The current economic downturn has taken a lot of the focus off soft commodities, but if you believe that over the long term that prices for wheat, cotton and beef etc. will rise again than investing in quality farmland may be good investment option. One way investors can do this is via a recently listed company: Prime Ag Australia Limited.
Prime Ag (ASX.PAG) is basically a listed company that invests in farmland and also manages the farms they own. The company aims buy up quality farmland, form regional support hubs for these farms and then utilise these assets to supply a range of soft commodities to both the domestic and export markets.
According to the Prime Ag website: “PrimeAg has been formed to invest in select, quality Australian rural properties, some with attached water entitlements, to take advantage of the increasing global demand for soft commodities, such as wheat, chickpeas, sorghum and cotton, as well as for livestock products.”
Now of course farming has many ups and downs; fire, flood and droughts can reduce farm outputs and these events would adversely impact the earnings of the company. According to information on the Prime Ag website:
“PrimeAg properties stretch from the Liverpool Plains of NSW to Central Queensland 1,200 kilometres to the north. By positioning properties over a 1200km zone, PrimeAg is able to mitigate climatic risks, most importantly those risks associated with rainfall and drought. Production is further secured through the ownership of irrigation water entitlements. PrimeAg will own irrigation water entitlements in the Upper Darling and the Fitzroy river systems. These entitlements mitigate climatic risk and increase production and financial returns from PrimeAg’s cropping enterprises, subject to the availability of water for irrigation.”
So Prime Ag try to mitigate these risks by owning farmland in different areas of Australia but as we know, it is not impossible for drought to be affecting one part of the country while vast areas in another region are in flood, so there is no guarantee their risk management will cover all scenarios.
Also is you believe in global warming (extreme version) then investing in farming is probably not the thing for you. There are also other risks like pests and diseases and these have the potential to wipe out crops and livestock across large areas so farming as always, is often an uphill battle.
Another issue is that soft commodities prices can fall and most soft commodities had quite a nasty correction last year. If you look at the charts for a few soft commodities you can quite clearly see how far prices have fallen for both hard and soft commodities. (you can find some price information and charts here)
I have an indirect interest in some Prime Ag stocks and I can tell you that that little investment is yet to return a profit. But I do believe that over the long term having an exposure to soft commodities via an investment like Prime Ag should pay off. There are of course other listed companies that offer exposure to soft commodities such as Graincorp (GNC) and AWB Limited (AWB) albeit in a slightly different way.
Although Prime Ag is what I would call a defensive type stock it has still seen its share price decline pretty much the same as the overall market. This is pretty much true of all stocks though, as nothing has really held up well in this savage bear market.
Prime Ag Australia Limited 1 Year Chart
Finally, investing in a company like Prime Ag means not only do you need to think about company fundamentals but you also need to take into account the fairly complicated range of issues that drive soft commodity prices. So this type of stock is not for everyone and as always, please do plenty of research and seek professional advice as applicable before making any investment decision.