The state-owned farming company is investing in longer term businesses to diversify income streams and make it more sustainable but is coming up against cashflow pressures from current farm challenges.
Higher operating expenses including an expensive long-term lease for the Wairakei dairy farms, managing Mycoplasma bovis, changing on-farm systems and an extra $1 million in shearing costs added to the development costs cut into earnings.
Those factors were compounded by a very dry late summer and autumn at the big Wairakei dairy zone in the central North Island, which produces about 45% of the group’s milk, Carden said.
Landcorp has moved to more sustainable feed systems there and reduced stocking levels.
“I’m as frustrated as anyone that we’re not getting the returns but there’s no doubt in my mind that our strategy is the right one,” he said.
Landcorp, trading as Pamu, had earnings before interest, tax, depreciation, amortisation and revaluations of $34 million in the year ended June 30, down from $48m a year earlier.
Ebitdar has long been the group’s favoured earnings measure as it covers the cash-producing farming operations.
However, after asset revaluations required by accounting rules, the bottom-line loss was $11m. The revaluations produced $22m of write-downs, mainly on beef cattle with higher start-of-year values and lower end-of-year values combined with lower numbers and on forestry land.
In 2018 there were $25m of revaluation gains on top of the $48m in Ebitdar.
In the latest year but below the core profit line there was a $12m hit to Landcorp’s balance sheet from the shareholding in Fonterra, partly offset by a $5m gain on the sale of its Westland dairy co-op stake into the Yili takeover.
The total proceeds from the Westland sale were $12m, most of which will be reinvested after payment of a $5m special dividend to the Crown.
Carden said Landcorp lost about $10m on Westland over the last six or seven years, given its poor returns. It has 12 dairy farms supplying the Hokitika-based processor and Yili’s assurance it will at least match Fonterra’s milk payout for the next 10 years will be worth an extra $2m or so a year in income.
Landcorp receives a number of premium payments on its A2 milk supply to Synlait but by far most of its milk is sent to Fonterra, which has its own issues to resolve.
“We need a successful Fonterra,” he said.
In recent years Landcorp has tilted its livestock operations towards beef and away from lamb. In the latest year beef production rose 4.5%, helped by a growing bull beef unit and transferring bobby calves out of the dairying business and keeping them in the core livestock business. Those gains were offset by flat to slightly lower prices.
Sheep meat sales rose nearly 2% on good lamb prices but reduced volume. Wool production was up 8% but sales down 22% on continued poor prices.
Better venison prices were offset by lower production because of the dry autumn in Southland/Otago.
Landcorp is a 35%-shareholder in Melody Dairies, which is building a dryer at Hamilton, for production of sheep, goat and cow milk infant formula and ingredients. It should be earnings positive from the time it opens next year, Carden said.
The Spring Sheep Milk joint-venture will take a few years to fully establish and Landcorp is also building up a deer milk business.
Avocado orchard development in Northland is new and will takes a few year till production.
“Animals will always be our core business but we’re trying to change, to alter our land use and diversify our income and you don’t get a return right away. It’s not an easy balance to drive those cashflows.”
Carden said group debt, about $220m out of total assets $1.7 billion, are a bit higher than the board would like. Most of the equity capital is tied up in land and the core business.
Releasing the preliminary earnings report, Carden and chairman Warren Parker said a continued focus on reducing costs and generating acceptable returns will be a key focus in this year.
