Australia: GrainCorp emerges from drought and restructuring in good shape

A slimmed-down GrainCorp says strong international demand is providing a hedge against any further trade sanctions from China, as its vast storage and handling network takes delivery of a bumper crop, the Financial Review reported on November 12.

GrainCorp said it had emerged from drought and restructuring in good shape and expects earnings to grow next year as it makes a big return to exporting.

Farmers have already delivered 3.9 million tonnes of grain from this harvest into its supply chain, and grain is flowing in at the rate of about 300,000 tonnes a day as harvest moves into full swing.

GrainCorp only received 4.2 million tonnes into its network last year as exports ground to a halt, but has a wave of shipments booked from all of its seven east coast port terminals.

Managing director Robert Spurway said the company was seeing good demand for Australian grain across the board and is not worried about China, after speculation that sanctions similar to those that crippled the barley trade could be applied to wheat.

"Current prices mean that Australian grain is competitively priced in most markets," he said.

"Frankly, that is a natural hedge against the uncertainty or volatility associated with China or any particular market.

"Any further disruption with China would be pure speculation. In fact we are not seeing it with the counterparties that we have in place and the trades that we have done."

Australia’s east coast grain handling giant reported full-year net profit after tax of A$343 million on November 12, up from a A$113 million loss last year.

In a year marked by restructuring and leadership changes, GrainCorp recorded an underlying NPAT loss of A$16 million compared with a A$158 million loss in fiscal 2019.

The improved result came despite a third year of drought and was driven by the sale of its bulk liquid terminals business and profit from the demerger of its global malt operations.

GrainCorp also received a gross payment of A$58 million under its production-based crop insurance agreement with Aon as drought hit the 2019 winter crop on the east coast.

The company reported underlying earnings before interest, tax, depreciation and amortisation from continuing operations of A$108 million, after a loss of A$107 million last year.

It will pay a fully franked 7¢-a-share dividend on the back of the improved financial performance.

GrainCorp's crop production contract with Aon cuts both ways and it faces paying the insurer up to A$70 million in 2020-21 on the back of farmers producing a huge crop post-drought.

Mr Spurway said the fact GrainCorp expected to pay Aon the maximum amount under the 10-year contract signed at the height of the drought was a "great thing".

"The way the product works is it only kicks in in terms of payments above 19.3 million tonne total crop [in Queensland, NSW and Victoria]," he said.

"When we get to that point we are already in an export task and the margins that we make by that full utilisation of our end-to-end network and the exports more than covers the incremental cost of the crop production contract.

"At a crop of 24.4 million tonnes we have a significant export task, as you are seeing with the nearly four million tonnes of grain we have received now – much of it started to be loaded on trains and pointed towards ports and ships and overseas destinations."

Mr Spurway, who took the helm as managing director and chief executive this year as the restructuring saw Mark Palmquist depart to run United Malt, said the financial performance had improved in 2019-20 despite a hat-trick of drought years.

“The most significant drivers in the year were the positive impact from the crop production contract, improved performance from our east coast of Australia grains and international trading businesses, and stronger oilseed crush volumes and margins," he said.

Crop production estimates from official forecaster ABARES show grain production in NSW, Victoria and Queensland bouncing back to a combined 24.4 million tonnes.

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