Agribusiness prospects looking up
IF ONE looks beyond the few negative factors, like land reform and other political issues, farm crime and unexpected natural disasters, prospects for the farming industry look better than they have for years.
Agribusinesses will undoubtedly share in this.
Not that food producers fared badly from March last year to the end-February this year: the share price of a listed company like Astral Foods [JSE:ARL], for example, rose by 30%, and Afgri [JSE:AFR] by about 19%.
And that’s in conditions of low food prices that have scarcely increased in two years and, in some cases, have even fallen.
In addition, everyone is talking of above-average increases in food prices. But does all this make it worth the effort for investors?
Perhaps we should look at the whole thing dispassionately: two unrelated surveys about the performances of farmers and businesses during the past year and the latest confidence index for agriculture all indicate a (considerably?) better time for the industry.
The latest agribusiness confidence index for the Agricultural Business Chamber (ABC), out last week, points to a large increase in agricultural confidence among agricultural and related businesses.
The index figure of 62 for the first quarter is not only 13% higher than in the last quarter of last year (55), but also the most positive it has been in three years.
Higher commodity prices, better international demand for agricultural products, a more lively economy after the recession and a huge improvement in general agricultural conditions are all positive factors.
Even export expectations are slightly better.
A "large increase" is indicated for agribusinesses’ turnover and profit expectations.
PricewaterhouseCoopers’ (PwC's) authoritative annual performance survey for agribusinesses, also released recently, indicates steady performances despite last year’s depressed agricultural prices and poorer turnover.
However, Kobie Bekker, PwC's national head for agriculture for this professional services group, mentions negative trends like a growing debtor book, but says that the majority of businesses expect the industry to return sound growth from the second half of the year.
"There are also pleasing indications that more alliances and joint ventures will be formed for tackling new projects, which will add value to producers’ products,” he says.
According to the survey, net profit before interest and tax for SA’s large agribusinesses fell by 18% in 2010, compared with the previous year.
However, that was from a very high base, because 2009’s net profit was 58% higher than in 2008.
However, small agribusinesses were a surprise in that their net profit before interest and tax rose by 9% compared with the previous year.
But the net profit percentage of the larger agricultural groups remains high at 6.08%, compared with the 4.43% of the smaller ones.
PwC economic adviser Dr Roelof Botha sums up the industry’s prospects as follows: “Against the background of a large number of well-known threats for agriculture, including unpredictable weather, inadequate infrastructure, high levels of crime and inefficiency in the public sector, it is comforting to know that the macroeconomy is performing well and that the demand for food should increase at a healthy rate in 2011."
The net farm income of SA’s farmers admittedly fell marginally from July 2009 to end-June 2010, but the drop was acceptably small under the circumstances.
According to the department of agriculture’s Directorate of Agricultural Statistics, gross farm income was 0.6% lower at R128.8bn, while input costs increased on average by 6.8%.
Net farm income was nevertheless R37.6bn, which, as a percentage of the gross income, still represented a satisfactory 28%.
Investment by farmers is also still continuing. The value of capital assets in agriculture was an estimated R223.4bn on 30 June last year, which is 8.2% higher than the previous year’s R206.6bn.
Farmers themselves have therefore not lost confidence in the industry.
According to the international Food and Agricultural Organisation’s (FAO's) food price index, food prices rose by an average of 56% from 2006 to 2008.
The global recession and other factors subsequently dampened this, but prices are taking off again.
SA’s food prices have so far not increased nearly as much as elsewhere, but double-digit increases in the next year or two are inevitable.
That’s bad news for consumers. But the same can’t be said for primary and secondary agricultural industries. Nor for investors.
* This article was first published in Finweek.
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