Australian Agricultural Company Limited – Annual report – 31 March 2022
A FINANCIAL PERFORMANCE (extract)
A1 Significant Matters (extract 1)
The closing herd headcount is 12.4% higher than the prior year, with approximately 382k head on hand at 31 March 2022. This increase is a result of the Company’s internal breeding program, and rebuilding of the herd following prior year drought and flood impacts.
Improvements in Wagyu and Non-Wagyu liveweight market prices since 31 March 2021 have resulted in an unrealised gain in the fair value of the herd of $129.6 million.
(1) As a biological asset, AASB 141 Agriculture requires the livestock to be valued at fair value less costs to sell at all times prior to sale or harvest. As such, value increases occur through changes in fair value rather than sales margin.
(2) Biological transformation in accordance with Australian Accounting Standard AASB 141 Agriculture, includes reclassification of an animal as it moves from being a branded calf, grows, ages, and progresses through the various stages to become a trading or production animal.
Accounting Policies – Livestock
Livestock is measured at fair value less costs to sell, with any change recognised in the profit or loss. Costs to sell include all costs that would be necessary to sell the assets, including freight and direct selling costs.
The fair value of livestock is based on its present location and condition. If an active or other effective market exists for livestock in its present location and condition, the quoted price in that market is the appropriate basis for determining the fair value of that asset. Where the Company has access to different markets, then the most relevant market is used to determine fair value. The relevant market is defined as the market “that access is available to the entity” to be used at the time the fair value is established.
If an active market does not exist, then one of the following is used in determining fair value in the below order:
- the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the end of the reporting period
- market prices, in markets accessible to us, for similar assets with adjustments to reflect differences
- sector benchmarks
In the event that market determined prices or values are not available for livestock in its present condition, the present value of the expected net cash flows from the asset discounted at a current market determined rate may be used in determining fair value.
Livestock are classified as Current and Non-Current. Current livestock are trading cattle and feedlot cattle with less than a year remaining in the feedlot at the end of the financial year, as these animals are due to be sold or processed within the next 12 months. Non-Current livestock are the commercial and stud breeding herd, calves and feedlot cattle with over a year remaining in the feedlot at end of financial year.
Livestock fair value
At the end of each reporting period, livestock is measured at fair value less costs to sell. The fair value is determined through price movements and movements in the weight of the herd due to growth, attrition, natural increase, beef transfers or sale.
The net increments or decrements in the market value of livestock are recognised as either gains or losses in the profit or loss, determined as:
- The difference between the total fair value of livestock recognised at the beginning of the financial year and the total fair value of livestock recognised as at the reporting date; less
- Costs expected to be incurred in realising the market value (including freight and selling costs).
Fair Value Inputs are summarised as follows:
Level 1 Price Inputs – are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date.
Level 2 Price Inputs – are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 Price Inputs – are inputs for the asset or liability that are not based on observable market data (unobservable inputs).
D FINANCIAL RISK MANAGEMENT (extract)
D3 Commodity Price Risk
We have transactional commodity price risk in the sale of cattle and beef. Other commodity price exposures include feed inputs for our feedlot operations and diesel. Purchases of commodities may be for a period of up to 12 months and partial hedging of these inputs may be for periods of up to 24 months.
Price risks are managed, where possible, through forward sales of boxed beef for a period of up to 6 months. Forward sales contracts for boxed beef are classified as non-derivative and are not required to be fair valued. Revenues derived from these forward sales are recognised in accordance with the Company’s revenue recognition policy for meat sales disclosed at note G3 (o).
We mitigate the price risk for the Company through internal production, on-site storage & entering into forward purchase contracts for grain & roughage commodities. As at 31 March 2022, stock on hand was approximately 18% (31 March 2021: 33%) of our expected grain & roughage usage for the coming 12 months. We had forward purchased approximately 65% (31 March 2021: 63%) of our expected grain & roughage purchases for the coming 12 months. These forward purchases include expected Internal Supply. Without the Internal Supply, we had forward purchased approximately 34% (31 March 2021: 21%) of our expected grain & roughage purchases for the coming 12 months. These contracts are entered into and continue to be held for the purpose of grain purchase requirements; they are classified as non-derivative and are not required to be fair valued. At the reporting date we had no commodity price exposures on forward sales and purchase contracts that are not designated as cash flow hedges.
We have entered into forward purchase contracts for $13.7 million worth of grain commodities as at 31 March 2022 (31 March 2021: $7.8 million). There are no forward purchase contracts for cattle as at 31 March 2022 (31 March 2021: $12.0 million). The contracts are expected to be settled within 12 months from the balance date.
Capital expenditure of $2.1 million has been contracted in respect of property, plant and equipment as at 31 March 2022 (31 March 2021: $0.7 million).
During the period, the Company entered into a separate Comanche Aggregation Lease agreement for 10 years of the Comanche and Homehill properties, which will commence on 1 May 2022 with an expected present value of net cash flows of $18.4 million.
OPERATING AND FINANCIAL REVIEW (extract)