South America Calling

Even amid near-record soybean and corn prices, Brazil's largest publicly listed farm, SLC Agricola, is struggling to keep investors happy.

Late Tuesday, the corporate producer reported third quarter results that came in well below expectations and included net losses for the quarter and the first nine months of 2012.

Concerns over its inability to post strong results mean SLC's shares are currently trading 34% off their 52-week high at $9.90 per share in New York.

The company reported net revenues of R$268 million ($132 million) last quarter, down 3% on the year, which was attributed  to lower-than-expected yields following excessive rain in Mato Grosso and drought in Bahia during the 2011-12 season, a reduction in the amount of soybeans sold on the year before and falling cotton prices.

Meanwhile, costs of goods sold surged, 31% on the year, due to the increased volumes of cotton and corn sold compared with soybeans but also because input costs rose across the board.

The result: Margins slid.

The Q3 cotton margin dropped 48% on the year to R$50 ($24.63) per metric ton, despite an 11% increase in unit price, year-on-year. Similarly, the Q3 soybean margin slid 24% to R$180 ($88.67) per ton, while unit price rose 32%, and the Q3 corn margin fell 50% to R$70 ($34.48) per ton on a 6% unit price drop.

The bottom line also made for uncomfortable reading with a net loss of R$303,000 ($149,000) recorded for the last quarter, compared with R$62.6 million ($30.1 million) in the year-before period.

The company attributed the losses in part to financial losses incurred on rising debt linked to land purchases -- in Brazil, land purchases are commonly indexed to soybean prices and so the recent run up in quotes has raised the value of outstanding payments on land. But this can't be dismissed as a quarterly blip since the company also reported a nine-month loss of R$12.4 million ($6.1 million).

According to SLC Agricola Chief Executive Arlindo Moura, margins should recover in the fourth quarter, when the company will have a lot of cotton to bill, but admitted that the climatic difficulties in 2011-12 "ate up" a lot of their profits.

Most worrying about this statement is that the weather problems in Mato Grosso and Bahia were marginal compared with the drought losses in the south, where SLC doesn't farm.

It would be a mistake to extrapolate from these numbers that SLC is in dire straits. After all, it is the accountants' job to limit taxable income and production margins remain decent.

But it does highlight the difficulties in transforming high commodity prices into farming profits and also how uncomfortable the investment community remains with the volatility involved in agriculture.

The company's share price dipped 0.8% to R$19.39 in morning trade in Sao Paulo.

SLC is one of the biggest grain farms in Brazil with nearly 650,000 acres in production and just over 100,000 acres in the land bank.

Amid skyrocketing land prices, the acquisition of new plots has proven one of the most profitable parts of SLC's business in recent years.

They were very active purchasers in 2010 and 2011 but, speaking during a conference call Wednesday morning, SLC's Moura said the recent jump in soybean prices have driven the local land market much higher, making it "difficult" to buy.

Currently there are very few opportunities to by "large areas" in the eastern and western Cerrado region, where SLC operates, he added.

"But with the more recent decline in soybean prices, the outlook should improve next year," he told analysts.

(ES)

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