California drought silver lining for selected crops

Australia | 11:25 a.m.

Beyond the current low in prices and earnings that led to the horrific, though unsurprisingly first-half result of Select Harvests, brokers remain confident that a multi-year cyclical recovery in almond prices is imminent.

-Management’s pessimism on almond prices is linked to the increase in Californian production
-Citi predicts an average almond price of $ 7.05 / kg in FY 22
-Wilsons expects almond segment profits to decline from -7 to 45%

By Mark Story

Watching the embers of what was arguably a dismal semester for Select Harvests, the management of the fruit and nut grower attempted to put a brave face to the result by reassuring shareholders that tree health remains good with strong vegetative growth. in 2021 and a high head load.

Select Harvests operates a diverse portfolio of almond orchards, as well as a state-of-the-art processing facility in Carina, Victoria and value-added processing in Thomastown, Victoria.

At first glance, the result of Select’s first half was the story of two diametrically different stories. First, the good news: In line with the underlying sustained improvements in yields over several years, the company’s almond harvest increased by 21% for the six months ending March 31, 2021, resulting in a total revenue increase of 37.4% to $ 84.8 million.

Helped by delayed sales from the second half of 2020, operating cash flow of $ 4.7 million also improved significantly from the prior period.

However, due to falling world almond prices – down -20% to $ 6.00 / kg – and higher production costs, the company’s net profit fell by -93% from $ 17.4 million to $ 1.3 million. Almonds’ profits of $ 3.1 million fell -89% and were -74% lower than Wilsons forecast.

In comments accompanying the first half result, management expects low price levels for its main product, almonds, for the remainder of 2021.

Hollow prices and incomes

Much of management’s pessimism about future almond prices relates to an expected increase in production in California, which is largely responsible for pricing. After a record California harvest in 2020, the USDA’s subjective estimate of almonds points to another significant harvest this year. As a result, almond prices in US dollars are expected to fall -5% in FY21 and -4% in FY22.

Select predicts that the second half of 2021 will be broadly consistent with the first half of 2021 based on an almond pool price of $ 6.00 / kg.

However, Wilsons notes that a significant deterioration in seasonal conditions, coupled with any flow of negative news about the California crop, could significantly alter the price forecast for almonds.

Beyond FY21, Citi continues to remain constructive on the outlook for kernel prices. Much of the broker’s multi-year cyclical recovery in the outlook for world almond prices is based on weaker California supply.

Despite the increased production expected by the USDA this year, the broker remains aligned with the prevailing industry sentiment that worsening drought and water supplies in California will affect crop yields. With 75% of the state currently in extreme drought and 26% in exceptional drought, the broker believes conditions are likely to impact 2021 crop yields.

Citi expects U.S. almond prices to rise due to lower supply, with continued strength in export demand seen in calendar year 2021 reaching US $ 2.32 / lb or slightly below pre-covid levels.

However, Bell Potter reminds investors that over the past decade, USDA’s U.S. crop estimates have averaged 98 percent accuracy. The broker also notes that the new 66,000-acre plantings have exceeded the 48,000-acre deletions, implying that there is still a tail of crop growth in subsequent years.

Meanwhile, the weaker H1 2021 result and FY 21 average kernel price results in a $ 19 million (-40%) reduction in Citi’s FY 21 profit forecast. But the broker predicts an average kernel price of $ 7.05 / kg for Select in FY22, which the broker says will mark FY21 in retrospect as a low in both price and profits.

Citi notes, an average almond price of $ 6.00 / kg for fiscal year 21 – on the back of the record 3.1 billion pounds. The 2020 U.S. almond harvest, along with disruption in the covid market – will be the lowest price since 2012.

As a result of the lower than expected average kernel price and the resulting greater operational deleveraging, Citi lowered its FY21 profit by -40%. Based on a slightly lower kernel price in FY22, a lower water saving benefit and a higher horticultural cost assumption, the broker also expects a decrease in profits for fiscal years 22 and 23 by -17% and -5% respectively.

Robust results

Due primarily to the lower kernel price assumptions in FY21 and FY22, as well as a slightly higher cost of production, Wilsons also expects Kernel segment profit to decline by -7-45%. But with improved food profits and lower depreciation and amortization partially offsetting Almond’s lower profits, the broker expects group profits (EBIT) to decline by 0-44%.

However, beyond the half-year result, Wilsons is encouraged by an increase in profits in the food segment, which, in the broker’s opinion, is proof of the first benefits of Select’s strategic review. As a result, the broker continues to view the risk / reward equation as skewed upward.

Aided by the reclassification of parts of the Food segment as a discontinued business, food revenues of $ 5.7 million increased significantly from the previous period, while company costs decreased by -26% due to reduced employee payments and discretionary spending.

Broker reminds investors that over key factors Select has some control, including crop yield and cost of production, the company continues to deliver robust results as these continue to compare well to the past seven years .

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