The growth in demands for agribusiness products including processed oil and feed ingredients for livestock seems to be picking up. The generation of profits for those companies has been largely determined by agricultural commodity prices that are volatile constantly and their ability to pass it along value chain.  

Sector’s current, trend, causes behind trend, and future

Current and Trend

• The growth in demands for processed vegetable oil and feeding ingredient for livestock has been negative for a few of years but may be picking up since 2017.
• In the past few of years, due to weak demand and thus the oversupplies the commodity price had been under pressure. However, driven by increasing demand the price has gone up since 2017 but the increase in price may be slowing down as supply increased as a result of increase in price and demand declined.
• Volatile commodity price created difficulties on companies’ flexibility in budgeting and caused instability of earning of many companies that heavily rely on forecasting on changes in supply and demand of commodity.

 

Causes behind the trend

• The fluctuation in sales volume may have been caused by changes in the sector of feeding ingredients of livestock food. The demands for animal feeding products decreased in 2015/16 because of the declining demands for meet protein provided by pork and chicken. Sales volume of companies in this sector increased in 2017 has also been a result of increase in demand for pork and chicken.
• The fluctuation in sale volume cannot alone explain the significant volatility in sales of companies in this sector. The volatility in commodity price and thus in selling price of processed products usually has also impact on sales numbers.
• What determined commodity price is very complicated and difficult to predict. And the factors may vary time to time. How the commodity price influence selling price of final products is also a complicated process. It usually works with derivatives and companies’ inventory management to determine the costs of goods sold, which are usually different for different companies and compete for expected margins to determine the lowest selling prices. Therefore, commodity price usually has no direct impacts on sales volume but has significant impacts on all companies’ margins and profits.

 

Industry Future

Except for alternative oil and animal feeding protein products, we cannot see any critical factors rising to changes market’s demands for edible vegetable oil and animal feeding ingredient that are currently produced in this sector. The services demands related to that agricultural commodity will keep strong as well. However, in long run changes may happen as consumers change their consumption behavior for premium vegetable oils and meet proteins. 

 

General Financial Performance of Companies In the Sector

Factors that influence demands for commodity and products that companies purchase and process mainly include demographic development and demands for meet protein/animal feeding.  Our data indicates that the global demands for agricultural commodity and processed oil and animal feeding protein seem to be rebounding in 2018 after continuing decline of several years, which can be partially attributed to declining demands for meet protein from pork and chicken.

Stronger demand seems to be supported by 2-3% annual growth in sales volume in 2017/18 from some of typical companies in this sector as compared with the average sales volume’s decline (at about 2% annual rate) in 2015/16. It seems the profits and cash inflows of the companies in this sector have been determined to larger extent by the margins since cash flow is obviously more sensitive to changes in margins when margins are relatively at low level.

As we know, in the agribusiness the margins are directly related to changes in commodity price, which are usually volatile in a large range. While the changes in commodity prices can be passed on to the prices of final products, due to time delays or use of future contracts, companies’ operating margins and thus operating incomes fluctuated during the time when commodity price are volatile as a result of changes in supply and demand. The average operating income in this sector decreased by 20-50% annually in 2016/17 when the commodity price went up but sales did not yet. However, as sales caught up and the rise of price slowed down in 2018 we have seen a large improvement in operating income of those companies (an average 120% annual growth).

Therefore, the companies’ fluctuated financial performances for some certain years have been determined to large extent by the volatile commodity prices and in the long run it generally has nothing to do with how the companies use derivatives to mitigate the impacts from trading market. It may be helpful in planning your budgets but not in improving income. Therefore, since we are not able to predict the changes in commodity prices, which are related to the whole agricultural environment and get involved with many uncertain factors we are not going to predict the agribusiness companies’ financial performances including operating income or cash inflow. Focus should be given beyond cycle of commodity prices fluctuation.

According our data, the sector‘s average enterprise price/EBI ratio has been fluctuated (relatively stable price of stock), a signal that capital market filtered the part of impact to the stock price from commodity market. We think a multiple of 20-26 may be appropriate to reflect the stability of cash flow generation and security of assets among companies in this sector.

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