PORTFOLIO POINT: In the face of rising food inflation, PrimeAg is heading for the ASX for money to buy land and water entitlements.
Former Woolworths boss Roger Corbett and Peter Corish (pictured, right), the former president of the National Farmers Federation, are exploiting the so-called soft commodities super cycle by listing the first company of its kind on the ASX to raise $300 million to buy land and water entitlements.
PrimeAg, which invests in soft commodities such as grains, barley and cotton, will list on the ASX on December 17, making it “the world’s first listed soft commodities company�, an asset class that is being touted as the next hot sector as global demand for food outpaces supply.
The company is set up almost like a fund, with the intention of investing in quality Australian agricultural land and attached water entitlements. The aim is to take advantage of the increasing demand for mainstream soft commodities such as wheat, barley, chickpeas, sorghum and cotton, as well as livestock.
The timing of the $300 million float, which has been underwritten by ABN-Amro Morgans, Southern Cross Equities and Grange Securities, is excellent as a recent set of events have put soft commodities on to centre stage, reinforcing Australia’s stereotype as a quarry and breadbasket.
The events include one of the worst droughts in Australian history and excessive rainfall in the US adding to a global supply shortage of soft commodities at a time when the consumption in developing markets such as China and Indonesia is increasing steadily.
The upshot is significant food price inflation, as seen in China where the latest data out this week showed that overall consumer prices increased 65% in October from a year earlier – matching the 11-year high from August. Food prices within China's CPI jumped 17.6%.
Indeed, prices are at record levels for corn and soybeans and the prices of many other soft commodities such as wheat have more than doubled in the past year, while dairy prices have risen by more than 60% over the past year.
This, coupled with an underinvestment in future production, including land and water scarcity, is also restricting supply.
Throw into the pot record oil prices and the move to a greener environment, making alternative fuels more economically viable, is also adding to demand. For instance, in the US, ethanol plants are springing up throughout the Midwest, increasing the demand for corn from which ethanol is distilled.
Research by the Commonwealth Bank says smaller wheat crops mean the "world is going to cut further into already dwindling inventories". Inventories of wheat are likely to fall to about two months' supply. "Levels have not been that low for the best part of half a century," according to Commonwealth Research in its September 4 Soft Spot report. The growing consensus that food prices will continue to rise contrasts with 2006 when some leading experts – including ABARE – were doubting the soft commodity boom. (See Michael Pascoe's March 2006 feature, Prices stay down on the farm.)
Close to home, recent movements on the ASX are also adding to the interest in the sector. These include Futuris’s move to sell its 43% stake in cattle grazing company Australian Agricultural Company (AACo), the $3 billion takeover of pesticide and herbicide maker Nufarm by Chinese conglomerate China National Chemical Corp, the $2.8 billion sale of Australia’s largest dairy farm business National Foods to Japanese giant Kirin Holdings earlier this month, and the takeover in July of Queensland Cotton by Singapore-based Olam International.
And the need for capital to expand has pushed groups such as dairy co-operative Dairy Farmers, owned by about 2500 farmer shareholders, towards an $800 million public float.
All of this, coupled with skyrocketing prices for grains, dairy and farm inputs such as pesticides and fertiliser, is being driven by growing demand from the industrialising economies of China and India, coupled with a push for biofuels in Europe and the United States.
Put simply, in the next decade millions of Indians and Chinese are expected to migrate from a rural to an urban environment. As the newly created city population moves into more modern Western-style environment, demographic studies reveal a subsequent increase in demand for higher quality food, clothing, and luxury goods.
As Charlie Aitken said recently: “Food is the first item to benefit from a rise in disposable income and consumer spending, followed by whitegoods/appliances; the third is a car, and then maybe an apartment or a house. But the end result is a change in dietary habits from three meals of rice per day to a more balanced diet of vegetables, fruit, and animal protein such as red meat.� (To read more of Charlie's views on food prices, see his feature from November 16, Go long food, agflation is here.)
But in common with any investment, the soft commodities business has risks. In the case of PrimeAg, the biggest risk is a slowdown in the world economy. That would cause consumers, especially those in emerging economies, to stop buying foods such as meats, sugars, oils and corn and revert to rice.
In the prospectus it lists as risks “soft commodity price fluctuations; drought, flood, hail, bush fires and other extreme weather conditions; change in water regulations; lack of operating history; availability, cost and timing of acquisition of further agricultural properties; reliance on key personnel and ability to attract personnel; pests and diseases; water sustainability; regulation and legislation; interest rates; exchange rates; and asset liquidity�.
However, these risks should be somewhat mitigated by the strong management and board of PrimeAg, who include Peter Corish, John Stewart and Roger Corbett.
As one fund manager says: “A lot of people see this as a concept stock because it is untried. When you have this kind of model, it really is down to the management and people’s perception of it – and these guys are well versed in food and agriculture.�
Corish has worked within agriculture since 1973, is a former president of the National Farmers Federation and currently owns and operates 7000 hectares of irrigation land, 3000 hectares of dry-land farms and 5000 hectares of grazing land.
For small investors the opportunities to take on agricultural commodities are limited. Until PrimeAg, the most direct route was through futures contracts for the various commodities traded on the sharemarket. But that is more for day traders and speculators than long-term investors. And while there is nothing wrong with that; it is definitely not for the faint-hearted.
Indirect investments on the ASX includes wheat exporter AWB and storage and handling companies GrainCorp and ABB Grain. But for those that want to get in directly to the soft commodity boom, PrimeAg is the only pure stock that will give a direct exposure to soft commodities.
Corish told Eureka Report after looking at international and Australian models, including that of Futuris’s Australian Agricultural Company, that the decision was made to collect and connect a sweeping portfolio of farming properties – and water entitlements – across northern NSW and southern Queensland.
In presentations to Australian institutions over the past few weeks, Corish emphasised that rural property values in Australia were competitive on a global basis and that many local farms were substantially under-capitalised and under-developed.
Corish maintains that the middle-classing of China and then India will have a similar impact on the demand for food as it has done for minerals and energy. As economic growth storms ahead, living standards will increase and that will create more demand for Western foods such as meat, bread, dairy products and coffee.
"The aim is to grow a broad grains, fibre, livestock production business and we think the strength of it lies in the growing demand for soft commodities. The fact that we are purchasing quality properties will help the company going forward, particularly as the demand for high protein foods continues to grow," says Corish.
He also believes the developing biofuels industry will contribute to demand. Corn is the feedstock for the bulk of US biofuels, and a range of Australian oil-seed crops could be used as feedstock for biodiesel.
The float proceeds to buy farmland – and water entitlements – in south and central Queensland, and the Darling Downs region. The fund will include three seed properties and 10 optioned properties – and water rights – with a total investment value of $83.4 million.
The prospectus says projected earnings of $7.7 million before interest and tax would deliver an investment return of about 9%.
The offering is 150 million shares at $2 a share, with the board, which includes Corbett as its deputy chairman, expecting to pay a dividend of 40% of net profit after tax, depending on business conditions. The minimum number of shares that can be purchased is 1000.
PrimeAg's share offer will open on November 26 and close on December 14. The listing is scheduled for December 17.
Adele Ferguson also writes for The Australian where she is business commentator.
