Tuesday

How to Invest in Cattle | Agriculture Companies Listed in Australia: Australian Agricultural Company (AAC)

Disclaimer: We own AAC in our portfolio.

Australian Agriculture Company (AAC) Chart

Australian Agriculture Company (AAC.AX) - 150 year old cattle producer in Australia is now trading close to its 52 week low.

We are very bullish in agriculture and have been looking through ASX for more exposure to agriculture. This is our hedge against inflation (we do not like chasing gold and silver close to its all time high - at least Gold anyway). Our only concern is, as Jim Rogers modestly says he ” is not smart enough to pick stocks, but if you are, go ahead, you will probably make alot of money”. We are definitely not as smart as Jim, so if he is not doing it (I am sure for good reasons), then perhaps we should not. Perhaps these agricultural companies will do very badly (inclimate weather, disease, lack of farmers etc), resulting in low yield - thus the lack of supply causing a rise in soft commodity prices. Only then would the supply side try to catch up.

However, if the hard commodity bull market is anything to go by, then we should see anything to do with agriculture go up. There are so many penny hopeful miners like tech stocks during the tech boom promised millions of ounces of gold/iron ore/copper in the ground that will never see the day of light. Serial capital raising and empty promises. Those that do deliver will ride the next commodity bull rally.

With agriculture, there are NOT many choices. We have looked at most of them, not in great detail, and have jumped in a few. Very small long term positions since we are still bearish and are hopeful for lower prices.

The one that is in our portfolio is Australian Agricultural Company.

Australian Agriculture Co (AAC)’s main business:

1. Live cattle producer : both domestic and export

2. Boxed Beef Brands : brands include 1824 Premium Beef, Darling Downs Wagyu, Kobe Cuisine, Master Kobe

Financials:

NPAT

-2008: Loss of 38.7 mil (Live cattle operations 2.6 mil profit + 2.8 mil profit from Boxed Beef)

-2009: Loss of 53.7 mil ( Live cattle operations (66mil loss) + 4.7 mil profit from Boxed Beef)

Shares on issue = 264 mil

Market cap at time of writing (sp of 1.40) = 369 mil.

Negative Cashflow (2009) = (10.5mil) = operating cash flow (56.4 mil) + sales of assets 141.3 mil + 130 repayment of borrowings (Gearing down 32% from 38%)

Balance Sheet

Cash                                              18.3 mil

Biological Assets (livestock)  353.2 mil

Property                                        681.7 mil

Total Liability                             645.1 mil

NTA:  2.42  (Share price 1.40 - 43% discount)

—————————

Few Questions:

1. Is the NTA reliable? Are their assets valued right given the potential for a property bubble in Australia? Are their livestock worth 353.2 mil (and is it insured against disease/etc that could potentially wipe out the 353.2 mil)?

2. Is the live cattle business going to be profitable anytime soon? Or is it going to bleed the company and result in more divestment in prime assets?

We are not the first to ask these questions. Another investor (who bothered checking AAC’s financial report) asked CEO Mr Farley on Investor Relations Service DearCEO:

Hi Mr Farley, I manage my family’s superfunds and have recently made a significant investment in AAC. I appreciate that AAC is trading below NTA, and have confidence in the NTA since AAC divested its assets > book value EVEN AT THE PEAK OF GFC. However, the cashflow concerns me. I have gone through this years FR and compared it with 2007 (and ignored 2008 as you pointed out due to an aberrant forced selling of cattle).
2009
-revenue = $156 m
-no cattle sold: 176,328
-price: $957 per head

2007
-revenue = $249 m
- no cattle sold = 181,943
- price per head = $927

Since 2009’s cattle price is ~2.6% higher, and the numbers sold ~ 2.7% lower than 2007, they should offset each other.
The wholesale beef revenue for 2009 (page 59) and 2007(page 70) was about the same, but revenue for cattle sales showed a discrepancy of 142m (2007) - 46m (2009) = 96m.

Question is: why is such a large discrepancy between revenue for 2009 and 2007 (90m)?

We have voted for the question and are still waiting for a reply before deciding how much and at what price to buy more.

In the coming soft commodity bull market, farmland prices are going to go through the roof, along with water entitlements, livestock, infrastructure, etc. To be able to ride that boom, AAC needs to at least survive that long without divesting all of its good assets. If they do, then we feel that $1.40 is a bargain. We are looking forward to the company’s response.

Q2 Valuation of livestock assets

Macroeconomics of Livestock

History of Cattle Prices - 1904-2009

Historical Price Chart of Cattle Futures 1909-2010

Current cattle prices at time of writing = 86 cents/pound. For up to date cattle prices check here. Live and feeder cattle futures trade in cents per pound at the CME (Chicago Mercantile Exchange).

(Inflation aside, the current price does appear to be on the top end of the 100 year chart above. We would much prefer buying at least closer to the mean ~ 65-70 cents per pound)

Cattle Production Cycle

The beef cycle begins with breeding of new calves. Most ranchers in temperate regions breed their cows in summer. Calves will be born by spring - which allows them to forage through summer and early autumn. Most calves are weaned from ther mothers after 7 months. Most are moved to the stocker operation and spend about 6-10 months growing to near full size by foraging wheat or grass. Cattle that are not used for breeding will become “feeder cattle”. These feeder cattle are sent to the feedlot, where they are fattened up. The animal will usually grow from 600-800 pounds to about 1200 pounds before it is ready for slaughter.

World Cattle Numbers in the last 10 years

World Cattle Numbers

World total cattle numbers have fallen from 1029 million heads in 2000 to 978 million heads in 2009.

—————————-

TheInflationist Agriculture Articles

1. How to invest in Sugar

2. How to invest in Phosphate Rock