Are You Benefitting from the ‘Dining Boom?’

In today’s Money Morning…how has the switch from mining to agriculture progressed for Australia?…how the marketing of ‘brand Australia’ has failed, and how it could change…the upside potential left in this boom…and more…

Treasury Wine Estates [ASX:TWE] results are out today.

Treasury Wine has become somewhat of a symbol of Australia’s so-called ‘dining boom’ of the past few years. So I thought it’d be a good chance to look at the progress of that trend, and what it may mean for you.

The ‘dining boom’ was a term coined at the end of the mining boom. The basic reasoning was that as China became wealthier and its middle class grew, demand for Australia’s agriculture, produce and livestock would as well.

Agriculture has always been a big industry for Australia. The old phrase about Australia ‘riding on the sheep’s back’ didn’t come from nowhere!

Australia will generate $66.8 billion dollars this year from the agriculture sector, according to ABARES (the Australian Bureau of Agriculture and Resource Economics and Sciences).

In fact, did you know that 52% of Australia’s entire land mass is used for agriculture?

Many hoped that the growth in this industry would help dampen the negative effects of the end of the mining boom.

The following chart demonstrates the train of thought.

Source: Carbon Brief
[Click to enlarge]

You can see that, as incomes rise, meat consumption tends to increase as well. Though there are certain cultural and local anomalies.

Such as the Brazilians, who love a good steak!

With 1.2 billion people to feed, Chinese trends have a bigger effect on outcomes than other countries. Currently an average Chinese consumer eats just over half the meat of the average American.

As incomes rise in China, this will narrow.

It’s not just meat of course. It’s fruit, vegetables, fish and commodities like wheat and grain.

The good news for Australia is that the Chinese perceive our agriculture as a quality product. Though some think we aren’t making enough of this advantage.

Andrew Forrest, CEO of miner Fortescue [ASX:FMG], is a staunch believer in promoting ‘Brand Australia’.

Australian product needs to be simply branded with a recognisable logo such as a map, or something as effective as New Zealand’s silver fern.

Mr Forrest has made the Australian label issue a personal campaign for several years.

He has argued that Australia’s food and marketing message to Chinese shoppers, in particular, is chaotic and confusing.

If this is true, there may be plenty upside left in the ‘dining boom’ if we could achieve a better marketing approach.

So, what companies can you invest in to benefit from this?

Food for thought

Let’s start with Treasury wine estates.

The headline results today were good.

Net profit after tax up 53% at $269 million. Earnings per share (EPS) at 36.5c. Return on capital employed at 11.6%.

TWE has been one company that have successfully branded its stock of premium wine products, such as Penfolds Grange, to an increasing affluent Chinese middle class.

The share price has risen from $3 to around $12.50 in just six years.

Another popular Chinese food play has been the A2 Milk Company [ASX:A2M]. Like TWE, it has roared ahead, up from a low of 46.5c in 2015 to around $4.60 today.

That’s a 1,000% return in just over two years.

Bellamy’s Australia Ltd [ASX:BAL] has had a few more bumps to contend with. This company specialises in baby formula and was rising fast in 2015 through to late 2016. Then the shares dropped 75% in just one month on the back of slower Chinese sales growth.

Other companies worth looking into include Capilano Honey [ASX:CZZ], Bega Cheese [ASX:BGA], and Clean Seas Seafood [ASX;CSS].

They are all single product companies, which makes it a bit easier to analyse the supply and demand dynamics.

An interesting play to consider is Ridley Corporation [ASX:RIC]. It produces animal nutrients and feedstock, so indirectly benefits from increases in livestock demand.

It’s a kind of ‘spades and shovels’ investing approach to the dining boom. Historically, these tend to be the lower risk plays.

The takeaway

The China dining boom story is real. But it’s not without risks.

Agricultural product prices are notoriously volatile at the best of times. And there are more potential storm clouds on the horizon than usual.

As an ABARES report this year states:

A slowing Chinese economy, an uncertain policy direction out of the United States and potential risks in Europe associated with Brexit and the French and German elections all add an extra dimension of unpredictability.

Valuations on some of the success stories are looking stretched at the moment.

And as the Bellamy’s example showed (and our Domino’s story in yesterday’s Money Morning) it only takes a whiff of slowing growth to derail a strong story.

The key differentiator we have noticed is that the successful ones are producers of food that cannot be readily obtained elsewhere.

There’s definite opportunity here. But proceed with caution.

Good investing,

Ryan Dinse,
Editor, Money Morning

PS: Technology could be game changer in the farming space over the next decade. From drone companies spraying crops, to genetically modified meat, and everywhere in-between. Most of these companies will be small-cap companies today. But maybe not for long. Check out a report on an unusual set of small agricultural companies here.

Ryan Dinse is an Editor at Money Morning.

He has worked in finance and investing for the past two decades as a financial planner, senior credit analyst, equity trader and fintech entrepreneur.

With an academic background in economics, he believes that the key to making good investments is investing appropriately at each stage of the economic cycle.

Different market conditions provide different opportunities. Ryan combines fundamental, technical and economic analysis with the goal of making sure you are in the right investments at the right time.

Ryan's premium publications include:

Money Morning Australia