SHV 2.30% $4.45 select harvests limited

Crop volume projections

  1. 1,060 Posts.
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    It seems that there isn't a great deal of appetite for Select shares at the moment. 

    Possibly, an improvement in the drought situation in California might have something to do with this. About two inches of rainfall was recorded in central Fresno over the past month, which is slightly above average for January.

    But a more significant factor, I suspect, is the somewhat lacklustre crop projection by the company, which might be discouraging prospective investors.

    https://hotcopper.com.au/data/attachments/1423/1423188-f3aad22a414036407a67e732d2003436.jpg
    The 8% projected increase shown above isn't much to get excited about. 

    But let's take a step back, and look at the equivalent crop projection chart that was put out by the company prior to the 2017 harvest: 

    https://hotcopper.com.au/data/attachments/1423/1423193-4fef4fcc03e254269e7dff8280534176.jpg
    Things didn't pan out quite as expected. The 2017 crop weighed in at 14,100 mt, below even the harvest volume of the previous year, and way below the 15,200 projection.

    My suspicion is that these crop projections are largely bunkum: given the vagaries of precipitation, temperature and other weather phenomenon that influence the size of an almond crop, the actual harvest would seldom weigh in anywhere near the projected forecast, and the projections more than 12 months out are surely not much more than guesses.

    Although in 2017 the actual crop ended up being much lower than the forecast, in 2019 I think there is some reason to suspect that the actual crop is likely to be higher than the projection.

    The 2018 crop was 15,700 mt, which was slightly below the projected forecast of 15,816 ('AGM Presentation', 24/11/17)

    But given the severe frost damage to the crop in the Northern orchards in late 2017, this actually wasn't a bad result. Fortunately, we can be fairly confident that this won't be an issue for the Northern orchards this year, as despite some chilly weather in early Spring last year, it seems that the frost damage was minimal.

    So, how much did those late frosts of 2017 shave off the crop volume last year?. It would seem that the impact was quite significant.
    https://hotcopper.com.au/data/attachments/1423/1423232-adb263f0fe1fd66cb48dce3c142ff50b.jpg

    The graphic above, taken from one of the announcements last year, suggests that the yields in the northern orchards were nearly half that of the orchards further south. In the southern region, in particular, it was a different story, with yields apparently about 25% above the industry average. This proved fortunate, as it largely compensated for the poor yields from the trees in the north.

    Of the 15,700 mt, 700 was from 'New plantings maturity', as is stated on pg 20 of the announcement of 29/11/18 ('SHV 2018 AGM Presentation')

    This phrase is ambiguous: does it refer to the substantial number of three year old trees that were producing the first time last year?. Or does it also include the rising yields of all the other young trees, aged 4, 5, 6 years?. 

    Drilling into the numbers, it looks like it includes everything: 14% of Select's trees were three years old last year, and the yield of a tree of three years is only about 14% of a fully mature tree. 

    The fully mature trees produced about 15,000 mt of the total crop last year, x14% =2,100, x 14%= 294. So it would seem that the three year old trees contributed about 300 mt to the total crop last year. The 4, 5, and 6 year old trees would have contributed the bulk of the remainder, adding up to 700 all up.

    Around 25% of the mature trees are in the northern orchards. So, if they hadn't been damaged by frost last year, they should have produced a crop of about 3,750 mt (25% of 15,000). 

    But, as can be seen in the graphic above, yields in the north were nearly 50% below that of the other orchards: that suggests that frost damage in the north knocked 1,750 mt off the trees.

    Almond tree yields tend to rebound strongly in the year after a poor crop, so it would be reasonable to expect the northern crop to be at least around 3,750, or about 1,750 higher than last year. 

    However, it also should be borne in mind that the opposite would be also true in the orchards to the south: after a strong year, almond trees tend to have a less impressive 'off' year. So you would expect the yields of the central and (especially) the southern orchards to be lower this year. 

    But the central and southern regions is also where we find that large number of young trees, with rising yields each passing year. In particular, around one in seven of the trees owned by Select are aged four years this year.

    This is significant: as can be seen in the graphic below, in the fourth year, the yield of an almond tree is about three time that of a three-year old tree. 

    https://hotcopper.com.au/data/attachments/1423/1423258-fde10a8399b57bb0d967cd2958fe135a.jpg

    So, that large number of four year old trees could be expected to produce about 900 mt in 2019, about 600 higher than the previous year. All up, all of the young trees should be adding another 1,000 mt to the total nut pool. 

    I think this should offset any drop in the yield from the mature trees in the southern and central regions. 

    In conclusion, it looks like the total crop volume for this year should be about 1,750 higher than the 2018 crop, or about 17,500 mt in total. All of this would be from the northern orchards, with the lower yields expected in the southern orchards offset by the rising yields from younger trees.

    17,500 would represent an increase of 11.5% on the crop of the previous year. Possibly, I might be being a little conservative here, as I am assuming the northern orchards will produce an 'average' crop, and it is possible that the yields of trees in this region might overshoot the average.

    I am also assuming here that the harvest goes smoothly. Given that we appear to be in a dry period of the weather cycle, however, I don't think there is much chance that the harvest will get disrupted by untimely rain. 

    From my perspective, SHV looks like a pretty good risk/reward play at the current price. The crop should be worth at least 20% more than that of last year, based on the most recent information on the almond price and assuming (at least) an 11% increase in crop volume.

    The company will face higher water prices, but this would be more than offset by savings from the H2E plant and the lower oil price. If the company is able to turnaround the food business following on from the move into China last year, that should also help to bolster the share price. 








      
 
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