Cyclical Business: A Case study of the cattle industry06.06.2016

When you are riding the cycle you can see some big highs and some big lows

Sometimes cyclical businesses can generate super profits from a confluence of positive forces, just look at the high flying Qantas, which has benefited from the falling oil price, a weaker Australian dollar and a relatively strong global economy.

Never mind that the Flying Kangaroo has come down in altitude somewhat after it abandoned its plans to add more flights due to a lack of demand. At $3.34 its shares are still more than three times their 95 cent level in late 2013.

What’s more interesting is when the wind is behind a company’s earnings, but its stock’s reaction has been rather more muted. Take this country’s dominant cattle player, the Australian Agricultural Company (AAC) which is benefiting from a beef price which has doubled from below $3 a kilogram in early 2014 to almost $6 a kilo earlier this year.

AAC owns a lot of cattle and a lot of prime agricultural land in North Queensland. Its stock has had a good run this year in the wake of some selling, but at close to $1.50, it’s still below where it was this time last year, and in late October, before Paradice Investment sold its 5.1 per cent stake.

More to the point, the buoyant conditions in beef should continue. Don’t take my word for it, listen to the Meat & Livestock Association’s market information manager Ben Thomas, speaking earlier this year: “Market conditions look very positive for cattle producers,”

The reason for Thomas’s confidence in the beef price is that there is very little cattle inventory currently available at a time where there is increasing demand from offshore, and the cattle industry is looking to re-stock.

Back in late early 2014 when the beef and cattle prices were whacked, Australia was in the middle of a lengthy drought and many farmers were forced sellers. Since then there been a big leap in interest from overseas buyers in Australia’s beef product, and there is increased global demand for beef. Meanwhile Australian farmers are looking to increase their herds to cater for this demand.

AAC is in a good position because of its big land holdings in key areas such as North Queensland which have not been as drought affected, hence the company has been able to maintain its herd size, and in fact build it up over the past couple of years.

Wellard (WLD)
At the other end of the spectrum is the newly listed cattle transporter Wellard (WLD) because the tight supply of domestic cattle isn’t good news. This company listed late last year, having raised almost $300 million at an issue price of $1.39 and it now trades at 80 cents. It failed to meet its prospectus forecasts due to mechanical issues with its giant ship designed to transport live cattle to Israel.

Sometimes cyclical businesses can also face a confluence of forces designed to make their lives very difficult indeed. In that case, it’s best to bail out.


About the Author

Caroline Mark

Caroline is the publisher of Under the Radar Report. She has a diverse background, from producing financial publications, to fundraising and marketing.

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