Analysts: Tim Morris,; Michael Hevern of the stockmarket newsletter StockCubes and Audrey Riddell, IBISWorld

Stocks: Incitec Pivot (IPL), Soil Sub Technologies (SOI), Nufarm (NUF), Australian Wheat Board (AWB), GrainCorp (GNC), ABB Grain (ABB)

In case you haven’t heard, soft commodities are the sexy ‘new black’ and being taken along for the ride are its closely related but decidedly un-sexy cousins, fertilizer stocks. Across the board the price of goods in the soft commodities sector (agricultural products such as wheat, corn, barley) have skyrocketed over the past 12 months, signalling the end of cheap food.

It is a case of supply and demand, says Tim Morris, equities analyst at “An increase in food demand globally due to limited land versus a growing population means more mouths to feed from the same resource,” he says.

Audrey Riddell, an analyst for IBISWorld argues that one of the main drivers for higher wheat prices in particular is poor production coming out of Australia over the last few years due to the drought. We have a large enough production base to affect world markets.

Other drivers affecting the soft commodity sector more generally include the movement to bio fuels (this year a third of corn crops in the US will be stgoted to ethanol production) and rising incomes in stgeloping countries, which is causing a shift in eating patterns from predominantly rice to more meat based diets (a rise in meat production equals a rise in grain production – seven kilograms of grain is required to produce one kilogram of beef).

Another significant factor pushing up prices is the amount of speculative money that has entered the soft commodities market. In the current market environment, investors are looking to alternate asset classes away from the volatility of equities. Also, a number of commodity investment funds have sprung up in recent times.

“Uncertainty in the market associated with global warming and inconsistencies in the weather lead people to believe that there isn’t as much reliable crop land available as we once thought,” says Riddell.

Projecting ahead, opinion is divided as to how this trend will play out. While most analysts predict robust prices in soft commodities well into the next decade, Morris expresses caution. “I definitely think there are some powerful long-term trends here, but I don’t know if it’s sustainable in the medium to short term because I think prices may have been inflated due to the impact of the drought,” he says.

“There’s also talk that bio-fuels are not the answer to the world’s energy needs,” he continues. “So even though bio fuel consumption has grown steadily over the past few years, there are now question marks over whether it’s a help or a hindrance because it’s driving up food prices.”

Riddell shares Morris’ prudent note saying, “we think that there is going to be a supply reaction, such as an increased adoption of genetically modified seeds, which will boost production and create an increase in yields and more consistent grain production coming out of India and Western European countries”.


ASX code

Analyst recommendation

Share price*

Incitec Pivot


BUY -StockCubes (Michael Hevern)

HOLD – (Tim Morris)


Soil Sub Technologies


BUY – (Tim Morris)




BUY – StockCubes (Michael Hevern)

HOLD – (Tim Morris)


Australian Wheat Board


BUY – StockCubes (Michael Hevern)




NEUTRAL – StockCubes (Michael Hevern)


ABB Grain


NEUTRAL – StockCubes (Michael Hevern)

HOLD – (Tim Morris)


*as at close April 1, 2008

Incitec Pivot (IPL) – HOLD ( BUY (StockCubes)

Fertilizer company Incitec Pivot’s proposed $3.3 billion takeover of explosives maker Dyno Nobel, announced early March, will create a chemical giant with a market capitalisation of over $9 billion.

The marriage will merge the world’s second-largest explosives maker and Australia’s largest fertiliser producer. Incitec already has a 13% stake in Dyno Nobel (DXL). Both companies rely heavily on ammonium nitrate, which is a key input in both fertiliser and dynamite.

It is anticipated that the expanded business will benefit from the growing demand for hard and soft commodities, generated by the economic growth of China and India.

The company’s significant earnings upgrade (to a record estimate of $700 million to $730 million) demonstrates the affect of the soft commodities/fertilizer boom.

Incitec Pivot Ltd is also eyeing new acquisitions and joint ventures in China and Latin America.

Soil Sub Technologies (SOI) – BUY (

Recently listed, Soil Sub Technologies (trading commenced 27 March) is an organic fertilizer manufacturer that uses the by-products of sugar or palm oil.

It is early days for the company but Morris likes its exposure.

“They’re looking to drum up contracts in China and we think that the whole organic movement and boosting crop yields from an organic perspective is a trend,” he says adding, “but I probably wouldn’t put the house on it yet”.

NuFarm (NUF) – HOLD ( BUY (StockCubes)

Nufarm Limited (NUF) is an international chemical company involved in the registration, manufacture, marketing and sale of branded, off-patent crop protection products and industrial chemicals. It produces products to help farmers protect their crops against damage caused by weeds, pests and disease. The company operates in most major global markets.

A recent private equity bid – around $17 a share – fell through because of an inability to get money due to the situation in the credit market. But Morris notes that the move “demonstrates the value in the company”.

“They’ve got a global distribution business and with farmers looking to increase the output of their crops, crop protection products are going to be in strong demand,” he says.

NUF has been in an uptrend since early 2003 and plans to continue the company’s acquisition strategy have been confirmed by executive chairman, Doug Rathbone.

Australian Wheat Board (AWB) – BUY (StockCubes)

Morris maintains that since losing its monopoly on wheat export marketing (the Cole inquiry findings in November 2006 revealed that the export body paid $300 million in illegal kickbacks to former Iraqi dictator Saddam Hussein’s regime under the UN oil-for-food program) the Australian Wheat Board, Australia’s largest wheat exporter, has lost its competitive edge.

Hevern’s “buy” is related to the dismissal late last month of a class-action lawsuit by US wheat growers, who claimed that the company had bribed Saddam Hussein’s regime in Iraq in an attempt to win business.

The claim was that the AWB depressed world wheat prices by winning a monopoly in Iraq through allegedly illegal payments. The ABB had previously stated that it was of the opinion that the case was ill-conceived and would vigorously defend the class action.