McGrathNicol working capital report: agriculture among revenue winners but cash tied up in inventories

Ag companies performed well in 2021 but their funds were tied up in inventories. See what a McGrathNicol report found.

Agriculture, food and beverage companies have largely generated higher revenue during 2020-21 but most of their cash has been tied up in working capital to run their businesses.

Much of that tie-up was a function of higher inventory levels, particularly for exporting companies, which had difficulty shipping their produce during the Covid-19 pandemic.

Supply chain management remained an important factor affecting their fortunes in the immediate future.

That’s some the findings of the chartered accountancy firm McGrathNicol Advisory in its ninth annual report on the working capital of 137 companies listed on the Australian Securities Exchange across seven industry sectors.

McGrathNicol Advisory partners and report co-authors Jason Ireland and Sean Wiles looked at the performance 11 agricultural companies, which included Elders, GrainCorp, Ricegrowers, Ridley Corporation and Treasury Wine Estates.

Many Australian food and agricultural companies face difficulties getting their produce to overseas markets, according to a McGrathNicol report.

Dairy companies Bega Cheese, Bubs Australia, the a2 Milk Company, Synlait Milk and Freedom Foods Group were among 10 companies in the food a beverage sector, which also included Domino’s Pizza Enterprises and Blackmores.

The agriculture sector ranked highest in company revenue rises during 2020-21, alongside the mining and retail sectors.

Mr Wiles said 73 per cent of the agricultural firms sampled reported revenue growth but only half increased their earnings, mostly due to rising labour and transport costs associated with Covid-19 biting into their margins.

He said inventory levels rose in 2021 for some companies, tying up working capital, but it was sometimes a case of two halves of the year.

Companies such as Treasury Wine Estates and the a2 Milk Company were able to reduce their inventories in the second half of 2021 with astute management.

Mr Ireland said agricultural firms normally had very intensive working capital requirements, which meant they had less cash available to use in capital works and other areas.

“It is one that needs very careful management, even in a year when conditions for that sector are good,” he said.

Mr Ireland said Australian food and beverage companies held more inventory than their counterparts in the European Union, Asia and North America.

That was partly a function of northern hemisphere countries opening up their economies quickly after the main Covid wave had passed but also due to their proximity to markets.

“It’s a tighter cycle here in Australia; they carry more inventory,” he said.

“It takes longer for suppliers to get her and longer to get to the customer.

“It’s a distance issue.”

Mr Ireland said financial recovery in 2022 might not be as quick as food and agricultural companies hoped.

“The economy will open up, demand should be fine, but how you manage your cash and working capital will be really important for companies to be able to take advantage of opportunities,” he said.