Morningstar | GrainCorp's Derivative Contract Leads to a Lower Uncertainty Rating
GrainCorp's success in any given year hinges upon the weather, which lately has been frightful for Australia grain production. The business owns significant strategic grain-handling infrastructure along the eastern seaboard of Australia, with large market share in storage, handling, and port elevation services. The diversification into malt production, edible oil refining and processing, and bulk liquid storage reduces earnings volatility and provides new growth opportunities, but results in the traditional grain business are nonetheless heavily affected by weather fluctuations. While cash flow and dividends display less volatility than earnings, we don't believe the firm has carved an economic moat. We expect returns on invested capital to roughly equal the firm's cost of capital in an average crop year.GrainCorp is a food ingredients and agribusiness company. Co. focuses its activities on three main grains (wheat, barley and canola). Co.'s reporting segments are: Storage and Logistics, which include grain receivals, transport, testing, storage of grains and other bulk commodities; Marketing, which markets grain and agricultural products and operates grain pools; Malt, which produces malt products, provides brewing inputs and other malting services, sells farm inputs, and exports malt; and Oils, which includes the processing and crushing of oilseeds. Co. also has a 60.0% joint venture interest in Allied Mills Australia Pty Ltd, a supplier of milled edible flour for human consumption.
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