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Potato farming a 'bright light' in UK ag, says Produce Investments

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The potato sector will prove a "bright light" of a UK agriculture sector facing weak prices of the likes of grains and dairy, leading packer Produce Investments said, as it unveiled a rise in its own underlying profits.

While the main UK potato harvest is still in its early stages - with 38,000 hectares cleared as of last weekend, according to the AHDB bureau - "growing conditions experienced so far… would point to an average quality crop and yield", said Angus Armstrong, the Produce Investments chief executive.

He noted "a wet and late spring followed by reasonable summer temperatures".

While planted area has risen by an estimated 4.3% from 2015-16, when UK potato output eased by 5.4% to 5.43m tonnes, "we are looking at a balanced market", Mr Armstrong told Agrimoney.com.

According to Kantar, UK potato volumes rose by 1.4% last season, albeit declining 0.7% by value.

'One of the bright lights'

"We have got supply and demand pretty well adjusted," Mr Armstrong.

"We do not see a great oversupply, but there is enough crop to go around."

The dynamics suggest "returns will be OK for farmers. Growers will be OK this year," he said.

"The potato sector will be one of the bright lights in [UK] agri this season," which has been blighted for many other parts of the industry by low prices for, for example, milk wheat – albeit with some support to values of exported produce provided by the dent to sterling from the UK's decision to leave the European Union.

Many farmers are still smarting from dismal 2015, when total income from the sector in the UK tumbled by 29% to £3.77bn, according to data from farm ministry Defra, which blamed the decline largely on agricultural commodity price weakness.

Price prospects

Potato prices have actually risen somewhat over the last year, estimated by the AHDB at an average of £166.73 a tonne as of last week, a rise of 10.7% year on year.

Free-buy potatoes - that is, those not grown under contract – are achieving £183.48 a tonne, a rise of 18.4% year on year.

Still, given the balanced market, growers should not bank on free-buy prices showing a hefty premium.

"Whilst it is still early in the season and therefore difficult to make predictions, we would expect prices for non-contracted free-buy potatoes to be in line with those that have been contracted," Mr Armstrong said.

'Extremely competitive'

The comments came as Produce Investments – whose operations include potato packer Greenvale, grower Jersey Royal and the Rowe Farm daffodils business - unveiled an operating profit of £9.21m for the year ended June 25, a rise of 14.6% year on year, on revenues up 3.7% at $185.1m.

However, earnings fell by 40% to £3.32m, a reflection of a one-off charge of £4.63m to account for a product recall at its Swancote business and the cost of closing a Kent packing site.

Barrie Clapham, who revealed he was to stand down as group chairman after more than 10 years in the post, said that the group, which includes some major UK supermarket chains among its customers, expected "the retail environment to remain extremely competitive".

However, a new supply contract, which transfers to customers some of risks of famously volatile potato prices, meant the group was "better placed to deal with any external pressures".

Broker reaction

House broker Shore Capital termed the results "excellent", although "in line with expectations".

Produce Investments has "benefited from a more stable [potato] market", and "from the recovery in the volume performance of its core [supermarket] customers as their fresh produce product offering in general has become increasingly competitive compared to that of the discount channel", the broker said.

Shares in Produce Investments were trading at a multiple of 6.1 times group earnings for the year to June 2017, or 4.0 times as a multiple of ebitda (earnings before interest, tax, depreciation and amortisation) to enterprise value, on Shore Capital estimates.

"Given that Produce now appears to be entering a new chapter in its development post riding out the storm in the some particularly challenging years, we believe this looks to be an attractive valuation," Shore Capital analyst Phil Carroll said.

Produce Investments shares stood 3.2% higher at 153.75p in lunchtime deals in London.

By Mike Verdin

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