Stock of the Day – Graincorp (GNC)

Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) estimates winter crop planted area will increase 1.7% year on year in the Eastern states to 10.4mha due to good rains in the 3 months till the end of May. ABARES also forecast winter crop yields to be higher. However given this remains highly dependent on follow up rain in the September Quarter particularly in Northern NSW and QLD, we believe that there remains a higher degree of risk to ABARES’s yield forecasts.




Probability of exceeding the median rainfall in July to September (Source – Australian Bureau of Meteorology)

 
According to ABARES, seasonal conditions have been generally favorable for the FY15 winter crop planting season in WA, SA, VIC and southern and central NSW.  However in most of Northern NSW and QLD conditions have been less favorable and there remains low level of soil moisture in parts of these regions. Sufficient and timely rainfall over winter will be critical to the development of winter crops, particularly in those areas where soil moisture levels are presently low.




Upper Level Soil Moisture Average for May (Source – ABARES, Bureau of Meteorology)

Yields are likely to be low than currently assumed if sufficient and timely rainfall is not received. As a result yield in Northern NSW and OLD remain highly dependent on follow up rainfall in the September quarter. The Bureau of Meteorology predicts a 70% probability of an El Nino event developing in 2014, which often results in below average rainfall. Additionally, the Bureau predicts a 60%+ likelihood that rainfall will be below median levels in the eastern grain production regions in the 3 months to the end of September.
 

GNC Daily Chart (Source – Thomson Reuters)

The average moisture profiles from May 2014 show that conditions were very good for planting in VIC and Southern NSW but far drier in Northern NSW and QLD. The probability of lower than median rainfall in the September quarter is higher in Central, Northern NSW and QLD. As a result, there remains a high degree of risk regarding forecast winter crop yields in FY15 in Northern NSW and QLD in particular. We believe the stock is expensive at its current price and would review the stock at a later date.

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