Why the Select Harvests Limited share price has crashed 72%

Credit: Harsha K R

It’s been a bumpy ride for local investors so far in 2016, with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) down 5.7% in just over three months. As is usually the case however, there are a number of companies that have performed far worse than the broader market.

According to data provided by S&P Global Market Intelligence, no company within the S&P/ASX 200 cohort has fared worse than Select Harvests Limited (ASX: SHV) in that time. Its shares are down 55.4% year-to-date and down 72.2% since peaking at $13.64 in August. The shares are currently fetching just $3.79.

Select Harvests is Australia’s largest almond producer, having yielded 14,500 tonnes of almond kernels in the 2015 financial year, with a crop estimate of 13,700 tonnes expected for 2016. While a reduction in crop size may be a concern for investors, it is likely that investors are more focused on the price for which the company can sell its almonds.

Indeed, the bulk of the world’s almonds come from the United States, or California to be specific. A severe drought in California has pushed almond prices higher in recent years, with Select Harvests getting roughly $11.45 per kilogram in 2015.

But heavy rains have since hit California, prompting a resurgence in supply that has forced prices lower again. Based on Select Harvests’ half-year results presentation, the company was expecting to receive around $9 per kilogram this financial year although, according to Almond Investors, the average price per kilogram had slipped to just $7.35 in February.

That’s down from a high of $14.29 in July 2015 – right around the time that Select Harvests’ share price started falling as well:

Source: ASX

Source: ASX

Now, that isn’t to say that Select Harvests is a bad investment. But as is the case with others in the commodities business, including the likes of BHP Billiton Limited (ASX: BHP) or Rio Tinto Limited (ASX: RIO), Select Harvests has no control whatsoever over the prices it receives for its products, putting it largely at the mercy of Mother Nature.

The rain relief hitting California may prove only temporary, which could see almond prices and Select Harvests’ share price rise strongly again. On the other hand, the rain could continue to fall, depressing earnings considerably.

The risk is perhaps exacerbated by the El Nino weather event, which could see weather conditions fluctuate drastically, creating much uncertainty in the process. It’s a risk that investors take when they buy the company’s shares, and one you certainly need to be aware of.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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