With the rocketing share price of Warrnambool Cheese and Butter (ASX: WCB), many investors have been focused on food companies.
The sector has certainly done well in 2013. Aquaculture company Tassal (ASX: TGR) has more than doubled in the last 12 months, as past capital spending pays off. Grain distributor Graincorp (ASX: GNC) has been the subject of a takeover offer.
However, my favourite primary producer for the long term is Select Harvests (ASX: SHV). Select Harvests is an Australian almond producer that is at the end of one of the most impressive turnarounds you'll see. In January 2013, the shares were trading below $1.40. Shares now change hands for $4.50, an increase of over 220%, in less than 12 months. Even at current prices, the company pays a dividend of 2.6%, fully franked.
Prior to this year, Select Harvest had a string of problems. Before the GFC, Select Harvests simply managed orchards, whereas now the company actually owns the almond orchards. In 2012, the company suffered write downs of about $24 million, leading to an accounting loss for the year. This may have contributed to the low share price.
Underlying profits doubled in FY 2013, although the company still carries more debt than is ideal — part of the reason I didn't buy shares when I should have. The number of acres of almond trees controlled by the company has consistently increased, and the company now boasts over 11,500 of almond-bearing acres.
Shares in Select Harvests are fairly rationally priced at the moment (the best time to buy would be when bad weather ruins a crop). However, when that does happen, I'll be jumping on any opportunity the market gives me. This is because demand for almonds is flat or growing, whereas the production process has become more expensive in the USA, the main producer other than Australia.
Honeybees are required to pollinate almond trees. In the USA, beekeepers have been losing their bee colonies at an alarming rate due to a phenomenon known as colony collapse disorder (CCD). Possible causes of CCD include pesticides and herbicides or the Varroa mite. However, the cause is not known with certainty.
Foolish takeaway
In recent years, CCD has not impacted American beekeepers as severely as it did in 2007-2008. However, Australia has never suffered CCD on anywhere near the same scale as the USA does regularly. In a global industry, Australia's relatively successful beekeepers give Select Harvests a competitive advantage.
Almond trees take over a decade to reach maturity. When supply fails to meet demand, there is not much that can be done about it in the medium term. Select Harvests could be in the position that almond prices continue to go up, just as it is increasing production significantly. For this reason, the company definitely deserves a spot on your watch list.
