GrainCorp Limited – Presentation to the Bell Potter ‘Home Grown’ Agriculture Conference 

This graph jumper out at me. ABARES June forecast for 2023 predicts it to be the 3rd highest crop on record. However, ABARES is very conservative in their guidance, as seen in the graphic below. Their guidance is higher than in June 2022 than it was in 2021 and 2020.

They are guiding for high gain carry out at September 2022, which bodes well for FY2023.

If La Nina holds, 2023 will outdo 2022, and at higher commodity prices assuming current spot prices hold.

Key takeaways from June 7, 2022 national overview:

• National planting to winter crops in 2022–23 is forecast to be the second highest on record at 23.4 million hectares.
• Winter crop production in 2022–23 is forecast to reach the fourth highest on record at 50.9 million tonnes
• Summer crops production in 2021–22 is estimated to reach a new national record of 5.5 million tonnes

According to the latest three-month rainfall outlook (June to August), issued by the Bureau of Meteorology on 26 May 2022, there is a very high chance that cropping regions in the eastern states and South Australia will exceed their median winter rainfall. Western Australian cropping regions are more likely to receive below average winter rainfall.

Winter crop production is forecast to reach 50.9 million tonnes, the fourth highest on record. Yield prospects are forecast to be well above 10-year averages in New South Wales and Queensland and more modestly in other states. High levels of subsoil moisture at the beginning of June and the likelihood of above average winter rainfall in most states are expected to support crop prospects. These forecasts assume average seasonal conditions in spring because Bureau of Meteorology outlook for spring is not yet available.

High costs of fertilisers and chemicals have caused growers to economise on their use planting and establishing crops, with the majority of growers securing sufficient volumes earlier in the year. While the cost and availability of chemicals are expected to be less of a constraint to production prospects, there is some risk that a tighter than expected rationing of fertilisers on farms in spring could reduce yield potentials. However, this downside risk is expected to be limited by the scale and specialist operations of large farms producing the majority of production in Australia, and their tendencies to hold adequate fertiliser stocks to maximise their returns to deploying farm machineries.

Wheat production is forecast to increase 22% above 10-year averages to reach 30.3 million tonnes, the fourth largest on record. Barley production is forecast to reach 10.9 million tonnes, also the fourth largest on record. Canola production is forecast to increase 47% above 10-year averages to total 5.6 million tonnes, the second largest on record.

DISC - HELD.

Late on Friday, Graincorp released a buyback notification, advising that up to 10% (22.9 m shares) of the shares issued will be brought back via on-market transactions before November 10.

372k of shares were brought back on the 2/6/2022 on the first day of the buy back period.

DISC - I HOLD

Key takeaways:

1. NPAT of $246 M, up from $50.5 million in pcp.
2. Grain handled: 38 MT (up 25%)
3. Contracted grain sales: 5.8 MT (up 0.3 M T)
4. Exports: 4.5 MT (up from 3.1 MT) - exports running at close to full capacity.
5. Hedge payment of $70 million included. This means H2 is unhedged, enabling GNC to realise the benefits of high grain prices.
6. Inventory and working capital financing increased significantly as a result of high commodity pricing and record grain volumes.
7. CAPEX forecast to increase to fund increased storage capacity.
8. Interim and special dividend of 24 cents per share combined. Shre buy back ongoing ($50 million)

GUIDANCE:

• FY2022 Underlying NPAT: $310-370 million.
• FY2023 outlook: Positive conditions for FY2023 Winter crop, at a time of ongoing Northern hemisphere supply chain disruption.

My long thesis for GNC is that Russia will destroy Ukraine's ability to export, store, sow, fertilise grain. Current estimates are a 30% drop in production - but I think this may be overly optimistic, and ails to take into consideration what Russia's strategy is. Russia will not end this war in the East. They are seeking to secure the Black Sea coastline.

Russia will most likely set out to destroy Ukraine's ability to feed itself, little own export grain to the world. This is a strategy to prevent / minimise gorilla warfare as they occupy more Ukrainian land.

Evidence of Russia taking grain from Ukrainian storage on a large scale in occupied Melitipol here. Odesa and Mykoliav are also hold substantial grain terminals - I think Odesa is one of the largest terminals in the world. They are currently Ukrainian held. Neither port is open to shipping. If Odesa falls, so will much of Ukraine's export infrastructure and grain storage.

There is ample grain stocks in the world now, but a big chunk is literally disappearing as we speak, and this is likely to continue.

Something to watch is an escalation from Russia form a "Special Military Operation" to a general mobilisation to war. This will need to occur within the next 1-2 weeks to enable time to be able to continue progress towards Moldova.

Underlying NPAT upgraded from $235-280 M to $310-370 M. That is about a 30% upgrade.

The upgrade is attributable to increased demand for Australian grain and oilseeds, and favourable planting conditions for winter crops.

“The conflict in Ukraine and resulting trade disruptions in the Black Sea region have created uncertainty in global grain markets, with buyers looking for alternate sources of supply. This has further increased both the demand for Australian grain and oilseeds and export supply chain margins.” 

“Recent weather patterns and continued La Nina conditions have provided excellent planting conditions for the 2022 winter crop to date, building confidence in grain supplies from ECA and further supporting export sales and supply chain margins.” 

“Despite recent weather-related supply chain disruptions across the ECA, we are continuing to operate our ports at close to full capacity, exporting as much grain as possible to international markets. Our supply chain resilience demonstrates the value of our infrastructure assets and is testament to the capability of our operations and 

planning teams,” Mr Spurway said. 

DISC - HELD

Graincorp is a commodity business, which earns about 15-20% commission on Australian grain & oilseed sales, as well as producing some grain & oilseeds itself. It's moat is the storage and transport infrastructure, and relationships with producers and grain buyers.

On February 7, 2022, Graincorp upgraded profit guidance significantly to $235 - $280 million (FY21: $139 million). This represents an 85% increase on FY2021. Since this upgrade, the following three significant events have occurred:

1. At the end of February, ABARES released the March edition of the Australian crop report. ABARES has reported the 2021 Winter crop, is the highest on record. Total Winter crop production is estimated to be 61.9 million tonnes, up 6% form its previous guidance in December, with wheat, barley, canola breaching national records. Summer crop production is forecast to rise by 64% to 5.3 million tonnes, the fourth highest on record.
2. Ukraine invasion. Russia & Ukraine is the worlds 1st (23%) and 5th (9%) largest grain exporter. 90% of all Russian and Ukrainian grain exports are shipped via the Black Sea, with much of the grain traditionally shipped through the Ukrainian port of Mariupol. Currently, commercial shipping in the Black Sea has halted, and the Ukrainian sowing season is 3-4 weeks away.
3. Ongoing droughts in South America and North America. El Nino / La nina Impacts.

Item 1 above means grain sales will be at record levels, and items 2 & 3 potentially means there will be a global shortage of grain, depending on how the war progresses, which is highly uncertain. Wheat futures have surged around 50% over the past few weeks.

I sincerely hope this war ends soon, and Ukraine farmers are not impeded from sowing their Winter crops, as if they fail to do so, thee world will be in for some significant instability, given African and Arab nations are the ones that will suffer the most from a shortfall in Ukrainian / Russian production.

I don't consider Graincorp a long term holding, more of a macro hedge against commodity inflation. As can be seen from the grain price chart below, Wheat grain was hitting all time highs before the Ukraine war, noting that the last time wheat was at these prices. Grain futures are indicating prices may rise far higher over the coming months, especially if the war drags on for more than a month.