El Nino buffets rural stocks

By Peter V O'Brien

Friday 29th November 2002

Keeping a weather eye open has a special meaning this year for investors in land-based and rural service companies.

Too much sun and no rain in some regions and excessive rain, cold and little sun in others during the spring were problems for farmers. They could flow on to companies that service them.

Wrightson chairman John Palmer and managing director Alan Freeth discussed the possible impact of an El Nino weather pattern this season. Mr Palmer noted the company's business was seasonal.

Traditionally, it earned most of its first-half profit in the October-December period. (The heavy profit comes in the second half but starts from October when livestock births and other rural activities emerge from winter.)

He said it was difficult to predict whether that would be the pattern in the current year because extremely cold weather coupled with an advancing El Nino caused a difficult spring.

Dr Freeth said Wrightson had a "close eye" on eastern parts of the country, such as Hawke's Bay and Marlborough, which faced drought possibilities from a strengthening El Nino.

"At the same time, we are watching the parts of the country that have suffered from persistent and significant rain and hail over recent months," he said. He referred to the drought in Australia, saying the impact had been limited, at least until mid-November. The timing of autumn rains in 2003 was the critical issue faced in Australia.

In passing, Dr Freeth's constant references to the America's Cup contest in Auckland (where Wrightson's meeting was held) and likening the company to Team New Zealand seemed laboured to this non-Auckland observer when read in print.

An oral presentation to a live audience would have been better than unemotional print but Dr Freeth should be aware of history.

US investment group Emerald came to Wellington for a [then] Brierley Investments' meeting. Its representative burbled on, comparing the company to an America's Cup contest. The impact on New Zealand shareholders was zilch.

Rural and land-based companies seem cautiously confident about the current season, subject to weather patterns, cyclical easing of dairy produce prices, exchange factors and slower real estate sales.

Pyne Gould Guinness (PGG) noted the last as an element affecting this year's activity in the South Island. Chairman Bill Baylis said in the preliminary report for the year ended June 30 the outlook for some sectors in the rural economy was less certain and not as positive as 12 months ago.

The company's clients were still enjoying favourable trading conditions, with some exceptions. PGG was confident it would maintain its earnings momentum this year.

Share price changes since The National Business Review considered the sector in May are in the table.

The list excludes Dairy Brands, which is effectively a cashed-up company looking for new investments and proposing another share buyback.

Cedenco had not reported at the time of writing on the year ended September 30. Investors were feeling unfavourable about the group's prospects, as shown in a 28.9% share price decline since May after a 7.5% fall from November 2001 to May.

Finance activities are a key to rural service companies' profitability. Farmers prefer total packages from their servicers rather than fragmented businesses.

They apparently left Wrightson in large numbers when the company was "restructured" under former chief executive Greg Kay, although the then board obviously approved his proposals.

Wrightson sold its finance business to the New Zealand arm of Rabobank. It has bought it back a sensible decision.

Other rural service companies were virtually gloating in recent years as they reported increases in farmer client numbers after Wrightson seemed to adopt an attitude that rural toilers were nothing more than economic units.

It is fashionable for city-based, trendy, theoretical economists to rubbish rural industries, claiming the country should be switched on to high-tech businesses. Many New Zealand farmers' technology capacities would surprise such economists.

Rural service land-based companies are currently static in terms of share price performance.

The effects of El Nino will decide their short-term future. El Nino comes and goes. La Nina follows it. The sector's share prices show a similar pattern.

Long-term shareholders in rural service and land-based companies get steady capital appreciation, perhaps less spectacular then that available to "in-out" traders in short-term operations.

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