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China trade, corn reforms return China Agri-Industries to profit

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China Agri-Industries unveiled a return to half-year profit, helped by "market intelligence" and Chinese ag subsidy changes and trade clampdowns – although it cautioned over the lapse of one tailwind, on state support corn processing.

The Hong Kong-listed group - a subsidiary of Cofco, the Chinese state-owned ag trading giant – revealed earnings of HK$1.21bn for the January-to-June period, a sharp improvement on the HK$292.3m loss reported a year before.

Revenues rose 9.0% at HK$44.43bn, "as a result of price recoveries in oilseeds products and fuel ethanol".

And the oilseeds processing division, which returned to the black, and the biochemical and biofuels division, which saw operating profits jump five-fold to HK$753.6m, were behind a jump in group operating profits too.

'Market intelligence'

The group said "market intelligence" had helped its oilseeds processing division report a profit of HK$425.6m, compared with a HK$404.0m loss a year before, with traders making timely decisions on oilseed purchases and sales of crushing products.

Against a backdrop of rising Chinese soybean imports and crushing capacity - and a "slow recovery of the domestic livestock feed industry [which] kept a cap on" prices of processing products - "profit margin for the industry narrowed from the peak level at the beginning of the year", the group said.

However, China Agri-Industries said that, "anticipating" the market conditions, it "accelerated the signing and execution of contracts while the market was still favourable.

"Both measures helped to support the bottom line."

The group also supported by margins by raising capacity utilisation, reporting a 1.5% rise to 3.66m tonnes in sales of oilseed meals, and a 6.2% increase to 1.82m tonnes in volumes of vegetable oils.

Favourable reforms

The biochemical and biofuels division, meanwhile, was helped to a jump to HK$753.6m in operating profits, from HK$153.7m a year before, by the market impact of a series of Chinese subsidy and trade reforms.

An end to the country's guaranteed corn scheme, which has undermined market values, meant that "cost pressure was eased for processors" of the grain.

Meanwhile, China Agri-Industries flagged "increased demand" for corn-based sweeteners, against a backdrop of hefty tariffs introduced in May on out-of-quota sugar imports.

And, thanks a reduction in imports of distillers' grains (DDGs), after Beijing slapped large tariffs on purchases of the corn-based feed ingredient, from the US, as well as improved oil prices, "the biofuel business was able to scale up and improve profitability", the group said.

DDGs are manufactured as a byproduct of making ethanol – a commodity on which China has also raised duties this year, removing a preferential import tax for US and Brazilian shipments and reverting to a normal rate of 30%.

Processing grant lapses

But China Agri-Industries flagged a setback to its outlook from the loss of one fillip, with the "expiration of government grants for corn processing", which Beijing introduced, alongside farm subsidy reforms, to encourage erosion of the country's huge corn stockpile built up through the guaranteed pricing scheme.

The group also said that "challenges will remain in price fluctuations in the oilseeds market".

However, it also flagged a boost to its prospects from a strategy of expanding into consumer food products from the less specialist markets it has historically focused on.

"As the domestic consumption is becoming more important as major growth driver, agricultural products will continue to see more demands for high-end products featuring nutrition, health, flavour and functional differentiation.

"Price sensitivity will play a less important role in consumer decisions, signalling new growth opportunities for added value and profitability."

China Agri-Industries shares closed up 0.9% at HK$3.52.

By Mike Verdin

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