Australia: GrainCorp lifts earnings forecast

GrainCorp is stepping up shipments of grain from Western Australia to the east coast as supplies needed in the food manufacturing industry and to feed livestock run low in drought-hit states, The Australian Financial Review reported on September 6.

The shortage means GrainCorp is sourcing grain from CBH – the farmer-controlled co-operative it targeted as part of a failed corporatisation bid in 2016 – at an ever-increasing rate.

It is understood GrainCorp plans five shipments from WA in the next few weeks – two to Brisbane, two to Newcastle and one to Port Kembla – as east coast wheat supply dries up.

This is on top of recent shipments to Brisbane and Newcastle sourced from CBH's near-monopoly storage, handling and port system in WA where growers have produced crops of 18.2 million tonnes and 14.3 million tonnes in the past two years and are on target for a record harvest this year.

Industry experts are tipping 5 million to 8 million tonnes of grain that would be exported in normal circumstances could flow from WA to the east coast to support food manufacturing and livestock production into next year.

GrainCorp bucked the trend for ASX-listed agribusinesses exposed to the impact of drought on Thursday by upgrading full-year earnings guidance on the back of strong performance in its malt division.

It lifted its forecast for underlying earnings before interest, tax, depreciation and amortisation to A$255 million to A$270 million, up from A$240 million to A$265 million.

The forecast for underlying net profit after tax for the year ended September 30 was revised to A$65 million to A$75 million, up from A$50 million to A$70 million.

However, the dominant force in east coast grain storage and handling warned for tough times ahead for its core business and farmers in Queensland and NSW in 2018-19.

Managing director Mark Palmquist said GrainCorp had benefited from the performance of its global malt business and its strong market position in the North American craft beer sector.

Mr Palmquist said the international grain trading book and liquid terminals businesses also performed strongly, and the company had made good progress in the foods unit within GrainCorp oils.

The grains business continued to suffer as exports dried up on the back of supply shortages. GrainCorp warned the east coast winter harvest was likely to be worse than previously feared.

"The benefits of our diversified business model are again being demonstrated in the face of the substantial drought challenges in eastern Australia," Mr Palmquist said.

"These conditions have slowed export volumes as farmers and the domestic market move to secure supplies."

GrainCorp said cropping conditions in the east Australian grain belt had deteriorated substantially, with large areas of NSW and Queensland in severe drought, since it delivered first-half results in May.

It said winter crop hectares planted were reduced and expected yields would continue to decline without decent rainfall in the next few weeks.

"We expect a considerable decline in grain production in eastern Australia in 2018-19, with production again skewed to Victoria and southern NSW," Mr Palmquist said.

"We continue to respond to the deteriorating outlook by adapting the network to better match the size and location of the crop and keeping a strong focus on operating cost control, asset utilisation and disciplined capex allocation."

"It is an extremely challenging time for our grower customers. Many of our own people live and farm in these communities and we keenly feel the difficulties they are going through."

GrainCorp said it had streamlined the process for farmers withdrawing grain stored in its system for use as animal feed.

Mr Palmquist foreshadowed a showdown with rail operators Pacific National and Aurizon as it braces for big losses on take-or-pay contracts.

He said the contracts, due to expire at the end of 2018-19, would again present a "significant challenge" given the tight supply and limited export volumes expected during the next 12 months.

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