Market Development
Both international and domestic crop market prices have declined during the quarter which reflects expectations of a 2013 supply response to the high prices seen since last summer. U.S. production especially is expected to rebound from the drought struck 2012 harvest and as a major exporter this has a large impact on international price developments. Reports of planting intentions together with stock revisions have contributed to this outlook. The general picture for Russia is mixed depending on region but also here the majority of estimates foresee a 20-30% rebound in total 2013 grain production from 2012 with a large exportable surplus. So far it is too early to predict with any degree of certainty, but near term weather conditions affecting final crop yields will be the key factor as we get closer to the 2013 harvest season in the northern hemisphere.
Q1 Sales & 2013 Financials
We sold 66 thousand tons in total, 50% of the carry-in inventory, during Q1 2013 with the majority of volumes consisting of corn, sunflower and barley. The average price of USD* 292 per ton is up 67% year-on-year which is a reflection of improved market prices but also better internal preservation of crop quality. The remaining 63 thousand tons of 2012 crop held in inventory, valued at USD* 21.5 million as of March 31st, has now also been sold
Given the seasonality of the business there is limited activity during the first quarter in terms of production with sales of 2012 crop inventory being the main factor affecting our financials. Given the fact that we mark our crop inventory to market, realized sales prices and the development of market prices is the main factor affecting the first quarter result. As market prices in general declined sales prices during Q1 were lower than the carrying value as at December 31st, therefore the gross result was USD* -4.7 million.
This was driven by both realized sales volumes and a USD* -1.6 million revaluation loss on the 63 thousand tons of crops still in inventory as at March 31st. G&A and distribution expenses were up a combined USD* 0.8 from 2012 as personnel and consulting expenses as well as transport costs were up year-on-year. The first quarter operating loss of USD* -10.4 million compares to USD* -5.5 million in 2012 and the deviation is mainly a reflection of the differing market price developments, i.e. rising prices in 2012 versus declining prices in 2013. If P&L revaluation effects from crop inventory and cost of sales are excluded, EBITDA for Q1 2013 was USD* 5.6 million compared to USD* 1.7 million in 2012. Operations generated positive cash flow of USD* 2.7 million in Q1 2013 vs. USD* 3.3 million in 2012 as the carry-in crop inventory was sold while outflows were limited by seasonal factors.
Spring Seeding & 2013 Crop Area
Approximately 900 hectares or 1% of the autumn seeded area was lost due to winter kill which is low compared with 3-4% in the past two years. The winter wheat area came out of the winter in a good overall condition as we finished autumn seeding earlier than previous years. Spring was somewhat late this year again but April was dry enabling good planting progress. Weather conditions so far have been benign for the majority of our area with good soil moisture levels. As of May 22nd 152 thousand hectares have been seeded with spring crops, 97% of the planned area with average seeding rates 5% ahead of last year and 14% better than 2011. The spring crops that have been drilled so far have established well and we expect the total 2013 crop area to be approximately 230 thousand hectares. Operational progress continues, not only in terms of efficiency but also in terms of quality of field works and in regards to the level of control and attention to detail. An extensive training program has been implemented for machinery operators in order to continue our push towards operational excellence. Our internal R&D will also be ramped up to continue to improve objective decision making and crop yield potential. Weather conditions during late May and June will of course be important for the final yield outcome, but I believe that there is higher potential for good crop yields at this stage of the season. Although the 200 hectares planted with potatoes this year for delivery to Frito-Lay (PepsiCo) is relatively small, we have executed this initial stage very well. It has been a complex project in getting seed, specialist machinery, irrigation etc. commissioned and working well but this has been accomplished in a short period of time. We are pleased with how this is progressing and are planning for the continued ramp of the area for 2014 and 2015.
2013 Revenue Risk Management
Progress on reducing revenue volatility also continues as 30% of expected revenue from 2013 crop is now priced. This includes both forward sales of oilseed rape for export as well as domestic deliveries of sunflower and potatoes to Frito-Lay plus malting barley to local brewers. All sugar beet volumes have also been contracted for local deliveries. Our plan is to export a large share of the wheat harvest but so far it has been difficult to contract for physical sales of wheat to be harvested 2013. Therefore international futures markets have been used to establish hedged positions against a potential drop in wheat prices. We expect to increase the percentage of revenue with fixed pricing as we get closer to harvest and the potential range of final production volumes becomes narrower. Current spot price levels are still highly favorable from a historical perspective but we are not counting on elevated prices for the 2013 harvest. Focus remains on continued operational improvements to lower the cost per ton of production in order to be competitive and profitable at lower price levels than we see at the moment.
As mentioned in previous reports we have also taken out crop yield insurance for 2013 crop to protect against negative weather events affecting crop yields in our operating regions. All these measures should contribute to lifting profitability but also reducing volatility in our results going forward.
23 May 2013
Richard Warburton
CEO and President
Black Earth Farming Ltd
* The functional and presentation currency for Black Earth Farming is RUR. For the convenience of the users of this report USD amounts are also presented – see note 2 (d).
