Saskatchewan-based AGT Food and Ingredients was riding a high in 2016.
In May its stock hit highs of more than $40 per share. Almost a year and a half later, the story had changed and AGT stock hit lows of almost $18 per share — a level not seen since mid-2014. Marching in near lockstep with AGT stock were pulse crop prices.
AGT is a pulse crop and durum wheat buyer, processor and exporter with locations around the world. The company has diversified in recent years by purchasing railways and building its food-processing divisions.
If you hold a graph of AGT’s stock prices from the last five years over a graph of Saskatchewan lentil prices from Statistics Canada the lines are extremely similar. At the start of 2013 lentils were sitting at $420.86 per tonne and AGT stock was around $13 per share. As the price of lentils edged up over the following years, AGT stock followed suit. When AGT stock hit over $40 per share in May 2016, lentil prices had hit a high only a few months before at $1,051.89 per tonne.
The price of pulses in Canada was driven higher following the 2015 harvest. India, a large consumer of pulses, had suffered from two consecutive years of drought. In 2015, India bought 30 per cent of Canada’s pulse exports, totalling 1.5 million tonnes.
“This is a commodity cycle. As prices accelerated demand was really strong, farmers planted more acres here but they also planted more acres in other countries around the world… So I think what we’re seeing now is the reaction, commodity prices have come down. The cycle will reset itself,” said Murad Al-Katib, president and CEO of AGT.
Moves with markets
As the Canadian pulse crop was planted and harvested in 2016 prices began to show the changing marketplace. In July lentil prices dropped to $870.78 per tonne and $721.05 by October. AGT stock followed suit and started to fall.
Over the summer of 2016 prices fluctuated, at times dropping to below $32 per share and other times hitting more than $36 per share. In October stocks were sitting around $38 per share but as lentil prices continued to drop over the next year AGT stock followed suit, dropping to around $25 per share by May 2017.
The summer of 2017 was clouded with uncertainty for the Canadian pulse industry. A regularly renewed fumigation exemption from the Indian government was only renewed for a few months. As the deadline drew closer no further exemption was granted, leaving Canada sitting in the dark.
In October the Indian government began to sell off its 1.8-million-tonne stockpile of pulses, adding supplies to the world pulse marketplace.
The uncertainty in the pulse industry transferred over to AGT. On Nov. 6 the company released its third-quarter results to investors which showed a dismal picture. AGT’s adjusted gross profit for the quarter had decreased from $47 million as of Sept. 30, 2016 to $29.4 million as of Sept. 30, 2017. AGT stock as well had dropped as a result of the low pulse prices.
“The market has reacted to us to say, ‘Look your earnings came down.’ So we got punished, our stock was down, I don’t know, 40 per cent, that’s a big reduction in the value of our company,” said Al-Katib.
Most of AGT’s profit in the quarter came from its food ingredients and packaged food divisions. The company also announced it had received a 99-year loan of $190 million from Fairfax Financial Holdings Ltd. at 5.37 per cent, which allowed AGT to reduce its net debt by 29 per cent. Stock that day closed just over $20 per share.
A few days later more bad news came for the pulse industry. India placed a 50 per cent tariff on all pea imports into the country. The tariff was meant to help prop up domestic pulse prices for Indian farmers. Two days later AGT’s stock dropped to less than $18.50 per share.
Over the next month AGT’s stock did regain some of its value. On Dec. 18, AGT announced a 20-year agreement with Fibreco Export Inc. a wood fibre exporter, to construct a terminal at its port space at the Port of Vancouver.
The pulse industry was dealt another blow only a few days later. On Dec. 21 India placed another import tariff of 30 per cent to chickpeas and lentils. However, AGT’s stock didn’t plunge this time, instead falling only a few cents to just under $20.40 per share.
“The latest tariff was lentils which should have obviously (affected our stock) if people were concerned… (but) we’ve communicated to the market very clearly stability in our financing. So our balance sheet is strong, our food ingredients business is growing and we’re diversified,” Al-Katib said.
When pulse prices were high Al-Katib said AGT was planning for the future by reinvesting profits back into the company. Approximately $60 million to $70 million per year for the last five years was invested into different infrastructure projects, including processing facilities around the world and shipping systems in Canada.
“Those types of investments are going to continue for us. We’re going to continue strongly into this value-added ingredients and we’re going to continue to look at the production of food products from pulses,” Al-Katib said.