Australian Wine Makers Still Profiting Off Chinses Demand

Towards the end of last year agribusinesses were king. I’m sure we all remember the fiasco surrounding baby formula. Chinese consumers were so eager to buy baby formula they were buying them by the pallet. Supermarkets had to put restrictions on the amount each consumer could buy. It seemed that domestic mothers were struggling to get their hands on the highly demanded product.

Companies like Bellamy’s Australia [ASX:BAL] were caught right in the sights of Chinese mothers. BAL was one of the biggest gainers in 2015. Their share prices skyrocketed its way to a 729.59% return. Of course when a company just keeps revising profits up that what’ll happen. Investors jump on board and hold on for a ride to the top.

Companies like Elders [ASX:ELD] who provided livestock and farm supplies also had a great year in 2015. ELD gain shareholder a 93.75% return last year. And while this was not as impressive as BAL, EDL still profited off increasing overseas demand.

Even wine makers were living it up last year. Australia wine now has five markets valued at $100 million, which is a first for us. While the US is still the most valuable market to Australia and the UK by total volume. The fastest grow market for wine in China.

China is ranked the third most valuable at $313 million and grew by 47% just last year. And for a brief period in June China became Australia’s most valuable wine consumer. One can only imagine this to be the norm not too long into the future.

Treasury Wine Estate [ASX:TWE] climbed up 73.94% last year on the back of international demand. Even though French wine is widely accepted as the best, the increase for Australian wine is rapidly increasing.

In their half yearly report TWE highlighted their outstanding sales within Asia. Earnings increase $26 million to $46.5 million over the first half of FY16. TWE stated that volume was driven by increasing consumer demand and enhanced routes-to-market.

Even though TWE didn’t have the best start in 2016, shares are still up 13.45% for the year. However it seems more and more start-ups are trying to take advantage of surfacing Asian demand.

While they are not what you’d call a start-up, Australian Vintage [ASX:AVG] has experienced aggressive growth already in 2016. Since 18 February AVG’s share price is up 32.47%.

Australian Wine vintage AVG

Source: Bloomberg

Around the same time AVG revealed its first half profits for FY16. Branded sales dry profits were up by 80% and exports to China were up 66% in value and 71% in volume.

Sure AVG has a lot of upward momentum right now but making an investment without looking at the risks is ridiculous.

Ok so what are the risk factors? Like with most businesses TWE is exposed to currency risk. The goods sold overseas are profits in foreign currency. This means depending upon the volatility of the Aussie dollar profits could be higher or lower.

But this is just a secondary risk when it comes to currency. What’s much more important to TWE is their exporting competitiveness. If the AUS is low then that means AWE will most likely ship more volume overseas. If this happens then AWE could increase total sales along with profits.

So will the dollar stay low? The AUD is around 74 cent. This year the dollar has hit highs of 75.95 cent in early march. A big influential factor on the dollar staying low is the RBA’s rate decisions. If the RBA cut rates then the AUD will likely recede, maybe even below 70 cent. Yet this is just speculation.

But for wine markers it’s preferable to keep interest rate low because this keeps the dollar low. And in turn it keeps exports competitive.

Another factor is somewhat intertwined with the first and is the Chinese economy. Demand exploded in 2015 and should likely continue for 2016. But whether demand is slowing or increasing pessimism is playing havoc on our stocks.

Fortunately TWE hasn’t had any major dips this year. But if Chinese woes increase and are perpetuated then we might see TWE take a dive. This is not to say that TWE’s business is dependent on China. Yet they are important for TWE and many other companies going forward.

China is the largest market and the second largest nation of consumers in the world. Very soon China will eclipse the US in term of largest economy and largest consumerist nation. And if their wine consumption continues to trend upwards, it will be a great year for AWE.

Härje Ronngard,

Junior Analyst, Money Morning

PS: Agriculture is just one sector you could play with this year. It was a great place to put your money last year. But you don’t have to limit yourself. There are other create investment opportunities out there.

Money Morning’s publisher Kris Sayce has written a report on the three best investments for 2015 and beyond. In Kris’s report ‘The Three Best Investments in Australia for 2015 and Beyond’ he’ll tell you why it’s time to load up on one of the most hated sectors. There’s also an ancient wealth protector that will insure your financial security. If you want to find out these and more get your free copy of Kris’s report 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.

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