SLC Agricola underlined the potential for a late-running
battle between Brazil and the US in soybean exports as it highlighted its
willingness to delay crop sales rather than pay the elevated freight costs
needed to sell during peak season.
The farm operator, which controls 3,800 square kilometres of
Brazilian farmland, flagged as a "point of concern" the "significant increase
in freight prices" in the country, which have topped R$300 ($150) a tonne for
shifting soybeans from the main growing state of Mato Grosso to port.
Freight costs have been raised by a cocktail of factors,
including a limit on truck drivers' hours of eight hours a day, and rising
diesel prices, which were increased last week for the fourth time since
Meanwhile, road delays – with the queue to unload at one of
the three Mato Grosso rail terminals reaching 60 kilometres last week, let
alone the waits at port – have tied up large portions of the Brazilian truck fleet,
also raising costs.
SLC said it had lowered its exposure to the problem by
selling part of its crop with the freight costs locked in, leaving merchants to
pick up the tab.
However, the group also stressed that for "the portion of the
crop that has not yet been sold, the company has the option of storing the
product in its own silos to await a more opportune moment in terms of freight costs".
Delaying sales would risk obtaining a lower gross price,
with many forecasters believing that world values will decrease approaching
what is currently expected to be a bumper US crop.
Indeed, there are growing ideas that, following their
logistics-hampered start to export this year, the peak season for Brazilian soybean
shipments will extend beyond the normal period, clashing with the seasonal
pick-up in US shipments, and, according to some commentators, putting extra
pressure on prices
SLC Agricola planted one-third of its soybeans with
super-early varieties aimed at tapping the early market and given extra time
for the sowing of follow-on crops of corn or cotton.
In Brazil, it is common practice to split soybean crops
between super-early, early and conventional varieties to spread harvesting, and
the risk of weather damage.
The group also revealed that it had sold some 62% of its 2013
soybeans ahead, at an average of $13.75 a bushel, compared with 55% sold ahead
a year before.
For cotton, forward sales totalled 75% of the estimated
crop, at 87.66 cents a pound, up from 68% a year ago - at a price of 103.0
cents a pound, which helped protect the group from the slide in New York futures
below 80 cents a pound for most of the year.
Indeed, the cotton hedging, "which guaranteed positive
margins", helped limit to 0.5% the decline, to R$290.3m, in SLC Agricola's underlying
earnings before interest, tax, depreciation and amortisation in 2012, despite a
weather hit harvest.
After-tax earnings tumbled 76% to R$38.4m, reflecting higher
prices of soybeans, which in Brazil are used as a metric for land valuations,
and therefore the value of debt SLC owes on farm purchases.
The group, whose harvests last year "were heavily impact by
weather conditions, especially the severe drought in western Bahia and the heavy
rains in Mato Grosso and Mato Grosso do Sul", said that a lack of moisture had
hurt crops currently being harvested too.
"For the 2012-13 crop year, we once again are experiencing
drought conditions in the states of Bahia and Piauí – the second straight year
of such conditions, which is atypical for the region."
The drought has cut hopes for the group soybean yield by
4.8%, and by 7.2% hopes for the cotton yield.
The yield downgrades were viewed by analysts at Itau BBA as more than offsetting the "positive" of the advance hedging positions made "at attractive prices".
The bank forecast that SLC Agricola earnings before interest, tax, depreciation and amortisation in 2013 would fall 6% below its previous estimates if the yield fears prove justified.
However, the bank retained an "outperform" rating on SLC stock, saying that "there is more
upside risk in land
triggers", such as an uplift in the value of the group's portfolio, "than downside risk in
current earnings estimates.
"The stock is still trading at a considerable
discount to its net asset value of R$27.3 per share, which we find
The shares closed 0.8% lower at R$19.06 in Sao Paulo.