High international commodities prices and a weakening shilling against the dollar are expected to cushion Kenyan listed agricultural stocks from inflationary pressures and the effects of a biting drought, analysts said.
Kenya's metrological department indicated in a forecast report in January that drought conditions are expected to plague the nation for the next three months, reducing agricultural output in the first quarter of 2011.
Agricultural stocks have been among the best performers on the stock exchange over the last 12 months.
Kakuzi, Sasini, largely tea producers, Rea Vipingo, a sisal producer, and Mumias Sugar Company have so far managed to shrug off negative sentiment after investors had expected their profits to be hit by drought.
The agricultural stocks have not lost ground from the drought effect, Samuel Gichohi, a senior analyst at NIC Capital said on Tuesday.
With the exception of the Sasini and Mumias, most of the agricultural firms have their shares held by a few investors, who keep them for dividends rather than capital gains.
However, despite the non-erosion of their share value, the companies' dividend outlook was not rosy. Analysts said due to lower output, cashflow would be constrained and most would be cautious on their payout policies.
Anticipating such issues, companies have diversified their income-earning ventures, with Mumias expanding into electricity production and ethanol distillation, with a capacity to generate 20 megawatts and 22 million litters of ethanol, while Sasini has ventured into other crops and coffee shops.
Most of the listed agriculture sector firms have tried to diversify their products, said Deris Mugoi, an analyst at Standard Investment Bank.
A weaker shilling could also sustain farm-based earnings. The shilling is trading at between 81.00 to 81.50 to the dollar and traders say it will likely maintain the level in coming months.
Agricultural exports made huge profits last year as the shilling depreciated from 75 to the dollar in 2009 to the 80/dollar level and if the trend continues we expect good results, said Dickson Magecha, a currency trader at Standard Chartered Bank.
For sugar producer Mumias, a global shortage of the sweetener could keep prices buoyant.
Sugar problems in Brazil, a large producer, has seen their produce drop and will lead to higher international prices on the global market, said Alex Muiruri, an analyst at Dyer and Blair.
Tea, Kenya's main foreign exchange earner, could be hit if the unrest in leading buyer Egypt persists. Tea is likely to be affected by international factors such as the crisis in Egypt, a leading destination for Kenyan tea, Gichohi said.
But soaring world tea prices could again counter the decline.