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Early this year, the world’s largest wheat exporter Russia invaded Ukraine, the fifth largest wheat exporting country, putting pressure on food supply chains. While the Food and Agriculture Organization’s food inflation index peaked in 2022, Australia grain industry is coming to the rescue with a bumper wheat crop this year.
The country recently reported that growers were on track to harvest 32.2 million tons of wheat this year, after a record production of 36.3 million tons last year. The wheat harvest figure for 2022 is 6.3% higher than previously anticipated as good weather helped increase the yield of most crops.
Global food supply chains have come under pressure after the war in Ukraine sharply cut its wheat exports as well as plantations, with exports down 53.2% year on year.
On the other hand, Russia produced a record wheat crop this year, as per estimates from research firm SovEcon, but shipments are lagging. Russia’s wheat shipments for the months of July and August were down 22% to 6.3 million tons, as per Russian agricultural exports tracking firm Logistic Operating System.
Chicago wheat futures hit a more than decade high early this year. While prices have retreated now, the ongoing war in Ukraine has left a lot of uncertainty in the market. Australia grain companies are now entering the market with a fresh harvest and are likely to see windfall profits, with the government forecaster Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) expecting agricultural export earnings to rise by almost 50% from a decade ago.
China is the biggest buyer of Australian wheat. Indonesia, the world’s second-largest wheat importer after Egypt, is banking on Australia grain as sourcing the commodity from Ukraine or Russia has become difficult. However, S&P Global in a report said that Australia’s port logistics might prove a challenge. Although Australian sellers are gearing up to sell wheat overseas, which companies are the best placed to enjoy windfall profits?
Australia grain dearer to the world
“An expected better (wheat) output is likely to ease the supply tightness in the global market as it may also increase the export volumes and supply cheaper wheat to Southeast Asia,” a trader based in Western Australia told S&P Global. Let us explore some ASX-listed firms that contribute directly to the Australia grain sector.
GrainCorp Ltd (GNC.AX)
Based on the east coast of Australia, GrainCorp is among the largest agribusiness in the country. The more than a century-old company has the largest grain storage and handling business on the east coast and is the biggest edible oil processor in Australia and New Zealand.
Listed on the ASX main board, GrainCorp has a market capitalization of $1.22bn (A$1.81 bn) and a PE ratio of 5.79, with a forward PE ratio of 11.76. The agribusiness is already reaping the benefits of high grain and oilseed prices and reported a near 50% increase in half-year revenue for the period ended March 31.
The company has raised its profit forecast twice this year, with expectations of a record year. GrainCorp said it sees FY22 underlying net profit after tax between $246-270 m. However, market analyst responses compiled by Yahoo Finance suggest that the exponential growth won’t last going into 2023, with sales likely falling by 11.50% next year.
Elders Ltd. (ELD.AX)
Adelaide-based Elders has a range of operations within the agricultural business of Australia. It has a feed and processing business, it provides rural services, real estate, insurance, and home loans, and the most relevant here for wheat investors is the branch network and wholesale products.
Elder Ltd has a market capitalization of $1.80 bn and has a PE ratio of 10.44, with the forward PE ratio pegged at 11.24.
For the half-year ended March 31, Elders saw its sales revenue rise 38% to $1.01 bn. As per the investor presentation, Elders saw the highest growth in agricultural chemicals and agency services (which includes the grain business). The company said it expects a strong performance for the full year and is optimistic about growth in FY23.
Nufarm Ltd (NUF.AX)
Melbourne-based Nufarm is an agricultural chemical company that was founded in 1956. It sells crop protection and seed technology products and solutions to growers. The company is not directly involved in Australia grain farming but provides solutions to the vast sector which is poised to outperform this year.
The crop protection firm has a market capitalization of $1.29 bn and a PE ratio of 18.70, with a forward PE ratio of 15.22. Nufarm stock has risen 14.51% in the past year. Market analysts polled by Yahoo Finance see the company’s sales to grow 12.70% this year but decline by 4.20% in FY23.
For the six months ended March 31, Nufarm saw its revenue rise 31.3% to $1.46 bn while posting a net profit after tax of $89.7 m, up 112% The company also announced its first interim dividend since 2018 of 4 Australian cents per share.
“Current industry conditions are highly favourable with grain prices likely to remain elevated driving increased planting and demand for crop protection products,” said Greg Hunt, Managing Director and CEO of Nufarm.
