The grain industry is a deeply troubled one, says an analyst who tracks the performance of Western Canada’s grain companies.
David Schroeder, of Dominion Bond Rating Service, says the first quarter financial results released last week by two of the biggest grain handlers illustrates that.
Saskatchewan Wheat Pool reported a net loss of $14.5 million for the three months ending Oct. 31, 1999, while United Grain Growers reported a net loss of $5.2 million for the same period.
Agricore, which is not publicly traded and therefore does not release quarterly financial reports, is posting similar results, said Schroeder.
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The share prices of the two firms reflect investor nervousness about grain. Sask Pool’s common shares traded on the Toronto Stock Exchange closed last week at $6.90, well below the 52-week high of $11.30, while UGG closed at $9.50, versus the 52-week high of $11.80.
Schroeder, who is in the midst of preparing DBRS’s annual report card on the major grain companies, said a number of factors have combined to create big problems.
“Technological change and deregulation are pretty much the most drastic changes an industry can go through, and the grain companies are going through both at the same time.”
Besides those basic structural changes, cyclical factors like low grain volumes, depressed commodity prices and low farm income levels are translating into reduced sales and earnings.
Schroeder said Sask Pool is having a particularly tough time. Just as it embarked on an aggressive and expensive elevator construction and rationalization program, the farm economy and world grain markets were going into a tail spin. With cash flow dropping, the company had to increase its debt load substantially to finance the capital expenditures.
UGG is doing relatively better than its peers in the industry, Schroeder said, thanks in part to its partnership with U.S.-based food industry giant Archer Daniels Midland, the major shareholder in the Winnipeg-based firm.
DBRS is reviewing all its credit ratings for the grain industry and is expected to issue an update in January.
