Flat corn prices and acquisitions lead to stellar performance for Agfeed

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Publish time:8/12/2008 12:00:00 AM      Source: www.cnchemicals.com
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August 12, 2008

Flat corn prices and acquisitions lead to stellar performance for Agfeed

Agfeed announced strong results for the quarter ended June 30, 2008, with operational income up 619 percent from Q2 in 2007 to US$8.8 million and record revenue of US$35.6 million, a rise of 417 percent from the same quarter last year.

The stellar performance comes on the back of profitable acquisitions made during the past year supported by relatively flat corn prices and record hog prices.

The company anticipates record earnings in the second half of 2008 after going through what it called the weaker of the two quarters in the year.

The company is also utilising hog genetics to boost its hog production capability while continuing its acquisitions of profitable hog operations.

The company expects to acquire at least four more farms in the second half of 2008.

With more farms and better genetics, the company hopes to double its pork production to 1 million heads by 2009.

While its US counterparts are being pummeled by high corn prices, Agfeed said corn prices, which makes up 70 percent of feed costs have been relatively stable in China. This is thanks to the fact that Beijing has last year been clamping down on corn-based ethanol production so as to control inflationary pressures. Corn prices have been flat this year and would remain so for the rest of 2008, the company said.

Hog production in China is also exempt from income taxes.

Premix Sales

Revenue from premix feed sales near-doubled to US$12.22 million, compared to Q2 2007.

AgFeed expects its current growth momentum in premix feed sales to continue through the remainder of 2008.

The increase in premix feed sales was due to significantly expansion in the AgFeed retail chain stores which now numbers more than 800.

Other factors were expanded commercial hog farm direct sales channels and two increases in the price of its premix feed products.

Hog Sales

Revenue from hog sales reached US$23.4 million, due to successful integration of its recently acquired hog farms.

AgFeed sold more than 90,000 hogs during the quarter.

One distinguishing trait of the company''s strategy is that it concentrates its hog markets in the wealthiest regions in China -- Shanghai and Guangdong – which sees the highest hog prices in the nation due to its high income levels and deep pork consuming cultures.

Hog prices in these markets are typically 5.5 percent higher than the national average.

The company strategically locates its hog farms and hog feed manufacturing plants around provinces neighbouring these two markets, thereby permitting significant cost savings on raw material purchases and transport.

Being the largest hog producer gave the company economies of scale when purchasing raw materials, which translated to a 4.8-percent discount on overall input costs. This discount, coupled with savings from more efficient operations, more than offset moderate price increases in raw materials, the company said.

Thus during the quarter, despite nation-wide inflation concerns, increases in the price of non-corn related raw materials increased cost of hog production by only less than US$4 per hog and had no material impact on income margins.

Moreover currently, prices of soymeal and that of other feed ingredients are declining, which bodes well for the rest of the year, the company said.

In hog production, the company expects to maintain approximately 25 percent in net income margins while premix margins are expected at 13 percent to 16 percent.

Hog production is expected to contribute 65 to 70 percent of total revenue, with the remaining coming from premix feed sales.

This range is dependent upon the anticipated closing of additional, already identified potential hog farm acquisition targets.

The company also intends to implement a hog genetics programme this year similar to the current US commercial hog production efficiency standards to further reduce production costs. AgFeed said it is in discussions with leading hog genetics company in these efforts.

Based on these factors, the company has raised its 2008 revenue guidance to between US$145 million and US$155 million.

The company''s current target of producing 1 million hogs in 2009, if achieved, would generate approximately US$250 million in revenues (based on the current market prices) from hog sales.

AgFeed is China''s largest commercial hog producer in terms of total annual hog production as well as the largest premix feed company in terms of revenues.