Avian flu still affecting agricultural cycles – Quantum Foods

24th May 2018 By: Simone Liedtke - Writer

The first six months of the current financial year proved how quickly agricultural cycles can change, says diversified feeds and poultry business Quantum Foods.

This is evidenced through two main factors influencing the macroenvironment during this period, ended March 31.

The first is the consequences of the highly pathogenic avian influenza (HPAI) outbreak of 2017, and the second is the lower raw material costs following the decline in maize and soybean meal prices owing to the record maize harvest in the previous season, as well as a stronger rand.

The prices of yellow maize on the South African Futures Exchange (SAFEX) and the landed cost of soybean meal declined by 33% and 6% respectively, compared with the first half of the prior financial year.

This price decrease, in combination with the congruent decline in bran and hominy chop prices, resulted in a material decline in the feed input costs of the business, which was significantly lower than the comparative period, the company said on Thursday.

This decline in feed input costs had very little effect on the farming and feed businesses, as final product prices follow the input prices. However, in the egg business, this assisted in opening up the margin, the company noted.

The full effect of the 2017 HPAI outbreak on the egg business was experienced during the reporting period and, since August 2017, Quantum Foods has lost about 20% of its layer rearing and commercial layer flocks owing to the disease.

Included in the results for the reporting period is a loss of 242 000 birds and a subsequent monetary loss of about R9-million owing to HPAI culling at a Western Cape layer rearing farm.

Mitigating measures were implemented, such as the restocking of previously dormant facilities and an increase in the commercial layer cycle, but it still resulted in egg volumes declining by 7%.

Egg prices increased by over 30% and the net effect was that the egg business produced a record profit.

In terms of the financial overview, Quantum Foods’ group revenue decreased by 0.3% to R2-billion, with a 0.5% decrease of R10-million in its South African operations, and a 4.6% increase of about R5-million in its other African operations.

Revenue from the other African operations contributed 5.4% to the group revenue for the period under review.

Revenue from most of the South African operations decreased by R31-million for the feeds segment and R88-million for the farming segment, with only the eggs segment having seen an improvement of R109-million.

Cost of sales also decreased by 5% to R1.6-billion, with fair value adjustments for the period amounting to R225-million.

Gross profit, excluding these fair value adjustments, increased by R248-million to R678-million at a margin of 33.3%.

Cash operating expenses increased by 10.3% in the period under review, owing to additional HPAI risk mitigation measures that were implemented, as well as the increased operational costs of the Western Cape broiler farms owned by the group, following the exit of some contract producers during the previous period.

Operating profit, before items of a capital nature, increased by 534% to R244-million for the period under review.

South African operations recorded a 330% increase of R183-million to a profit of R239-million at a margin of 12.4%, while eggs and farming improved by R178-million and R7-million, respectively.

Feeds, however, weakened by R1-million.

Other African operations recorded an increase in profits of R20-million, which resulted in a profit of R11-million.

Headline earnings a share increased to 82.5c from the 12.4c in the prior comparable period.

Cash inflow from operations amounted to R204-million for the reporting period, and includes an increased investment of R20-million in working capital.

Capital expenditure for the period amounted to R32-million, with the main items being a project to increase capacity at the broiler hatchery in Hartbeespoort, and expenditure to renovate previously dormant commercial layer houses.

Cash and cash equivalents increased from R261-million at September 30, 2017, to R359-million at March 31 this year.

OPERATIONAL OVERVIEW

While margins in the animal feeds business remained stable, the first phase of the Olifantskop feed mill was successfully completed.

The layer breeding operations remained very efficient and, despite the effect of HPAI, the company noted that these operations continued to have a positive effect on overall profitability.

The production efficiency on commercial layer farms not impacted by HPAI continued to improve.

However, the broiler breeder efficiencies declined from a very high level and the results were below expectation. This followed the introduction of a change in the genetics to which business did not adapt adequately, Quantum lamented.

Revised farming management procedures have been introduced to address this and the breeder efficiencies are expected to improve going forward while production efficiencies at commercial broiler level remained very good, the company stated.

The other African businesses performed in line with expectations.

PROSPECTS

Egg prices, although still higher than prior to the HPAI outbreak, have started to decline towards the end of the reporting period.

This, the company noted, is attributable to increased egg supply following the restocking of the national flock.

The full restocking process is, however, not expected to be completed in this financial year and although the expectation is that egg prices will remain firm during the second half of the year, prices are expected to be lower than those achieved during the reporting period.

Maize and, in particular soybean meal prices, have bottomed out and have started to increase. The impact of these raw material price increases will be experienced during the remainder of the financial year, particularly in the egg business, Quantum Foods warned.

Further HPAI outbreaks remain the main factor that could affect the South African poultry industry; however, the company’s geographical spread of its farms mitigate the potential impact.