Insights | Article | Investing in Australian Livestock Agriculture: With strong headwinds closing in, do the risks outweigh the rewards?

Investing in Australian Livestock Agriculture: With strong headwinds closing in, do the risks outweigh the rewards?

11 August 2022

For investors in Australian livestock, significant headwinds have begun closing in; a changing climate, the spread of animal borne diseases, the rise of antibiotic resistance, animal welfare concerns, and the growth in alternative protein markets all point to a future fraught with uncertainty.

Let’s unpack some of these headwinds…

Climate and Environment

Overall, it is becoming increasingly difficult for farmers of livestock to navigate these climatic and environmental risks. In the long term, mitigation and management strategies may accumulate unfeasible financial costs.

Figure 1: “Scorecard ranking companies on deforestation‑free beef policies and implementation activities”

Demographic change & animal welfare

Figure 2 ”Top five environmental and social issues consumers want to avoid, by generation”

Headwinds aside, livestock agriculture contributes significantly to Australia’s wealth

Figure 3 “The emerging middle class in developing economies” indicates that Asia Pacific is forecasted to increase dramatically through to 2030

Many companies are transforming risks into opportunities

Read more about Australia’s plant-based meat sector in Food Frontier’s 2020 State Of The Industry

Australians are embracing alternative meat and dairy products as the third-fastest growing market for plant-based foods. In 2019–2020, the sector gained $185 million in sales at an increase of 32% from the $140 million figure in the previous year, contributing $50.4 million to the nation’s economy. International plant-based protein and dairy industries have since entered the Australian market to capture changes to Australian diets and preferences to plant-based alternatives. These international brands include:

  •  Alternative Kitchen (Canada)
  • Beyond Meat (US)
  • Fable Food Group (Malaysia/Australia)
  • Impossible Foods (the Grill’d burgers chain supplier in Australia)
  •  Linda McCartney (UK)
  • Quorn (UK)

Where animal protein is still a core product, companies are consistently raising the standards of animal welfare by embracing ethical farming practices. For example, many supermarkets are sourcing their products from recognised certifications like the RSPCA Approved Farming Scheme. For 25 years, the RSPCA has created a strict standard for Australian farmers to show their dedication in upholding ethical and humane farm animal practices. The companies sourcing RSPCA Approved chicken include:

  • Aldi
  • Coles (ASX:COL)
  • Grill’d burgers
  • Herbert Adams (ASX:PFL)
  • McDonalds (NYSE:MCD)
  • Nandos
  • Woolworths (ASX:WOW)

Companies who participate in sourcing from ethical, high welfare farms benefit from enhanced brand reputation as they demonstrate their commitment to supporting high welfare farming. By promoting animal welfare, businesses also create competitive advantage through reduced costs, increased productivity, and accessing markets with greater welfare standards. Collectively, these advantages seek to promote long-term success and keep participating businesses at the forefront of consumer preferences. In fact, evidence shows responsible investment practices prioritising animal welfare bolster future long-term growth and stability.

Welcome to the stage the ASX’s very own Agribusiness Index

Launching in July of 2022, the ASX, in partnership with S&P Dow Jones Indices, has created a new agribusiness index (ASX:XAG). With a market capitalisation of almost $30 billion, the new index features livestock agriculture companies including Elders (ASX: ELD) and Australian Agriculture Co. (ASX:AAC) (figure 4). Elders operates as a specialist working to improve production efficiency with Australian farmers by providing technical advice and access to global markets across retail, real estate, and financial products. Elder’s performance in FY21 reported a 22% increase in revenue with a 31% increase in statutory profit after tax and holds a share price of $13.31 at the time of writing.

Australian Agriculture Co. owns and operates cattle farms and feedlots occupying around 7 million hectares of land in Queensland and the Northern Territory. During FY21, the company reported an operating profit of $17.7 million pre-JobKeeper and $24.4 million post JobKeeper payments. Since the start of 2022, the company’s share price has risen from $1.48 to $2.08, a 61.24% rise in the past year.

The inception of this index strengthens the profile of livestock agriculture and other agriculture industries into the market. The creation of this index signals significant investor interest and awareness present in the market who are seeking for opportunities to participate in an industry previously overshadowed by Australia’s other large commodities like mining and energy. By gaining this index, the industry will inherit greater attention, innovation, and progress to support efficient and sustainable practices to reflect the climate and environmental risks facing the industry. In addition, ASX:XAG will contribute to the Delivering Ag2030 goal of becoming an industry worth $100 billion by 2030 and grow a vital sector in Australia’s economy.

Figure 4 “The XAG top 20 constituents now and their ranking since 2015”

Livestock agriculture will face its fair share of adversity. Factors such as rising geopolitical tensions, a global pandemic, and climate change form significant headwinds that will continue to disrupt the industry. The introduction of a younger, more environmentally and ethically conscious demographic of investors will be a catalyst for change as producers are challenged to address animal welfare concerns and meet the demand for meat alternatives. Some companies have moved quickly to capitalise on this shift, turning risk into competitive advantage. Despite this uncertainty, Australian livestock agriculture continues to thrive as a highly profitable industry for investors, consumers, and producers of livestock. Only time will tell whether the risks outweigh the rewards.

 

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This article originally appeared in the Australian Shareholders’ Association magazine.