Agriculture division review

Trevor Grant Managing director, Agriculture division

Financial performance

Financial highlights

Our Agriculture division’s range of specialised products and services are encompassed by its unique Nutriology^® offering, which helps customers optimise crop yield and quality.

Operational performance

Global operating environment

This year saw extreme weather conditions across the globe. Australasia in particular has had widespread devastation caused by extensive flooding. The worst floods to hit Australia in over 50 years have severely affected mining and agricultural activities. Investment bank JP Morgan expects food prices to spike as a result of up to 50% of the country’s crops being affected, with an estimated 20% literally wiped out. Global weather extremes and subsequent crop damage have sparked new concerns on food availability and food security.

These conditions, coupled with low global food inventories, have led to an increase in the international maize price which, in turn, has fuelled global demand for fertilizer and has caused an increase in international fertilizer prices.

South African consumers have been partially protected from spiralling food prices by the strength of the rand as well as by the challenge the country faces in using the prior year carryover maize surplus.

Trading conditions in countries to the north of South Africa in general remain challenging, and continued rand strength has made South African-produced products less competitive compared to US dollar-based imports, resulting in a significant portion of fertilizer requirements being sourced internationally rather than from South Africa.

Prices of raw material fertilizer inputs increased sharply, by up to 34% in some instances. However, due to the continued strengthening of the rand, local agricultural markets were protected, to an extent, against the full impact of price increases.

Local operating environment

Major players in the African fertilizer industry have restructured their operations, resulting in fundamental changes to the sector this year. Fortunately, we anticipated these changes, and were thus well placed to capitalise on the restructuring process, which contributed to improved volumes and operating profit.

Due to industry changes, Omnia Fertilizer has become the only chemical compound fertilizer producer in South Africa. This bodes well for the year ahead and increased focus has been placed on Omnia’s superior product offering and Nutriology^® model, which both deliver superior on-farm performance.

As a result of late rains during the year, and the attractive returns associated with sunflowers and soybean, significant hectares have been switched from maize to these two crops, with a resultant decrease in planted maize hectares of 13,5%. In addition, plantings of sunflowers and soybeans have increased by 61% and 34% respectively. Should this crop switch be an ongoing occurrence, the size of the South African fertilizer market will reduce from past levels.

The market continues to evolve, and with our Nutriology^® model, we are well positioned to take advantage of the changing agricultural landscape.

Agronomic support services

The Omnia Nutriology^® model continues to be agronomically driven. This entails use of a large team of agronomic specialists supported by competent technological services. During the period, all three of our laboratories at the Sasolburg facility received ISO 17025 certification for specific element analysis, including analysis of potentially harmful elements (heavy metals). In addition to rigorous product quality control testing, the laboratories perform raw material, microbial, soil and plant sap analysis. This uniquely positions our laboratories to certify products according to stringent European GAP requirements.

OmniSap^® samples have increased significantly over the prior year. In the pursuit to maximise crop yields for food security, this is significant as OmniSap^® analysis can be used to determine whether the crop/ plant has absorbed its nutrients in the expected ratio during any growth stage, monitor the fertilizer recommendation programme, and identify problem areas. By using this technology, the farmer can rectify possible nutrient deficiencies timeously to lower the producer’s risk and maximise yield.

The FAO (Food and Agriculture Organisation of the UN) states that by 2050, world food production will have to increase by 70%. Some 80% of the production increase is projected to result from increased yield and cropping intensity in developing countries.

As progressive farmers make the transition to technology-based farming practices, we offer a full range of support services. OmniPrecise™ is a complete precision agriculture service for our customers. Precision agriculture can be viewed as a management system, through which farmers use resources on their land optimally by applying modern technology to improve profitability.

Research and development

Our research and development department continued research into new products. Particular focus was placed on micro elements and the new emerging market of the “health” range of products.

Financial performance

As a whole, we had a pleasing year, with the South African and Zambian operations performing well. The strong rand and unfavourable ammonia:urea ratio adversely affected the South African operation’s profitability. Zambia achieved record sales volumes resulting in the second-best financial performance in the operation’s history.

Revenue for the period increased 10% to R3 680 million (2010: R3 337 million). This can be attributed to higher volumes, coupled with rising international fertilizer prices.

Operating profit was strong at R312 million against a prior-year loss of R85 million. This loss was primarily due to a R350 million abnormal downward valuation of inventory against the background of turbulent commodity and fertilizer prices during the previous year.

Outlook

Our key challenge will be to continue demonstrating the advantages of our Omnia Nutriology^® model and its superior chemical compound product. Raw material costs and availability will play a significant role in our overall performance next year.

Global agriculture markets for the year ahead look positive. Agriculture commodity prices reached levels last seen prior to the financial crisis in 2008. Food security has again topped various countries’ agendas, driven primarily by low global cereal inventories and concerns on current crop damage in various regions. The world is likely to experience regional food shortages and the full effect of rising prices is still to be felt by the consumer.

The upswing in agricultural commodity prices has fuelled demand for fertilizer globally. Although fertilizer price increases have not been as pronounced as the increase in agricultural commodity prices, the same trend is definitely evident.