INSIGHTS BLOG

TAKING STOCK - THE RISKS OF AGRI SECTOR INVESTING

Mark Lister, 15 May 2019

It’s been a rough couple of weeks for some of the primary sector companies listed on the local sharemarket. We’ve seen negative news from NZ King Salmon, Delegat Group and Comvita, all of which has been weather related.

This is a timely reminder of the inherent risks of investing in the agricultural sector. There are numerous unpredictable factors beyond the control of these businesses, which can have a significant impact on earnings.

NZ King Salmon was first to report some bad news. On the first day of this month the company announced that warm water temperatures had not been kind to the 2019 fish performance, and the mortality cost for the year would be significantly higher than in 2018.

Consequently, earnings are now expected to be at the lower end of the guidance range previously provided to the market. The share price fell 17.5 per cent on the day of this announcement, and it has declined further since then to see the value of the company down almost 25 per cent this month.

A couple of days later, Delegat provided a market update that suggested the 2019 harvest would be down 11 per cent on the 2018 vintage. The wine company blamed adverse conditions through the spring flowering season, although it noted that more recently the weather had improved.

Delegat also saw its share price slip back a little in the wake of this news, although given the earnings impact appeared to be negligible it was only marginally lower.

Natural health products business Comvita was third in the trifecta of weather related disruptions. On May 6, the company provided an update on the honey harvest for the current season, which confirmed the third tough season in a row.

Poor weather patterns were again a key culprit, as was the overcrowding of Manuka sites with competing hives.

The impact of this is expected to be a $6m loss of operating earnings from the apiary business, which means the second half of the year won’t be nearly as good as expected for the company. Comvita saw its share price decline almost 15 per cent in response to this news.

The primary sector is a large part of the New Zealand economy, and such volatility won’t come as any surprise to those involved in the farming sector.

While many aspects of an agricultural business are within the control of an operator, an equally large number that are not. Commodity prices, consumer demand and exchange rates are but a few, while weather and other climatic conditions are even more unpredictable.

There are many other companies listed on the NZX that are at the mercy of such things, to varying degrees.

Scales is in the business of growing apples, while a2 Milk, Synlait and Fonterra are all involved in the dairy sector. Sanford is our largest integrated fishing and aquaculture company, while the large electricity companies all operate hydro dams that depend on favourable weather conditions and rainfall.

Many of these are great businesses with exciting prospects and an opportunity to take high quality, homegrown products to consumer both here and across the world.

However, this month has been a reminder that when you’re in the farming or agriculture game, nothing is certain, especially the weather.

 

This article was also published in the New Zealand Herald on 9 May under the title "Mark Lister: Sharemarket plays of the week"

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