Shares of diversified food business Freedom Foods Group Ltd (ASX: FNP) have skyrocketed today after the company announced that it – along with Perich Group – had struck a landmark deal with China's New Hope Group following the signing of the China Australia Free Trade Agreement (ChAFTA).
The shares climbed a remarkable 35 cents or 11.9% to be sitting at $3.30 while earlier in the session they managed to record a fresh all-time high at $3.41. That reflects a return of more than 1,200% since the beginning of 2011, when they traded at around 25 cents.
So What: Under the ChAFTA, the Australian Government managed to secure the removal of all tariffs on our dairy products within 4 to 11 years. Given that these tariffs can currently range as high as 20%, that provides an enormous advantage for Australian producers in that their products can become far more competitive against those from other countries. This is particularly pleasing considering the strengthening middle-class population in China which could drive enormous levels of growth for decades to come.
Recognising this, Freedom Foods, Perich Group and New Hope Group signed a Memorandum of Understanding which will see each party cooperate to develop and implement growth in long-term dairy milk supply from Australia. New Hope has established an investment fund of up to $500 million which will largely focus on boosting new dairy capacity.
According to the news release, the management of future farm operations will then be undertaken by the Perich Group, through a separate farm management services agreement.
Now What: Although the full implications of the Free Trade Agreement reached between Australia and China are yet to be realised, the deal certainly has the potential to deliver our agricultural companies with enormous growth opportunities. To highlight just how incredible this deal could be for companies such as Freedom Foods, the Australian Bureau of Resource Economics and Sciences predicts that China will account for 43% of all growth in world-wide agricultural demand through to 2050.
Freedom Foods, together with companies such as Bega Cheese Ltd (ASX: BGA) and Graincorp Ltd (ASX: GNC), could be worth watching very closely.
