Paul Jensz: Absolutely. Thank you, Tim.
Tim McGowen: Now, the ag sector historically has a lower correlation with the equity market, but quite a high correlation with inflation. Can you elaborate that and give us your current outlook in regards to agriculture and the inflationary environment?
Paul Jensz: Absolutely, Tim. So, on inflation and the ag sector, the top-line price for commodities is well-correlated to inflation. It’s about 95 per cent correlated. The tricky thing in all of it is the actual margin that farmers and processors make is not that well correlated. So, while the commodity prices can push along, you can get inputs going up and you can get disruption. So, it’s now more important than ever to focus on companies that have got pricing power in their supply chain to ensure that you’re aligned with those groups that are making good cash flow.
Tim McGowen: And, Paul, talking stock examples, can you give us an example within your portfolio of how that’s playing out in this inflationary environment?
Paul Jensz: Yeah, so, with inflation, the best stock to go for at the present time in Australia would be Elders (ASX:ELD). It’s very diversified across geographies, across products. It makes around 25 per cent return on investment. Very strong cash flow and balance sheet. And it doesn’t really mind where the growth is coming from. And it always gets its margin, and it’s a very good player with both the farmers and the suppliers.
Tim McGowen: And, Paul, I note you expect ag food sales to grow by about 4 per cent per annum over a three- to seven-year cycle. Can you give us a little bit more colour on what this means?
Paul Jensz: Right. So, through this high inflationary environment, we’ve got to remember the big picture. The big picture is the Australian Bureau of Agricultural and Resource Economics and Sciences here in Australia predict 4 per cent growth from now until 2030 for a hundred billion dollars of sales pre-farm gate, and a hundred billion dollars of sales post-farm gate. And you look at the UN, the UN expects 50 per cent more food by 2050. And you combine all those numbers, we have to grow at 4 per cent per annum. And what we’re after with our stock picking is to find those niches inside that 4 per cent growth that can grow at 5 to 10 per cent. And the examples of those are companies that are in the aquaculture space. So, we’ve got some unlisted companies like Yumbah. And we’ve also got examples, say, in the almond area, like Select Harvests (ASX:SHV), which is incredibly well-positioned with very low cost base versus California. And those groups can grow at well over 4 per cent per annum.
Tim McGowen: And, Paul, obviously the market’s been very volatile, particularly in the tech sector offshore. What are you seeing in the ag tech space within your investment mandate, if you like, and is there room for productivity improvement there?
Paul Jensz: Absolutely. I mean, this is the time when ag tech actually shines, particularly those groups that are associated with traditional companies. So you’ll find groups like Select Harvests (ASX:SHV), like Elders (ASX:ELD), and groups like Ridley (ASX:RIC) investing 10, 20 per cent of their money into high-productivity improvement areas, and helping ag tech through and giving an increase to their margin and allowing the good tech to come through, much like emerging resource companies coming through BHP (ASX:BHP) and Rio (ASX:RIO), you’ve got that.
On top of that, you do have groups that have been working for 10 to 20 years to be overnight successes. I’m up here in Sydney today with a Canadian group called Crush Dynamics, which takes wine grape waste and makes it into a food additive that is incredibly important to lower sugar, salt, extend the shelf life of products, and use a waste material that has been used by animals in a high food additive value-add.
So, there are kernels associated with traditional ag companies. And there are these wonderful groups that have been shining their ag tech for 20 years, and now are getting to 5, 10 million dollars of revenue. And they’re the groups that we are looking to invest in.
Tim McGowen: And, Paul, talking to water. Water’s now considered an investible commodity, if you like. We’ve had a lot of rain in Australia. We go from drought… Feast to famine, so to speak. How do you see technology helping you invest into the water market?
Paul Jensz: That’s a great question. Water prices have come down from around $400 a megalitre that you buy on an annual basis to less than a hundred dollars. So, we’ve got this amazing swing in a key commodity here in Australia. The actual entitlements for water are still very high in price because people can see some long-term value in that water.
So, again, bringing that technology thing we were talking about before, Tim, it’s about using a scarce resource really over time, which is going to be water, and using it really well. And groups like Select Harvests, again, are looking very carefully at how they use water, and we’re very happy to back them. And there’s also some technologies around water that we hope to bring to the community over time. One that we’ve invested in recently is Digital Agriculture Services, DAS. It’s a spin-out from CSIRO. And what they’re doing is trying to improve the efficiency of water with crop management and farms, and relate that back to insurance companies and finance companies to give them more comfort that their farmers are using their water, and sequestering their carbon, and using their assets very well.
Tim McGowen: And, Paul, in this ag mandate that you operate, do you see a lot of M&A activity at the moment?
Paul Jensz: Oh, there is. There’s absolutely. We would’ve seen, as you would’ve seen recently, Tim, Tassal (ASX:TGR) getting taken over by Cooke Aquaculture out of Canada. Another reason why we’re going along with the Canadian consulate today with one of our tech companies, to find out what’s going on, because we’ve also had Saputo come over and take over Warrnambool Cheese and Butter, and Murray Goulburn. Ontario Teachers Fund’s been very active here in Australia. So, there’s a lot of money coming out of North America, Canada and Asia into our area. And it’s great. We need billions of dollars spent in Australia and around the world to achieve these targets of having 50 per cent more ag food made by 2050. So, we need this money, but we also need organic-type money to come through from our fund and others to help those traditional companies, the Elders, the Select Harvests, those sorts of groups, and these technologies like Crush Dynamics and DAS to come through as well.
Tim McGowen: Paul Jensz, thanks for your time.
Paul Jensz: Thank you, Tim.