Investing in food companies: a mixed bag of share price results

Investors seeking to profit from high food prices need to tread carefully as companies produce and mixed bag of results.

Food price inflation remains stubbornly high but it’s not translating into share price inflation for food-related companies.

Food producers and other agribusiness stocks have dropped 10 per cent overall so far in 2023, while the broader share market is up about 1.5 per cent.

However, shares in the nation’s two biggest food retailers – Woolworths and Coles – have had a good year so far, up 13 per cent and 8 per cent respectively since December 31, and analysts say they may be the safest option for investors right now.

Food-related stocks were strong in early 2022 when Russia invaded Ukraine, one of the world’s largest food producers, but since then their overall performance has been lacklustre.

Overseas food-related investments aren’t faring well either, with the BetaShares exchange traded fund FOOD, which tracks global agriculture companies, down 14 per cent in the past 12 months.

Infinity Asset Management portfolio manager Dominic Mlcek said the strong recent share price gains of Coles and Woolworths were justified by the companies’ latest trading updates, and Woolworths remained its preferred supermarket.

GrainCorp shares spiked after a strong profit result this month. Picture: Supplied

“It has been a mixed bag for companies operating across the food supply chain in the current environment, with food distributors like the major supermarkets significantly outperforming producers during the calendar year to date,” he said.

Research by UBS found food inflation hit a new peak in April, up 9.6 per cent year on year.

It said this increased rate of inflation was a surprise, especially given Coles and Woolworths had reported declines.

“We suggest the achievement of a new peak in food is due to ongoing cost pressures on suppliers due to commodities and the domestic supply chain including labour,” the UBS report says.

Woolworths and Coles are also impacted, it says.

Food price inflation remains high.

“High inflation has driven a shift to private label at Coles and Woolworths, which is a negative for supermarkets as it is gross profit dilutive, with this trend likely to continue given rising cost of living pressures.”

The fortunes of food companies have varied widely in recent weeks, with a strong profit by agriculture chemicals company Nufarm briefly pushing its share price sharply higher.

IG market analyst Tony Sycamore said Nufarm’s seeds business was a star performer.

However, shares in agribusiness company Elders have slumped 20 per cent in the past fortnight following a 46 per cent fall in half-year profit.

“Weak crop prices, wet weather, and softer livestock prices are to blame for the disappointing result,” Mr Sycamore said.

Fertiliser producer Incitec Pivot also had a disappointing profit result, and its shares have dropped 19 per cent this year.

“Given the direct exposure food groups have to many variables, including the weather, the war in Ukraine, and fluctuations in livestock, crop and fertiliser prices, investing directly in these companies requires a more aggressive risk appetite,” Mr Sycamore said.

He said buying into Elders and Incitec Pivot shares now could be “akin to catching a falling knife”.

“Large food retailers such as Coles and Woolworths have better diversified and more reliable income streams and offer a better proposition for investors looking for exposure to food companies.”

Macquarie Research has “outperform” ratings on agriculture group GrainCorp and Nufarm, and “neutral” recommendations on Incitec Pivot and Elders.

Almond producer Select Harvests could benefit from more almond price rises.

“Australian agricultural production is coming off record highs with less favourable seasonal conditions expected than those experienced over the past three years,” it said in a report this week.

Macquarie said agriculture commodity prices had fallen back but remained above long-term averages, while price declines across fertilisers, chemicals and livestock were headwinds for Elders, Incitec Pivot and Nufarm.

Infinity Asset Management’s Mr Mlcek said his firm was positive on food producers that could take advantage of firming commodity prices.

“Select Harvests is a company we have in our small/mid cap strategy and they are highly leveraged to firming almond prices given a relatively high fixed cost base,” he said.

“Select Harvests is Australia’s largest producer and exporter of almonds and, as per other soft commodities, we believe further price rises are likely given the persistent inflationary environment.

“We expect supermarket sales growth to slow towards the longer-term growth rate of low to mid-single digits over the next 12 months as inflation moderates. However, despite the lower growth expectations, we still see this as a positive and continue to like the quality defensive characteristics of Woolworths.”