Agriculture stocks 'may enjoy cyclical upturn'

A sugar cane farm in Brazil. Production yields for many crops worldwide could be hit by El Nino-linked weather patterns, thus hastening a rebound in prices for commodities such as sugar and palm oil. Even so, operating conditions for agri-businesses
A sugar cane farm in Brazil. Production yields for many crops worldwide could be hit by El Nino-linked weather patterns, thus hastening a rebound in prices for commodities such as sugar and palm oil. Even so, operating conditions for agri-businesses are likely to remain challenging.PHOTO: BLOOMBERG

Agricultural equities could be on the cusp of a recovery as firms experience a "cyclical improvement" in the coming months, according to a report yesterday.

The palm oil and sugar segments, in particular, are expected to deliver a "modest outperformance", according to BMI Research, a subsidiary of financial information provider Fitch Group.

It is turning bullish over palm oil firms, though the operating environment remains challenging, because it believes some key factors - "higher palm oil prices and a cyclical improvement in emerging market equities" - will help push share prices higher in the short term.

"We expect palm oil prices to head higher as reduced production due to El Nino gets priced into the market during the first half of next year," said the firm.

"Moreover, some of the largest palm oil firms in our basket, such as Wilmar International and Sime Darby, are cheap by recent standards."

BMI Research said it is also confident about sugar companies, since prices are "in the process of bottoming, and will head higher as the global market turns to deficit".

"The sector will see a cyclical upturn over the coming months as a stabilising Brazilian real and rebounding sugar prices improve investor sentiment towards sugar companies," it said.

Still, it noted, share prices are likely to remain below 2011 peaks.

"We expect sugar prices to average higher over the coming years, as we forecast the market will turn to deficit next year," it said.

"Like the palm oil firms, the sugar firms in our basket are based mainly in emerging markets, whose equity indexes have rallied in recent weeks, after the United States Federal Reserve failed to raise interest rates last month."

Meanwhile, the outlook for dairy companies remains generally strong, and European chocolate firms are likely to continue posting weak performances as cocoa prices remain elevated amid slowing demand, the report noted.

The report frames an optimistic future for the global commodity industry, which has been racked by low prices amid a supply glut. These conditions have battered the world's agricultural equities, including ones listed here.

Even so, local agri-business stocks have seen a slight upturn in share prices over the past weeks.

The stocks of Golden Agri-Resources, one of the world's largest palm planters, fell 5.4 per cent to 35 cents yesterday - but they were up 18.7 per cent for the month.

Wilmar gained 7.6 per cent over the month, but its closing price of $2.82 yesterday was still far from the $5 levels seen in 2012.

At the same time, other analysts are warning that commodity prices could go lower yet.

A recent Citigroup report said the sluggish world economy makes it "hard to argue" that most prices have already bottomed.

Independent analyst Nicholas Teo told The Straits Times: "What would lead to a sustainable rebound is growth in real demand, but we've not seen any signs of that.

"Traders seem to be buying into local (agri-business) stocks using 'hot money' - it's more opportunistic, either because of the El Nino factor or from relief that the Fed has not raised rates."

He added: "Whether the rally will continue beyond that remains to be seen."

A version of this article appeared in the print edition of The Straits Times on October 09, 2015, with the headline 'Agriculture stocks 'may enjoy cyclical upturn''. Print Edition | Subscribe