After its profits were scorched by the North American drought last year, United Malt Group has stitched up a crop insurance contract which will see it compensated if another heatwave leaves the big maltster scrambling for barley in Canada.
The deal comes as shareholders at UMG's annual general meeting questioned why United had failed to deliver the profit and growth expectations promised when it split from its parent, GrainCorp, in early 2020.
Since the demerger GrainCorp's financial results and dividends have blossomed, with net profit after tax rising to $380 million in 2021-22, up from $139m a year earlier, while the malt business's profit slid from $14.5m to $11m last financial year.
"What's happened? You took the best GrainCorp business and the best people. What went wrong?" one shareholder asked the Sydney meeting.
Derivative contract
United Malt's special derivatives contract is similar to a 10-year risk mitigation strategy GrainCorp signed with global insurer, Aon, during the depths of drought in Australia in 2019.
Aon subsidiary, White Rock, pays the big grain logistics and marketing business up to $80m any year the harvest shrinks below 15.3m tonnes in its east coast catchment area.
United Malt managing director, Mark Palmquist, who previously led GrainCorp when that earnings safety net deal was negotiated, said UMG would have received about $30m in compensation if the latest contract had existed when much of the Canadian crop failed in 2021-22.
Low yields and poor grain quality forced United to import barley from Australia and Denmark at great expense to ensure its three big Canadian malt houses met their supply commitments to brewers, distillers and other customers.
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"Had this contract been in place in 2021-22 it would have significantly increased FY22 earnings," Mr Palmquist said.
Exact details of UMG's special derivatives contract or the global insurance company involved, have not been released, however, Mr Palmquist said the deal would be of no "material cost" to the company.
Speaking after the AGM he said, like GrainCorp's derivative contract, UMH's obligation included paying its insurer extra money in years when the Canadian barley crop exceeded a tonnage benchmark.
However, unlike Australia, where droughts could strike every five years or less, the Canadian harvest was likely to be relatively stable most years and compensation payments to the malt company were only expected when "the situation is more catastrophic - maybe once in 20 years."
Last season's widespread Canadian drought was the worst in 20 to 30 years.
Not needed in Aust
Insurance coverage does not extend to Australia, the US or Britain, where United also has malt operations.
Australian barley production was spread sufficiently broadly across the continent to minimise the risk of significant crop shortages, particularly with Western Australia firming up as a barley producer.
Much of the US crop was irrigated and less vulnerable to seasonal setbacks and the UK also had a relatively diverse range of production geographies.
Meanwhile, to further reduce its risk of exposure to seasonal setbacks, United Malt has changed its contract terms to better capture cost-to-serve returns from major customers.
Buyer payment requirements will be incrementally adjusted based on conditions at crop planting, mid-season and when harvest yield observations were clear.
Progressive price arrangements should also help cut risk exposure to fluctuating energy and freight costs which had burnt UMG last financial year, too.
What went wrong?
Responding to shareholder questioning about "what went wrong?" chairman, Graham Bradley, said almost immediately after United Malt's March 24 2020 listing on the Australian Securities Exchange as a standalone business the coronavirus pandemic forced the hospitality sector into lockdowns, or reduced sales options.
In particular this hit hard in the promising craft beer and brew pub sector which uses significantly more malt than mainstream brewers.
Freight and distribution setbacks had also stifled United's business opportunities.
"In October 2021 we expected improving market conditions as the pandemic appeared to be on the wane," Mr Bradley told the AGM.
"But our business was adversely affected by several headwinds, including the resurgent Omicron COVID impact, severe drought in Canada, significant disruption to ocean and rail supply chains, and increased freight and energy costs."
"The 2021-22 financial year was a disappointing one for all of us in United Malt Group."
GrainCorp, on the other hand, experienced different events and market forces since the demerger.
Most notably, a dramatic post-drought turnaround in crop production and strong market demand for cereals and oilseeds because of overseas crop shortages, supply chain restrictions and Russia's war in Ukraine.
Mr Bradley believed the demerger had been "very much the right thing to do" in the interests of shareholders.
"I think it was exactly the right thing for United Malt, but it's unfortunate the company has been impacted by dislocation and headwinds in the supply chain," he said.
Earnings recovery
A rebound in the volume and quality of the latest North American barley crop and good crop prospects elsewhere, plus waning disruption in the beer market and freight and energy sectors would help underpin a progressive earnings recovery.
"We anticipate an improved result in FY23 and confirm we expect underlying earnings before interest, tax depreciation and amortisation (before SaaS costs) to be in the $140m to $160m range, assuming no material deterioration in market conditions," he said.
Much of that improvement would be more obvious in the second half as new pricing and sales arrangements for the 2023 year began in January.
Mr Palmquist said United remained vigilant about inflation pressures in North America and Australia, and the possibility of a recession, but beer consumption was not typically significantly impacted in global recessions.
Major international brewers suggested demand was generally remaining resilient.
Malt whisky production and demand for distilling was "expected to continue its upward trend".
United's earnings would reflect boosted production capacity after spending $50m last financial year at Inverness in Scotland, where commercial malt production for the distilling market would start in March.
Promising sales trends were also emerging from the boutique whisky and gin distilling segment in Australia and North America.
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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).
