Agribusiness revenue up but cash tied up in inventories as working capital blows out

Global supply chain woes have left 137 of Australia’s biggest businesses with $5.5 billion in inventory locked up across their balance sheets, it can be revealed. The impact of COVID-19-caused supply chain disruption was laid bare in a new report to quantify the effect of COVID-19 by analysing working capital performance. McGrathNicol Advisory’s ninth annual working capital report involved a 2021 health check of 137 ASX-listed companies across seven industry sectors. The list included 11 agricultural companies — including heavy-hitters Elders, GrainCorp and Treasury Wine Estate — and 10 food and beverage companies. Among the food and beverage companies were Bega Cheese, Bubs Australia, a2 Milk Company, Synlait Milk and Freedom Foods Group. Agriculture had the biggest uptick in revenues this year, alongside mining and resources and retail, driven by higher commodity prices and offshore demand. McGrathNicol advisory partners and report authors Sean Wiles and Jason Ireland found average revenues were up 8.6 per cent, but supply chains were deeply troubled. “Some operators experienced the ongoing challenges associated with transporting goods due to closed borders,” Mr Wiles said. Supply chain disruption affected the fortunes of the 11 agribusinesses, which had a profitable year but found most of their cash tied up in working capital. Agribusinesses were some of the worst affected by supply chain disruption due to closed borders and larger customers pushing the inventory “burden” back on them. The report showed food and beverage companies carried over a month’s more working capital than retail customers and their transport suppliers. Inventory loads had increased in four of the seven sectors measured, while the time working capital took to be deployed had lengthened by eight days. Food and beverage experienced the largest deterioration in working capital across all sectors, with timelines blowing out by 9.7 days. Mr Wiles said this highlighted where the working capital burden sits in their supply chain. Mr Ireland said it was one of the biggest changes in working capital the company had seen in nine years of producing the report. “The agriculture sector reported the highest inventory load and highest average net working capital of all of the sectors we covered in 2021,” he said. “Whilst 64 per cent of the sample reported an increased inventory, the grain producers carried over a month’s more stock on average than they did in 2020.” Agribusinesses also reported an increased working capital load, with a 2.5 day lengthening of the net working capital cycle and 11.8 days more stock on average. The net working capital cycle of the companies lengthened by just over two weeks, locking up an additional $400 million in cash. Exporters were hardest-hit with international benchmarking showing Australian businesses had 1.4 million times the inventory of their US, EU and Asian counterparts. Inventory holdings peaked in the second half of the year, with several operators lengthening supplier payment cycles and shortening debtor collection cycles to cope. But there was plenty of good news contained in the report. Average revenues increased by 8.6 per cent across the 137 companies analysed, with 69 per cent of operators reporting revenue growth. Mr Wiles said 73 per cent of the agricultural businesses sampled reported revenue growth but only half increased their earnings. He said this was mainly due to rising labour and transport costs associated with COVID-19 biting into their margins. Mr Ireland said working capital management would determine whether businesses took advantage of growth opportunities next year. “The reality is Australia is emerging from the second wave of COVID later than other western economies,” he said. “The demand from Europe and North America is placing strain on supply chains that have not fully recovered. “They are also paying more, (and) increasing costs across the supply chain, not just the well-publicised shipping price rises.” While there were growth opportunities on the horizon next year, businesses’ recovery would not be the same as the first emergence from COVID-19. The report urged management teams to focus on “dedicated and disciplined” inventory management and working capital more broadly. “There is a chasm between the best and worst managers of working capital in the agriculture, food and beverage sectors, which is more than 200 days,” Mr Wiles said.