Genus revealed that small growth in profits in the first
half of the year had gone into reverse as it flagged setbacks from the US hog
virus outbreak, and from the "sudden sharp drop" of pork prices in China.
The UK-based animal genetics group said that its underlying
pre-tax profits for the first 10 months of its financial year, which ends next
month, were "slightly lower" year on year, even excluding a dent from the
strengthening in sterling.
Genus profits grew 2% in constant currency terms in the
July-to-December period, the first half of its financial year.
The decline reflected a dent to hog genetics royalties in North
America, where porcine epidemic diarrhoea virus PEDv "is now estimated to have
affected over half the North American and Mexican swine herds".
"Despite record high hog prices, pig producers continue to
be cautious in committing to sow herd expansion while the virus continues to
spread," Genus said.
Although in the US higher hog weights have of late made up
for lower slaughter numbers, Rabobank last week forecast the country's pork
production falling 6-7% this year, with Mexican output seen tumbling 9.7%
thanks to PEDv.
'Sudden sharp drop'
In China, Genus highlighted the "unexpected sharp reduction"
in pork prices - which were in March 25% lower than in September on a
month-average basis, according to Rabobank – a decline which had pushed
producers "into losses" and prompted cutbacks in producer spending.
"The financial pressure on the industry caused by the sudden sharp drop in pork slaughter prices has led to delays in stockings and farm
expansions across the industry," Genus said.
The group, which has rated expanding in China as one of its
top priorities, said that it had put on hold a joint venture over which it
signed outline terms last year.
"We have decided to extend the period for completion of the
joint venture where Genus had signed a memorandum of understanding," Genus said,
although it added that "market volatility reinforces the need to share farming
risk through joint ventures while progressively adding capacity".
Beef and dairy
However, Genus said that its Asian sales rose 20% by volume,
in hog and cattle genetics, despite the China setbacks.
Group revenues had grown at double-digit rates so far in the
financial year, in constant currency terms, helped by strong beef and milk sectors.
"Market conditions for Genus's dairy and beef customers have
been favourable, supported by rising output prices for milk and beef," the
The company added that the pressure from PEDv and China's pork
sector weakness were expected to continue for the rest of 2014, with "performance
improvements gradually to come through in constant currency in the 2015
financial year, as these headwinds reduce".
Chinese market support
The comments come Beijing officials are attempting to
stabilise the domestic pork industry, a huge employer, with the meat itself a
large part of the Chinese diet, and viewed as having symbolic importance too.
The National Development and Reform Commission, which in
March moved to buy 65,000 tonnes of frozen pork for state reserves, last week
unveiled another round of purchases.
"The announcement is aimed at increasing pork prices to the
point where some degree of profitability is restored to the pig feeding sector
to reduce the risk of an accentuated pork price cycle, and further sharp price
rises, down the track," Australia & New Zealand Bank said.
Hog prices, which in April traded around four-year lows,
rose 18% week on week last week, "similar to the pattern last year, when the
government announced a round of pork buying in May 2013".
Then prices rose 20% in a week "before then stabilising for
Genus shares stood 3.1% lower at 1061p in afternoon deals in London, as the investors digested the deteriorated growth.
At VSA Capital, Edward Hugo noted that "having previously
forecast an improving rate of growth from 2014 onwards… Genus now expects
performance improvements to come through gradually in financial year 2015.
"Chinese expansion is clearly occurring at a much lower rate
than initially expected."
While VSA does not have a published rating on Genus shares, the
broker said that the company was trading at a forward price-earnings ratio of
23.9 "which we still feel is too high for a company likely to deliver a third
year of low-to-negative growth" in pre-tax profits.