Australia | Jan 15 2007
By Chris Shaw
Since reports first emerged the of financial scandals in dealings in Iraq the share price of AWB (AWB) has been volatile, plunging to below $2.50 per share compared to a year high of more than $6.00.
While this is a reflection of the uncertainty regarding the companys future and that of the single desk for wheat sales, the Wheat Export Authority (WEA) has released its annual Grower’s Report for 2006, which offers some insight into how the AWB is actually performing in its wheat marketing operations.
The conclusions appears to be not too badly, as the report assessed the AWB achieved a premium in the marketplace of between A$0.80 and A$6.16 per tonne depending on the grade of wheat sold. This was based on the 13.7m tonnes of wheat exported in 2004/05, which was part of a total cropping season production of 20.4m tones.
On WEA numbers the AWB actually outperformed the Wheat Industry Board by $18.50 per tonne, with further gains achieved by foreign exchange activities that netted around $179m and so protected the National Pool from the impact of a strengthening currency.
One area where there hasn’t been outperformance is that of storage and handling costs, the WEA noting the AWB’s marketing power is not enough to significantly influence costs in this area.
Commodity hedging has also produced somewhat disappointing results, the WEA finding the practice delivered a slightly lower than benchmark return. Such an outcome impacts on the size of any additional payments made to AWB.
With the drought to impact on total wheat output and exports this year the AWB’s international operations has reduced the fee payable to the AWB, while at the same time the AWB’s outperformance hurdle has been lifted to $7.50 per tonne from $5.00 per tonne, so achieving a similarly strong result this year appears likely to be more challenging.
Further evidence of this can be found in the reduced premiums from price discrimination, which is the selling of wheat at different prices in different markets in accordance to the respective market conditions. The WEA report shows the premiums being achieved by this policy are falling due to increased levels of competition in global markets.
With the analysis also showing Non-AWB exports in several markets are achieving better prices than the AWB has been able to generate, there appears little validity to the argument such exports are undermining the pricing of the National Pool.
While offering no opinion as to whether the AWB’s single desk should remain, the WEA report points out there are termination provisions in the Service agreement between AWB and its international operation, which could result in lower grower returns unless the agreement is renewed on similar terms.
Given the level of uncertainty surrounding the future of the AWB brokers are taking a wait and see approach, as the FNArena database showing the company is rated as Hold four times and Avoid once.
The average price target on the stock is $2.74, which is well below the current share price of $3.19, up 3c in today’s trading.