Dongfang Modern Agriculture Holding Group – Annual report – 31 December 2017
3 Summary of accounting policies (extract)
3.7 Bearer plants
A bearer plant is a living plant that:
(a) is used in the production or supply of agricultural produce;
(b) is expected to bear produce for more than one period; and
(c) has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales.
Bearer plants of the Group comprise trees in forests, of which the Forestry Right Certificates have been issued to the Group involved in the agricultural activities of the transformation of bearer plants into agricultural produce for sale or further processing.
Bearer plants are accounted for in the same way as self-constructed items of property, plant and equipment before they are in the location and condition necessary to be capable of operating in the manner intended by the management. Bearer plant is stated at cost less accumulated amortisation and impairment loss (if any). Bearer plant is amortised over the term set out in the respective Forestry Right Certificate.
3.8 Agricultural produce
Agriculture produce harvested from bearer plants for further processing is measured at its fair value less costs to sell at the point of harvest. The fair value less costs to sell at the time of harvest is deemed as the cost of agriculture produce for further processing.
If an active market exists for Agriculture produce with reference to comparable species, growing condition and expended yield of the crops, the quoted price in that market is adopted for determining the fair value of that asset. If an active market does not exist, the Group uses the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the transaction date and the end of reporting period, or the market prices for similar assets adjusted to reflect differences to determine fair values or as determined by independent professional valuers.
All the plantation costs incurred after the harvest period is stated as deferred expenses at cost. When the Agriculture produce is harvested, the carrying amount of the deferred expenses is recognised as expenses in the period in which the related revenue is recognised.
17 BEARER PLANTS
Bearer plants represent Camellia, Navel Orange and Tangerine Forests (“the Forests”) located in the PRC. The total cultivable area was 59,651Mu at 31 December 2017. (2016: 45,819Mu)
The Group recognises the Camellia, Navel Orange and Tangerine Forests as bearer plants when, and only when:-
- The Group controls the Forests as a result of past event, which is evidenced by the risks and rewards of cultivation bases have been passed to the Group;
- It is probable that future economic benefits associated with the Forests will flow to the Group; and
- The fair value or cost of the Forests can be measured reliably.
According to the Forestry Right Certificates issued by or confirmation received from the relevant PRC authority, the Group was granted a right to perform Camellia, Navel Orange and Tangerine plantation and harvest within the cultivable area of 59,651 Mu for 20 to 30 years.
The Group is exposed to a number of risks related to Camellia, Navel Orange and Tangerine cultivation:-
- Regulatory and environmental risks
The Group is subject to laws and regulations in the PRC in which it operates. The Group has established environmental policies and procedures aimed at compliance with local environmental and other laws. Management performs regular reviews to identify environmental risks and to ensure that the systems in place are adequate to manage those risks. The directors are not aware of any environmental liabilities as at 31 December 2017.
- Supply and demand risks
The Group is exposed to risks arising from fluctuations in the price and sales volume of Agriculture produce. When possible the Group manages this risk by controlling its harvest volume, according to market conditions. Management performs regular industry trend analysis to ensure the Group’s pricing policy is comparable to the market and the projected harvesting volumes are consistent with the expected demand.
- Climate and other risks
The Group’s plantation is exposed to the risk of damage from climatic changes, diseases, forest fires and other natural forces. The Group has procedures in place aimed at monitoring and mitigating those risks, including regular forest inspections and pesticide preventions.
15 DEFERRED EXPENSES
Prepaid lease payments represent the rental payment of the cultivation bases situated in the PRC which are held on operating leases with terms of approximately 14 years.
Deferred plantation costs represent the costs incurred to cultivate agriculture produces which will be harvested in the subsequent years. The deferred plantation costs in relation to the harvest with 12 months from the end of each reporting period are classified as deferred expenses under current assets. Deferred expenses classified under current assets represent the prepaid lease payments and plantation costs incurred for the harvest of agriculture produces within 12 months from the end of each reporting period.
10 SEASONAL FLUCTUATIONS
By its very nature, the business undertaken by Ganzhou Chinese is highly seasonal with all harvests and sales occurring between the months of September to December each year as follows:
CHIEF EXECUTIVE OFFICER’S REVIEW OF OPERATIONS (extract)
At the end of 2017, we controlled 21 plantations, spanning 10,763 hectares, all within China’s premier citrus growing region, the Ganzhou City district within Jiangxi Province. The region is ideal for citrus fruits, enjoying significant amounts of sunshine, good levels of rainfall (about 1,500mm per annum) and a long, frost-free growing season.
Our tremendous growth is reflected by the fact that in 2012 we held only 9 plantations covering approximately 4,500 hectares.
Demand for citrus and camellia fruits continued to increase in China, accounting for about 13% of total fruit production in 2017, and among the fastest growing fruit segments. We expect demand will continue to grow at a compound annual growth rate (CAGR) of about 10.2% by value, and 4.9% by volume, through to 2020, supported by favorable People’s Republic of China government initiatives.
In 2017, we harvested 265,496 tons of tangerines, oranges, pomelos and camellia fruit products, a 6.6% increase compared to 2016 production of 249,070 tons. Our business is seasonal, with harvests taking place in the final months of the calendar year.
During the three-month harvest in August, September and October 2017, we produced 146,945 tons of tangerines, 1% less than the previous year of 147,781 tons. After a price surge in 2016, unit prices in 2017 were about 8% lower, with customers purchasing a greater proportion of lower priced products without packaging.
Our tangerines are well known in China for their thin skin, bright colour and sweet flavour, and are sourced primarily from orchards located in Xunwu County, Ganzhou City of Jiangxi Province. Tangerines are Dongfang Modern’s primary product, representing approximately 55% of output.
Navel orange production was a record, although prices were slightly lower in a high-production year for the region. The group’s ‘Gannan’ orange orchards are located in the Special Citrus Zone in Ganzhou City, where a warm, high-rainfall climate and the well-drained hill slopes of the region help produce fragrant, sweet fruit with a high juice content. The Ganzhou region is China’s largest navel orange producing area.
During the harvest, mostly completed in November and December 2017, we produced 33,619 tonnes of navel oranges, up 73% on 19,486 tonnes in 2016. This reflects additional production from the 544-hectare navel orange plantation in Xingguo country acquired in July 2017. Unit prices decreased by 3% to average RMB4.97 per kg in 2017, due to higher volume production requiring negotiation of new distribution agreements.
Our sweet pomelos are sourced from plantations in the Nankang District, south west of Ganzhou, China. These are similar to grapefruit, with white, pink or red flesh.
During the harvest months of September, October and November 2017, 47,040 tonnes of pomelos were harvested, down 8% on 51, 374 in 2016 due to unfavourable weather. We received unit prices of RMB3.1 per kg, down 3.2% on the previous year.
Apart from citrus fruit, Dongfang Modern also harvests camellia fruit from several plantations in the Ganzhou City region including in Xingguo County.
Camellia fruit produces a nut that provides seeds and other useful by-products of significant value to growers and processors. Our camellia seeds are mostly processed into ‘heart healthy’ cooking oil which has a high percentage of unsaturated fats, providing nutrition benefits to consumers. Chinese consumers often use camellia oil in food preparation – similar to olive oil. Camellia has a much higher smoke point than olive oil and is regarded as premium cooking oil in China.
During the two-month harvest period from October through to November 2017, we produced some 37,893 tonnes of camellia fruit products, up 24.5% from the previous year of 30,428 tons.
In 2017 the group changed its reporting of camellia production to seed volume which provides a more accurate measurement of sales. Using this measure, we produced a record 9,971 tonnes of camellia seed products, up 24% on 8,070 in 2016. The increase reflected yield improvement and additional production from the 380-hectare camellia plantation in Xingguo country acquired in July 2017. Unit prices increased by 4% year-on-year, reflecting increased demand for camellia oil.
We are continuing to assess opportunities for downstream processing of our camellia products that would leverage our existing logistical networks to consumers in tier-1 markets.