AA Co logs $46m loss for March quarter, as cattle price slump bites hard

Beef Central, 24/05/2013


The world’s largest cattle producer, the Australian Agricultural Co, has logged a net loss after tax of $46.5 million for the three months to 31 March.

Under Australian accounting standards the result was significantly adversely affected by a non-cash $43.2m pre-tax write-down of the market value of the company’s 676,000-head herd, due to the slump in domestic cattle prices, a statement to the ASX issued just minutes ago said.

Domestic cattle prices have been significantly depressed due to the ongoing effects of the Federal Government’s June 2011 suspension of live cattle exports to Indonesia and below-average seasonal rainfall in northern Australia.

The majority ($35.3 million) of cattle written down in value were long life-cycle breeding cows and young grower cattle, AA Co’s statement said.

Most of the cattle are not intended for immediate or near-term sale and accordingly the write-down was a non-cash valuation adjustment not expected to be realised in the short term, the company stressed.

Managing director David Farley said AA Co had increased both cattle sales and wholesale beef revenue in the three months, however domestic prices continued to be depressed.

AA Co sold 41,186 head for the quarter, up from 29,646 head in the first quarter of last year to drive operating cash flows which were in line with the prior corresponding period, he said.

“The drought and the continued impact of the Federal Government’s 2011 suspension of live cattle exports to Indonesia continue to be felt in domestic cattle markets.”

With the biggest herd in Australia, changes in livestock value have a significant impact on AA Co’s financials. A 10c/kg liveweight change in trading cattle prices equates to an $8.7 million impact on AA Co’s pre-tax profit.


Price disparity ‘validates’ Darwin plant

AA Co managing director David Farley “The local oversupply and depressed cattle prices are at odds with continuing high global beef prices,” David Farley said.

“This disparity validates AA Co’s vertical integration strategy and the decision to build a Darwin abattoir to capture these global prices,” he said.

“This state-of-the-art facility will open up new channels to market as well as reducing freight costs currently incurred by moving cattle from the north to eastern Australian abattoirs.”

The stage-one civil works for the development of the Darwin abattoir have been completed. AA Co announced to the ASX on April 19 that it intends to fund the construction from its own balance sheet.

The completion of the abattoir would go some way to insulating AA Co from movements in domestic pricing and live export fluctuations, by opening up another marketing channel, the company said. It would be well-positioned to take advantage of the current continued rising global beef price.

The abattoir will be the only major beef processing facility in northern Australia and would allow cattle to be processed locally, reducing transport and freight costs for northern producers who currently truck live cattle long distances to eastern processing plants.

As previously announced, AA Co has moved to a new financial year-end of 31 March. The three-month results issued today align the company’s reporting from a 31 December year-end to the new financial year.

The company stressed that the three-month result was not representative of results for a full 12-month period, as the bulk of cattle sales and profit are generated outside of this three-month period.

The company finished the March quarter with net tangible assets of $1.90 per share, down from $2.04 at 31 December. The decline is principally attributable to the non-cash herd valuation write-down.

Seasonal Conditions

Rainfall was well below average for AA Co’s Northern Australian properties in the March quarter. The 2012/13 wet season rainfall was lower than in the 2007 drought.

The drier conditions have given rise to increased feed and other costs, including water and transport, during the three-month period.

Cattle Operations

During the March quarter AA Co delivered 41,186 head of cattle (March quarter 2012 -29,646 head), at significantly lower prices than the prior corresponding period.

The unseasonally dry weather is continuing to affect domestic cattle prices, with the benchmark Eastern Young Cattle Indicator tracking well below 2012 prices due mainly to a decline in demand for re-stocking cattle.

Market conditions for all categories of cattle apart from longfed Wagyu were reflected in declines in value over the quarter.

Volume of beef produced during the quarter was 8500 tonnes, down from 11,100t in the first quarter last year. The reduction was largely due to the drier conditions affecting all large trading herds.

Wholesale Beef Group Operations

AA Co’s Beef Group had a 65 percent increase in volume sold for the first quarter. The major contributors were larger volumes of AA Co’s signature ‘1824 beef brand and improved inventory management due to new customer and market development.

The development of an integrated supply chain from the feedlots to the wholesale beef operations continued, this morning’s statement said. This development would be furthered with the commencement of the Darwin abattoir operations and would provide the group’s wholesale beef division with broader market access.

The wholesale beef division continued to perform on lower than desired margins due mainly to the adverse effects of the high A$.

Property Portfolio

There was no change to the company’s property portfolio during the quarter, however as announced this week, the company has exchanged contracts for the sale of 19,400ha of cropping and grazing land from its Goonoo aggregation for $23 million. The company will lease back 7800ha of high quality cropping land for a five-year period at commercial lease rates.

Brighton Downs Station, which has been determined to no longer fit into AA Co’s supply chain, was put to auction on Wednesday, and was passed-in at $10.25 million. Negotiations continue with interested parties.




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