Farmlands, or agricultural landscapes, captures the interest of a number of researchers based at the Department of Human Geography, Stockholm University. On this blog we share information about research findings, activities, events and comments related to our work.

Our interest in farmlands has three roots: farming, landscape and society.
Farming as a practice, including farmers knowledge and labour investments
Landscape as society-nature relations, congealed history, and as space and place
Society as a short form for institutions, gender relations, political economy and scientific relevance

Most Welcome to FarmLandS!

Sunday, October 5, 2014

Interim Results from current agricultural season of the Swedish Agroholdings in Russia and Ukraine

Originally, I wanted to blog about how the current crisis in Ukraine is affecting or not affecting the "Swedish" investments in Ukrainian and Russian agriculture -- such as Black Earth Farming, etc... However their recently posted half year results (see below) do not give an indication of much of anything, and that points to a completely different problematique, i.e. the special problems agricultural firms face in reporting results, which itself can be said to be part of a larger problem concerning the degree to which corporations can optimally conduct farming compared to family (or peasant) owned and operated farms.

The diagram below shows the relationship between net profit/loss as published in the half year results of  four "Swedish" firms between 2006 and 2013 and the final annual result for net profit (Note that data for the entire period 2006 to 2013 was not available for all the firms, for example for Grain Alliance (GA), there was only data for 2013). The x-axis is net half year profit/loss in kr, and the y-axis is net annual profit/loss. BEF posts their results in dollars, while Trigon posts their results in Euro, so I have used the average annual exchange rate from dollar or euro to Swedish kronor, which are published by the Swedish Central Bank. Arrayed on the x-axis in blue are the half-year net profit/loss results for 2014 in kr (annual results for the year have not yet of course been published). Note that Agrokultura has posted an interim net profit of 47.7 million kr, for 2014, which however becomes a net loss of 48 million kr when taking into account the sharp decline in value of the Ukrainian Hryvnia. I have chosen to use the latter figure in this diagram. In any case, as shown in the diagram there is only a loose correlation between half year net profit/loss results and annual profit/loss results (r2 = 0.0305).   

Generally speaking, interim results are a good indicator for annual results, at least according to an article published in 1972 by Reilly, Morgensen and West in the Journal of Accounting. OK, that's a rather old article, but this is just a blog. (It would be interesting to see how agricultural firms compare to non-agricultural firms in terms of the relationship between interim and annual results, and how vertically integrated food processors compare with “pure play” companies such as the Swedish agricultural companies in the former Soviet Union) Obviously firms in sectors that experience a lot of seasonality will see more fluctuation in interim results in relation to annual results, and agriculture is definitely a sector with a lot of seasonality. The problem here however is not the seasonality per se, but the way in which international accounting principles stipulate that crops growing in the field should be valued for the purposes of financial reporting.  IAS 41 Agriculture, which are the international accounting principles that all the Swedish listed firms use, state that, after enough “biological transformation,” the crops should be valued according to “fair value,” less cost of sales, and, importantly, that the fair value of the crops should appear in the income statement as revenue. That is how we can talk about these firms being profitable before they have sold any of the harvest. The problem is that fair value depends on yield and prices, both of which are constantly moving targets. The basis for “fair value” for the first half of the year is generally taken to be the yield estimate and prices on 30 June, but even this close to the harvest of winter wheat, when one should have a good idea of what the harvest will be and what price it will fetch, small adjustments in either can have a big impact on the bottom line. A second factor affecting quarterly results is how slow or fast companies sell their harvest. Generally the largest part of the harvest is sold in Q4 of the year of that harvest, the second largest part of the harvest is sold already in Q3 of the same year and then the third largest part is sold in Q1 of the next year. But depending on storage capacity and what they think future prices will be, companies can keep crops in storage hoping that the prices will be better in the future or they can sell them relatively fast, believing that prices will only go down in the future. The first scenario will make a farming company’s bottom line look worse for the calendar year in which the harvest was gathered, but better during the next calendar year. At times, companies can still be selling crops into the second quarter of the following year. Finally, it has to be mentioned that late summer crops (corn, sunflower, soy) have an increasingly large impact on the annual result -- something that would not be visible in the 1H / 2Q reports because not enough biological transformation has happened to make a fair value assessment. 

To go back out to the big picture, firms listed on the stock exchange are obligated to publish interim and annual results (though auditing requirements are stricter for annual results). For agricultural firms, this in turn requires that the firms account for the value of crops growing in the field. Internationally accepted accounting principles state that crops growing in the field should first be valued at cost, but then, after enough biological transformation has occurred, they should be valued at fair value, and posted in the income statement as revenue, despite it being unrealized. This can be and often is the  largest item on the revenue side in interim results. (For more on IAS 41 Agriculture and how fair value is arrived at, see Fischer and Marsh 2013) The firms have not come up with this by themselves, and if anything, we – coauthors and I – have heard a fair amount of criticism about the fair value exercise coming from representatives of these firms in ongoing research we are conducting. Black Earth Farming's 2Q 2014 results are interesting in this regard. In what can only be described as a good faith effort to really arrive at a fair value, they explain in some detail how they are changing their fair value accounting. One of the main points to make about this is this is not something that a family farmer would have to go through. 

Is there another way to tell half way through the year, if it will be a good year? The answer is not really -- because it is too early to  make an assessment of the late summer crops. One can say at this point that, however, just as the spring was favorable in terms of weather in Ukraine and Russia, the fall is shaping up to be hot and dry, so the yield of summer crops will be negatively affected, even as prices, at least according to this article, continue to fall. 

Third quarter results are a better indicator of the final annual result, since as assessment of the summer crop outcome is possible. The diagram below is the same as above, but for 9 month results as reported in the 3Q reports. Note that Agrokultura does not publish 3Q reports, and Trigon did not publish 3Q figures in 2007, so there are a few missing data points. Even here though there is a lot of variation where 9M net result is -60 million kr or more (i.e. from -60 million kr towards 0): at this level of net loss 9 months into the calendar year, annual results have varied from -150 million kr to +50 million kr. So, there are some question marks here as well (and not enough data points).

So we'll have to wait until November, when companies post 3Q results, before we can get a somewhat better sense of how 2014 will be for these companies. This year, probably the biggest impact will be how currency exchange rates affect the bottom line. If I read Agrokultura’s 2Q report correctly, they would have been profitable if the Ukrainian Hryvnia had not lost 50% of value. For the next crop year however, these firms will face tighter credit and more expensive input prices (since many inputs are imported).

No comments:

Post a Comment