While Australian farmers have revelled in a year of bullish cereal prices, largely courtesy of poor weather conditions on northern hemisphere farms, the droughty conditions overseas have clobbered Aussie-based United Malt Group.
The one-time malting division of big eastern states grain processor and logistics business, GrainCorp, has been punished by last season's big dry impacting Canadian barley plantings.
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Local share market traders have not been too happy about the news, either, with UMG shares dropping from last week's $4.23 high point to $3.98, before recovering to just above $4.
United Malt is Canada's largest buyer of malt grade barley.
It now forecasts as much as $25 million in extra production costs associated with drought in 2021-22.
Other challenges, such as the global logistics bottlenecks on freight routes have also chewed into the balance sheet this financial year.
Managing director, Mark Palmquist, who moved from running GrainCorp in Sydney to his new US base when UMG split from the parent business two years ago, said the drought had slashed Canadian crop yields by a third.
What was harvested was also of much poorer quality than usual, which subsequently required more effort and expense to process grain before it degraded further.
Additional shipping and logistics costs were incurred in importing barley from as far away as Australia to be processed in North America.
Barley from Australia
The import effort alone stripped away between $10m and $12m as malting barley was pulled from Australia and Denmark to ensure United's food and beverage customers had uninterrupted supplies.
The cost blowout attributed to lower quality harvest issues was likely to total from $10m to $13m.
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While the extra expenses were likely to be temporary, particularly as the current barley season has begun relatively well, Mr Palmquist said the company had encountered greater challenges than it had anticipated back in February at its annual general meeting.
The deteriorated quality of the depleted Canadian harvest was particularly notable, but the maltster also had to deal with supply chain disruption in sea, rail and road freight exacerbated by port shutdowns in China and Russia's war on Ukraine, which delayed shipments to customers.
Tighter labour markets, increased software and technical platform introduction costs and higher energy prices were also a challenge.
Fortunately, United Malt had been able to fall back on its international operations in other barley growing countries to help it keep faith with customers.
The world's fourth largest commercial maltster has up to 1.25m tonnes of annual capacity at 12 processing plants in Australia, Canada, Britain and the US.
Overall, its underlying earnings before interest tax depreciation and amortisation are tipped to be $57m for its first half to March 31, subject to an audit review, and between $115m and $140m for the full year to September 30.
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That forecast compares with a poorer EBITDA $123.3m last financial year.
Outlook improving
Mr Palmquist said the new season Canadian barley crop, to be harvested in the northern hemisphere autumn, was likely to be about 52 per cent bigger than the past year, or about 10.5m tonnes, based on Agriculture and AgriFood Canada's latest outlook forecast, and assuming normal weather and yield trends.
He said sales volumes in United Malt's processing segment were set to exceed 2020-21 as coronavirus-stagnated markets re-opened and demand returned.
The company's warehouse and distribution segment continued to benefit from reopening in major markets and the return of craft brewing demand.
United also benefited from its enhanced distribution capacity with three warehouses now in Mexico and a new facility in Derrimut in Victoria servicing eastern Australia.
However, the higher freight and energy costs would force the company to lift prices in the next nine months to ease the impact in the 2022-23 financial year.
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Capital spending
Compounding UMG's operational cost rises have been big ongoing capital expenditure outlays, primarily tied to a malting plant development in Scotland absorbing much of this year's $110m capital program.
Base spending was likely to be about $55m to $60m in 2022-23.
"The fundamentals for malting remain positive," Mr Palmquist said.
"Beer remains a significant and growing beverage category, while demand for craft beer and ancillary products continues to accelerate.
"Demand for distilling continues to grow with United Malt's customers laying down spirits for 10-plus years for aged whisky.
"Looking forward, we remain confident in the outlook, particularly as these temporary factors begin to roll off as a more typical barley crop returns in Canada."
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UMG's dividend policy remained unchanged, paying out approximately 60pc of underlying NPAT as dividends.
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Andrew Marshall
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
Andrew Marshall is the group agribusiness writer for ACM's state agricultural weeklies and websites. He is a former editor at The Land and has worked in various Rural Press group roles in Canberra, North Richmond (NSW) and Toowoomba (Qld).
