Americans are being driven to drink – more craft beer (and spirits like bourbon whiskey) it seems and as a result GrainCorp says it is enough to more than offset the impact of the East Coast drought on its business.
Just why Americans are drinking more craft beer (which has boosted demand for malting barley produced by GrainCorp) is an open-ended question. A hot summer, the sideshow with President Trump in Washington, or the looming mid-term elections.
GrainCorp said in an earnings guidance update on Thursday that higher demand for malt from brewing and distilling had helped it raise its underlying net profit guidance range from between $50 million and $70 million to between $60 million and $75 million.
That news saw GrainCorp shares jump more than 6% to nearly $8, before settling back to close up 1.5% at $8.01 in a very negative market on the ASX yesterday.
Away from its improving malt business, CEO Mark Palmquist noted conditions were more challenging.
“The benefits of our diversified business model are again being demonstrated in the face of the substantial drought challenges in eastern Australia,” Mr. Palmquist said.
“These conditions have slowed export volumes as farmers and the domestic market move to secure supplies.”
Mr. Palmquist said Graincorp expects a considerable decline in grain production in eastern Australia, with production again skewed to Victoria and southern NSW.
GrainCorp has little presence in the WA grains sector where a bumper season is being forecast.
Besides the malt business, Mr. Palmquist said that the company had also benefited from its international grain trading book while the Liquid Terminals businesses also performed strongly.
“(W)e have made good progress in the Foods unit within GrainCorp Oils. However, the Grains business experienced ongoing challenging operating conditions in eastern Australia.
“The benefits of our diversified business model are again being demonstrated in the face of the substantial drought challenges in eastern Australia. These conditions have slowed export volumes as farmers and the domestic market move to secure supplies,” Mr Palmquist said in yesterday’s statement.
“The Malt business has had a strong second half FY18, with a full contribution from the new plant in Pocatello, Idaho, the company said yesterday. “The business continues to operate at high utilisation, servicing a broad mix of brewing and distilling customers globally. Demand for specialty products in the craft beer and distilling sectors continues to grow and GrainCorp Malt is well positioned to participate in these markets.”
“Since GrainCorp’s half-year results on 11 May 2018, cropping conditions across the east Australian grain belt have deteriorated substantially, with large areas of New South Wales and Queensland in severe drought. Winter crop hectares planted were reduced and yields may continue to decline if the season progresses without decent rainfall in coming weeks.
“We expect a considerable decline in grain production in eastern Australia in FY19 with production again skewed to Victoria and southern New South Wales,” Mr Palmquist said. “We continue to respond to the deteriorating outlook by adapting the network to better match the size and location of the crop and keeping a strong focus on operating cost control, asset utilization and disciplined capex allocation.”
“It is an extremely challenging time for our grower customers. Many of our own people live and farm in these communities and we keenly feel the difficulties they are going through,” Mr. Palmquist said.
“Due to the small crop outlook, GrainCorp’s take-or-pay rail contracts will again present a significant challenge for the Grains business with tight supply and limited export volumes anticipated in the year ahead. These rail commitments expire at the end of FY19, with the new rail contracts coming into effect in FY20 and providing greater flexibility to manage transportation costs through the crop cycle,” the company said yesterday.