Select tips big water costs to linger after dry and COVID-19 cut profits to $17m

Select Harvests profit down 13pc but crop outlook solid after big dry

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A 70pc leap in water costs, softer global almond prices and supermarket house brand competition combined to shave about $2.6 million Select Harvests half-year profit

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Much improved autumn rainfall and the prospect of even more in winter has heartened almond business Select Harvests, but the big orchardist is still bracing for higher than usual water costs for the year ahead, and further down the track.

"The value of water has re-positioned itself," said managing director Paul Thompson.

The drought's contribution to a 70 per cent leap in water expenses to more than $1000 a megalitre, combined with softer global almond prices and rising competition from supermarket house brands shaved about $2.6 million from the almond grower and processor's half-year net profit after tax.

The coronavirus pandemic has also been a challenge, initially hitting Chinese orders, then domestic sales into entertainment markets and now causing ongoing global sales sluggishness as the world's third biggest market, India, remains in lockdown.

Government behaviour, particularly state governments, has had the biggest impact on water price - Paul Thompson, Select harvests

Although Select's crop yields in South Australia, northern Victoria and southern NSW survived the big dry relatively well, it has posted a 13.4pc profit drop to $17.4m.

Market disrupted

Yet, while drought-depleted inflows into the southern Murray Darling Basin in the past two years have coincided with bigger orchard plantings to intensify downstream demand for water, Mr Thompson pointed to recent changes in government water policies and rules as bigger market challenges.

"Government behaviour, particularly state governments, has had the biggest impact on water price," he said, specifically highlighting alterations to northern Victorian grower's water rights.

Water prices had lately settled to about $250/Ml and more favourable rainfall forecasts should help restrain prices into 2021, but he said the supply availability equation and demand priorities had changed immeasurably.

"The whole water market will need to rethink itself before anybody starts thinking about new planting intentions," he said.

"That's in regard to both the horticulture and broadacre sectors."

Paul Thompson

Paul Thompson

Select Harvests, which grows about 20pc of Australia's almond crop, managed to weather the drought with only a minor 0.4pc dip in yield estimates for the 2019-20 year.

The company's trees were in good health going into their dormant stage, and healthy bud formations augured well for the 2020-21 crop.

However, Mr Thompson said it was difficult to predict Select's likely water costs for the next crop given the changed water regulatory rules at play and considering allocation values had tripled in less than a decade.

The Australian Competition and Consumer Commission was also due to report its findings into water trading behavior due next week.

"We're not going to recoup the $9.6m in increased water costs we spent last season - we may get back $5m," he said.

The first half has delivered a good result considering the challenges of the drought and the disruption of the supply chain caused by COVID-19 - Paul Thompson

Total revenue for the six months to March 31 was 6.5pc down at $93.5m and operating cash flow slipped to negative $32m, although the second half was on track to deliver a strong positive cash flow result as the current harvest - now completed - was processed and sold.

Select's earnings before interest, tax, depreciation and amortisation were $34.5m, down 10.4pc on the same time last year.

"The first half has delivered a good result considering the challenges of the drought and the disruption of the supply chain caused by COVID-19," Mr Thompson said.

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Global demand for almonds remained solid, with Australia's total exports up 25.7pc in the 2019-20 marketing year, and 70pc of the current Select crop committed to sale.

Solid crop result

Harvest volumes and quality were consistent with 12 months ago at 22,600 tonnes, but margins had been undermined as COVID-19 woes, including shipping delays weighed on market.

The likelihood of a record US crop later this year after near-ideal growing conditions had also softened prices.

However, China, which in the past two years has grown rapidly as a customer to take almost a third of Australia's crop was steadily rebuilding its orders as that economy recovered from the pandemic.

India, which traditionally buys about 15pc of our crop and 12pc of America's massive exports, was also expected to rebound "relatively quickly" once its economy reopened for business.

Mr Thompson acknowledged recent friction which had emerged between China and Australia over beef and grain exports, but said the almond industry could not allow itself to be distracted from its focus on delivering the quality, healthy product Chinese consumers were clearly seeking.

Just a few years ago China bought only 5pc of the Select Harvests crop. Last year it took 30pc.

"We have to maintain an emphasis on being sure to supply a competitive product on time," he said

Select Harvests will pay an interim dividend of nine cents per share, fully franked - down from 12c a year ago.

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The story Select tips big water costs to linger after dry and COVID-19 cut profits to $17m first appeared on Farm Online.

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