The outbreak of foot-and-mouth disease in Britain and the crisis it has created in Ireland serves to highlight how significant agriculture and food production remains to the economy.
The relative weight of agriculture and food production in the overall economy has been declining for decades and the rapid economic growth of recent years has accelerated this process. The weight of agriculture in the economy is now much smaller than during the last foot-and-mouth scare in 1967. At that time there were no quoted Irish food companies and it is only since the late 1980s that a quoted food sector of any significance has emerged on the Irish Stock Exchange.
The accompanying table provides a summary of the Irish quoted food sector that consists of eight companies. The market capitalisation of the sector amounts to approximately €4.5 billion (£3.54 billion), representing just over 5 per cent of the total market capitalisation. The sector represents a small portion of the overall market and only Kerry Group makes it into the top 10 quoted companies with a market capitalisation of €2.3 billion.
Apart from Kerry Group and IAWS, the stock market performance of the sector has been abysmal. Over the past five years the sector has under-performed the overall market. In the past year the sector has declined by 10 per cent producing an under performance relative to the overall market of -23 per cent.
Profit margins are tight with an average operating margin of just 5.3 per cent. This reflects the fact that the production of food is a commodity business with low and often fluctuating profit margins.
Another factor that has served to depress the sector's share price performance is several companies are operating with high levels of debt. Glanbia and Golden Vale stand out in this regard and this would go a long way towards explaining the extremely low valuations placed by the stock market on these companies. Glanbia is trading on a price-earnings ratio of 3.3, while Golden Vale's shares are on a p/e of 4.3.
Although the current crisis has led to some weakness in the sector, it is likely that sharp falls in food companies' share prices would only occur if foot-and-mouth disease enters the State. On a more positive note, it is likely that several of the Irish food companies could benefit from the crisis. The extensive slaughtering of animals in Britain has already created a shortage of meat and prices to the consumer have moved sharply higher. If Ireland is successful in keeping the virus out, then producers and processors stand to make windfall profits due to higher food prices.
Irrespective of the outcome of the crisis, investment in the food sector still needs to be considered on company by company basis. Some companies such as Kerry and IAWS have successfully shifted activities to high margin and growing business such as food ingredients and high margin consumer food products. Others such as Golden Vale and Glanbia continue to operate in low growth and unprofitable sectors.
