Agricultural stocks declined yesterday despite the issuing of a policy document by the central government that called for more investment and subsidies for the country's farmers.
Yunnan Green Land Biological Technology Co Ltd led the decline, falling 9.98 percent to 26.25 yuan. Beijing Shunxin Agriculture Co Ltd also dropped 5.68 percent to 16.60 yuan.
On Sunday, the central government released the "No 1 Central Document" of 2010 that aimed to encourage agricultural investment and stimulate rural consumption by providing more subsidies to farmers.
But analysts said yesterday's declines in agricultural shares were within expectations as the positive impact of the government policies had already been taken into account.
"The declines were normal because there has always been speculative trading in agricultural shares prior to the publication of the No 1 document.
"Expectations about the measures had already been factored into the rise in share prices in the past few weeks," said Zhang Xu, an analyst with Shangxi Securities.
The agricultural sector bucked the market's downward trend to surge sharply in the past few weeks, mainly boosted by market expectations of government support for the industry this year.
The share prices of seed firms Hefei Fengle Seed Co Ltd and Gansu Dunhuang Seed Co Ltd have nearly doubled since last September. Yuan Longping High Tech Agriculture Co Ltd has risen nearly 30 percent since last December.
Fund companies significantly increased their holdings of agricultural shares in the fourth quarter of 2009, further driving up share prices.
Zhang noted that the risks of investing in agricultural shares are growing as there will be less chance of a continuous rise in the short term once the government's policies to boost the sector become clearer.
The current average price-to-earnings ratio of the agricultural sector has reached 40 times and the market valuation also hit a record high, indicating greater risks of corrections in the future.But the government's plans to further subsidize seed and food production to stabilize crop prices will continue to generate investment opportunities in agricultural companies that will offer long-term benefits, analysts said.
"Seed companies still hold the possibility of becoming a top performer in the market as they will benefit from more government subsidies and rising food prices in 2010," said Zhang Junyu, an analyst at Zheshang Securities.
The seed industry will also benefit from the country's development of genetically modified (GM) crops following the government's approval of the commercial production of GM rice and corn last year to boost food supplies, Zhang said.
Meanwhile, sectors including building materials and household electric appliances are also likely to gain from the government's effort to expand sales and stimulate rural consumption.
