Commodities | Oct 12 2020
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The Australian government's investments into turbocharging ag-exports will be a longer-term benefit for the sector
-Government wants to ‘turbocharge’ agricultural exports
-Benefits for ASX-listed ag-companies mostly longer term
-Ag-tech emerging as the next exciting growth area
By Anastasia Santoreneos
The Coalition has promised to deliver billions towards “turbocharging” agricultural exports and securing better infrastructure in its 2020 Federal Budget, meaning the future of stocks in the sector is looking bright(er).
The Government committed $328m towards cutting the red tape on the export process and $317m to the International Freight Assistance Mechanism, which will help expedite the transport of perishable goods to overseas markets.
The Budget also committed $2bn towards the National Water Grid, which aims to increase the nation’s water security. A further $1.3bn will go towards the Modern Manufacturing Initiative, with a portion of that going towards increasing Australia’s food production capabilities
The agriculture sector represents around $14bn on the ASX. Once you remove Incitec Pivot ((IPL)) it reduces to just $13bn, meaning the changes in the Budget aren’t likely to have a huge direct impact on listed agricultural stocks.
However, they are likely to benefit from changes in the long term.
$328m to turbocharging exports
The majority of the Government’s $328m export spend will be put towards creating a single interface for exporters to complete their paperwork, rather than manually fill out forms to get their products moving.
According to Datt Capital founder Emmanuel Datt, the changes spell good news for all agri-stocks in the future.
“It’s a manual process at the moment, and there are a lot of steps to the export. This is a step towards the future, and it’s going to benefit all agri companies,” he said.
$317m to expediting overseas exports
The $317m International Freight Mechanism will result in fewer obstacles for perishable goods companies exporting their produce overseas.
While Elders Limited ((ELD)) isn’t strictly an agricultural group, it provides a lot of support services to the agriculture industry, meaning it’s likely to also see some long-term benefit from eased trade conditions.
On the flip side, we won’t see much movement in consumer stocks like a2 Milk ((A2M)) that have a domestic retail focus.
$2bn to water security
Wattle Partners director and adviser, Jamie Nemtsas, isn’t convinced the water security investment will do much for the majority of agriculture stocks listed on the ASX.
However, companies that are involved in planted irrigated agriculture, like Costa Group and Treasury Wine Estates ((TWE)) will benefit.
“Think about nuts and berries, fruits and grapes,” Nemtsas said. “There’s only a very small part of the permanent planted farming community that is actually listed – it’s very tiny, less than 1% – but these groups should benefit from a better national water grid, because they need water on a regular basis to be able to expand.”
$1.3bn to manufacturing capabilities
The $1.3bn investment in improving the competitiveness of Australia’s manufacturing industry is hugely important, because it will mean we can finally value-add when it comes to food manufacturing.
Right now, the majority of Australia’s agricultural value comes from growing produce and shipping it off, but the buck stops there.
For example, wheat doesn’t get processed in Australia. Instead, it gets processed overseas and turned into secondary or tertiary goods.
Companies that do manufacture their food in Australia, like Bega ((BGA)) and Ricegrowers Limited ((SGL)) will benefit from the billion-dollar investment.
“Again, we’re not going to see direct benefits here,” Nemtsas said. “It’s more, the field that we’re playing on is a shade greener.”
Freedom Foods Group ((FNP)) is another company that manufactures its own food in Australia.
However, given the recent revelations the company was forced to write off a total of -$60m worth of expired inventory, and is facing an investigation into its financial position, it remains to be seen how much this investment could actually help.
$17.4 million relocation allowance
The Government is also providing $17.4m to expand the Relocation Assistance to Take Up a Job program, which will also be a positive force in the long-term.
“A lot of these bigger agricultural groups that operate in rural Australia have massive problems with staff, and they pay an enormous amount of money for staff,” Nemtsas said.
The relocation allowance, which offers a cash incentive for foreigners to come to Australia and work rurally, will allow companies to execute their harvest and pruning in a more cost-effective way.
Commodity prices are driven by demand
With the Government promising to increase Australia’s global competitiveness when it comes to exporting produce, the future certainly looks (more) promising for local listed companies in the sector.
However, it’s important to note that commodity prices are driven by overseas markets, and with Australia so isolated from the rest of the world, it’s unlikely anything that happens locally will drive any major immediate changes in prices.
“It really depends on supply and demand,” Datt said.
One investment space that will continue to remain quite attractive, regardless of supply and demand, is ag-tech.
“Australia is considered a high cost producer, because it’s obviously much cheaper to hire people in Asia, and that’s who Australia really competes with in terms of primary production.
“So, the ag-tech industry has been historically aimed at reducing that labour component or reducing the cost to grow food, which makes it attractive going forward.”
Food security also remains a huge, global issue. According to a 2020 World Health Organisation report, the number of people affected by hunger will surpass 840m by 2030.
It follows then that ag-tech stocks in crop production like Root Sustainable Agricultural Technologies ((ROO)), which works to regulate the temperature of crop roots in order to produce quicker, may provide attractive investment opportunities in the future.
While there aren’t many ag-tech stocks currently listed on the ASX, with hunger and the high cost of labour continuing to present challenges to the exporting industry, it’s likely we will see more pop up over the coming years.
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