Damage from Ukraine war set to last for years, lifting demand for Australian wheat, says GrainCorp

Even when hostilities cease, the war-ravaged country is expected to take years to recover, up-ending global markets.

Demand for Australian wheat is expected to remain strong, with ASX-listed grain handler GrainCorp saying it will take years for Black Sea exports to resume to normal levels as the region reels from Russia’s invasion of Ukraine.

Russia and Ukraine supply about a third of the world’s wheat, feeding billions of people via bread, pasta, noodles and processed foods. But damage to ports and other essential infrastructure of Ukraine’s Black Sea coast, sparking fears of global food shortages and prompting a shift to alternative grain markets, with Australia a big beneficiary.

GrainCorp’s half-year net profit has surged from $50.5m to $246m, prompting the group to lift its interim dividend by 4c as well as pay shareholders a special fully franked 12c dividend.

GrainCorp chief executive Robert Spurway said while the war in Ukraine had bolstered demand for Australian grain, the company’s higher profit reflected more favourable weather conditions from the La Nina weather phenomenon.

“If you look at these results, it‘s important to remember the disruption and Ukraine was actually only very, very late in the half,” Mr Spurway said. “Really, the results (are) benefiting from a second consecutive year of bumper crops, very strong demand for Australian crop grain off the back of drought in the northern hemisphere, and US and Canada in particular. That created the opportunities for margins given that demand.”

But Mr Spurway said it will take years for the Black Sea region to recover from Russia’s invasion of Ukraine – even when hostilities cease.

“If we look more specifically at the disruption in Ukraine and the Black Sea, it‘s very difficult to get accurate reports of exactly what’s going on other than there is a clear and developing humanitarian crisis in the Ukraine that could likely extend to other parts of the world who rely so heavily on grain produced in the Black Sea area.

“It‘s our view that that is likely to be disrupted for several years based on the fact that fighting is still underway, there’s been damage to infrastructure, and rail and roads in particular. So even despite the prospect of the farmers in the Ukraine being able to produce a crop, it will be some time before they’re able to resume a normal export program, given the infrastructure damage.”

GrainCorp is now investing across it terminals ahead of the 2022-23 harvest to “efficiently manage” high volumes from growers. It also launched a $30m venture capital fund on Wednesday to invest in agtech start-ups across Australia’s farming sector.

While pandemic isolation rules have created chaos across Australia’s food supply chains, putting pressure on inflation, Mr Spurway said GrainCorp has so far “shown incredible resilience”. “We‘ve exported four and a half million tons of grain in the half year, that sees us well on track to deliver between the eight and a half and nine and a half we’re forecasting for the full year,” he said. “We‘ve overcome the sorts of challenges that many participants in global supply chains have seen. And some of that is the fact that we’re predominantly a bulk exporter, relying on vessels that we charter and manage.”

The company’s revenues jumped 49.9 per cent to $3.84bn in the six months to March 31, while earnings before interest, tax, depreciation and amortisation surged to $427m from $140m the previous year.

GrainCorp is now expecting to deliver a full year net profit of up to $370m and earnings before interest, tax, depreciation and amortisation of up to $670m.

“You wouldn‘t have to go too far to find people that would comment that it’s been a very wet season in Australia. The soil moisture conditions across the greenbelt on the east coast creates the potential for another very large harvest,” Mr Spurway said. “We‘ve got growing confidence about the prospect of another very good crop on east coast Australia.”

The group lifted its half-year dividend from 8c to 12c a share, fully franked. This compares with last year’s interim dividend of 8c a share.

The company will also pay a special dividend of 12c a share in recognition of its “outstanding” half year performance. Both dividends will be paid on July 21.

Despite the lift in investor payouts, GrainCorp’s shares were trading 1.9 per cent lower at $10.36 in afternoon trade on Wednesday. This compared with a flat broader share market.

RBC analysts said GrainCorp’s dividend’s appeared low, representing a 22 per cent payout ratio. “Management has guided to a 50-70 per cent payout of ‘through the cycle’ NPAT, implying ’through the cycle’ NPAT is $40-55m,” analysts said in a note to investors.

Meanwhile, Wilsons analysts said: “Favourable early season conditions for east coast winter cropping significantly reduces lower tail risk on crop volumes”. “Our forecasts currently assume crop volumes in line with historical average,” Wilsons said in a note to investors.

The dividends are on top of the planned on-market share buyback of up to a maximum of $50m, which GrainCorp announced last November and is expected to begin shortly.