How far can the value of companies in the organic agribusiness sector go?
Will the famous adage of the stock exchange “trees don’t grow to the sky” ever apply to the valuation of companies in the Organic sector?
What are we talking about? Are they companies whose core business is the transformation of organic raw materials within the framework of the construction of a division in which the relationship between the farmer and the transformer is based on a suitable, contractual and balanced relationship ? Or is it a diversification of opportunity because it is trendy and because you can’t perform without it? In this case we are in a classical relationship between the producer and the transformer with a tense relationship that it may represent in terms of supply.
For having created one of my first organic start-up in 1995, this experience showed me the absolute necessity of a strong relationship of trust with the producers. Of course, today the organic agricultural production has been structured, reinforced, and organized, but it is still emerging and the French production is not enough to supply the market. Today, the development of the organic sector grows exponentially, the risks of a lack of quality raw materials are real and therefore only companies that have built long term relationships will resist.
In terms of companies’ value, we observe valuation multiples that can only delight sellers, but which can be described as unreasonable compared to usual standards. Even when comparing to those in the agribusiness, which are already considered as important in relation to other sectors of activity, theses multiples appear very high and demonstrate the market’s confidence in the growth of the organic agribusiness sector.
Therefore, we can suggest to companies that want to specialize in organic production, to create a strong relationship with the upstream environment because it is a key element for the success and the sustainability of their business.
By Bernard Gaud, expert of agribusiness and organic products sectors at Auris Finance
