Warrnambool Cheese not a cracker

It hasn’t been a pleasant first half to the financial year for Warrnambool Cheese & Butter Factory (ASX: WCB) with revenues declining nearly 12% and net profit after tax falling a hefty 50% to $15.3 million. Management cited a depressed export market, the elevated Australian dollar, and a highly competitive milk pricing environment for the fall in earnings. On hearing the results the market sold the shares down over 6%.

Unfortunately for Warrnambool and its shareholders this interim result does not bode well for the full year. As the company outlines in the notes to its accounts, “due to the industry and other seasonal factors, it is normal for the half-year operating results to exceed those of the full year”. This scenario is due to the payment structure of the milk industry, which requires Warrnambool to retrospectively pay farmers for any increases in milk prices. Luckily for farmers, though not for Warrnambool, milk prices have been going up and so the company will be stepping up its payments to farmers in the second-half of the financial year.

The drop in profit, the $30 million increase in debt levels, and very poor cash flow generation have led the board to not declare a dividend. In comparison, last year shareholders received a 4 cent interim dividend.

With Australia’s comparative advantage in agriculture and the growing food demands of our Asian neighbours, in theory agriculture and food producers should provide some good investment opportunities. Within the dairy sector Warrnambool’s competitor Bega Cheese (ASX: BGA) increased interim profits by 13.6%, while newly listed Fonterra’s (ASX: FSF) shares have had a good start by trading above their issue price. For exposure to grains, GrainCorp (ASX: GNC) is the only remaining major listed player, while Australian Agricultural Co (ASX: AAC) owns and runs extensive beef operations across Queensland and the Northern Territory.

Foolish takeaway

The weather and commodity prices are inherently difficult to predict, which makes primary production and related industries a difficult area for investment.

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