Market drives ag optimism

While medium-term farm income expectations from Australian grain and beef exports look relatively flat according to national forecaster the Australian Bureau of Agricultural Resource Economics and Sciences (ABARES), farm commodities have so far outperformed many other asset classes on the global stage.

International observers point to a 10-plus per cent lift in global corn prices; Chicago wheat futures are up 30pc since January; the US cotton market is up 15pc after rebounding to US90 cents a bale since November, and coffee prices are now 65pc up on January values to $US2.20 a pound.

Rabobank's agricultural commodities global head Luke Chandler said wheat prices have had their strongest start to the year since 2008, pushed up by tensions between Russia and the Ukraine in the Black Sea grain production zone, drought in eastern Australia and crop losses to frost in the US.

Frenetic buying activity by China has fuelled milk product values, particularly powder, to near record highs with skim milk powder up another 5pc since January to about $US4960/tonne.

However, Rabobank analyst Tim Hunt is expecting price rises to steady by mid-year after a big production surge from Europe and particularly New Zealand (20pc to 30pc more than last season).

With demand for all food commodities rising fast across Asia, Australia's box seat position as a food exporter could see agricultural output overtake manufacturing as a proportion of Australia's gross domestic product in the not-too-distant future, according to analysts.

Tom Richardson, the editor with the multimedia stock market advisory group Motley Fool, noted farm sector companies able to meet and capitalise on this demand were set to outperform the share market.

"Some think the best returns in the next decade will come from agriculture investing," he said.

"Many agricultural stocks look cheap after unusually poor climatic conditions and the potential bottoming of an economic cycle combine to hit volume, demand and margins through lower prices for core products such as fertilisers, grain, and livestock."

Among those companies on the advisory group's list to watch are GrainCorp, Australian Agricultural Company, Nufarm and Elders, as a "highly speculative long-term punt".

Motley Fool noted poor climatic conditions and the blocked takeover by Archer Daniels Midland contributed to a big sell-off in GrainCorp's share price which may be a great opportunity for long-term investors looking for agricultural exposure.

Pac Partners agribusiness analyst Paul Jensz said while the share market success of most agribusinesses was not directly linked with commodity movements, better returns to farmers could flow on to good business for service providers such as fertiliser suppliers and service companies.

"Our top three picks are Bega Cheese, which is taking full advantage of the current dairy market strength; Tassal, which is a very low cost business with 60pc of the domestic salmon market, and Select Harvests which is enjoying record almond export prices and reduced import competition."