Maintain the Grain

As has been widely discussed the TPP stand to benefit the agricultural industry more than most. It’s what Australia does really well and as investors we can capitalise on this ongoing world domination. While the current fad diets demand that we gut the grains, on company determined to run the gluten hating hippies out of town is GrainCorp (Unfortunately, we could not get stock quote ASX:GNC this time.). As the name suggest these guys operate in wheat, barley and canola space.

But not hinted in the name is the vertically integrated strategy. Across the chain the group does harvest, processing, marketing, storage and transport. As a result they get to stamp the ticket at a number of stages of process. The operations span the globe with a presence in TPP countries USA and New Zealand mitigating in part the natural weather risk that agricultural companies are exposed to. ASX:GNC is poised to take part in the Asian century, and may benefit from the accelerated momentum that a multilateral trade agree can bring.

As previously mentioned here at Blue Lake Invest there is heightening demand from the emerging middle idle from our Asian neighbours. What the TPP and other recently announced FTAs does for Australian companies like GrainCorp is gives preferential access to these key markets. There is an opportunity to increase the dependence on Australian food and improve margins moving into the Asian century.

With these closer economic ties one might even raise takeover bids. The AWB and other Australian agricultural giants have been bought out by global conglomerates, and GrainCorp has form here. 2013 saw the then federal treasurer block a bid from a Canadian (TPP member country) company looking to take over GrainCorp. It is understood this decision was largely political, and with the changing tide in Canberra some are suggesting companies might come circling once again.

But we investors can’t put all our eggs in the takeover basket. So here is the fast facts on GrainCorp. Firstly 2014 wasn’t a great year, as we saw the return on equity drop to 5.4%, significantly down from the previous two years performance of 10.1% and 14.4% respectfully. The chairman has pointed to uncertainty around ownership and the quest to find another highly paid CEO as reasons, but sitting beneath that is that the grain yield was down this year.

Like most companies struggling with profit and return on equity they are turning the focus on optimising the asset base, improving the processes and increasing their yield. If successful we could see the group return to the highs of 2012. The immediate forecast for grain isn’t great and GrainCorp is calling this out. But with demand continuing to grow and the opportunity to make revenue on processing the year isn’t done just yet.

Right now the group is priced at $9.20 down from the May peak of $10.36. Back in 2013 when the Canadians were circling the price maxed out at around $12.60 suggesting any takeover rumours could see the stock explode.