DON'T be surprised to see major changes in strategic direction taken by the Australian Agricultural Co in coming months, as it battles to shake off last week's shock profit warning.
A week ago the company provided an earnings guidance to the Australian Stock Exchange forecasting a huge $53 million to $60m net loss for the year ending December 31.
AA Co blamed extreme weather, the stronger Australian dollar and low cattle prices for the downgrade. It came after a half-year forecast loss of $30m, and an August prediction that the company would return a second-half profit after tax, provided cattle prices remained steady.
The 2009 year would be the first full reporting year in which AA Co absorbed the impact of the 2008 drought across the Barkly/Northwest Queensland region, the ASX advice said. Other production impacts included cattle losses through the floods in early 2009 and subsequent decreased herd fertility, higher calf mortality and an increase in logistics and feed costs. The adverse weather had also reduced cattle weight gain figures, further affecting revenues and cattle valuations.
In February/March last year the company downplayed the extent of stock losses due to floods sustained across its properties in the northwest region, but later conceded that these were much higher than previously thought.
External market impacts such as foreign exchange rates, flat international demand and subsequent lower cattle prices, margins and profitability had also contributed to the result forecast.
"All options in terms of addressing the problem are on the table and absolutely nothing is being ruled-out," one source close to the company said this week, in the wake of the loss forecast.
One strategy understood to be under consideration is a move to divert all company cattle bred on its Barkly Tableland and VRD holdings into live export this year, rather than through the company's own beef production streams in Queensland.
While this could take advantage of premiums available for lighter cattle in the booming live export trade to Indonesia, it would inevitably put pressure on AA Co's own existing grainfed production systems including the 1824 brand program.
Friday's profit downgrade presents a monumental challenge for new chief executive David Farley, who took over the reins of the company in mid-December. He has spent much of his early induction period getting to know the business and its key personnel and has already instituted some significant staff changes.
Because of public company obligations Mr Farley said he was unable to discuss the AA Co result or its immediate plans in greater detail until the annual result was formally lodged in mid-February.
Speaking more broadly about the outlook for beef, however, he felt there were grounds to believe there could be a demand-led recovery in cattle prices in the early stages of 2010, given a shortage of red meat across key supply countries.
He referenced comments from US commodity analysts pointing out that while US beef sales were increasing, US cattle on feed in January were the lowest seen in eight years, suggesting a compounding effect on supply in the US market. Similarly, processed beef stocks in Australia had been run down over the past few months as processors had reduced their rates of kill.
"Add to this the record live exports to Indonesia last year and it could be argued that the quality beef pipeline around the world is now incredibly empty," he said.
"I'm convinced we're going to see something of a demand-led recovery during the first quarter, even despite the impact of the high dollar," Mr Farley said.
AA Co shares were pounded on Friday after the profit warning, closing down 6.5pc, but staging a solid recovery on Monday, clawing back 5pc of the lost ground before closing at $1.37.
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