Genus shrugs off China hit, unveils Cargill tie-up

Genus reaffirmed its faith in China's hog industry, announcing a tie-up in the country with a Cargill-backed business, even as it blamed "very poor" conditions in the market for a disappointing performance.

The animal genetics group - which in May ditched a pig production tie-up in China with Yunnan Shennong Agricultural Group because of "adverse market conditions" - on Wednesday unveiled a joint venture in the country with River Stone Farm to exploit "long-term potential growth".

River Stone Farm is a joint venture between US-based Pipestone System, which manages 170,000 sows on 40 production units in Minnesota, and Cargill's Black River Asset Management investment business .

Through River Stone - which runs four breeding farmers in Shandong, eastern China, with capacity for producing more than 600,000 market pigs a year - Genus said it would "be able to access more than 10,000 grandparent gilts a year for sale to large-scale integrated producers".

Karim Bitar, the Genus chief executive, said that the deal represents an "important milestone" on a strategy of boosting capacity in China, "whilst reducing the upfront investment and exposure to commodity risk".

'Very poor market conditions'

Mr Bitar added that "as the largest market for pork globally, we continue to see long-term growth potential in China".

The forecast comes despite the group blaming China for a halving to £6.0m in operating profits at its Asian operations in the year to the end of June, on revenues down 16% to £46.5m.

Volume growth of 9% in China was "below market expectations", and reflected "very poor" market conditions.

"Pork prices fell by more than 25% in the first few months of 2014, causing producers to lose up to £50 per pig" in the January-to-June period, the group said.

This significantly reduced the larger producers' planned expansion projects and the demand for breeding stock," while prompting the closure of less efficient farms, and causing a drop of some 4m head, or 8%, in the Chinese sow herd so far this year, according to official data.

'Learning to cope'

However, the decline in the sow herd has, in reducing production potential, made "stronger prices likely in 2015", Genus said.

"There is evidence that [market] conditions are improving."

And with North American hog producers "learning to cope" with the porcine epidemic diahorrea virus (PEDv) outbreak, which has badly hurt their performance over the past 18 months, and low grain prices helping livestock margins, "we are cautiously optimistic that 2014's challenges are starting to abate", Mr Bitar said.

"Although some headwinds remain, our business is positioned to accelerate growth and we expect to perform in line with expectations in 2015."

Market reaction

The group's overall pre-tax profits for the year to the end of June fell 8% to £39.3m, reflecting a hit from a strong pound besides the China business, with other operations, particularly bovine genetics, showing profits growth.

The data received a tepid response from London broker VSA Capital which said that "in our view 2015 doesn't look likely to produce a huge step forward in performance, with the board expecting to perform in line with market expectations".

With the group facing "a third year of low-to-negative growth", but its share trading at a multiple of 22.8 times earnings, "we remain negative on the stock".

Nonetheless, the shares stood 1.4% higher at 1151p in morning deals in London.

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