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| Introduction |
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In what was another
challenging year
for agriculture,
AFGRI, from continuing
operations, achieved
a 61% increase
in headline earnings
before income
tax on a 21% increase
in
turnover. Maize
prices averaged
R725 a ton in
2005, at which
price few farmers
were making a
profit. This low
price was
the result of
a strong Rand
combined with
a substantial
maize surplus.
Farmers reduced
plantings in 2006
in an effort to
influence prices,
which they successfully
did: prices for
2006 averaged
R1 237 a ton,
on a total maize
crop of 6,6 million
tons.
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| Pieter F
Erasmus Chairman |
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All businesses,
with the exception of Handling
& Storage and International,
reported substantial improvements
in profits. While some of these
improvements were due to higher
agricultural commodity prices,
resulting in wider margins in
certain of our businesses and
margin pressure in those businesses
reliant on commodity inputs,
the challenges of the past year
brought out the best in the
management team.
There was continued focus on
reducing fixed overheads and
a group-wide focus on improving
inventory management and procurement
practices while, at the same
time, maximising efficiencies
across the entire agricultural
supply chain. The result was
a positive turnaround of R127
million in the profitability
of Producer Services, assisted
by a R60 million reduction in
inventory and an improved product
mix in the retail business.
Products reported a 93% increase
in headline earnings after internal
interest, assisted by a strong
performance from the recently
acquired Daybreak operation.
This vindicates the decision
to re-enter the fast-growing
broiler market. Products also
reported a welcome turnaround
in the fortunes of the Industrial
Oil and Protein business (formerly
Foods).
It is a credit to management
that the business in Western
Australia, which suffered the
worst drought in recorded history
over the last year, traded profitably
throughout the year. The Zambian
business had a poor trading
year but, after restructuring,
is now trading profitably. The
Handling & Storage business
reported a 42% drop in revenue
due to the substantial reduction
in maize plantings last season,
despite higher than normal carry-over
stock from the previous year.
Overall it was an excellent
year for AFGRI and the benefits
from the various restructures
and rationalisations in the
previous financial year are
evident in these results.
The recovery in maize prices
encouraged farmers to increase
maize plantings for the current
season and initial estimates
for the year put the expected
crop size at 7,8 million tons.
However, following several months
of drought in the key maize
growing areas of the country,
crop estimates have been reduced
to 7,0 million tons and may
be further revised as the growing
season progresses. This is only
slightly higher than the previous
season’s crop, though
the average price realised should
exceed that of the previous
season. Maize prices on Safex
jumped above R1 700 a ton in
the early part of 2007, but
have since moderated somewhat.
While the increased price will
go some way to offsetting the
lower crop yields, the loss
of about one million tons of
maize to drought represents
a substantial loss of revenue
for farmers. |
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| Impact
of ethanol on the maize market |
A fundamental
shift in the dynamics of the
global corn (maize) market is
underway due to the growing
demand for ethanol as a fuel
additive. US corn prices have
been rising steadily with President
Bush’s strategy of replacing
20% of the country’s petroleum
usage with alternative fuels
over the next decade. It is
reckoned that a new ethanol
production facility opens every
five days in the US and that
next year 80 million tons of
a projected crop of about 280
million tons will be used to
produce ethanol.
International corn prices have
virtually doubled to around
$4 a bushel over the last two
years, due largely to the increase
in demand from ethanol producers.
Stronger prices have prompted
farmers to increase corn plantings
at the expense of traditional
crops such as cotton. The USDA
announced that the substantial
increase in corn plantings over
the last year will result in
a record US crop this year,
which has reduced prices in
recent weeks.
The impact of this development
will continue to ripple across
the world for years to come,
with important implications
for other agricultural commodities
– notably red meat and
chicken – which are reliant
on corn feed. Non-related agricultural
commodities such as cotton and
wheat are also likely to be
affected due to the switch by
farmers to more profitable corn
farming.
The merits of the rush to alternative
fuels such as crop-based ethanol
have been widely debated in
the international press. Some
of the unwelcome effects are
already evident: corn prices
have escalated steadily over
the last two years hurting the
world’s poor, particularly
those dependent on corn as a
staple food. Higher prices have
pushed up the costs of corn
feed to chicken and red meat
producers, who have been forced
to pass on these costs to their
customers. In South Africa,
food inflation continues to
pose problems for our fiscal
and monetary planners and this
problem is likely to remain
with us for the foreseeable
future.
As far as AFGRI is concerned,
higher maize prices are a mixed
blessing: they encourage higher
plantings by farmers which has
a positive impact on the Producer
Services business, and –
weather permitting – this
increases demand for our Trading
and Handling & Storage businesses.
Higher maize prices increase
the cost of down stream protein
and are expected to reduce margins
in the Broiler and Animal Feeds
businesses.
Inevitably, local maize prices
take their cue from the international
market, where prices are trending
higher due to ethanol demand.
The weakening in the Rand since
May 2006 has further influenced
local maize prices and South
Africa is unlikely to see prices
return to the lows of around
R700 seen just over a year ago.
South Africa will not escape
the global trend towards ethanol
as a fuel additive and AFGRI
will position itself as a supplier
to this industry when the time
is right. |
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| Black
Economic Empowerment (BEE) |
| The BEE
partnership with The Agri Sizwe
Empowerment Trust, which acquired
26,77% of AFGRI Operations in
2004, continues to grow from
strength to strength. As I mentioned
in my last chairman’s
statement, we are witnessing
the benefits of this relationship
at all levels of the organisation:
from strategic input at Board
level to new market penetration
and internal transformation.
The partnership with Agri Sizwe
has invigorated our decision-making
capability and infused the organisation
with fresh thinking and operational
strength in many areas. I am
pleased to report that this
partnership has delivered in
ways we did not fully envisage
at the outset and has strengthened
our relationship with the public
sector. |
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| South
African economy and agriculture |
The domestic
economy is expected to continue
its current growth trajectory
in 2007, having reached or exceeded
5% growth in each of the last
two calendar years. This augurs
well for the achievement of
government’s 4,5% to 6%
annual growth target between
now and 2010. The South African
economy appears to have hit
a sweet spot of strong, sustainable
growth and rising fixed investment,
which is nudging towards 20%
of GDP as both private and public
sectors roll out their spending
programmes over the next five
years.
Business optimism is the highest
it has been in recent memory,
particularly in the manufacturing
and services sectors which have
been expanding at rates in excess
of the national average. Much
of this optimism comes from
the expected R450 billion in
public sector infrastructure
spending and a possible further
R1 trillion from the private
sector.
While manufacturing and services
are enjoying virtually unprecedented
growth, the same is not true
of agriculture, which contracted
by 13,1% in 2006. This was the
worst performance by the sector
in over 10 years, according
to independent economic analysts
RLJP. The main reasons for this
poor performance are spelled
out above, namely the much lower
than expected maize crop in
2006 coupled with weaker maize
prices. Maize is the primary
crop in South Africa and the
fortunes of maize farmers have
a powerful bearing on the farming
community.
The current maize crop is likely
to be only slightly better than
the last, though firmer domestic
prices combined with a significantly
weaker Rand should see some
improvement in the balance sheets
of the maize farming community.
Given the current low stock
levels and reduced crop estimates
for maize and wheat, South Africa
will again have to make up the
domestic supply shortfall through
imports. Maize imports are expected
to reach up to 1,5 million tons
this season, compared to 100
000 tons last season. Wheat
imports could reach 1,3 million
tons, up from 1,1 million tons
last season, while protein imports
are likely to be slightly higher
than last season’s 600
000 tons. This volume of imports
will exert additional pressure
on the country’s rail
and road transport infrastructure.
Any economy reporting growth
rates of 5% and above can be
expected to experience pressure
in some of its key economic
indicators. The current account
deficit is running at well over
6%, though capital inflows are
sufficiently large to finance
this deficit for the time being.
Inflation is pressing up against
the Reserve Bank’s upper
target ceiling of 6% and the
prospect of even higher interest
rates cannot be completely discounted
at this stage. By the Reserve
Bank’s own estimates,
inflation is likely to remain
close to the 6% upper target
range well into 2008, which
diminishes hopes for an early
reduction in interest rates.
The higher grain prices mentioned
earlier are putting upward pressure
on red meat, broiler and pork
prices, since grain is the largest
input cost for animal protein
farmers. Grain and meat constitute
around 9,5% of the total consumer
price basket and around 45%
of the total consumer food price
basket, which contributed almost
two percentage points to the
6% year-on-year consumer price
inflation in February 2007.
Cattle farmers could respond
in one of two ways to rising
grain costs: they might attempt
to pass these costs on to consumers
or, unable to sustain the high
feed prices, increase slaughtering
of cattle. The resultant increase
in meat supply to the market
would have the effect of pushing
down meat prices. Research by
Standard Bank suggests there
is a relatively high correlation
between meat prices and consumer
spending on durable goods. This
demonstrates that meat prices
are only raised during times
when consumer spending is buoyant.
While the unpleasant prospect
of food inflation looms large,
there are grounds to believe
the pass-through effect at the
retail and manufacturing levels
will be lagged and partial.
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| Changes
to the Board |
In April
2006 we welcomed Dominic Sewela
to the AFGRI Board of Directors
as an executive director. Dominic
assumed the role of deputy managing
director to Jeff Wright and
has proved to be an able and
energetic addition to the team.
During the year under review
two independent non-executive
directors were appointed to
the Board: Dave de Beer was
appointed in July 2006 and Jethro
Mbau in January 2007. In the
brief time they have been with
us, Dave and Jethro have made
impressive contributions to
AFGRI and have enriched our
Board immensely. |
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| Corporate
governance |
| The AFGRI
Board of Directors has always
recognised its responsibilities
in terms of risk management
and sound corporate governance
practices. The practices have
been tabled and approved by
the Board and circulated to
all staff. The Group’s
corporate governance standards
adhere to all the significant
principles outlined in the King
Code on Corporate Governance.
The Board comprises a majority
of non-executive directors,
with sub-committees responsible
for audit and risk controls
reporting to the Board. The
recommendations of the King
Code have been incorporated
into AFGRI’s risk management
procedures and controls at all
levels of the business. |
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| Prospects |
Given the
poor rains across much of the
country over the last few months
and the reduction in the maize
crop estimate for the 2007 season,
the year ahead will be a challenging
one for AFGRI. Higher maize
prices will benefit our Producer
Services and Financial Services
businesses, but the reduced
crop will have a negative impact
on Handling & Storage and
put pressure on margins in the
Animal Feeds and Broiler businesses.
The emphasis in the year ahead
will be on more efficient procurement
and improved management of supply
chain logistics to mitigate
the effects of higher maize
prices in those parts of our
business that are sensitive
to escalating prices. Risk management
strategies are already in place,
but these will be reviewed and
amended as needed to contend
with an environment characterised
by rising and volatile commodity
prices. Despite the challenging
conditions that lie ahead, we
remain confident of achieving
positive earnings growth in
the coming financial year.
AFGRI’s growth in comparison
with growth in the agriculture
sector, indicates a material
growth in market share. A systematic
disengagement from non-agricultural
business and greater focus on
core business, contributed greatly
to the good results.
Farming production units are
becoming bigger and more efficient
and this presents specific opportunities
and challenges to service providers
and AFGRI meets these requirements.
In spite of certain long-term
climate and political uncertainties
in the agricultural sector,
AFGRI remains positive that
factors such as food supply
and job creation, will secure
a sustainable future for agriculture.
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| Appreciation |
| I extend
a special word of thanks to
our hard-working executives,
staff and Board members, who
give substance to our vision
of providing world-class full-spectrum
service to our customers. I
also want to thank our non-executive
directors for their wise counsel
and strategic insights. Finally,
I would like to express my appreciation
to all AFGRI’s farmer
and agri business clients, who
have responded so warmly to
our business partnership approach.
We look forward to strengthening
our relationships with all stakeholders
over the coming year. |
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| Pieter
F Erasmus |
| Chairman
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| 15
May 2007 |
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