Golden Agri takes a hit as corn and soybean prices tumble to record lows

The firm is vulnerable to further pullbacks.

When it comes to profit, there is a bad harvest ahead for Singapore’s Golden Agri-Resources Ltd. The company has taken a hit as prices of corn and soy continued their downward spiral in Q2, with further pullbacks expected as the US could reap a record-high crop this year.

According to a report by OCBC, the continuing decline in corn and soy prices could weigh on crude palm oil costs, which will adversely affect GAR’s margins as one of the largest palm oil plantation owners.

“Over the past three years, GAR share price has shown a strong 0.7 correlation to CPO prices. While Asia is expected to experience drier-than-expected conditions due to the El Nino phenomenon, experts remain divided over the severity of the impact. We have built in a modest impact and are unlikely to revise our US$830/ton forecast at this stage,” noted the report.

Here’s more from OCBC:
According to Bloomberg, soybean futures fell for the 10th straight session on Friday - its longest slump in 41 years, weighed by expectations that the US could reap a record-high crop this year, bolstered by milder-than-expected weather forecast for the growing regions.

The USDA has raised its stockpile forecast (31 Aug 2015) to 415m bushels, up sharply from 325m forecast made in Jun. It expects world inventories to hit a record 85.31m tons, versus 82.88m previously forecast.

Besides soybean prices, prices of corn (another substitute) have also tumbled since May to their lowest levels since 2010.

In the same vein, we believe that the downward spiral in soy and corn prices could also weigh on CPO (crude palm oil), given that it is also viewed as an oil substitute (but slightly behind in the pecking order i.e. consumers tend to switch up to soy and corn oils if the price differentials are not significant).

Indeed, we note that the Soy-CPO premium has narrowed considerably to the 13-year average.