China Loves Agriculture, but Only Overseas

China’s stock market hasn’t changed since the end of 2015. It’s still performing horribly. Stock market turmoil has spread throughout. The effects are being felt by everything, from Chinese banks to technology companies. But something has happened this year that analyst didn’t expect —agriculture is taking a dive in China.

Agribusinesses enjoyed a tremendous boost towards the end of last year. Australian companies like Bellamy’s Australia [ASX:BAL] and Blackmores [ASX:BKL] enjoyed tremendous growth. And it was all on the back of Asian demand.

Analysts predicted continual growth for the sector. Yet when the new year started not even Chinese agribusinesses were protected from their inflated market.

China’s stock market dropped 17% within the first month of the year. The market hit lows that weren’t even touched when the Shanghai Composite [SHA:000001] almost halved. Many sectors have already retreated. And the same has happened for China’s agriculture.

Source: Yahoo Finance

 

Agribusinesses dropped from 20% to 60% over the January trading period. The decline showed that nothing ‘s protected from the fears of a slowing China. Yet if we take a look at the bigger picture, we see a logical explanation. China still loves agriculture, just not their own.

China’s still aggressive over agriculture

Chinese agricultural sector is lagging. Yet it’s not the same for international markets. Syngenta AG [VTX:SYNN], the Swiss agrochemicals company, conducts genomic research globally. They’re a leader in the field with their innovative practices.  And they’ve captured the eye of Chinese buyers.

China’s had problems recently with meeting national food demands. That’s why on Tuesday, state owned ChemChina successfully acquired Syngenta for $43 billion. The takeover was the largest foreign purchase ever made by a Chinese firm. There’s also a great chance investors may be seeing similar takeovers in the future.

Only about 10% of China’s farmland is efficient. So if we look at the bigger picture, the government is trying to address a real problem. China needs to feed their ever growing population and the demand is only increasing.

The one child policy was abolished late last year. The decision has opened the flood gates for Chinese couple to have a second, or even third, child. The demand for baby formula skyrocketed last year. Many Australian companies like Bellamy’s profited off this trend. And it’s far from over.

If anything, the trend is increasing in scope. Instead of just dairy products, demand for beef and wine is also on the rise. Australia and New Zealand are right in the cross hairs of Chinese private equity firms. It’s quite possible that agribusiness takeovers may spike this year.

Australian agricultural exporters say that orders are still being placed. China’s diet is changing rapidly. More Chinese households each year are having beef and pork for dinner. But you might not draw this conclusion from look at China’s livestock companies. Chinese animal feed and livestock we one of the hardest hit this year. So where is China getting all this meat?

China is importing internationally. Countries like Australia and the US are feeding China’s new diet preferences. And they’re capitalising big time. What’s interesting is that Australian luxury goods like wine are not being affected by China’s woes.

Wine Australia representative, Stu Barclay said, ‘while we are not trying to predict the future, we do see a strong growth coming out of China for the foreseeable future.’ Stu also added, ‘last year’s economic woes in China didn’t impact wine sales’ in the slightest.

With China ramping up their demand for beef, wine and cheese, Australia may be best positioned to benefit. Why? Because Australia has something that countries like US and France don’t. We have a free trade agreement with China.

Yet there could be one problem arising in the near future for agribusinesses. It’s a hurdle that every exporter will need to face: importing goods is becoming more expensive for China.

Currency devaluation might not be as frightening as you think

China devaluated their currency back in August of last year. Since then the Chinese government has been closely monitoring exchange rate prices. But what this means specifically for Australia is a reduction in exports to China.

Or does it?

The yuan has depreciated by only 0.88% since the start of February. Yet the Australian dollar isn’t too high either. The ADU hasn’t been above 74 cents per US$1 this year.

AUD USD

Source: Forex Factory

The low Aussie dollar is just one factor that explains the lessened impact on Australian exports, Mr Barclay said. ‘At the moment we’re seeing lots of enquires coming from China in terms of new importers seeking wineries to represent,’ he said.

Always be cautious when investing. But the pessimism surrounding agriculture is just noise. And it should be factored into your investment decisions.

Härje Ronngard,

Junior Analyst, Money Morning

PS: There’s huge demand for agricultural. It could be the next big sector to propel Australia forward. But sometimes it’s not always good to have all your eggs in one basket. To make things easier, Money Morning’s Publisher Kris Sayce has written a report naming the five best stocks this year.

In his report Kris will show you a sneaky way to play the property market. And he’ll tell you why the retail market is in for a revival. To get your free report today, click here.


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia