Adecoagro Downplays Losses to Argentine Drought – Even as Exchange Slashes Crop Forecasts

(Agrimoney) –  Adecoagro downplayed the impact of Argentina’s drought on its own crops, even as the Rosario grains exchange slashed its forecasts for the country’s corn and soybean output, citing heavy yield and acreage losses.

The New York-listed group, which has the Qatar Investment Authority as its top shareholder, acknowledged that “Argentina has been experiencing a drought with rain levels below historical averages.

“Argentina´s Humid Pampas, the country´s corn belt region, along with the north east region are amongst the most affected by the dry weather.”

However, Adecoagro said that the impact of the dryness had been “partially mitigated thanks to both our geographic diversification strategy and no-till production”, with cultivation methods which fail to disturb the soil enhancing moisture retention.

‘Mild impact on yields’

The group – which controls 230,000 hectares of Argentine farmland spread across six provinces, besides owning less extensive operations in Brazil and Uruguay too – said that for its 58,277 hectares of soybeans “crop development has been diverse, according to the region.

However, it added that “we are expecting adequate rains and hence, only a mild impact on yields”.

For corn, Adecoagro said that its early-seeded crop, planted in September-to-December, “grew under good conditions and was much less affected by the lack of rains.

“Soil humidity was adequate during the development of the crops, favoured by abundant rainfalls during last year.”

Nonetheless, “the late corn planted areas have been more exposed to dry weather and need to receive rains over the next weeks”.

‘Uninterrupted lack of rain’

The comments followed a report from the Rosario grains exchange showing far worse prospects for Argentina’s crops overall, thanks to the “uninterrupted lack of rain that characterised the summer”.

The exchange slashed by 6.5m tonnes to 40.0m tonnes its forecast for Argentina’s 2017-18 soybean production, reflecting expectations that 1.1m hectares of the 18.1m hectares of the oilseed sown would not make it to harvest, and a downgrade in the yield estimate of 0.32 tonnes per hectare to 23.6 tonnes per hectare.

For corn, the production estimate was cut by 3.0m tonnes to 32.0m tonnes, reflecting in part expectations that 1.07m hectares of seeded crop will not be cut for grain, and also a cut of 0.45 tonnes per hectare to 5.98 tonnes per hectare in the yield estimate.

Separately, the Buenos Aires grains exchange reported 73.6% of corn in “poor” or “very poor” condition, up 4.9 points week on week, with the soybean figure at 78.9%, easing 0.2 points week on week.

The exchange stood by expectations for a 42.0m-tonne soybean crop, and 34.0m tonnes corn harvest.

Commodity hedging

For Adecoagro, broker BTG Pactual said that “initial projections suggest that [the group] may suffer up to a 10% cut in its 2018 soybean and corn output due to the drought, which could lead to an estimated $5m impact” on earnings before interest, tax, depreciation and amortisation (ebitda).

Adecoagro data on crop hedging show that it had sold forward 116,830 tonnes of soybeans for 2017-18, in line with a comparative figure a year ago of 110,224 tonnes.

For corn, however, forward sales had slowed to 85,422 tonnes, from 114,845 tonnes a year ago, even though the group has scheduled an extra 11,000 hectares or in seedings of the grain.

The hedging data, accurate as of the end of December, also show that Adecoagro speeded up forward sales of sugar from its Brazilian cane crushing operations, with 360,426 tonnes hedged, at 16.7 cents a pound, well above the current market price.

A year before, it had sold 232,918 tonnes, albeit into a strong price, with the group hedging at an average value of 18.6 cents a pound.

Adecoagro is already hedged at a decent 16.7 cents a pound, about 30% above the spot price, for close to 50% of estimated 2018 sugar output, which should secure decent margins,” BTG Pactual said.

Too much rain

Adecoagro reported earning down 59% at $4.94m for the October-to-December period, on revenues down 17.0% at $275.6m, depressed in the main by a 34% tumble to $172.1m in sales by the cane crushing operation, following wet weather.

“The fourth quarter of 2017 was marked by abundant rainfalls in the Centre South region, which generated disruptions and delays in harvesting operations,” the group said, reporting a 29% drop to 2.2m tonnes in cane processing volumes for the period.

“Lower crushing volumes are reflected in a 34.3% decrease in sugar and ethanol production.”

However, the “unharvested sugarcane as of December 31 remains on our fields and is expected to be harvested during 2018”.

Broker Reaction

The results were termed by BTG Pactual as “uninspiring”, and short of the broker’s forecast.

However, noting the above-market sugar price Adecoagro has locked in, the broker said it was “still confident in our $300mn 2018 ebitda estimate, which could still be revised upwards if Adeco delivers on land sales”.

Adecoagro stock “seems undervalued”, the broker added.