Shares in Nufarm Limited (ASX: NUF) plunged 8% to $7.72 on Monday, after the agrochemical company flagged a substantial hit on earnings due to continuing dry weather in Australia and New Zealand. Earlier today, the stock had printed a 52-week low of $7.47.
Australian agriculture has suffered one of the driest autumns in the last 100 years. The resulting drop in demand for crop protection products has put significant margin pressure on Nufarm.
The company now expects its ANZ division to contribute between $5 million and $10 million to the group's EBIT for FY18. Last year, the ANZ business had earnings over $50 million.
Nufarm had already revised its earnings guidance in May, setting it on the lower end of a previously forecasted 5% to 10% increase on the FY17 EBIT of $302 million.
Even that prediction appears optimistic now that the company has issued a new EBIT guidance in the range of $255 million to $270 million.
The company has explained that a normal crop season could have still been possible had a rain break arrived in July. The end of last week was a turning point, after which such an occurrence became highly unlikely.
However, the expectation of a decent winter crop led to a high level of imports in the Australian crop protection market. This means that the agrochemical sector now has abnormally high inventory levels. This oversupply, combined with the dry spring forecasted by the Australian Bureau of Meteorology, will probably weigh on Nufarm's sales through to FY19.
Foolish takeaway
I was quite impressed with Nufarm's acquisition of $500 million worth of European patents back in March and thought that an agricultural company with a global presence was well positioned to navigate the seasonal cycles that characterise the industry.
I still think geographical diversification is a point of strength for Nufarm, but the two consecutive guidance downgrades and the negative outlook are making me wonder whether the stock has bottomed out yet.
For the time being, I'd rather look at companies set to grow in 2018, such as these three.
