According to official data, in the five year period from 2006 to 2010, the average minimum wage in China increased 12.5% per year. In the five years to 2015 growth should be at least 13% per year according to a government job marketing plan published in February 2012. One of the things that people will be spending this extra income on is protein rich food.
It is widely accepted that as countries become more developed, their people eat more protein. Indeed, the Economist estimates that global protein consumption will grow by around 3% this year, driven almost exclusively by people living in emerging markets.
China aside, rapidly developing south-east Asian countries like the Philippines and Indonesia have large populations. This region is even closer to Australia than China and is therefore a more natural market for its products.
Over recent years the Australian economy has grown on the back of selling hard commodities to China. A major reason for this success has been Australia's proximity to Asia which means that shipping costs are much lower than from other metal producing regions. This advantage also applies to food exports and so the future looks bright for Australia's farming industry especially when you factor in the prospect of a weaker Aussie dollar.
3 promising agriculture stocks listed on the ASX
Select Harvests (ASX: SHV) is an almond producer. Global annual almond consumption has exceeded production in the last two years. Almond trees take 7 years to reach maturity and only grow in dry climates with hot summers and cool winters providing significant barriers to entry for would-be competitors. The company has a strong maturity profile with 44% of its orchards due to reach full maturity in the next two years.
Select Harvests reported a 106% rise in sales volumes from its company-owned orchards in FY 2013 leading to an increase in underlying net profit after tax (NPAT) of 141% to $22.9 million from pcp. This impressive result was mainly due to an increase in crop volumes of 102% due to more favorable growing conditions. Higher prices also contributed and these are likely to rise further given limited supply and increasing demand for almonds.
Despite a significant rise in share price over the last year, Select Harvests is currently trading at a P/E ratio of 11.7 using the underlying rather than statutory profit figure (which includes one off write downs that have no cash impact). It acquired 1,286 acres of orchards in February 2013 which increased its total holdings by 12.7%. The full year impact of this acquisition will provide further NPAT growth in FY 2014.
Ridley Corp (ASX: RIC) produces a wide range of animal feeds and is therefore set to gain from an expected increase in livestock numbers. The company has recently undergone significant restructuring, divesting its salt division and acquiring a large rendering business. This makes it difficult to value and so although the share price has fallen by 25% since the start of the year, it may still have further to fall in the short term.
As part of the recent restructure, the company has reduced its debts from $105 million to $35 million which will significantly lower its finance cost in the future as well as provide it with a solid platform from which to grow. Also, there will be a positive profit impact in FY 2014 due to the full year contribution of the rendering business which it acquired half way through FY 2013.
The company sells feed for fish, cattle, poultry, pigs and sheep which provides it with some protection from a slow-down in an individual market. Management is streamlining the company to focus on its core business and this appears to be the correct strategy given there is likely to be strong demand for animal feed in the future.
Tassal Group (ASX:TGR) is a salmon producer. It is currently targeting the domestic market which is experiencing strong per capita growth. This approach is working with the company recording an increase in earnings per share of 18.8% over pcp in FY 2013.
Demand for fish is growing in rich world countries due to its health benefits and this is pushing up prices. Tassal's earnings growth in FY 2013 was driven entirely by an uplift in prices and this is likely to continue given the strong and growing demand for salmon.
Tassal has a P/E ratio of 13.7 which is attractive given its growth profile. Generally speaking, if expected earnings-per-share growth is greater than the P/E ratio of a stock then it represents good value.
Tassal doesn't currently need to pursue foreign markets due to local demand for its salmon products. However it will be well positioned when export prices reach a level that make it desirable to do so.
Foolish takeaway
The profits of agriculture companies are often susceptible to changes in soft commodity prices, the weather, disease and other risks. They are also usually capital intensive businesses which can mean they experience slow profit growth. However, major global economic trends seem to be indicating an upturn for the industry and there may be good investment opportunities available given Australia's advantageous location.
