Ag stock's rude shock

Most Australian public companies involved in ag do not perform well for their shareholders...

LET'S suppose you work in agriculture, broadly defined, and you think you know it fairly well.

Let’s also suppose you decide to use this knowledge to invest in firms listed on the stock exchange whose main business is in agriculture. You might even think of it as a legal version of insider trading.

Let’s further assume you have a friend who does not share your knowledge of agriculture. Your friend therefore decides to buy shares in an Exchange Traded Fund that tracks the All Ordinaries Index, so that movements in the Index are directly reflected in the value of his investment.

Over the last two or three years, which one of you would have made the most money?

The answer is not what you might expect. Unless you had limited your share buying to just six of the 21 agribusiness companies I found, your investment would have lost a substantial amount of your investment, whether you started in 2010 or 2011.

The poor performers cover the gamut from input suppliers to output marketers. Examples include AACo, AACL, Agricultural Land Trust, Conquest, Elders, Namoi Cotton, Ridley, Arrium and Shearer. A few managed to almost keep up with the All Ordinaries, while there is a very short list of those that outperformed it. One of them, GrainCorp, is only in that position because of the ADM offer.

And not one is substantially above it.

Your friend, on the other hand, would have enjoyed a handy increase in his investment.

This is a bit of a shock. The experts tell us that investing in a limited number of firms that we know something about, in an industry we understand, is the smart way to do it. Brokers employ analysts who specialise in particular industry sectors, and high performing investment funds often have a bias towards sectors with which they are familiar. And they all regard beating the All Ordinaries as the absolute minimum for performance.

It is unfortunately the case that most Australian public companies involved in agriculture do not perform well for their shareholders (although their management usually does a lot better).

Return on capital tends to be low, dividends are meagre if paid at all, and the share price struggles (and mostly fails) to keep up with the market.

This leads to reluctance to invest in agriculture. Those managing superannuation funds, for example, are well aware of the history of poor results from agriculture investments and tend to stay away. It’s not as if they don’t have plenty of alternative options.

Increased profitability and reduced volatility by listed agriculture firms would make a huge difference to their appeal as investments and have all sorts of flow-on benefits. But I can’t see it changing.

High profits are actually not uncommon in agriculture, albeit with some big ups and downs. In every sector of farming, from apples to zucchinis, grapes to goats, and of course wheat, dairy, wool and beef, the top 20 per cent or so are generating returns on capital that would make a fund manager blush. There are also input suppliers, rural merchandise retailers and machinery manufacturers which are doing handsomely.

What characterises these businesses is that they are strongly focused on what they know, and their owners are intimately involved in their operations. Public companies typically lack both these attributes.

But it is also true that the big international agribusiness firms such as Agrium, ADM, Glencore, Cargill, Louis Dreyfus, the big Japanese trading houses, plus the major international crop protection companies, manage to achieve respectable performance. Most of these are public companies.

The difference in their case is global scale. They have suppliers in a range of countries and customers in all corners of the world, allowing them to benefit from fluctuations in global supply and demand.

When there is a drought in Australia, it is usually a good season in the US or Russia and vice versa. Costs can be spread across huge volumes and volatility is substantially reduced.

Given my background, I was once among those who thought investing in Australian agribusiness firms made sense. These days I avoid them all.

While I understand the logic of investing in the growing demand for food, buying shares in Australian agribusiness companies is a good way of losing money. Investing in the All Ordinaries Index is more lucrative, and it is safer to buy shares in international companies.

  • David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at
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    David Leyonhjelm

    David Leyonhjelm

    has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
    Date: Newest first | Oldest first


    1/08/2013 6:02:35 AM

    Your scenario seems the wrong way round David. Any savvy person in ag would think to himself, farming as a whole returns about 2% so why would I invest in listed ag. While his none ag friend would be more likely to listen to a consultant on how great ag is and invest his hard earned in it. How dumb do you think farmers are? Why do you think the super funds won't touch it.
    Jen from the bush
    1/08/2013 6:25:42 AM

    There is absolutely no way I would invest in agriculture and I have been in agriculture all my life. The only things which consistently seems to make money are sex, drugs, banks and politicians. I will leave it to chose should you be lucky enough to have that thing called profit.
    1/08/2013 7:26:22 AM

    I am a beef and grain producer in a highish rainfall area and agree with David. We generate a sound return because we focus on what we know and continually strive to do it better. Unfortunately many of the public ag companies are set up by people who aren't at the grass roots level and therefore ultimately fail because they lose touch with the reality of farming. Look at some of the recent forays, paid big dollars for assets, directors paid themselves a princely sum and now divesting their assets. Fund managers would be best investing in top family farms who know their stuff.
    1/08/2013 8:33:00 AM

    Gee ah – So the majority of listed Ag companies are run by semi educated old red necks, using early 19th century management styles.- The government needs to pay for some financial counselors and consultants to teach them basic business skills.
    1/08/2013 8:41:33 AM

    I see the old 20% chestnut trotted out again. That’s the problem with quoting statistics without knowing the full story. The sheer volume of variables in farming means that somebody some-were will be doing better than the rest. Yes 20% of farmers do a lot better very year, but it’s not always the same farmers in that top 20%.
    1/08/2013 8:42:50 AM

    Every time I muster I miss 20% of my cows, but because I read their tag whenever they come through the yards. I know that I’m not missing the same cows every time. It’s rare for a cow to miss 3 musters in a row, and I’ll bet it’s equally rare for a farmer to be in the top 20% 3 times in a row.
    1/08/2013 9:10:39 AM

    I reckon you'd be wrong qlander. Good farmers are always good. The others have a good year every now and then.
    1/08/2013 9:46:58 AM

    Dickytiger: 'Always' is a big word. If you've never had to manage a loss making year or two you're not an Aussie farmer.
    1/08/2013 9:50:23 AM

    As a rule of thumb 3 years in 10 will losses, and 3 will be good profits. It's the ability to manage the 4 in between years that make the difference over the long term.
    1/08/2013 10:28:02 AM

    By gee there are some more brains out in the bush than is generally realised.A lot of wisdom up there.Yes overpaid executives cannot be tolerated in a truly well functioning rural sector.We have farmers wasting money in good seasons when history tells that Australia is Hanrahan country.Much of that money returns overseas but of course only spending maintains rural communities.F's and G's are largely locked into rapacious techniques even when proven wrong BUT a national co-ordination of 'best practice' does not yet exist.There are also too many Rural Companies competing in uncertain times.
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    Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at


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