Farmers tighten spending and PGG Wrightson's profit drops

PGG Wrightson’s [NZX: PGW] first half profit dropped 19% as low dairy prices and fear of an El Nino drought contracted farmer spending.

Profit fell to $16.1 million, or 2.1c a share, in the six months ended December, from $19.7 million, or 2.6c, in the year earlier period.

Revenue fell 4.8% to $623 million, while the cost of sales slid 6.9% to $462 million.

Farmers have tightened their wallets after milk processors cut their farmgate milk payouts below the cost of production as a global oversupply lasts longer than anticipated. Fears of an El Nino drought heading into summer also kept farmers cautious with their spending.

"Low dairy prices, and the perceived risk of drought from El Nino conditions led to more conservative spending from PGW's farming customers in New Zealand," says chief executive Mark Dewdney.

The company says tough market conditions could mean its full-year earnings will be pushed towards the lower end of its forecast range of $61-67 million in operating earnings before interest, tax, depreciation and amortisation.

"While the sentiment in the dairy and sheep meat sector has deteriorated over the last three months, there is strong confidence in the horticulture-based sectors that will provide further opportunities for growth," Mr Dewdney says.

Fears of widespread drought have receded following regular rainfall since the start of the year, although the company's livestock business will probably be hit by lower trading volumes in the second half of the year after fear of dry conditions prompted sheep farmers to process more of their animals in the first half, he says.

"Falling commodity prices have replaced El Nino at the top of the list of things attracting attention. Although commodity price movements have been mixed, the outlook for dairy prices in particular remains extremely challenging."

In the first half, profit at Wrightson's rural services unit slid 14% to $19.8 million as revenue dropped 4.3% to $449.8 million.

Within the rural services unit, retail profit edged up 0.2% to $17.1 million even as revenue slipped 2.4% to $306.6 million as horticulture and its fruitfed businesses improved.

However, the livestock unit turned in a loss of $322,000 from a profit of $2.3 million in the year earlier period as revenue dropped 27% to $30.3 million due to a lack of live cattle exports. Domestically, higher cattle and sheep tallies offset a decline in sheep prices and dairy volumes.

In the company's other main unit, the seed and grain business which operates in New Zealand, Australia and South America, profit slumped 30% to $3.7 million as revenue dropped 8.8% to $167.5 million.

"Our South American business has experienced a challenging start to the year with some very wet weather and falling soybean prices reducing demand for seed and ag chemicals," Mr Dewdney says. "This was, however, offset by another strong result from our New Zealand seed business."

Wrightson will pay a dividend of 1.75c per share on April 5, down from a payment of 2c in the year earlier period.

Its shares dropped 1.2% to 41c. The stock is rated a 'hold' according to the average of three analyst recommendations compiled by Reuters.

(BusinessDesk)