The agriculture sector has been a strong performer on the ASX recently, with shares in Elders Ltd (ASX: ELD) and Graincorp Limited (ASX: GNC) up 25% and 16% respectively since the start of the year.
Is now the time to buy shares in the agriculture sector?
Agriculture shares explained
Companies that operate in the agriculture sector can sometimes face some tough operating conditions.
Like other commodities companies, they’re exposed to weaker commodities prices and don’t have the ability to dictate these prices.
Not only this, but companies can also face foreign exchange (FX) headwinds, changing weather conditions, and differences in consumer tastes.
It’s not all bad news though, as these variables can also work in favour of agricultural companies, but you can see that conditions tend to fluctuate resulting in a fairy cyclical business model.
For this reason, investors might trade these sort of companies based on the current stage of the cycle, rather than a “buy and hold” investing strategy.
How is Elders performing?
The rise of Elders’ shares is likely the result of improved seasonal conditions, particularly along the eastern coast of Australia.
ELD share price
According to the Department of Agriculture, Water and the Environment, these improved conditions will likely see farm cash income increase around 18% in 2020-21.
Part of what Elders does is supply rural products like seeds, fertilisers, chemicals and animal health products to retail and wholesale markets. Given the lift in optimism and income levels, the logic would be Elders may be a likely beneficiary as it can support the increased demand.
According to Goldman Sach’s research, it thinks Elders is also likely to benefit from a structural shift towards online livestock auctions. Analysts reiterated their buy recommendation on the stock with a 1-year target price of $15 per share.
What about Graincorp?
Similar to Elders, Graincorp has also seen an uptick in performance on the back of significantly better seasonal conditions.
Last month, the company upgraded its FY21 underlying earnings before interest, tax, depreciation and amortisation (EBITDA) guidance and expects it to between $230 million and $270 million (FY20: $108 million).
Underlying net profit after tax (NPAT) is expected to be between $60 million and $85 million (FY20: $16 million loss).
In regards to Graincorp’s recent performance, CEO Robert Spurway said that “the outlook reflects the strong turnaround in cropping conditions in east coast Australia and the continued delivery of GrainCorp’s operational initiatives.”
“We experienced near optimal conditions across much of eastern Australia during the recent winter cropping season and this has translated into one of the largest crops in recent history.”
Summary
At Rask, we’re mostly interested in investing with a long time horizon, rather than trading based on cycles.
It’s pleasing to see companies in this sector are performing well at the moment, but we typically look for companies that can perform well in all stages of the cycle.
If you’d like to know more, I’d recommend signing up for a free Rask account so you can access our stock reports.
For more stock ideas, click here to read: 3 ASX growth shares I’d happily buy this week.
