CBH Group has plunged into the red with its worst net trading loss ever after receiving WA's second largest grain harvest of 16.4 million tonnes at the end of 2018.
Australia's biggest grain exporter's deficit, before rebates are paid out, for the year to September 30 was $13.3 million, a monumental $141.3m turnaround from a $128m surplus in 2017-18 which, in turn, was down 48 per cent from a record $247.6m surplus in 2016-17.
CBH recorded a net loss after tax of $29.7m to September 30, a $63.2m turnaround from $33.5m in net profit it earned in the previous 12 months.
The last time Australia's largest non-distributing co-operative failed to show a profit was 2011 when its net after-tax loss amounted to $21.3m.
Minimal debt gearing at 14pc, net assets value remaining at $1.8 billion and total revenue growing by 10pc to $4.2 billion were positive signs from the financial year just gone, outlined by CBH in a financial report released Monday - well ahead of the annual general meeting on February 20.
Revenue growth was driven mainly by higher year-on-year prices for grains traded in the early part of the financial year, before circumstances took a significant downturn for CBH's marketing and trading business unit.
The revenue growth supported management's assertions CBH remains fundamentally strong, with 2018-19 results impacted by unforeseen circumstances - such as a softening of east coast demand for wheat and substitution of cheaper barley after China announced an anti-dumping investigation in November 2018 - and "challenging" markets and political conditions overseas.
As well, some of CBH's investments incurred significant "impairments" and required one-off provisions totalling $35.1m, compared to only $3.1m the previous year, management said.
Chief executive officer Jimmy Wilson, who confirmed the $29.7m loss as the co-operative's worst ever, pointed to an underlying group surplus of $21.8m - down year on year from $131.1m - as an indicator of what might have been without the "impairments".
"Despite a challenging year, this reiterates the strength of the co-operative's financial position and capacity of the business to return value to growers, including reducing supply chain fees, while managing unexpected market impacts," Mr Wilson said.
"While the loss is disappointing, it should not overshadow the strong financial position of the co-operative which has a robust balance sheet that has been strengthened over many years with $1.8 billion in net assets and little long-term debt."
As previously announced by CBH - signalling the impending financial results released on Monday to its 3900 grower members in advance - patronage rebates growers can claim off current season handling costs were slashed from $10.50 a tonne to just $1/t.
Slashing rebates saved CBH $78.1m year on year, with its operations business unit putting in the entire $16.4m for the reduced 2018-19 patronage rebate program.
The marketing and trading unit contributed nothing to the program after having provided more than half of the funding the previous year.
Partly offsetting the slashed patronage rebates, CBH reduced supply chain fees and charges to growers by $4/t as promised, which potentially skimmed a further $60.4m off the operations unit's bottom line.
CBH's overall results largely reflected the contrasting fortunes of its business units.
On the back of receiving the second largest and most valuable grain harvest and exporting 13.8mt - more than it had received the previous year - the operations business unit posted a very healthy $99.5m after-tax profit from net revenues increased 12.7pc to $507.7m.
That was after allowing for a combined $76.8m to be passed to growers via fee reductions and patronage rebates.
But the marketing and trading division suffered an after-tax loss of $119.3m - it had made a profit of $3m the previous year - from net revenues up 9.3pc to $3.2 billion.
Jason Craig, general manager marketing and trading, explained that unexpected changes in domestic demand, uncertainty created by China launching an anti-dumping investigation in relation to Australian barley and an inability to achieve a "reduced risk profile" for the 2018 harvest because of high prices paid to growers for grain, were among issues impacting on the unit's financial performance.
Driven by the east coast drought, WA wheat prices and basis levels - the difference between local physical prices and Chicago Board of Trade (CBoT) futures prices which CBH uses as a risk mitigator - rose above export parity in late 2018.
Mr Craig said demand suddenly softened and switched to barley once the Chinese Ministry of Commerce announced its anti-dumping investigation causing the barley price to fall and then continue falling.
He said the domestic situation was then exacerbated by wheat imports from Canada.
By the time wheat prices returned to parity, CBH's regular wheat customers had turned to the Black Sea and South America for supply.
Similarly, Mr Craig explained, the unit was caught by the basis level for CBoT wheat collapsing from $154/t in December 2018 to just $43/t in July, brought on by the unusual combination of a fall in Australian wheat price and a CBoT price rally caused by concerns wet ground after heavy rains would limit corn plantings in North America.
The marketing and trading unit traded 8.9mt of grain during the year, down from 9.6mt the previous year, due primarily to a "modest" WA canola crop in 2018.
The fertiliser component of CBH's marketing and trading unit had its biggest year yet with 103,000t sold for the 2018-19 year, up from 90,000t and it remained profitable.
But CBH's Interflour joint venture with Indonesia's Salim Group continued to cause financial pain, with a strategic review by Interflour on whether it should cut its losses and quit Turkey where one of its 10 flour mills is located.
A "changing regulatory environment" governing Turkish flour exports made Interflour's Turkey business model hard to sustain, with returns far less than expected, Mr Wilson said.
But he declined to be drawn on whether the political instability of the region made doing business there unnecessarily difficult - Turkey is the world's largest processed flour exporter.
He did confirm however that a $42.9m interest-free loan to Interflour, which was announced in August, had no impact on CBH's results for the year to September and that a 10-point plan to turn the Interflour business around appeared to be working, particularly for its South-East Asian flour and malting core businesses.
Mr Wilson pointed to a 91pc increase in Interflour's earnings before interest, tax, depreciation and amortisation (EBITDA) to US$41m in 2018-19 as evidence of this.
He said CBH's share of Interflour's net loss for the year was A$15.2m and of that, the amount attributable to the Turkey impairment was A$13.7m.
Other impairments included $8.5m associated with CBH's involvement in the Newcastle Agri Terminal, New South Wales, and stemming from drought reduced grain volumes on the east coast, as well as $300,000 through the marketing and trading unit's involvement in CI Trading in Vietnam, an independent joint venture with Interflour which CBH has now exited.
Its Blue Lake Milling oats milling and processing subsidiary reported EBITDA of $4.7m and net profit after tax of $1.1m.
This was despite significant increases in oat prices because of the drought and the profit had been reinvested as capital improvements for the Forrestfield oat mill, Mr Wilson said.
He said changes had been made to risk limits to reduce CBH's exposure to dramatic market movements in future and the marketing and trading unit had obtained more than $1b of loans to purchase grain from the current harvest.
This demonstrated "the continued strength of our banking relationships and balance sheet, despite a difficult previous financial year," Mr Wilson said.
"We have taken stock of the circumstances that led to the 2019 result and reflected on how we can best position ourselves to limit exposure to similar events occurring in the future."
Mr Wilson said the ongoing Chinese barley anti-dumping investigation was likely to continue causing uncertainty and downward price pressure, but CBH was co-operating with the Chinese, had done everything the investigators had asked of it and remained adamant that it was not responsible for any dumping.
He said changing international relationships, particularly between the US and China and in Europe with the UK leaving the Economic Union, were likely to continue to have an influence on grain trading into the future.
Also, changes to maximum residue limits in key markets needed close monitoring.
But some things could play to CBH's favour, like the International Maritime Organisation's sulphur cap on marine fuels which had potential to increase international freight rates.
Increased shipping costs would have less impact on CBH because it was geographically closer to its major South-East Asian markets than competitors.
Mr Wilson said a lower Australian dollar also helped provide favourable exchange rates for selling WA grains overseas but disadvantaged growers by generally raising the cost of imported farm inputs and equipment.
WAFarmers' grains section president Duncan Young was philosophical about CBH's financial results.
"It was not unexpected, they were not the only trader that made a loss last year with the volatile pricing," Mr Young said.
"From our point of view we are more concerned with what they do as a co-op than their trading business, but at the end of the day I'm still very confident in the business in the long run," he said.
NETWORK INVESTMENT
AN unprecedented $285.3 million was invested by CBH Group on its grains accumulation network in the year to September 30.
This comprised $236.1m on network projects and $49.2m on maintenance.
In the previous financial year, with its network strategy in full swing, it spent just over $200m and the year before that, just under $100m on the network.
More than 100m tonnes of new permanent storage were added in the 2018-19 financial year and "throughput enhancements" were completed at 37 receival sites across the Geraldton, Kwinana North and South, Albany and Esperance zones to increase grid speeds to up to 500 tonnes per hour.
As well, 19 new 36 metres or longer weighbridges were installed at key receival sites to minimise delays for growers delivering grain by weighing entire road train combinations rather than individual axles.
"In line with our purpose of sustainably returning value to growers, we made a record annual investment in the network, accelerating the pace of new storage builds that will drive throughput capacity and efficiency, enable competitive supply chain fees and meet export demand at the right time to capture value for our growers' grain," said CBH chief executive officer Jimmy Wilson.
"We've continued to accelerate the pace of investment in the network as part of our overall strategy to reduce paddock to port costs and increase network agility, integrity and efficiency."
He said CBH would continue to invest in the network and now that it had a rail access deal with Arc Infrastructure which gave "certainty" to its ability to move grain on rail into the future, some of the focus would shift to upgrading and adding fast fill facilities for trains at some locations.
Mr Wilson said facilities at ports to empty trains would also be improved to minimise train turnaround times.
He said the focus would not necessarily be on transferring grain from road to rail, but on eliminating "restrictions" on the timely flow of grain from paddock to port.