Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Your guide to the S&P/ASX Agribusiness Index (XAG)
The Australian Securities Exchange (ASX) recently launched the S&P/ASX Agribusiness Index (XAG) to offer investors direct exposure to domestic public agribusinesses.
The idea is that the XAG will increase awareness of the local agriculture sector and entice potential listing candidates.
The ASX hosts a variety of global agribusinesses, including Penfolds owner Treasury Wines (ASX: TWE) and Vegemite owner Bega Cheese (ASX: BGA).
There is currently no ETF following the index. But the ASX is hopeful by launching the Agribusiness Index it will incentivise a provider such as VanEck or BetaShares to create a product over the top.
Ken Chapman, head of strategic delivery, capital markets at ASX, said:
“By raising the profile of the sector, the AgBiz Index will increase investor understanding and interest, and be a critical ingredient in priming the market for the next phase of agricultural innovation.”
The index follows other sector-specific ASX indexes including Technology, Banks, Industrials and Real Estate.
Australia well-positioned to ride the food tailwind
The agriculture industry has been thrown into the limelight this year as the world grapples with a shortage of food. The culmination of extreme weather, Russia’s invasion of Ukraine and supply-chain bottlenecks have led to commodity prices soaring.
Looking further out, the outlook for food is strong. By 2050, the world’s population will exceed 9.6 billion, leading to a 70 per cent uptick in demand.
Fortunately, Australia has a robust agriculture industry. Domestic products such as dairy, beef and wool are revered abroad. Agriculture in total represents 12 per cent of Australia’s total export earnings.
XAG features
The index first looks at the top 1,000 companies by market capitalisation on the ASX. It then screens for companies that directly engage in or benefit from agricultural activities. Constituents must meet minimum liquidity requirements. There is no cap on the number of holdings, but there is a 10 per cent single-stock weighting limit.
Four companies are allocated the maximum weighting of 10 per cent:
- Treasury Wine Estates (ASX: TWE)
- A2 Milk (ASX: A2M)
- Nufarm Ltd (ASX: NUF)
- Elders Ltd (ASX: ELD)
Other notable holdings include Nufarm (ASX: NUF) and United Malt (ASX: UMG).
There are currently 25 holdings, with the top ten accounting for 80 per cent of the total index.
The median market capitalisation is $571 million. Typically, inclusion in the S&P/ASX 200 requires a market capitalisation upwards of $1 billion. This suggests that ASX will need to convince more big agriculture companies, to reduce concentration risk.
Surprisingly, XAG has been a relative under-performer. Over the past five years, it has gained just 2.0 per cent a year, compared to 6.8 per cent for the S&P/ASX 200. Similarly, it under-performed over three years with a -3.5 per cent annual performance.
Positively, it had outperformed the broader market with a one-year return of -4.7 per cent compared to -9.6 per cent for the benchmark index. This is likely due to the aforementioned impacts of the global food shortage.
While there is no other index dedicated to Australian agriculture companies, XAG will face existing competition from other food ETFs.
The BetaShares Global Agriculture Companies ETF (ASX: FOOD) and BetaShares Future of Food ETF (ASX: IEAT) focus on global companies involved in the food sector.
However, neither FOOD nor IEAT holds Australian companies with holdings overwhelmingly domiciled in the United States.
Overall, the introduction of the S&P/ASX Agribusiness Index (XAG) will be a positive for Australian agriculture. It brings greater attention to existing public companies and entices private businesses to list and receive index inclusion.
It will likely take a few more big fish to list before an ETF provider creates a product. Nonetheless, it will be an index to follow closely for investors looking for agriculture exposure.
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