes a payment to White Rock Insurance. The insurance payment is capped at $80 million a year.

The insurance instrument has been triggered in its first year by the weak harvest. But while the insurance instrument protects shareholders in poor seasonal conditions, it also caps the upside in good season – and this is what appears will happen in the coming year. Broker Morgans points out that if the 2020/21 east coast winter grain crop does come in at 20.2 million tonnes, GrainCorp will be up for a payment to its insurer. Currently Morgans sees that payment at about $40 million, but says it could rise to up to $76 million.

GrainCorp recently made itself smaller, by spinning off its malt business, United Malt, as a separate ASX stock. Analysts see good value in GrainCorp at current levels.  The most optimistic broker, Macquarie, has a price target on the stock of $4.79.

Rural Funds Group (RFF, $1.97)

Market capitalisation: $667 million

3-year total return: 10.1% a year

Estimated FY21 dividend yield: 5.7%, unfranked

Analysts’ consensus valuation: $2.19 (Thomson Reuters), $2.30 (FN Arena)

Rural real estate investment trust (REIT) Rural Funds Group is a way to play Australian agriculture as a landlord. The trust is in the great position of having agricultural tenants growing produce on its land on long-term rental contracts – tenants such as ASX-listed pair Select Harvests and Treasury Wine Estates, beef processor JBS and Singaporean agribusiness giant Olam International, which grows cotton, almonds, pulses, cocoa and dairy in Australia. The company has tweaked its portfolio in the last couple of years, selling its poultry assets in favour of building up its beef cattle exposure: the portfolio is now based around almond orchards, vineyards, cattle, cotton and macadamia assets. RFF offers a healthy – albeit unfranked – yield, and scope for further price recovery, as confidence increases in the sector.

Drew Meredith

Drew is publisher of the Inside Network's mastheads and a principal adviser at Wattle Partners.