Shares in Australian farm companies are, thanks to firm food commodity markets, to continue a period of outperformance which has seen them return more than twice as much as other stocks, analysts believe.

Money invested in stock in agribusinesses will return 34% over the next year, far higher than the 18.7% expected for the average Australian share, analysts' forecasts show.

Such gains would continue a period of outperformance which, in the July-to-September quarter, saw Australian farm sector shares hand investors a return, including dividends, of 21%, compared with an average of 8.0% for the country's top 200 stocks.

Merger help 

Historically, the sector has proved a poor investment. Even including the latest gains, the sector has only rise by 48% since April 2000, compared with 121% for the average share, said Commonwealth Bank of Australia, which compiled the data.

However, the "bright" recent performance had been spurred by "rallying commodity prices and bumper seasonal conditions", which have put east coast states on course for one of their best ever grains harvests, with rain improving pasture conditions for livestock farmers too.

"Tight global grain supplies, rising demand for dairy products, particularly milk powder, rallying commodity prices and strong east coast seasonal conditions are expected to push up prices of agribusiness stocks over the next 12 months," Brendan White, a CBA executive general manager, said.

Stocks have also been buoyed by takeover activity, with the quarter seeing grain handler AWB accept a bid from Canada's Agrium, in the latest of a series of offers by foreign suitors for Australian farm sector businesses.

"Confidence in the agribusiness sector has improved over the last quarter following positive reporting season results and mergers within the sector," CBA said.

Currency threat 

The comments came as AWB, in a weekly update on prices farmers can expect from its grain pools, raised forecasts for returns from noodle wheat, for which supplies have been hurt by dry weather in Western Australia.

"It's a clear case of small supply and high demand, with customers anxious to secure shipments of noodle wheat and seeing the effect of the WA drought on production estimates," Mitch Morison, AWB's general manager commodities, said.

However, he also flagged the impact on grain export potential of the stronger Australian dollar, which has risen above parity with the US dollar to its highest levels in 28 years.

"The Australian currency has been volatile in recent weeks, but the lift of two to three US cents over the past week is not what growers of export grain wanted to see and it has certainly put a cap on Australian prices," he said.