While drought conditions in eastern Australia have worsened, many companies that operate in the rural sector claim they will not be significantly affected. A report from Merrill Lynch identified Wesfarmers, BRL Hardy, Southcorp, and WMC as facing drought risk due to their reliance on the rural economy. However, representatives from these companies stated that the drought would have limited impact due to factors like the diversification of their businesses and the timing of sales. Overall, many Australian companies believe that competitive market conditions and cost-cutting measures will help offset rising food prices caused by the drought.

1. Dry, but no disaster
INFORMER
Byline: JONATHAN MORRIS
Despite the worsening drought in the eastern states, many companies that, in theory,
are exposed to the problem claim they will not be affected. In July, the investment
bank Merrill Lynch issued a report that said Wesfarmers, BRL Hardy, Southcorp and
WMC were exposed to "drought risk" because of their earnings from the rural sector.
Despite the worsening drought in the eastern states, many companies that, in theory,
are exposed to the problem claim they will not be affected. In July, the investment
bank Merrill Lynch issued a report that said Wesfarmers, BRL Hardy, Southcorp and
WMC were exposed to "drought risk" because of their earnings from the rural sector.
Conditions have deteriorated since July, and on September 10 the Australian Bureau
of Agricultural and Resource Economics predicted that Australia would have its
smallest winter grain harvest since 1994. The rural economy accounts for less than
3% of gross domestic product. But Westpac economist Justin Smirk predicts that the
drought could shave nearly 0.8 percentage points off Australia's growth rate in 2002-
03.
Wesfarmers' finance director, Richard Goyder, says the drought will not have a huge
effect on the company's rural merchandising, insurance and fertiliser operations.
These rural divisions account for only 10% of the company's earnings.
Companies such as Orica and WMC are exposed to the drought through their
fertiliser operations. A WMC executive says: "We have
not been impacted hard by the drought, largely because of the timing of our fertiliser
sales." UBS Warburg analyst Frances Loo says the diversified nature of Orica acts
as a buffer against any effect of the drought on individual divisions.
The wine sector is also relaxed. BRL Hardy's chief executive, Stephen Millar, says
the drought benefits the company by allowing it to run down the excess wine stocks
left from the large 2002 harvest. The investment bank JP Morgan says a lower grape
intake in 2003 means BRL Hardy could cut costs by reducing the grower bonuses it
pays and reducing its average grape cost per tonne.
National Australia Bank, Australia's leading agribusiness lender, with a $7-billion loan
book, is not concerned by the drought's effect on rural lending. Its agribusiness
general manager, Mike Carroll, says bad debts as a proportion of total lending are
not expected to increase much. He says most farmers are "well cashed up" after
three good seasons.
Drought cuts farm output and raises prices, but Westpac's Smirk says
food price inflation "will struggle to make 1% in 2003". Rising grain prices will be
offset by falling beef prices as drought-stricken farmers are forced to sell excess
cattle.

2. Goodman Fielder admits it will be affected by the wheat price rise of about 20% in
the year to September 30. Its chief executive, Tom Park, says bread prices will rise
5% to "recover recent cost increases". The company reduced its rural sector
exposure by selling its flour and milling operations in August.
Grocery retailers such as Woolworths and Coles Myer, who are higher up the food
chain, say the drought is not a risk to their earnings. Competitive retailing conditions
and a strong focus on cost containment (Woolworths is aiming to cut its costs by
$5.1 billion over the eight years to 2006-07) should moderate any rise in grocery
prices because of drought.
The dairy company National Foods is also unconcerned. In August, it won the
national $300-million house-brand milk contract with Woolworths. Winning Australia's
largest supermarket food contract has made managing director Max Ould "very
positive" about the company's earnings growth, drought or no drought.
Despite the worsening drought in the eastern states, many companies that, in
theory, are exposed to the problem claim they will not be affected. In July, the
investment bank Merrill Lynch issued a report that said Wesfarmers, BRL Hardy,
Southcorp and WMC were exposed to "drought risk" because of their earnings from
the rural sector.
Conditions have deteriorated since July, and on September 10 the Australian Bureau
of Agricultural and Resource Economics predicted that Australia would have its
smallest winter grain harvest since 1994. The rural economy accounts for less than
3% of gross domestic product. But Westpac economist Justin Smirk predicts that the
drought could shave nearly 0.8 percentage points off Australia's growth rate in 2002-
03.
Wesfarmers' finance director, Richard Goyder, says the drought will not have a huge
effect on the company's rural merchandising, insurance and fertiliser operations.
These rural divisions account for only 10% of the company's earnings.
Companies such as Orica and WMC are exposed to the drought through their
fertiliser operations. A WMC executive says: "We have
not been impacted hard by the drought, largely because of the timing of our fertiliser
sales." UBS Warburg analyst Frances Loo says the diversified nature of Orica acts
as a buffer against any effect of the drought on individual divisions.
The wine sector is also relaxed. BRL Hardy's chief executive, Stephen Millar, says
the drought benefits the company by allowing it to run down the excess wine stocks
left from the large 2002 harvest. The investment bank JP Morgan says a lower grape
intake in 2003 means BRL Hardy could cut costs by reducing the grower bonuses it
pays and reducing its average grape cost per tonne.
National Australia Bank, Australia's leading agribusiness lender, with a $7-billion loan
book, is not concerned by the drought's effect on rural lending. Its agribusiness

3. general manager, Mike Carroll, says bad debts as a proportion of total lending are
not expected to increase much. He says most farmers are "well cashed up" after
three good seasons.
Drought cuts farm output and raises prices, but Westpac's Smirk says
food price inflation "will struggle to make 1% in 2003". Rising grain prices will be
offset by falling beef prices as drought-stricken farmers are forced to sell excess
cattle.
Goodman Fielder admits it will be affected by the wheat price rise of about 20% in
the year to September 30. Its chief executive, Tom Park, says bread prices will rise
5% to "recover recent cost increases". The company reduced its rural sector
exposure by selling its flour and milling operations in August.
Grocery retailers such as Woolworths and Coles Myer, who are higher up the food
chain, say the drought is not a risk to their earnings. Competitive retailing conditions
and a strong focus on cost containment (Woolworths is aiming to cut its costs by
$5.1 billion over the eight years to 2006-07) should moderate any rise in grocery
prices because of drought.
The dairy company National Foods is also unconcerned. In August, it won the
national $300-million house-brand milk contract with Woolworths. Winning Australia's
largest supermarket food contract has made managing director Max Ould "very
positive" about the company's earnings growth, drought or no drought.
Caption: ILLUS: DROUGHT: Grim reapers. Louie Douvis
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Publication: Business Review Weekly
Publication date: 26-9-2002
Edition: Late
Page no: 22
Section: News and Features
Length: 1216