Agriculture companies weigh higher prices with rising costs
28 May, 2022
Elevated agriculture prices fuelled by robust demand and tight supply are helping some companies fight surging input costs, but not all businesses are proving capable of protecting profits from the wrath of inflation.
Russia’s invasion of Ukraine has disrupted trade flows from the two agricultural powerhouses, squeezing global supplies. This has coincided with unfavourable weather conditions in major grain-producing countries, placing further strain on output.
Meanwhile, concerns of global food shortages are boosting demand, triggering sharp increases in the price of key staples such as wheat, rice and corn, and boosting the revenue of local producers.
“Many agricultural companies are benefiting from the elevated levels that soft commodity and grain prices are at the moment,” said Ramoun Lazar, resources analyst at Firetrail Investments. “Farmer incomes are very good, so they’re able to pay higher prices for all these inputs whether it be fertiliser or chemicals. As along as grain prices remain high, it’s a very favourable backdrop for these companies.”
GrainCorp admitted earlier this month that it has benefited significantly from trade disruptions in Ukraine and the Black Sea after Russia’s invasion which helped the company post record half-year profits.
This has been compounded by La Niña weather patterns creating favourable planting conditions for the 2022-2023 winter crop. This has boosted confidence about grain supply from the east coast of Australia, further supporting export sales and supply chain margins.
However, the rise in agriculture prices has taken place against the backdrop of surging input costs, including fuel and fertiliser, forcing businesses to either pass on costs or risk a margin squeeze.
“High grain prices also correlate significantly with high fertiliser prices, and the current high-price period is no exception,” said Stefan Vogel, RaboResearch general manager for Australia and New Zealand
“Farmers and the food supply chain will have to plan for elevated input costs, not only for fertiliser but also for energy.”
Earlier this week, Costa Group warned that it expects transport, fertiliser, packing and export shipping costs to remain elevated for the rest of this year.
The company said it was working to offset the impact of higher costs through increased domestic and export pricing, a strategy which Goldman Sachs says is being implemented successfully.
“We believe price strength has generally outpaced cost inflation and forecast margin expansion in the current year,” said Michael Peet, an equity analyst at Goldman.
Strong demand for fertiliser and cropping chemicals is helping agribusiness and pastoral company Elders which on Monday lifted its full-year underlying profit forecast. The company now expects profits to rise between 30 per cent to 40 per cent in the 12 months to the end of September from the prior year compared to its previous projection of 20 per cent to 30 per cent.
The company’s chief executive Mark Allison said conditions in the agricultural sector are expected to remain “very strong” over the next 18 months to two years.
Nufarm made a similar projection in its result last week, saying that grain prices are likely to remain elevated this year, forcing farmers to ramp up planting which will boost demand for crop protection.
However, the company warned that its full-year result will be more weighted to the first half due to elevated forward sales that are being made because of “global uncertainty and volatility in relation to active ingredient pricing, global supply chain and logistics challenges.”
Broker Citi said it sees the Russia-Ukraine conflict keeping agricultural prices higher into the 2023 financial year and that Nufarm’s earnings have yet to peak.
Record milk prices
New Zealand dairy co-operative Fonterra predicted that farmgate milk prices will also remain high heading into the 2023 financial year, setting its forecast at a mid-point of $NZ9 a kilo, or a range of $NZ8.25 a kilo to $NZ9.75 a kilo.
The co-operative also confirmed its financial 2022 pricing expectations of $NZ9.10 a kilo to $NZ9.50 a kilo, which it said would be the highest forecast milk price in its history.
“On the supply side, growth from key milk producing regions is expected to remain constrained as high feed, fertiliser, and energy costs continue to impact production volumes,” said chief executive Miles Hurrell.
“These demand and supply dynamics are expected to support dairy prices in the medium to long-term.”
However, the co-op warned of a plethora of risks including further impacts from COVID-19, inflationary pressures, a tightening labour market, rising interest rates and the possibility of a demand shock due to higher dairy prices.
Fonterra reported that operating expenses have increased on the back of inflationary pressures and COVID-related supply chain disruptions which has resulted in higher distribution and storage costs.
Despite high milk prices, the co-op’s earnings before interest and taxes fell $NZ134 million to $NZ825 million in the nine months ending April 30, reflecting lower sales volumes, margin pressures, COVID-19 disruptions and the rapid decline of the Sri Lankan rupee.
Mr Hurrell warned that some of these conditions aren’t expected to abate any time soon.
“While favourable price relativities in the fourth quarter are positive for earnings, we expect continued pressure on our margins due to the higher milk price coupled with the normal seasonal profile of our business,” he said.
Almond grower and processor Select Harvests reported on Friday that its supply chain remains disrupted with freight, port movements and logistics being affected both inwards and outbound.
This is shifting buying behaviour, with sellers, referring to growers and packers, needing to convert product to cash to help pay for next season’s input costs.
The substantial increases in freight costs are also being reflecting in buying prices.
“Until such time as this issue eases, and excess US inventory is cleared, it is expected that pricing will remain under pressure,” the company warned.
“Margins from the value-add activity were lower due to the higher cost of raw material input and the impacts of the current low almond price.”
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Source: www.afr.com
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