GrainCorp: Profitability Should Snap Back to Reality as Harvests Normalize

Three consecutive bumper crops and strong demand for Australian grain have allowed no-moat GrainCorp GNC to command historically high supply chain margins in recent years. Global supply shortages amid a poor Northern Hemisphere harvest and disruption to production and trade from the Ukraine/Russia conflict have lifted global pricing, encouraging exports and allowing GrainCorp to maximize capacity in its processing infrastructure. We forecast fiscal 2023 EBITDA of AUD 525 million, based on an above-average east coast winter crop of about 31 million metric tons. But back-to-back-to-back bumper harvests aren’t typical, particularly in combination with globally high grain prices. We expect GrainCorp’s profitability to normalize over the coming years as cropping normalizes and we maintain our AUD 7.20 per share fair value estimate.

While grain volumes can fluctuate from year to year, over the long run, GrainCorp’s value hinges on a normalized crop-growing year, which won’t be as lucrative. The Australian Crop Report, released by the Australian Government’s Department of Agriculture, Fisheries and Forestry in September 2023, forecasts the 2024 east coast winter grain production of about 21 million metric tons, a 30% decline from 2023 production. Pricing has also moderated over the past year as Northern Hemisphere supply improves, with Chicago SRW Wheat Futures down 35% since September 2022 to about USD 6/bushel. We forecast fiscal 2024 EBITDA of about AUD 300 million—a far cry from record fiscal 2022 EBITDA of AUD 703 million.