SYDNEY, AUSTRALIA — In his address at GrainCorp’s annual general meeting, company Chairman Don Taylor warned that in contrast to the strong crops of recent years this year’s drought impacted wheat crop would mean significantly lower grain volumes in GrainCorp’s elevators. This drop in receivals will negatively impact the company’s profit.

“We are clearly entering an environment with new challenges. The drought conditions that have prevailed in northern NSW and Queensland had a big impact on growers and their crops — substantially reducing the volumes coming into our network,” Taylor said. “ Coupled with an export program that is heavily skewed to the first months of this financial year, much of our country network will stand almost empty for the second half of our financial year. We are also looking at increasingly intense competition — both up-country and at the ports.”

During his address, he noted that GrainCorp recorded another strong result for 2013 and continued to deliver on corporate objectives. “The underlying net profit after tax of A$175 million reflected strong grain volumes; but it also highlighted the benefits of our diversification strategy, with strong contributions from our marketing and downstream processing businesses, including the new business, GrainCorp Oils. The total dividend of A$0.45 cents per share reflects our objective to be a reliable dividend payer, by distributing approximately 40-60% of NPAT through the cycle.

“We measure our overall performance against return on equity. We achieved a 10.1% return in 2013 and have averaged 12.5% over the last three years,” Taylor said.

Taylor further emphasized the disappointment in the Australian government's rejection of the takeover bid by Decatur, Illinois, U.S.-based Archer Daniels Midland Company (ADM). “As you know, after rejecting two earlier offers GrainCorp’s board unanimously recommended a third offer from ADM, as we firmly believed this materially improved offer was in the best interests of our shareholders.

“The rejection of the offer was obviously very disappointing; however, that decision is made, and we cannot afford to dwell on it.”

He further noted that GrainCorp is operating in a fiercely competitive environment. “At port there are now four competing bulk export terminals — and up to 2.5 million tonnes of grain bypasses bulk facilities altogether and is exported in containers. Regulation of our ports continues to be a focus, while our ports are regulated by the ACCC, three of the competitor terminals are free of regulation, and the new competitor terminal in Newcastle loaded its first vessel last week unencumbered by any of the strict disclosure or capacity allocation constraints that apply to our terminal.

“Up-country, we have to fight hard for every single tonne of grain and the competitive pressures are growing significantly. We have a wide variety of competitors, many of them large multinational grain companies with financial backing and the strategic intention to compete aggressively. There is now enough country storage capacity to hold the average east Australian crop two and- a-half times over — and there is more storage being built all the time.

“To compete effectively, we need to provide the highest levels of customer service, as well as competitive prices, to attract growers and grain into our network.”

Taylor noted that GrainCorp is assessing how the company can strengthen its network and free up capital to allow investment in the core sites that growers strongly support. This will involve some sites growing, some sites shifting focus, and some unviable sites closing. It’s a process we are working through carefully, methodically and in close consultation with our customers," he said. "We are also working closely with governments, as investment to improve the rail link between country and port remains critical to the competitiveness of our entire industry.

Taylor added that the company’s challenges further demonstrate the importance of the board’s diversification strategy.

“The solid performances of GrainCorp Marketing, GrainCorp Malt, GrainCorp Oils and Allied Mills this year mean that they now make up almost 60% of our earnings. This proportion is up from 25% just four years ago, and we expect it to grow further, to around a two-thirds contribution in a ‘normal’ year. By reducing our reliance on the contribution of one single business unit, we place our business on a much more sustainable footing.”

In closing out his speech, Taylor commented that the GrainCorp board is in the process of looking for a new chief executive officer (CEO). “I have given a commitment to the board that I will continue as interim CEO until the appointment of a new CEO. I am hopeful that this process will be completed by mid-year.”