At the start of 2017 I argued that the cessation of the crippling drought that lasted about four years would lead to a material recovery in food sector confidence, farming output and the maize harvest.
SA’s 2016 maize crop of 7.7Mt was much smaller than those of previous years and than the 10Mt it needs for self-sufficiency.
Safex prices surged to about R3,500/t due to the shortage.
My call in January 2017 was that there would be a bumper maize harvest, due to early indications of favourable weather conditions and plant population health. In the end, 17.7Mt was harvested — SA’s biggest maize crop in history. It drove the price down 60%. Yellow maize was 40% lower on a yearly comparative.
My top calls were for poultry stock Astral Foods as well as food manufacturer Pioneer Foods and its proxy, Zeder Investments, given the savings I envisaged from lower input costs.
During early 2017 all looked promising. Both Astral and Pioneer started to run, as the market expected earnings recovery from the 2016 slump.
Then we had divergence.
Astral Foods became a sector consolidator and picked off weak mid-sized players. Other sector players, such as Rainbow, simply cut production and moved away from bulk chicken. With the benefit of lower feed costs from maize and soya, Astral’s earnings and profit profile soared. It recently announced that its 2017 earnings would rise 80% to 100%. The Astral share price in the year to date is 54% ahead, and prospects for 2018 look rosy.
Pioneer Foods, after early-year gains, sagged. On top of revelations of trouble with the giant food manufacturing business’s huge procurement of soft commodities came profit warnings. Other issues affected the company as well. Earnings were expected to fall by 48% to 56% for its 2017 full-year reporting period.
The stock has declined 25% in the year to date. Pioneer makes up 60% of Zeder’s portfolio, and Zeder has also fallen 14%.
So why am I positive about the sector and the same stocks in 2018? Again, much has to do with my expectation for the maize crop and soft commodity prices. Deducting domestic use and exports, about 4Mt of the 2017 maize harvest will be carried over to 2018, placing a cap on pricing. Further, the planting season for the 2018 harvest has started well, under ideal conditions. If a normalised crop of 12Mt is forecast for 2018, given the carry over, the maize price should be lower for longer despite underlying planting hectarage being down 6% year on year. A 25% increase in soya hectarage planted should also keep a cap on that important animal feed soft commodity.
The rolling year-on-year input cost benefits will continue.
Astral should have a good first-half period, which encompasses the traditionally buoyant festive period, and post-Christmas prices should remain.
Pioneer Foods’ base is set so low that recovery is pretty much inevitable into 2018. Consumer confidence remains weak, but since Pioneer’s biggest division is essential foods, the lower input costs of maize and wheat will boost margin and profitability.
For those who wish to play Pioneer, and get some risk mitigation from an excellent portfolio of agricultural assets that include Capespan and Kaap Agri alongside Pioneer Foods, I’d recommend Zeder Investments; it trades on a discount of 17%.
For an even more direct soft commodity and agricultural exposure I’d recommend Zar X-listed agricultural grains titan Senwes, now trading at R12.50. It showed a healthy 38% rise in earnings to 108c/share and is on a p:e of 12, but given the nature of its business, its earnings in 2018 should be a record; the p:e should fall to 8. Senwes has a solid balance sheet and healthy dividend, and if it were ever to migrate to the JSE main board I could see re-rating potential.
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