Rising prices of agricultural products structural opportunities for agricultural stocks

The time window for the defense attribute of the agricultural product sector to play a role is relatively short, and in the later stage, as the expectation of agricultural production reduction persists, the pressure of rising prices and the pressure of promoting agricultural production will also continue to be the focus of agricultural sector investment. We suggest that: 1) varieties with relatively strong yield reduction expectations such as rice and cotton 2) after the disaster, the government may introduce some good agricultural policies for the purpose of promoting agricultural production.

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Summary of the report

Judging from the recent price trend, the weekly data of the Ministry of Commerce show that the price index of edible agricultural products has risen in an anti-seasonal pattern since mid-April. Judging from the recent rise in agricultural prices, the increase has mainly occurred in some vegetables and fruits, food prices and pork prices are rising, but the rate of increase is still relatively moderate.

The second quarter is the most important autumn crop sowing season in China, and climatic conditions in 2010 have repeatedly affected crop production in some areas. Although it is too early to say that China's grain production must be reduced, the expectation of a reduction in grain production will be difficult to eliminate for some time to come, which determines that expectations of price increases will persist. On the other hand, for the fact that grain prices are rising, it is not conducive to maintaining farmers' enthusiasm for production, which determines that the later government intervention is more aimed at influencing speed than direction.

As the production cycle of agricultural products is relatively long, it is difficult to improve in the short term if there is a supply gap, and the demand for agricultural products is relatively rigid, so it often becomes an excellent carrier of excess liquidity. We have observed an alarming increase in the prices of some agricultural products, such as garlic, mung beans, potatoes and so on. Under the background that the liquidity is difficult to be removed in the short term, agricultural products are still expected to continue to assume the function of liquidity carrier, and the supply gap is the main basis of liquidity inflow, while cotton in the main agricultural products is determined by the supply pressure.

The correlation between the trend of the agricultural products plate and the market has declined significantly recently, and the agricultural products plate has achieved better relative benefits at the same time as the market has fallen continuously. We use the price of agricultural products, favorable policies and plate defense to observe the trend of the agricultural products plate, the time window for the defense attribute of the agricultural products plate to play a role is relatively short, while in the later stage, due to the expected existence of agricultural production reduction. We suggest that attention should be paid to: 1) varieties with relatively strong yield reduction expectations, such as rice and cotton; 2) after the disaster, the government may introduce some good agricultural policies for the purpose of promoting agricultural production, and the agricultural products involved are expected to be affected by policy favorable factors.

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Agricultural stocks got off to a good start in May. Since May, the industry index has risen 3.8%, and the relative income has exceeded 10%. Historically, the monthly relative income of more than 10% is a very good performance.

Excess returns come from resilience. The excess return of the industry index in 2010 mainly comes from two stages of resilience: the first stage is January, and the second stage is the strong shock when the market has plummeted since April 15.

Agricultural stocks have become a refuge. Since the beginning of this year, the rotation of hot spots in agricultural stocks is very fast, showing more of the risk aversion effect in the weak market, to some extent, similar to investors using gold as a risk aversion choice, which is also the origin of the title of this article.

Two major reasons for refuge. First, the agricultural industry has never had negative policies, on the contrary, it has issued policies to support agriculture from time to time; second, agricultural stocks have benefited from inflation, coupled with more abnormal weather this year, agricultural prices are expected to strengthen.

The price of agricultural products will rise moderately. The last wave of soft commodities has been delayed, bad weather has reduced expectations of continued grain production, sustained economic recovery has led to a rise in inflation expectations, and agricultural products will show a moderate rise.

It is only a matter of time before pig prices bottom out. The space for the decline of pig prices is limited. At present, the low price ratio of pig food makes farmers lack the willingness to make up the fence, and it is only a matter of time before pig prices pick up. According to the long-term average price of 13-14 yuan / kg, based on the current price, the purchase price of live pigs still has more than 30-40% room to rise.

Beware of making up for the fall. Agricultural stocks are not gold, nor are they like gold. In the second half of the market adjustment and even after the market stabilizes, the risk of agricultural stocks falling is very great, especially when the industry as a whole has achieved huge excess returns.

Haida Group is the first choice. In terms of industry space, performance growth, management team, governance structure and other aspects, the current valuation of Haida Group is in an acceptable range, which is the investment target that can obtain long-term returns.

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The price cycle is still in a state of deviation: in terms of the price cycle, although the prices of minerals and kerosene electricity are already high, and the prices of agricultural products are rising rapidly, however, as one of the most important agricultural products, pig prices are still hovering at the relative bottom of the price rise cycle. At the same time, in terms of absolute levels, pig prices have fallen back to the level of April 2007. Therefore, if the deviation of this special price cycle is taken into account, the cyclical rebound of pig prices in the future will further push up the level of agricultural products and even the overall inflation level.

A rebound in pig prices from the bottom will be a high probability event: whether from the impact of stock-cost-profit changes on prices in the pig cycle, or from the perspective of epidemic disease or government regulation, at the current point of time, a rebound in pig prices from the bottom will be a high-probability event. At present, pig prices have begun to bottom out and rebound.

A new round of "domestic and foreign" high inflation may come: there is evidence that a new round of inflationary pressures have arrived unwittingly. Under the background of the deviation of the current price cycle, with the emergence of various internal and external inflation factors, the rise in pig prices will most likely lead to a more serious "internal and external" inflation than in 2007-2008. the rise in pig prices will strengthen the future cycle of inflation and contribute to drought.

Agricultural stocks hedging the risk of high inflation will usher in better phased investment opportunities: looking back at 2008, under the economic background of high inflation at that time, the agriculture, forestry, animal husbandry and fishing sector performed extremely prominently. At the same time, we found that in the inflation cycle, the most obvious excess return of agricultural stocks is the stage from mild inflation to high inflation. Since then, every rebound in agricultural prices will be reflected in the more obvious excess returns of agricultural stocks. Looking ahead, agricultural stocks are still expected to be the investment theme of the next stage in anticipation of a jump in long-term inflation.

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Bring China's pesticide industry into the scope of research for the first time.

For the first time, we included the Chinese pesticide industry in the study and rated five stocks. Although volatile bad weather so far this year will have a negative impact on crop production and is not good for the fertilizer industry, pests usually thrive in warm weather and after droughts.

Therefore, we expect the demand for pesticides to remain strong in 2010-11.

Over the next 5-10 years, we expect the rapid consolidation of the industry and the reshuffle of leading companies to be the main investment themes, and we believe that the recent decline in share prices in this sector creates a good opportunity for people to invest in long-term winners.

Investment opportunity

We are optimistic about pesticide enterprises with well-known brands, diversified products, strong R & D strength, extensive or unique distribution network and solid customer base. We grade the companies according to the above principles, and the preferred stocks are Yang Nong Chemical and Lear Chemical.