GrainCorp shares surge on profit upgrade with wheat prices set to remain high despite Russia-Ukraine deal

A bumper crop combined with tight supply following Russia’s invasion of Ukraine has sparked GrainCorp’s second profit upgrade this year, sending its shares soaring.

Robert Spurway, the CEO of GrainCorp, says demand for Australian grain is strong amid a global supply crunch.

GrainCorp shares have soared as high as 10.3 per cent after the company upgraded its annual profit forecast for the second time this year as Russia’s protracted invasion of Ukraine continues to crunch the global supply of grains and oilseeds.

Chief executive Robert Spurway said the company was well placed to help meet global demand following another bumper Australian crop. He said GrainCorp was investing in additional bunker storage, with its “supply chains at close to full capacity”, to capitalise on the above-average harvest.

GrainCorp has lifted its earnings before interest, tax, depreciation and amortisation forecast to $680-730m this year – up from previous guidance of $590-670m. It expects to deliver full-year net profit of $365-400m – up from $310-370m.

The upgrade sent GrainCorp’s shares soaring up to 10.3 per cent to $8.43, before giving up half its gains to close 5.1 per cent higher at $8.03 on Wednesday.

“Our teams have done an outstanding job in overcoming disruptions relating to weather and Covid to export 7.9 million tonnes of grain year-to-date. We expect another well above average ECA crop in 2022/23 based on crop development we have seen to date, and a favourable three-month rainfall outlook,” Mr Spurway said.

GrainCorp is investing in extra storage capacity and grain handling equipment.

“This positive outlook is driving an increase in fourth-quarter activity and supporting export volumes, forward contracted grain sales and supply chain margins.

“In preparation for the upcoming harvest, GrainCorp is investing in additional bunker storage and grain handling equipment to maximise receival capacity at key sites across our network.”

Global wheat prices hit record levels earlier this year following 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, sparked fears of global food shortages and prompted a shift to alternative grain markets, with Australia – which is the world’s sixth biggest wheat exporter – a big beneficiary.

Already, the war in Ukraine has sparked a near fivefold jump in GrainCorp’s half-year profit, which 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.

In May, Mr Spurway said it will take years for the Black Sea region to recover from Russia’s invasion of Ukraine – even when hostilities cease – given “damage to infrastructure, and rail and roads in particular”.

Although Moscow and Kyiv struck an agreement last month to give grain shipments safe passage from Ukraine’s blockaded ports, offering some hope for boosting exports over time, many farmers have little faith the deal will hold.

The Marshall Islands-flagged Star Helena that left the Ukrainian port of Chornomorsk with a cargo of grain, transits the Bosphorus strait in Istanbul, Turkey. Picture: Getty Images

Like Mr Spurway, many farmers don’t expect a speedy recovery. Ivan Kriuchkov, who began harvesting last month said: “If all this ends soon, we get loans and the ports reopen, still Ukrainian farming will return to its previous levels very slowly.”

While global wheat consumption is headed for its biggest annual decline in years as customers source cheaper alternatives, Rabobank is forecasting above-average prices to continue for the next year.

“Temporary calm windows of opportunity will result in vessels leaving Ukrainian ports, which will likely cause price weakness. However, we expect that as long as Russia continues its invasion of Ukraine, a sustained flow of grain is unlikely and the cost of exporting via this corridor will remain high, both will keep prices elevated for the rest of 2022,” Rabobank said

But Royal Bank of Canada analysts said: “The recent recovery in global wheat supply and export expectations has triggered a material turn in commodity pricing and the investment outlook.

“Despite today’s upgrade (from GrainCorp) and what we expect to be some very strong results and capital management, the forward earnings trajectory is negative from FY23 onwards. We maintain our 12-month $8.50 price target and sector perform rating.”

Mr Spurway said GrainCorp’s processing and feeds, fats and oils businesses have also continued to perform well, benefiting from strong ongoing demand for crude and refined vegetable oils, and renewable fuel feedstocks such as used cooking oil and tallow.