Just as a butterfly flapping its wing in the Amazon supposedly causes an earthquake in Japan, the prolonged Californian drought is directly affecting two specialist local agri-plays, one listed and the other aspiring to do so.
With a $500 million market valuation, Select Harvests (SHL) is the country’s second-biggest almond grower behind Singapore’s private Olam International. Murray River Organics, which is spruiking ahead of a planned listing, is the world’s biggest producer of organic sultanas, currants and raisins. MRO, which raised $20m in two pre-IPO rounds, plans to list in late November, but has yet to produce a prospectus or quantify the amount sought.
The “currant” market for these dried table grapes is not huge: a sultana is more likely found in a Brunei palace than on a plate.
But there’s a powerful “raisin d’etre” driving founders Erling Sorensen and Jamie Nemtsas: to emulate the runaway performance of $1.3 billion market cap organic baby food maker Bellamys (BAL).
The common theme, of course, is the demand for unadulterated food for Asia’s teeming middle class (although Sorensen says the company is not reliant on the Chinese market and sees just as much growth in Western markets). In any event, it helps to have one’s rivals on their knees.
A major table grape producer, California is in its fifth year of drought and conditions are only sporadically improving. The big dry has devastated the local industry, prompting farmers to pull their water-intensive vines.
Sorensen says the drought is having a “secular”, rather than cyclical impact: “the farms are unlikely to go back to vines as it is incredibly capital intensive.’’
Founded from a base of one 28ha farm, MRO now accounts for 1700ha of vineyards in the Riverina area, much of the ground purchased below inherent market value.
By 2022 MRO expects to produce 8500 tonnes of organic fruit, one-third of current global demand. “We own the land and the supply chain all the way to the customer,’’ he says.
While MRO is eyeing Asia, its biggest customer is the US, notably Aldi here and Costco in Taiwan.
While synonymous with school kids’ lunches — and usually discarded in favour of chips — the wizened grapes are more widely used in commercial baking and cereals.
For Select, it’s been more a case of surfing the tightening almond price, but then suffering a partial share wipe-out as traders built up excess inventories.
Californian growers account for 80 per of the world’s almond supply, which is not exactly a sliver of market share. Select plans to exploit the disruption by increasing its almond output by 46 per cent over the next eight years.
Almond demand is influenced by India, where the nut is used in curries and presented as gifts in the upcoming festival season.
When the almond price peaked at $US9 a kilogram in 2015, Indians substituted for other nuts, but re-entered the market after the price fell back to $7.80kg.
Select, which reports on August 27, has guided to a $8kg average price in 2016-17 (assuming a US72c exchange rate) with volumes increasing from 13,700 tonnes to 14,000 tonnes.
Select Equities analyst and Select fan Mark Topy says the market, which is not exchange traded and has little transparency, experienced a “major disturbance’’.
“We do not see the price swings as related to the long-term underlying demand and expect more typical market conditions will lead to price stability returning.’’
Topy says the Californian supply constraint is ongoing, because 35 per cent of the orchards will need to be replaced because the trees have exceeded their productive life of 20 years.
Select Harvest in May reported the biggest US grower removed about 4000ha — 25 per cent of its portfolio — with a likely 14,000ha pulled across the industry. This number is expected to double next year.
Topy expects Select to report a normalised net profit of $35m, below the previous bumper $59m. Topy credits current management from reinventing the company since its alliance with the failed management investment scheme Timbercorp, which resulted in years of woe for Select.
Almonds need sandy loam and are grown here and the US (California), as well as Turkey, Morocco, Iran and Spain.
While a drought plays havoc on the water-intensive trees, when things go right the producers’ fortunes soar.
Meanwhile, the MRO listing will be a key test of investor appetite for new food plays.
most recently tested with the backdoor listing of Maggie Beer’s culinary empire. A2 Milk (A2M), Freedom Foods (FFP) and Capilano Honey (CZZ) have all tapped the Zeitgeist.
“People seem to like what we’re doing,’’ Sorensen says.
“The thematic of organic food is a strong one.’’
He adds that weather will play a key role in the company’s fortunes, with too much rain at the wrong time just as hazardous as too little.
Speaking of which, Goldilocks conditions in hitherto parched Queensland grazing regions has been manna for Australian Agricultural Co. (AAC), which is also benefiting from soaring beef prices and the commissioning of its Darwin abattoir.
Shares in AAC, our oldest agriplay, have risen 70 per cent in the last six months.
Forecast higher grain receivals also spells weather-related relief for our biggest listed agri-stock, GrainCorp (GNC).
Despite that, GrainCorp shares remain under pressure following this month’s abortive attempt by Archer Daniels Midland to dispose of its 19.9 per cent stake.
Sadly, management has little control over the weather or the intentions of its largest shareholder.
The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not hold shares in the stocks mentioned.
SHV Price at posting:
$6.77 Sentiment: None Disclosure: Not Held
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