Food price inflation and retailers are driving demand in Agribusiness sector, it is claimed

Changes in the US bond market are positively impacting the agribusiness sector, creating strong demand for capital goods such as machinery and farming equipment, according to a leading expert.

Customers conserved cash during the downturn but now food price inflation is boosting worldwide spending on agricultural equipment and the market continues to value companies with exposure to this trend, said Ralf Oberbannscheidt, portfolio manager of the DWS Invest Global Agribusiness fund.
 
‘The recent decision by Standard and Poor’s to place the US government’s mounting debt on credit watch pushed the broad market down in April, as political divisions on deficit reductions were again laid bare. The S&P report questioned whether both sides of the political spectrum will be able to reach an agreement before the election in 2012,’ he explained.

‘The downgrade to a negative outlook means that there is a one in three chance that US bonds could be downgraded from the current AAA rating. Bond prices initially fell, but later rebounded as investors viewed the report as a lever to move both sides closer together on a deal. Globally, markets quickly recovered as data indicated that manufacturing output for the US economy positively influenced the agribusiness sector, as output grew more than four times faster than the estimated rate,’ he said.

‘Due to this, we are seeing strong demand for capital goods in the agricultural machinery sector, even those firms that have a secondary or tertiary place in the agribusiness value chain,’ he added.

Current promising sectors include food retailers, particularly US based supermarkets, as overall retail grocery sales improved in April compared to March. UK food retailers also performed well, as companies were able to pass higher agricultural commodity prices onto consumers, he said.
 
He also pointed out that in the US, following a year of input cost deflation and declining prices, price inflation is taking hold with large multinationals responding with price increases. Average prices rose by 2% in February and by 5% in March. ‘Companies with strong brands and private label products will benefit from the current environment, whilst those without price or innovation advantage will lose market share,’ said Oberbannscheidt.

Other sectors which have performed well include supply chain managers, as tight conditions for soft commodities continue to benefit companies who grow and process farmer’s crops. European based crop protection manufacturers have also seen positive sales. Excess inventories have been reduced, pushing consumer purchasing prices above analysts’ expectations.

‘We are in a time period where the focus shifts to the planting decisions of US farmers as Brazil, Argentina, and South Africa are in the midst of harvesting crops. As we receive more definitive data on the quality and yield estimates for next year’s crops in the summer, performance of agribusiness stocks will be impacted by the level of exports to key countries like China and Japan as well as their current appetite for grain,’ he added.