February 22, 2007

 

Australian grains industry outlook brightens
 

 

After a lean year because of severe drought, the outlook for Australian grain growers has suddenly brightened, although the perennial issue of export wheat marketing arrangements continues to dog the industry, participants said Thursday.

 

Indeed, the potential for Australian grain production and exports has rarely been so bullish, if normal season conditions resume, underpinned by increased global demand on the back of bio-fuel demand, GrainCorp Ltd. Chairman Don Taylor told a shareholders' meeting.

 

"Australian growers will be encouraged to plant a winter crop in 2007 with a great deal of confidence, provided there is a decent seasonal break," he said.

 

Taylor did not issue a production forecast. But his counterpart at AWB Ltd., Brendan Stewart, cited an unnamed independent crop forecaster predicting the next wheat crop could reach about 26 million to 27 million tonnes.

 

If this comes to pass, production will more than double from an actual 9.8 million tonnes this crop year ending Mar 31.

 

Export wheat availability could increase fivefold to about 20 million tonnes, from 4 million tonnes from the last crop.

 

Formal acknowledgment of the improved seasonal outlook for the weather came Wednesday, when the government's Bureau of Meteorology said an El Nino climate event in the Pacific has ended and a 20 percent chance exists of its opposite, La Nina, developing, which generally means wetter-than-normal conditions across eastern Australia from autumn.

 

Yet, even as the outlook improves, companies continue to report the outcome of the devastating 2006 drought, which for grain companies means lower throughput and revenue.

 

GrainCorp reiterated a forecast loss this fiscal year in the range of A$20 million (about US$15.77 million) to A$30 million, swinging from a profit of A$39.5 million last fiscal year.

 

AWB Managing Director Gordon Davis expects net profit this fiscal year to be 30 percent to 40 percent below an actual A$58.1 million last fiscal year, which was not even one-third of the A$184.1 million net profit reported in the year ending Sep 30, 2005.

 

The drought resulted in underperformance of many operations, including ship chartering and grain logistics, Landmark unit rural merchandising and services, and financial services, he said.

 

The key downside risk to the forecast remains whether the drought will break in autumn, while possible changes to the current wheat marketing exporting arrangements also pose a risk, he said.

 

Such are the risks to earnings that AWB directors "aren't in a position to forecast a dividend payout due to the uncertainties at this particular time," Chairman Brendan Stewart told a meeting of shareholders.

 

AWB will review its position regarding dividends after its fiscal first half results are issued in May, he said. AWB paid total dividends of 20 cents last fiscal year.

 

Meanwhile, uncertainty about AWB's long-term operation of a wheat export monopoly continues to take considerable time and effort of management and board.

 

In the past year, under interim arrangements, two other companies have been licensed to export bulk wheat, breaking down AWB's hitherto monopoly control.

 

Already a four-member panel established by the government to report by Mar 30 is consulting growers and industry about their wheat marketing needs. The government will use this report as an input to its decision on export wheat marketing arrangements.

 

Unusually, Treasurer Peter Costello weighed into the issue, saying the most important consideration in any change to export arrangements must be to maximise returns to growers.

 

AWB always argues that through its collective export sales pool arrangements, it extracts a premium from world markets for Australian growers.

 

GrainCorp's Taylor said regulator Wheat Export Authority found in a grower report in late 2006 that while AWB extracted a A$1/tonne premium on major grades of export wheat, this was more than offset by costs to service these exports of about A$5/tonne compared with an open export market.

 

The export market should be open and fully contestable, and GrainCorp stands ready to participate, he said.

 

The government decided to consult growers on their export marketing needs following a report from an inquiry about AWB's payments of US$221.7 million in kickbacks to the former Iraqi regime of Saddam Hussein under a UN oil-for-food programme.

 

AWB shares lost 1.2 percent to settle at A$3.23, a price move comfortably within recent volatility, while GrainCorp lost 1.9 percent to A$9.62.