Market analysts say the prolonged rise and swift fall of the primary sector index were caused primarily by a2 Milk Company (ATM), which rose in price to $21 a share (July 2020) and has since fallen to $6.
Against the trend of record commodity prices, some of New Zealand’s listed agribusiness companies are not feeling the excitement, judging by their index of collective share prices.
The primary sector index of 16 listed companies in agriculture, horticulture, viticulture, aquaculture and forestry has fallen 13.7% in the past 12 months.
For comparison, the NZX index for all equities on the sharemarket has fallen 1.66% over the past turbulent year.
The S&P/NZX Primary Sector Equity Index was launched in April 2018, taking over from the NZX Farmers Weekly index, which contained similar stocks.
From 2011 to 2018 the previous index grew by 327%, almost twice the growth of the NZX 50 index over the same period.
The renamed primary sector index continued to sprint ahead of the NZX 50 during four years from 2017 to early 2021.
But since a peak on April 24, 2019, the index track has declined 25%.
Market analysts say both the prolonged rise and the swift fall were caused primarily by a2 Milk Company (ATM), which rose in price to $21 a share (July 2020) and has since fallen to $6.
With its huge number of 743 million shares, ATM dominates the index by market capitalisation even at today’s $6 share price.
Currently $4.4 billion, ATM remains 40% of the primary sector index $10b capitalisation total.
A case of a dog wagging its tail.
Craigs Investment Partners research head Mark Lister says since the end of 2019, ATM has fallen 60% and so has Synlait (SML), while Fonterra Shareholders’ Fund (FSF) and Sanford (SAN) are down 30% and 40% respectively from their recent peaks.
“After a mixed history, PGG Wrightson (PGW) has risen 100% and Delegat Group (DGL) has been a standout performer since its listing,” Lister said.
“Scales (SCL) has also been a very good operator.”
Lister says the big index component companies had issues specific to them and belied the very good performance of the primary sector as a whole.
He says as the ATM example shows, the S&P/NZX primary sector index is by no means representative of the primary sector in its scope and parts, which has been a failing for the NZ sharemarket historically.
“All the time I have been in the finance industry, 20 years, it has been quite difficult to get exposure to our biggest sector that produces our export earnings,” he said.
Since Sir Selwyn Cushing’s privatisation of Rural Equities there hasn’t been a direct farm or orchard ownership investment option.
A year ago NZ Rural Land Company listed, which hasn’t yet made it into the S&P index.
While the index contains three dairy companies, all three are conflicted.
Fonterra is represented by its increasingly irrelevant unit fund, not the 13 times larger amount of its supply shares.
Mataura Valley is a2 Milk’s very small and recently acquired NZ milk supply and processing presence.
Synlait is majority owned by China’s Bright Dairy (39%) and biggest customer a2 Milk (19.8%).
The meat industry is not found in the listed stocks on the NZX, its biggest players being a mix of farmer co-operative ownership (Alliance, Silver Fern), overseas investment (ANZCO, Silver Fern) and family ownership (AFFCO, Progressive, Greenlea, Taylor Preston, AMP).
Producer co-operative ownership is antithetical to company listing for institutional and private share ownership.
Horticulture fares much better on the share market and in the index, with the notable exception of its biggest player, the co-operatively owned Zespri.
Horticultural companies are Comvita, Delegat, Foley Wines, Marlborough Wine Estates, Scales, Seeka and T&G Global (94% overseas owned).
Collectively they have market capitalisations of $3.15 billion, 30% of the total index.
The rest of the index is made up of rural servicing company PGW (market cap $329m), forest nurseries ArborGen ($125m), fishing company Sanford ($464m) and medical cannabis start-up Rua Bioscience ($56m).
The index does not contain any sizable forest companies, nothing in the deer or grain industries, no fertiliser importers (both are co-ops) and no rural servicing representation beyond PGW.
Apart from intertwined a2 Milk and Synlait, primary sector index companies have traded profitably during the past 12 months and have paid dividends that should be reflected in the index.
NZ is a world leader in producing and processing food and fibre (wool and wood) and its primary commodity exports are the foundation of its economy.
Farmers, orchardists and their processors and packers spend more than half of their $60b export revenue on inputs like consumables, labour, machinery, fuel, fertiliser and debt servicing.
For the truly long-term investor, the primary index has risen by 11% over the past 10 years, showing that investing in NZ agriculture is not a get-rich-quick avenue.
