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Wool price 'collapse', dairy caution cloud PGG Wrightson outlook

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A "collapse" in wool prices, and a failure yet by higher milk prices to spur higher dairy farmer spending, prompted PGG Wrightson to warn that its 2017 financial year will see a "tougher trading environment than 2016".

The New Zealand based farm supplies-to-auctions group forecast that its operating profits for the year to the end of June next year would come in at NZ$62m-68m.

That would be down from the NZ$70.2m reported for the group's latest year, and would represent the first decline in four years.

The outlook reflects an observation that "the trading environment for agricultural inputs and services has become marginally tougher in New Zealand," PGG Wrightson said, despite the revival in dairy – a key earner for the country, which is the world's top milk exporter.

"We believe that 2017 will be a tougher trading environment than 2016," the group's chief executive, Mark Dewdney, said.

Cutting debt vs raising spending

Mr Dewdney termed as the "key development" the recovery in dairy markets, with whole milk powder prices recovering by 33% over the last three months at GlobalDairyTrade - the auctions run by New Zealand giant Fonterra – including a small rise at Tuesday's event.

With forecasts for milk payouts to farmers rising too, "this has been welcome relief for the New Zealand dairy sector, who were facing their third season in a row of cash-flow losses", he told PGG Wrightson investors.

However, Mr Dewdney cautioned that it was too early yet to bank on New Zealand farmers using improved prospects as a basis for increased spending, saying that "uncertainty on the pay-out level remains high.

"I suspect that if a dairy farmer is planning on receiving a higher pay-out on their milk cheque this year, then their first thought will be to reduce debt rather than spend more on inputs" he said, highlighting "very little demand" from dairy producers for irrigators.

"In short, while the recent price rise is undoubtedly a positive, we don't think it's enough to translate into a materially higher spend from our dairy clients this year."

Wool price 'collapse'

He also cautioned over a setback in the wool market, saying that "significantly lower volumes of wool are being traded due to the collapse in international wool prices, and a large reduction in Chinese demand".

In fact, while wool prices, as measured by Australia's much-watched eastern market indicator, recovered from a September stumble to stand at 1316 Australian dollar cents per kilogramme last week, volumes have remained low.

Elders, the Australian wool trader-to-feedlots agribusiness said that "less than 32,000 bales were offered" last week – "the smallest national total for an October selling week" since at least 1995.

However, PGG Wrightson was upbeat on some other agri sectors, saying that "while some sectors are facing lower commodity pricing and a more challenging environment other sectors such as horticulture and the beef market continue to be optimistic about their prospects".

'Significant praise'

Alan Lai - the chairman of both PGG Wrightson and the group's controlling shareholder, China-based Agria Corp – said that he was "very pleased" with the company's performance, and voiced "significant praise" for the recovery in profits since 2013.

"Over the past three years, we have transformed PGW into a robust and resilient enterprise," he said.

PGG Wrightson shares closed down NZ$0.02 at NZ$0.51.

By Mike Verdin

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