Poor crop quality, a late harvest and plummeting prices contributed to slumping margins at the end of 2016 for the world’s largest pulse processing company.
AGT Food and Ingredients posted margins in its pulse and grain processing segment of $64.68 gross profit per tonne in the fourth quarter, down from $92.42 the previous quarter.
“The quality in Canada was more adversely affected than our original estimates,” company president Murad Al-Katib told investment analysts during a conference call.
“It did in fact reduce the velocity of our shipping programs and exposed AGT to quality claims and margin pressures.”
The late harvest didn’t help matters. AGT was unable to deliver product during the agreed upon period in some contracts.
“Discounts were very, very deep. We’re not talking about $10 per tonne discounts. We’re talking about $100 per tonne discounts, $200 per tonne discounts,” he said.
However, perhaps the biggest factor contributing to the slumping margins was the rapid decline in pulse prices.
New crop wholesale lentil sales that started at $800 per tonne have fallen to the mid-to-high $500 range, which led to millions of dollars in losses for importers and more defaults than usual.
Al-Katib said defaults, quality claims and discounts shaved $5 million off of earnings for the quarter. He said the problems have largely been dealt with and he is forecasting strong pulse demand for the second half of 2017.
Margins were also down in the company’s bulk handling segment because of a dismal Canadian durum crop, which accounts for about 25 percent of AGT’s bulk handling business.
“I don’t know if we’ve historically ever seen durum quality worse than it is this year,” said Al-Katib.
Deliveries were slowed by having to blend high vomitoxin durum with better quality crop.
While the fourth quarter had its challenges, Al-Katib was happy with the overall results for 2016.
AGT posted adjusted earnings before interest, taxes, depreciation and amortization of $118.8 million for 2016, an increase of 18 percent over the previous year.
“We’re pleased to report a consistent performance for AGT in 2016.”
Earnings in the high margin food ingredients and packaged food business slumped slightly in the fourth quarter compared to the third quarter, but Al-Katib is confident business will rebound.
He said demand for pulse proteins, flours and starches remains strong in the pet food business and is starting to gain traction in the dairy and extruded snacks side of the human food business.