The economic power struggle the majority of investment markets has been forced to withstand of late has done little to dent interest in the agribusiness sector.
From an overall sector perspective, the turmoil of the financial markets has not entirely hampered agribusiness and in some cases aided demand for the sector.
Despite a number of key Australian players coming close to buckling under the pressure of poor markets, none have fallen to the point where they will never stand again.
For other industry players, the muddied market waters provide opportunities for bolstering existing business and developing fresh avenues for new business.
However, in spite of the positives emerging from the current financial climate, agribusiness firms did not escape the weak market entirely, with many still sporting scars.
The agribusiness sector fell by 20.8 per cent against the broader S&P/ASX200, which fell by 6.5 per cent during February, according to the February Commonwealth Bank Agri Indicators report.
"Dividends and earnings have been downgraded by a number of key companies making up the index," Commonwealth Bank agribusiness acting executive general manager Dale Champion says.
Agribusiness companies, such as Incitec Pivot and Futuris Corporation, issued profit downgrades for their 2009 full-year net profit after tax, Champion says.
Incitec Pivot downgraded to $450 million, well below the previous consensus of $675 million.
Futuris also revised its forecasts as a result of sharply lower trading conditions for December, with an underlying net loss after tax previously forecast at $9 million now anticipated to blow out to $23 million.
With agricultural organisations downgrading profit forecasts and investment analysts devaluing stocks based upon future earnings potential, it is no surprise there may be more volatility ahead, Champion says.
Despite the potential short-term volatility, the agribusiness sector is still expected to outperform the broader market.
"Agribusiness is expected to return 11 per cent over the next 12 months compared to 7 per cent from the broader market. On a risk-adjusted basis, agribusiness is in the middle of the pack," Champion says.
"The materials and energy sectors have negative forecast earnings over the next 12 months."
In a depressed market, it is not unusual for an alternative asset class such as agribusiness to become a bit of a diamond in the rough.
"It's obviously a very interesting investment climate that we live in at the moment, but I do think that should mean that alternative asset classes have far more relevance and attractiveness in this current climate than ever before," Great Southern managing director Cameron Rhodes says.
"As people look at the volatility of the stock market, depressed property market and exceptionally low interest rates in terms of investment alternatives, I think people may be more prepared to look at other assets and in that space, in agribusiness and forestry, as they do offer some very unique diversification opportunities and far less volatile return profiles than the more mainstream asset classes.
"Certainly I think it's the old line as the share market has tumbled and the property market has tumbled, tress and agricultural assets continue to grow."
Financial crisis versus climate change
While the plummeting markets have affected the agribusiness space, the issues of climate change - be it flood, drought or urbanisation - are causing more of a headache to the agricultural sector.
"Climate change is a longer-term problem for agriculture, there's no doubt about that," Deutsche Asset Management director and investment specialist Bill Barbour says.
"We're going to see more arid areas and some areas are advantaged. If you're higher up a mountain you might get a productivity increase, but overall it's bad for agriculture," Barbour says.
According to Barbour, weather-related events around the world are becoming more extreme.
Hurricane Katrina, snowstorms in New York, Brazil's 50-year record droughts and high temperatures in southern Australia are all evidence of early signs of climate change, he says.
Another sign of change for the agribusiness space is rising income levels, a trend Barbour and Deutsche picked up in 2005.
"The most exciting thing that we identified in 2005 was rising income levels, not so much in the developed world but in the emerging world, and we've got 3 billion people on the planet that are moving from levels of around US$1000 per year to up to US$3500, US$4000, US$5000 or US$6000 per year," he says.
"The key part of all that is that if you only earn US$1000 per year you already spend all that money on food and shelter, you've simply got no more money to spend. But as these incomes are rising these people are changing their diet, they are spending more on food and are changing more to higher protein-based diets."
The rise in income is creating more demand for food, which on the flipside ultimately means the ratio of further agriculture versus available land will become extremely unbalanced.
Barbour offers Japan as an example.
"You've got areas such as Yokohama in Tokyo, which has consumed huge parts of the best part of the rice growing district in the world. We have a huge problem with the increase in the population. The actual amount of land per person is in serious decline. In 1950 we had about half a hectare [of land] per person, with the population back then only 2.5 billion. Right now we'll be 0.3 of a hectare [per person] and by 2020 we'll be at 0.2 of a hectare [per person]," he says.
"Added to this we've got the madness of bio-fuels. Sugarcane would probably be a reasonable idea, but to make it to make from corn like the North Americans are doing is a little bit crazy we believe. But it's legislative; it's going to be here to stay."
For Macquarie Capital Products executive director Anthony Abraham, there are three main drivers in the agricultural industry, none of which are affected by a falling market.
"When you think about the fundamental drivers of demand in agriculture, it's growth in population. Is that affected by the current economic turmoil? Answer is no," Abraham says.
"Is ethanol being affected by the economic turmoil? No.
"Interestingly enough we see that milk powder prices have started to rebound and if you speak to investors there is generally more confidence or comfort in what's happening with food, which ultimately brings you back to agriculture."
Rhodes believes agribusiness is driven by completely different dynamics than other asset classes.
"When people talk about a diversified portfolio they think about equities, property and cash, but all of them are driven by the underlying fundamental economics," he says.
"Whereas agriculture is typically driven by demand and supply of a particular agriculture commodity, so the trees don't care if the equity markets or interest rates are up or down. They have different profiles."
In a broad sense, a good example of this in Australia is cattle, with interest in the market both locally and internationally, he says.
"I think agriculture and forestry has a very significant international interest because land, water, carbon, agricultural commodities are scarce resources," he says.
"Internationally people are looking for opportunities and I think they recognise that Australia is very well placed with the availability of land and the good climate, proximity to the Asian markets that it does make it a very interesting asset class."
The rebound effect
For Barbour, the shift in the agribusiness investment space can be pinpointed to a 10-week period in 2008.
"We've [DWS Global Equity Agribusiness Fund] outperformed hugely. In US dollar terms the fund was up 30 per cent above the MSCI [world index] over almost the two years that we started it," he says.
"We were up substantially and basically in a 10-week period last year we gave all of that back."
As Barbour recalls, hedge fund managers prompted the shift with their sudden interest in agribusiness investments.
"We'd seen commodity funds come into it - funds like Schroders raised billions of dollars - and when you throw this at commodity markets it's a very small market so you can have big price increases, and that certainly happened in the case of commodities," he says.
"And some of the agribusiness stocks became market darlings, particularly for the hedge fund managers ... they became very much overpriced. Now we sold out of many of those companies in April/May 2008 and switched to companies that we saw as better upsides."
The funds continued to garner interest up until June, before agribusiness stocks slid, as did the rest of the market.
"Basically from September we saw the liquidation of the hedge fund off spray and it was a commodity player and it really started the slide in liquidations in the commodity markets, and then we saw panic selling from hedge funds. Hedge funds liquidated about US$160 billion in a period of six to eight weeks and many of the companies that were affected were agribusiness companies," he says.
"Last year soft commodities had a 0.99 correlation. So agribusiness was slammed, but since then I'm delighted to say that the market has outperformed and the market has bottomed and the volatility has sort of peaked in the middle of November."
Since November last year, the fund has outperformed by nearest dollar terms about 18 per cent above the MSCI.
"As these correlations come back to more normal levels, the tail winds that are driving agribusiness will continue to make them a variable space to invest," Barbour says.
Like any other asset class, preparing for a market or even climate change event is near impossible. It becomes more about solid management.
"There's only so much you can do in planning. As far as drought is concerned we're in our third year of extreme drought, and we have simply become very good at managing through dry conditions," Timbercorp chief executive Sol Rabinowicz says.
"We're actually quite pleased with the results we've gotten. We've been able to get close to prospectus yields through most of our projects; not for all of them.
"Almonds is probably the classic example. We've achieved close to prospectus yields year after year, notwithstanding the drought conditions, and what's that shown us is that it's a manageable issue, and with a lot of planning around irrigation infrastructure and a range of techniques that can be adopted we can cope with it.
"Woodchips is a bit different because Australia is the lead exporter into Japan, who is the biggest importer in the world, so Australia has more influence. In fact, we directly negotiate woodchip prices with Japan. Having said that the price we settle with them will be influenced by what Japan are paying Chilean suppliers and South African suppliers."
As the market stands, Rabinowicz believes it is a good time to buy.
"I'm a contrarian so I think the best time to invest is when no one wants to and prices are at their lowest, and in terms of the agribusiness sector I think now does present some really good opportunities," he says.
Opportunities
Macquarie more generally is actively looking at opportunities to grow its business in the agricultural funds management side of the market, according to Abraham.
"The thing that people may not know is that very quietly over the last year or so we've been building up a team," he says.
"So here in Macquarie there are about 150 people who work within the agricultural funds management side of things. Of those there are probably 20 people who work in an office in Sydney and the rest are out there in the paddocks."
While Macquarie already has a presence in the agricultural funds management side, through its pastoral fund, the fund manager is looking to expand on its existing offering, with talk of heading offshore.
"The pastoral fund now has about 3 million hectares of property. I think it has about $750 million, which is either funds, which they are managing, or it is either committed to be managed. So we're very large there," Abraham says.
"We're currently raising funds from offshore. Without going into detail we're looking at how we harness the expertise we've got here in Australia and we use it offshore.
"The Australian agricultural sector survives in a market where we don't have any protections, so we're dealing with a free market . we think Australian agriculture has actually been formed in pretty tough conditions and so would prosper well in offshore jurisdictions.
"Our 2003/04 forestry projects as we look at the year three inventory data they are on track to exceed PDS requirements in the forestry sector, and that's in a year where others have come out and said things aren't going so well. So we're very proud of that and we think that sets us apart.
"In our almond project we're going to be 20 to 30 per cent above yield, so we've said 440 kilos of almonds per hectare. That's actually going to be somewhere between 550 and 600, so again it just comes down to focusing on your operations."
Great Southern is also taking the view that the current market conditions may provide opportunities.
"We've flagged that we may look to sell selected cattle assets, so that's probably a space that we're looking to capitalise on the international interest in that sector at the moment and to have a core focus on forestry in particular, and then to manage the other asset classes which we have, which is quite significant in olives, wine grapes and almonds," Rhodes says.
Outlook
It is agreed the agribusiness sector as a whole has a very positive outlook.
"There is a very positive outlook to the sector broadly taking a medium to long-term view. You cannot change the fundamentals, which are the global population is clearly growing," Rabinowicz says.
"The amount of available arable land per capita is dropping. Consumer tastes are shifting. Particularly in huge countries like China and India, they will be consuming more agricultural produce, more fresh produce.
"Yes, we're in a major economic crisis that has put the slow down on things, but once that's over we will return to a very high level of interest in the sector and a lot of interest in the sector."
