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Nufarm scouts for deals - and flags Australia's need for rains

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Nufarm underlined the need for rains for both crops and demand for the likes of sprays in its home Australian market, as the agrichemicals and seed group unveiled a rise in earning and an appetite for deals.

Greg Hunt, chief executive of the Victoria-based group, said that "things are very dry in most of New South Wales and southern Queensland", meaning that these key eastern Australian growing districts "need to get rainfall in the next sort of 4, 5, 6, 8 weeks… to get a decent summer crop".

"Rest of the country generally speaking is average to below average," with northern parts of Western Australia, the top grain-growing state, "quite dry, which is why you're seeing some of the commentary now that the winter crop this year will be down around 30% than what it was last year".

Many commentators are forecasting an Australian wheat harvest of some 20m tonnes this year, down from last year's record 31m-tonne result, which was helped by unusually ample rains.

"Hopefully, one of these days, we're going to get back to what is a normal -- or what one might consider as normal seasonal conditions in Australia," Mr Hunt said.

'Declining crop forecasts'

The comments came as east coast wheat futures extending their rally, adding 1.0% to Aus$296.00 a tonne in Sydney for January delivery, a seventh successive session of gains, and taking headway so far this month to 17.0%.

"The market is still catching up with declining crop forecasts in eastern Australia," said Tobin Gorey at Commonwealth Bank of Australia.

"That makes more people short which, in this context, means that trading is about getting the deal done and not about the price – the fear would be that the price will only get higher."

'Rains are needed'

Mr Hunt flagged the importance of rains for Nufarm's own growth prospects in Australia, saying that while in the new financial year, which started last month, the company was expecting to "see sales and production volumes improve" in the country, it performance would be dependent in part on weather.

"Spring and summer rains in northern New South Wales and Queensland are needed to generate demand for crop protection products in the summer cropping period," he said.

In the year to the end of July, growth of 9.9% to Aus$47.0m in operating profits in the group's Australia and New Zealand division, on revenues up 18.1% at Aus$654.2m, defied setbacks from dryness, with June "the driest on record in many parts of the country.

"The dry conditions reduced product demand, which led to pricing pressure across the market," Mr Hunt said.

'Revenue growth, margin expansion'

Excluding one-off factors, Nufarm reported a 25% jump to Aus$135.8m in earnings for the financial year.

Besides a revenue rise of 11.5% to Aus$3.11bn, the growth in earnings also reflected a boost to margins from a three-year cost saving scheme.

"The company's performance improvement programme – initiated in 2014 – has reduced the fixed cost base of the business, lifted profitability and enhanced Nufarm's competitiveness," Mr Hunt said.

For the newly-started financial year too, "the combination of revenue growth, margin expansion and additional cost savings benefits is expected to result in earnings growth".

'Actively assessing opportunities'

Mr Hunt added that the improved performance meant that Nufarm was "positioned to capitalise on the many opportunities evolving in the global agricultural space", amid a wave of deals in the agrichemicals and seeds sector, such as the Dow-DuPont and Bayer-Monsanto tie-ups.

"The company continues to remain alert to potential acquisitions that might result from the current round of industry consolidation."

The merger wave, which is seeing the global majors put some businesses put up for sale as part of the process of gaining regulatory approval for deals, "gives rise to opportunity for us to secure assets that will strengthen our position in core crops and geographies or add new growth platforms in our seeds business".

Mr Hunt said that Nufarm was "actively assessing opportunities, but we'll be very disciplined.

"We remain interested and engaged in that process. We are considering a number of opportunities."

Nufarm shares closed down 2.5% at Aus$8.76 in Sydney.

By Mike Verdin

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