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Rains spur Argentine soy yield hopes - but bring 'complications' too

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Adecoagro flagged the upside of Argentina's heavy rains, in boosting soybean yields, even as the Buenos Aires grains exchange braced to upgrade its crop forecast – although the wetness may yet have a sting in its tail.

Adecoagro, the sugar-to-cotton producer in which George Soros's Soros Fund Management is a major investor, revealed it had been prevented by "excess humidity" from planting some 5,000 hectares of crops.

Indeed, "excess rains caused flooding and damages" in parts of Argentina, including the north west of Buenos Aires province, where it operates a number of farms.

The group's main crop soybean sowings had, at 55,200 hectares, fallen some 5,600 hectares short of target, and first corn plantings dropped 1,500 hectares, with the area made up somewhat by later-crop seedings.

'Vital for crop flowering'

However, the moisture had meant the condition of crop which did make it into the ground, with the group's plantings totalling 225,000 hectares, was in "very good" condition.

Argentina soybean harvest estimate, 2016-17

Rosario grains exchange: 56m tonnes

USDA: 55.5m tonnes

Buenos Aires grains exchange: 54.8m tonnes

IGC: 54.5m tonnes

The comments came as the Buenos Aires grains exchange said that, while it was sticking for now with a forecast of 54.8m tonnes for Argentina soybean output in 2016-17, a "positive trend in yield expectations" had left it open to raising its forecast.

"After recent rainfall, we estimate that 70% of national soybean area is developing in good-to-optimal soil moisture conditions," the exchange said.

'Complicated harvest'

For corn too, in which the exchange forecasts a 23% jump to 37.0m tonnes in Argentine output, it flagged that initial harvest results had come in "above initial expectations", topping 10 tonnes per hectare.

However, the exchange highlighted too some difficulty in the harvest presented by the wetness levels, which had slowed the harvest by bogging down vehicles, besides leaving crops with "above-optimal" moisture levels.

Adecoagro said that "due to climatic condition, we are expecting a humid and complicated harvest, full of logistical challenges.

"Our teams have already begun logistical preparations, including road improvements, clearing drainage ditches and securing availability of harvesters and trucks."

Sugar rush

The group's comments came as it unveiled a return to the black for the October-to-December quarter, with earnings of R$11.9m, compared with a $9.60m loss a year before, with the improvement attributed largely to an "outstanding" performance at its Brazilian sugar operations.

"The combination of dry weather, availability of sugarcane and operational efficiency enabled our mills to crush 3.1m tons of sugarcane, 73.8% higher" than a year before, Adecoagro said.

"Dry weather during November and December resulted in 64 effective milling days, 45% higher" year on year.

And, with the division seeing a 51% rise in the price of sugar sold, and 36% increase in ethanol sales prices, its earnings before interest, tax, depreciation and amortisation (ebitda) jumped 123% to $122.1m.

'Milestone year'

The performance came at the end of a 2016 which Adecoagro termed a "milestone year" for the group.

"After eight years of large investments, our operations have delivered… $84.9m of free cash flow," the company said, restating a "commitment to generating sustainable long-term returns for our shareholders".

However, the report received a somewhat cautious welcome from analysts at Bradesco BBI who, while terming the results "solid", said that "unfavourable weather" for the sugar operations could yet "ruin the party".

"Sugarcane crops in Mato Grosso do Sul have been experiencing bad weather," the bank said, adding that "this should harm productivity".

'Still undervalued'

Bradesco BBI, which also cautioned over the threat to Adecoagro from a stronger Brazilian real and a "less favourable outlook for ethanol prices" restated a "neutral" rating on the group's shares, with a price target of $14.00.

"The stock is trading at [a multiple of] about 6.0 times ebitda, which we think is a fair multiple for the stock," and above the 5.0 times at which shares in Brazil sugar producer Sao Martinho are valued at, the bank said.

However, BTG Pactual termed the shares "still undervalued and overlooked", restating a "buy" rating, with price target of $18.50.

The upbeat comment came despite the bank saying that Adecoagro's sales for the latest quarter, despite soaring 52% to $332.1m, were a little below its forecasts, with the earnings result short of expectations too.

Adecoagro shares fell 4.5% to $11.70 in morning deals in New York.

By Mike Verdin

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