Negative returns for Agribusiness

THE listed Agribusiness sector has fallen short of the broader market in the past month through a difficult reporting season and a strong Australian dollar.

The sector posted another month of negative returns after two months in positive territory. 

The Commonwealth Bank Agri Index recorded negative growth during the past month, delivering a loss of 3.1 per cent over the month, while the S&P/ASX200 index reported a loss of 1.2 per cent over the same period.

Brendan White, executive general manager, Commonwealth Bank Agribusiness said the Agri Index’s move into negative territory followed a significant period of market volatility with uncertainty still in the sector. 

“The performance of the listed agribusiness sector this month is not unexpected," he said.

"While confidence in the economy is slowly returning, investors remain cautious and this month’s results are indicative of a more prudent approach.

"In addition, several companies in the index reported net losses and are in the midst of completing capital raisings.”

Forest Enterprises Australia (FEA) and Incitec Pivot Ltd (IPL) reported net losses. In addition FEA and GrainCorp Ltd (GNC) were in the midst of capital raisings last month. IPL accounts for 36.3 per cent of the Agri Index and GNC accounts for 10.6 per cent.

“The Agri Index is heavily dependent on the performance of these companies and as such the current results are not surprising,” Mr White said.  

“The strength of the Australian dollar does pose challenges for the agribusiness sector, and all export led industries in the coming six to 12 months.

"With the Australian to US dollar exchange rate recently exceeding 0.9300 and forecast to trade to 0.9500 by March, this could mean more tough times are on the horizon for the sector.”

This month’s short-term loss was buoyed by a more favourable long-term forecast for the agribusiness sector.

“The consensus forecast return for the year to November 2010 is 9.0 per cent,” Mr White said.

"This return is in line with the broader market, which is expected to return 9.4 per cent over the next 12 months."

On a risk-adjusted basis Agribusiness wass now in the middle of the pack – in line with the expectations for Consumer Discretionary and Consumer Staples. Agribusiness is expected to outperform Utilities, IT, Minerals, Energy and Property.

"Although we’ve seen investor confidence slip this month, the sector’s historical performance is evident of its ability to withstand short-term blows," he said.

"Consensus view is that it will ultimately regain wealth in the longer term.

“Undoubtedly we can’t ignore this month’s decline. However, the fundamentals of agribusiness are solid and over time we should see investor confidence lift, resulting in more positive returns for investors."