Drought and trade war tensions cost GrainCorp $40m

GrainCorp cops $40m trade and drought hit to marketing revenue


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Tough grain trading conditions and a dry summer scorched earnings in the final weeks of GrainCorp's 2018-19 first-half

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Drought and international trade frustrations are biting GrainCorp's grain trading and logistics business, slashing $40 million from its latest half-year earnings.

The company has told the Australian Securities Exchange "disruption" to grain trading conditions in the final six weeks of its half-year reporting period to March 31 caused a deterioration of about $40m to its earnings before interest, tax depreciation and amortisation.

"Clearly this is a disappointing outcome in a challenging period in international grain markets, compounded by the ongoing drought conditions in Australia," said chief executive Mark Palmquist said.

"However, we have strong risk management processes in place and continue to closely monitor market conditions."

Market volatility and redirected global grain movements have followed the market fallout from the trade war between the United States and China and a halt to Australian barley sales to China.

The Chinese are investigating hotly disputed market dumping allegations against Australian exporters.

The already sensitive global feed grain market has been spooked by the US-China tariff barrier feud and subsequent trade indecision elsewhere around the world.

China market impact

China is Australia's biggest barley market normally taking more than 4 million tonnes of our total malt crop, worth more than $1 billion.

Most years Australia rates a leading global player in barley export markets, supplying up to 40 per cent of the world's malting barley trade and 20pc of the feed barley trade.

Also of significant concern for Australia's biggest listed agribusiness is the ongoing drought in eastern Australia, which battered earnings last financial year and reduced the 2018-19 winter crop harvest to a whimper in NSW and Queensland.

GrainCorp said droughty spring and summer growing conditions had "significantly impacted crop production", especially the sorghum crop.

Industry observers say the national sorghum crop is unlikely to have yielded the 11 million tonne forecast by the Australian Bureau of Agricultural Resource and Science Economics in February.

Financial results in May

Full details of the revenue hit will be disclosed with GrainCorp's audited half yearly results, scheduled for release May 9.

Early this month GrainCorp unveiled early plans for a crop insurance-style weather derivatives strategy it intends to develop to protect grains division earnings from the volatility caused by difficult seasonal conditions.

It will also merge its oilseed processing and consumer product manufacturing division into its grain business, while separating and listing its global malt business under the new name, MaltCo.

At the same time, newly formed private equity group Long-Term Asset Partners (LTAP) is still claiming to be keen to pursue its debt-funded $3.3 billion takeover offer for the entire GrainCorp business.

That deal is also believed to be relying on a weather insurance model to insulate revenue and guarantee returns to investors.

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GrainCorp also recently sold off the Australian assets in its port-based bulk liquid terminals business, which were originally acquired with the Gardner Smith oilseed processing operations in 2012, and subsequently expanded.

Mr Palmquist said he was still open to discussions with any suitors interested in MaltCo or other assets, or the whole company, if offers represented a better deal for shareholders.

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