All the group’s cane estates were affected by the devastating drought affecting agriculture in the entire southern African region. While the impact on yields in the 2015 season was limited, with low dam levels and little prospect of significant rain before the next summer, production in the 2016/17 season is likely to be far more severely affected.
The expected lower yield affects the profits of the 2016 financial year through its impact on the value of the standing crops at year end, which is based on expected yield and pricing. Total cane production of 616 368 tons was 6% lower than the previous year, mainly due to the impact of the drought and earlier harvesting on some estates.
Fortunately the lower yields in SA were partially offset by an above-inflation price increase in the RV (relative sucrose value) by 16% to R3 979 per ton from the previous year. However, the ERC (estimated recoverable crystal) price in Zambia decreased by 4% to R3 413 per ton and the Swaziland sucrose price increased by only 5% to R2 979 per ton. The Swazi price remains depressed compared to other prices in the region, putting pressure on returns from that estate.
As a result, revenue of R283,3 million was only 0,7% higher than the previous year and operating profit of R61,4 million was 21% lower than the previous year. A decrease in the value of standing cane at year end of R4,7 million compared to that of the previous year due to drought contributed to the decline in operating profit.
While some areas of the Western Cape have been affected by drought, the group’s deciduous farms received ample rain in the wet winter period to fill the dams and carry them through the dry summer. Provided reasonable rainfall occurs in the current winter, no negative impact is foreseen from the drought.
Production in the 2016 season amounted to 81 722 bins, a 33% increase on the previous season.
As a result, in the 2016 financial year operating profit increased by 359% to R57,8 million from R16,1 million the previous year. The excellent result was enhanced by good yields, quality and prices in the 2016 season, the latter boosted by the weak Rand. It is particularly pleasing to see the largescale replant undertaken over the past seven years starting to bear fruit. We expect a continued steady increase in fruit volumes as the replanted orchards mature.
The banana operation at Komati experienced an outstanding year. The orchards were largely unaffected by the drought as the bananas received priority in the allocation of available water, although high temperatures affected quality in the latter part of the season.
Production increased by 10% to 18 669 tons and quality as measured by the Lebombo (first grade) percentage improved from 71% to 77%. The average price increased by 11,8% as a result of the better quality. This improved performance ensured that revenue increased by 23,5% to R104,9 million and operating profit increased by 68% to R26,8 million. Again, it is pleasing to see the positive impact of the large-scale replanting and upgrading undertaken in 2013 and 2014.
A total of 54 further hectares of macadamias were established over the past season. The first-phase planting has been completed and consists of a total of 303 hectares of orchards planted to high yielding cultivars. The development of the trees has been exceptional and we forecast good yields when the trees start bearing. In time, we expect this operation to become a major contributor to group profitability.
The 2016/17 year is likely to be exceptionally tough for the group’s cane operations, with little relief expected from the difficult climatic conditions, as we go into winter with very low dam levels and restricted irrigation in Mpumalanga and Swaziland. It is expected that cane production will drop by a further 10% in the season ahead due to the effects of the drought.
This will be offset to some degree by higher prices expected for cane in South Africa, Zambia and Swaziland. The full impact of the drought will only become clear later in the season when the extent of root mortality and the level of replant required will be established. If good rains do not occur next summer the result could be catastrophic for the industry.
The group has traditionally been highly exposed to the sugar industry, with cane contributing by far the largest portion of income. As our diversification efforts bring results, this dependence is declining. In the past year, for the first time, income from cane constituted less than 50% of group operating income.
We anticipate that deciduous production will continue to increase as new orchards come into production, although the rate of growth might slow next year after the bumper crop of the current season. Deciduous fruit will become increasingly important to the group in the future. The effect of the drought on the banana crop tonnage and quality is unknown at this early stage, but early indications are good and we expect good yields and grades in 2017.
Prices are also expected to be good as the supply to the market is reduced by the drought. The group expects costs of inputs to increase, especially fuel, chemical and fertiliser prices, due to the high exposure of the prices of these inputs to the weak Rand. Above- inflation increases are also expected in wage and electricity costs. Management is committed to disciplined cost control and the continuous improvement strategy is focused on optimising efficiency by increasing yields and quality, improving productivity, and reducing water and electricity consumption.
The group’s prospects for the medium term are exciting, with the replanted deciduous fruit orchards approaching maturity, the macadamia orchards coming into production and the implementation of the Renishaw development imminent. Following the capital raising exercise, several high return projects/acquisitions are under evaluation to build on the group’ s expansion strategy.
- Raising of share capital of R215 million via share issue to Silverlands
- Conclusion of 20-year joint venture agreement with Mawecro community for operation and management of Komati farms
- Approval of investment in 300 hectare banana project in partnership with Silverlands in southern Mozambique
- Receipt of statutory approvals for start of Renishaw property development