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Penny-pinching farmers dent rural rivals

By Shoeshine

Friday 28th November 2003

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The listed companies that supply the rural sector ­ Wrightson and Pyne Gould Guinness ­ are regarded, rightly or wrongly, as bellwethers of the agricultural economy, so their NZX releases are pored over with more than the usual amount of interest.

Investors keeping tabs on the dollar and its effect on the rural sector will have had a thoroughly confusing week.

Last Friday it all looked good. The Real Estate Institute's Property News reported the rural property market strengthened in September. Median sales were up from $540,000 the previous month to $610,000 and it is clear, the report says, that dairy, finished grazing and horticultural properties were all experiencing good demand.

Over the weekend, reports of an economic uptick around the world continued ­ good news, surely, for export commodity prices.

Monday brought a National Bank treasury report suggesting the kiwi wouldn't hold recent gains against the greenback.

"The market needs to differentiate between those countries that can sustain a relatively stronger appreciation against the US dollar," the bank said. "New Zealand is not one of those countries."

Then the axe fell. The same day brought an announcement from Wrightson that December first-half earnings before interest and tax would be 20% below last year's.

The release said the rural supplies and livestock divisions were the problem.

Livestock was suffering from lower sheep tallies, offset partly by "better prices across sheep, beef, and dairy."

Rural supplies was the victim of "the contraction in rural spending," pressure on margins and, cryptically, "business performance issues."

Wrightson has 'fessed up to problems at rural supplies before, most recently when it announced in August a 13% full-year profit fall.

Shoeshine remarked at the time that the share price, after a well-deserved rerating, was looking a tad vulnerable. He also remarked on the company's poor communication of how each of its divisions was contributing to overall performance.

The Dominion reported the next day under the headline "Rampant dollar hurting profits" that "the surging Kiwi dollar is starting to seriously hurt rural and exporting businesses."

Wrightson managing director Allan Freeth said in effect he hadn't made much about the dollar because he didn't want to be seen to be blaming those business performance issues on the currency. Nonetheless farmers "had put their cheque books away, that's for sure."

Well, have they or haven't they?

Monday's survey of regional economies from the National Bank reckoned the economy was firing across all regions for the first time in 18 months. Gisborne, Waikato and Southland ­ bastions, surely, of the rural economy ­ were the fastest growing regions.

Rural New Zealand's economic activity rose 1.6% for the September quarter, the strongest rise in three years. That compared with urban areas' 1.1%.

But that was Wednesday. Thursday's news ­ also from the National Bank ­ was that farmers were the gloomiest of all the country's business sectors.

The bank's business outlook survey, looking at who expected their business condition to get worse over the next 12 months, found pessimists outweighed optimists in the agricultural sector by 44.2%.

Manufacturers were relatively perky, with pessimists outweighing optimists by a mere 25%. Next came services industries (a net 18% gloomy), retail (15%) and construction (8%).

The key reason for farmers' grumpiness, the National Bank reckoned, was the dollar, which started the year at 52.3USc and had since hit 64.7USc.

Then again, farmers had been the gloomiest sector since August 2001.

That was one of the best farming years on record and back then the exchange rate was 44.3USc.

Most observers read the conflicting signs as indicating farmers, while they've had it better, are still doing all right by historical standards.

But the effect of their spending crackdown can't be doubted.

While Wrightson is doing its best to be upfront about the rural supplies division's performance issues, it isn't the only company finding the going tough.

Pyne Gould Guinness' farm supplies division this year saw earnings before interest and tax fall 47% to $2.6 million.

PGG said a review had identified "a number of ways to improve the way we run this business and be more responsive to clients' needs" and reckoned "we can definitely lift our game to do better in farm supplies despite the more competitive and challenging environment."

The two companies are no doubt watching each other closely.

A third victim of the spending slowdown is Tru-Test, whose weighing machines and fencing are sold through PGG and Wrightson's stores.

This week the company reported a profit fall to $2.4 million, from $2.7 million a year ago and has fallen well before earnings forecasts made at the time of a share issue in late 2001.

Profit-takers note: with competition increasing, Pyne Gould Corporation holding a 56% PGG stake, and a 19.9% Fonterra stake in Wrightson possibly under review, the sector is a good bet for consolidation.

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