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Australians everywhere breathed a collective sigh of relief when the GDP figures for the December Quarter came in at 1.1%, beating expectations.  GDP for Calendar Year 2016 came in at 2.4%. Negative GDP of 0.5% reported for the September Quarter ignited fears of recession.  The surprising rebound in some commodity prices boosted the contribution of our beloved miners; but it was another sector that led in contributing to GDP by a wide margin – Agriculture. The following table breaks down GDP contribution by sector. 

Farm production for the December quarter grew by 8.3%, with the biggest increases coming from grain, cotton, and livestock, as reported by the Sydney Morning Herald. 
Agriculture is one of those highly touted long term mega trends where experts of all types urge Aussie investors to look for opportunities.  The Australian Government’s Rural Industries Research and Development Corporation (RIRDC) expects our agriculture sector to benefit from five key mega-trends over the next 15 to 20 years.  From the RIRDC website here are the research findings from an August of 2015 study: 
1. A hungrier world: by 2050, there will be 70 per cent or 2.3 to 2.4 billion more people on earth, who will need 60 to 70 per cent more food than what’s currently available.  
2. A wealthier world: increasingly wealthier consumers in developing economies will drive demand for more and diverse foods. In Asia alone, with over 1 billion people expected to move out of poverty as average incomes rise from US$12,000 to US$44,000 per person by 2060, beef consumption is predicted to rise 120 per cent, while dairy consumption will double by 2050. 
3. Fussier customers: empowered by information, the consumers of 2050 are likely to expect food to be nothing less than healthy, nutritional, clean, green and ethically produced.  4. Transformative technologies: advanced digital, genetic and materials science technologies will enable farmers to improve how they produce food and fibre products, while innovative sensory systems and data analytics will create highly integrated ‘farm to fork’ supply chains. Farmers will be able to make better decisions and manage risk more effectively, while consumers will have greater access to trace the origins of their food, putting production methods under the spotlight. 
5. Bumpier ride: Australian rural industries can expect a changed risk profile, which will call for new and deeper levels of resilience to withstand shocks associated with climate change, environmental change and globalisation.  
Note that of the five trends highlighted; only the fifth – bumpier ride due to environmental changes and globalisation – can be considered as headwinds. And even globalisation works in our favor due to our proximity to the area of the world where the greatest change in consumer behavior is expected to occur – Asia. 
Within the broader ASX Agricultural sector there are six stocks with operations in grain, cotton, and livestock.  

With the exception of Graincorp Limited (GNC) the two year earnings growth forecasts serve as a reminder of an inherent risk in all agriculture stocks the mega-trend prophets sometimes forget – near-term risks frequently outweigh long-term potential in the minds of many share market participants. 
Agriculture stocks are subject to the economic risk of declining soft commodity prices as well as to the most unpredictable of non-controllable factors – weather; droughts, floods, and unseasonable heat or cold, to name a few. 
For those with a long term view companies whose operations focus on a particular agricultural market, such as beef, grain, or cotton, would seem to be at more risk than those that provide services to a wide array of agricultural producers. In reality all the stocks in our table are diversified within their sector to varying degrees, but a strong case could be made for Rural Funds Group Limited (RFF) as having the most diversified customer base.
Rural Funds Group is a REIT (Real Estate Investment Trust); the only agricultural REIT listed on the ASX.  The Group owns and leases out farm properties to a broad array of agricultural producers, including ASX listed wine producer Treasury Wine Estates (TWE) and almond producer Select Harvest (SHV).  Rural Funds farm property portfolio also boasts leasing contracts with cotton growers, and beef and poultry producers. The following chart from the company website shows the RFF FY 2017 revenue forecast broken down by product offering.

The biggest contributor is expected to be RFM Poultry, listed on the New Zealand Stock Exchange under the CODE RFP.  For the Full Year 2016 RFF reported a rise in net income from $21.7 million to $26.5 million while net profit more than tripled from $10.2 million to $34.8 million.
Rural Funds also owns water entitlements near its poultry producers and plant and equipment processing for its almond producers.  The company’s current dividend yield is 5.2% which is forecasted to increase by 7.6% over the next two years. The company is relatively new to the ASX, listing in February of 2014.  Here is a price movement chart for RFF since it came on the ASX.

In mid-2014 Elders Limited (ELD) – in business for close to 175 years – was floundering and speculation regarding takeover bids abounded. The stock price hovered around $0.22 before management initiated a cost cutting program and a 10 for 1 share consolidation, lifting the share price to around $2.15.  The recovery continued, with the share price reaching an all-time high of $4.48 on 7 March of this year.
Elders offers a highly diversified range of services to agricultural producers, primarily those operating in wool, livestock, and grain.  Services offered include financial planning; real estate; insurance; home loans; and Elders Rural Services offering farm supplies; a mobile app for keeping up to date with the price of agricultural commodities and the local weather; and feedlots and supply chain management for beef producers.  Elders began exiting its live cattle exporting business in mid-2016.
Between FY 2015 and FY 2016 Elders increased revenue 9% with profit increasing 35%.  Although Elders has not paid a dividend for some time, there is speculation the company will reinstate dividend payments in FY 2017.
Australian Agricultural Company (AAC) has a long history of disappointing investors.  The company has a book value per share of $1.75 (most recent quarter or MRQ) while its share price is about 30 cents lower.  A highly valued asset base is relatively meaningless if the company does not produce adequate returns from those assets.  AAC in fact has a negative rate of ROA (Return on Assets) -7.4%.  The company’s share price has yet to recover from the GFC.  Here is a price movement chart for AAC since it began trading on the ASX.

Australian Agricultural posted a strong showing for FY 2016, with revenues increasing from $347 million to $495 million and profit rising from $9.6million to $68 million.  The profit mark was a record high, sending the share price to its highest level since 2009. 
Australian Agricultural Company’s only diversification beyond its vast herds of cattle is the property it owns on which the cattle grazing and breeding takes place; and a processing operation in Darwin.  However, its beef operations extend from breeding to processing to exporting to sales of branded meat products.
The upsides to taking a chance on AAC include improved trade agreements with China and its relatively recent entry into the processing and selling of branded beef.
Graincorp Limited (GNC) operates internationally, buying, storing, marketing, selling, and distributing grain and grain processed products.  The grains on which the company focuses its operations include wheat, barley, and canola. Graincorp Malt division has multiple subsidiary companies around the world providing malt to local brewers and distillers.  Graincorp Oils refines edible oils into food products for humans and animals as well as for use in biofuels.
The company’s substantial earnings growth forecast may reflect the jump in grain production seen in the GDP release.  In 2013 investors were treated to a roller coaster ride amidst the ultimately unsuccessful takeover bid from US based Archer Daniels Midland (NYSE:ADM).
Ridley Corporation Limited (RLC) provides animal nutrition products; including animal food in a variety of forms and nutritional supplements.  Ridley’s clients include producers of poultry, pigs, dairy and beef cattle, horses, domestic pets, and research laboratories using specialised product.
Ridley’s presence across virtually the entire range of livestock puts it in a unique position to benefit not only from rising demand for livestock, but also by protection from falling livestock prices in a given segment.  In the unlikely event the price of all forms of livestock drops, the animals still need to be fed and producers generally wait before cutting back on animal production.
Naomi Cotton (NAM) is a small company with a market cap just short of $50 million and scant investor interest.  The three month average daily trading volume is 17,885 shares per day.  In contrast, shares of Graincorp – with a market cap of $2 billion – has traded an average of 833,438 shares per day over the last three months.
Despite its size and relative anonymity, the company has a solid track record of total shareholder return over the last three years.  Naomi is a co-operative, meaning it operates on co-operative principles with its grower members according to rules registered with the government.
The company has 13 operational cotton gins; as well as seed processing facilities and packing facilities for cotton seed, wheat, chickpeas, and other grains with port delivery services included.   Naomi’s Half Year 2017 Results released last August showed a 27% increase in revenue and an 82% rise in net profit.
Ruralco Holdings (RHL) is another agricultural stock to consider, although it has less exposure to livestock and grain and no exposure to cotton. The company operates 500 outlets across rural Australia serving farmers with branded products from animal feed to livestock and wool marketing services to a network of real estate agents to water management and financial services.  
Ruralco is arguably the most diversified agricultural stock on the ASX with its outreach to more than forty different business segments serving virtually every agricultural operation imaginable.  The current share price is $2.82, down 18% year over year. The company reported earnings per share (EPS) of $0.054 for FY2016 which by some estimates is expected to grow to $0.24 by FY 2018.  Ruralco’s FY 2016 dividend payment was $0.098 per share, which is forecasted to rise to $0.11 per share by FY 2018.
Australian investment house Washington H Soul Pattinson & Co Ltd (SOL) has a 20% interest in Ruralco.

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