What's the buzz around a new agriculture index in Australia?

Highlights

• The ASX has launched a new index for the agricultural sector, called the S&P/ASX Agribusiness Index.
• Agriculture is garnering increased attention from the government and is on its way to becoming an integral part of the Australian financial market.
• Lockdowns in China, supply-side issues and rising prices have clouded the outlook for the Australian agribusiness sector.

Agriculture is a crucial sector for the country, not just in terms of its export-oriented approach but also in terms of its contribution to GDP and overall employment.

The Australian agricultural sector accounted for 12% of the goods and services exports in 2020-21, as per the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES). Additionally, agriculture accounts for over half of Australia’s land use. As per the Australian government’s “Delivering Ag2030” plan, the agricultural sector is expected to grow into a US$100 billion industry by 2030 on the back of rising food demand.

The agricultural sector also forms an integral part of the ASX and is a key pillar of the Australian economy. However, the sector does not have as much of a financial profile compared to the sector’s  importance in the economy.

The latest good news for the agricultural sector comes in the form of an all-new ASX Index titled the S&P/ASX Agribusiness Index, which includes companies that are primarily involved in the creation of agricultural products. The new index has further cemented the position of the agribusiness sector in Australian financial markets. Meanwhile, the integration of agriculture into finance supports the government’s rising concerns about expanding the agricultural sector.

What’s new in the Agribusiness index?

The S&P Agribusiness Index is further evidence of the agricultural sector’s growing contribution to the Australian economy and now the financial ecosystem. The index has been launched by the ASX in partnership with S&P Dow Jones Indices  . The index has 25 constituents, including Treasury Wine Estates Ltd (ASX:TWE), Elders Ltd (ASX:ELD), and a2 Milk Company Ltd (ASX:A2M).

The index had been underway for two years, only for it to be introduced at a time when demand for consumer goods was at an all-time high.

The index will presently be calculated on an end-of-day basis, while the real-time calculation of the index will start from July 1.  The index is weighted by float-adjusted market capitalisation, subject to a 10% single stock cap. The index is rebalanced semi-annually in May as well as November.

The best period for Australian agriculture to grow

Global pressures have created a demand-supply imbalance, leaving a large proportion of demand unfulfilled. Tensions between Russia and Ukraine have exacerbated the supply-side challenges, hurting the already damaged global supply chain.

Besides, the war in Ukraine has created a shortage of many essential consumer goods, such as wheat. Most European countries form a major market for Ukrainian exports, and a depleted supply has also led to a surge in prices of crucial items such as bread. However, the growing importance of consumer staple exports has paved the way for an agribusiness boom. Thus, many investors are now eyeing agricultural stocks as a profitable way to diversify their portfolios.

Bolstering through the headwinds

A weaker global outlook has dampened the prospects for the Australian economy, with inflationary pressures being the biggest concern. Additionally, the possibility of a wet winter in Australia has heightened tensions across many production regions in the country. Overall, there is a mix of factors panning out for the Australian agricultural sector.

Experts fear that such weather-related aspects could hurt the 2022-23 winter crop in Australia. While a wet winter would probably be beneficial to farmers, global food security would continue to remain a concern. Heating tensions across other countries such as Russia and Ukraine and droughts in Germany, France and parts of Africa have all led to higher prices of grains.

Ongoing lockdowns in China have also worsened the global outlook. Additionally, most central banks are introducing interest rate hikes to combat inflationary pressures. Concerns loom that these rate hikes could decline affordability across nations, which can further hurt global demand. Overall, the recessionary fears presented by global headwinds could once again threaten global demand for consumer goods. However, this time the Australian agribusiness sector could have a firm leg to stand on, and even the government has pushed for an enhancement in the sector.