Great article. Do you have any concerns about the impact of the 'tax summit' being held next week by the government? In particular the impact of the proposed 5% cashflow tax.
The reality is if SHV revenues tick over $1B (the proposed threshold), this would be the least of our problems and the thesis would have already well and truly played out.
Otherwise, the proposal would see SHV's corporate tax rate drop from 30% to 20% plus a 5% annual 'cashflow tax' - meaning a lower effective rate than current (granted there are differences with treatment of CAPEX that will be fully deductible and interest which wouldn't).
- What 2-3 concrete facts in the next 1-2 years would disprove your structural bull case (e.g., SGMA carve-outs, carry-in collapsing, plantings inflecting)?
- Beyond SHV, who are the next best two vehicles (by torque vs risk) and why not own those instead?
An inflection in new plantings is the primary metric to watch for any signs of thesis break in my view. Carry-in expanding wouldn't disprove the stuctural bull case over the next 1-2 years and would likely instead serve to depress prices in the short-term whilst reinforcing the long-term bull case as outlined in the write-up.
Other players like Olam Group and JBSS have broader exposure to this theme but the bottom line is they do not provide pure-play almond exposure and are exposed to downturns in unrelated commodities. SHV is the only publicly listed company in the world which offers this pure play exposure to almonds and that is what I am looking to isolate for.
Another great post, thank you! I guess in a way it is the delta of the water dynamics in both locations that this hinges on. Is the SGMA regulation/situation entrenched enough and deemed immovable as such? Not an expert in this area as you can tell from my comment, but I wonder if regulation can be reversed/delayed if farmers make loud enough noise specially with Trump in office, as far as precedents is concerned? The 2nd question is do you think demand holds up even if price jumps? For example consumers/producers bring in pistachios or cashews into their products as substitutes of sort?
The State of California's stance is unlikely to be moveable in my view given they have already spent close to $1B in SGMA-related activities. In the Western SJV, reductions in system capacity to move water due to land subsidence is already at 46%. The potential cost for re-establishing this system capacity due to land subsidence (as a result of over-draft) is likely to span Billions of dollars over the next 20 years as is. Delays in enforcement are more of a risk in my view and something to continue monitoring.
Re Demand: multiple studies have been conducted on the elasticity of demand with a wide range b/w 0.47-0.83. The average is 0.646 and consensus for all studies points to demand being inelastic. So if price gets to a point where we see meaningful demand destruction then I believe the thesis would have already well and truly played out.
Great write up! originally looked into SHV as a niche tariff play that the Indian and Chinese market would choose to purchase AU stock in response, unsure if the run-up from 3.70 to 5 was Trump driven or not. Interesting again now that the price has come back below where it was November last year.
Hi Gabriel, we should see the first update on how the 2025 crop is tracking in mid-September with the release of the August Position Report from the Almond Board of California.
In saying that, it will still be too early to draw any definitive conclusions as to whether the crop size will fall short of the Objective Estimate and we will probably only get a good idea on this around November/December.
1. Does replanting to replace current production have a big capex requirement?
2. Does the company plan to plant more to increase production?
3. Are they planning on expanding to other areas in Australia or elsewhere?
Regarding the industry:
“Buybacks reduce the total volume of water available for irrigation and other productive uses by permanently transferring purchased entitlements to the Commonwealth Environmental Water Holder (CEWH), who use these for ecological benefits rather than agriculture.”
4. Does this increase costs for Select as water rights become more expensive?
5. Do water right owners have the right to refuse a bid from CEWH for their rights?
“Consider that if the 3B lbs proves out with a 550M lb carry-in to the 25’ year, then net saleable supply would be 3.55B lbs for the ’25 crop year. Given 2.7M lbs in total shipments, this could feasibly lead to the highest carry-in on record heading into the ’26 crop year of 850M lbs; a highly bearish signal for near-term price and Californian growers.”
6. Is this due to higher storage costs for that 550M lb carry-in?
2 and 3: No current plans to increase acreage. The focus is on enhancing yields and efficiency. They are also increasing their processing capacity.
4: Long-term, yes it would. Hence, the importance of increasing Select's permanent water entitlements.
5: Yes of course. The buybacks function in the same manner as public markets and require willing sellers.
6: No, it's more due to the emotive role of the carry-in and what this signals about supply. I wrote about this earlier in the piece under the sub-title 'Importance of Carry-in."
Hi TC, another great write-up. And totally agree with the macro outlook for Almonds. Although could you comment on a couple of issues I have with the stock:
1. Production costs of ~$6.60/kg in FY24 do not reconcile with the P&L Statement. By way of example, FY24 Cost of Sales (as per the P&L Statement) were $288M*. This includes Lease costs of $34.0M, Staff costs of $42.1M, Processing Costs of $178.4M and D&A of PP&E of $33.5M (which has been a decent proxy for SHV's SIB Cap Ex). As such, true Production Costs (including SIB Cap Ex) is more like $8.62 in FY24! And this calc excludes $18m in Admin Costs. If we gross up for the Admin Costs, Break Even Production Costs are $9.24/kg.
* NB FY24 Revenue and COGS were restated by $43M for another accounting F*** up by management (Note 1.3 of the 1H25 accounts).
2. Revenues - I have never been able to accurately forecast Revenues (nor can the analysts in this market), largely due to "Value Add" revenues. How do you allow for the variably in "Value Add" revenues?
This accounting method used - mandated via AASB 141 - separates the unrealized value attributable to biological transformation and market dynamics during the growth phase of the almond (captured via unrealized fair value adjustments on the income statement) from any post-harvest value adds and sales realization. This results in a P&L that functions differently from non-agricultural companies.
As such, under IFRS/AASB accounting, Cost of Sales in agriculture companies is not the same as Cost of Sales for companies in other industries and cannot be inferred as the companies cost of production.
The accounting works in the following manner:
Actual input costs (growing, harvest, processing, lease, bearer depreciation) are initially capitalized to biological assets at cost (where they later unwind via the I.S. as I’ll soon get to). For SHV, we can see these costs in the breakdown of biological assets in Note 3.3 to the Financial Statements of the FY24 annual report at $195.7M.
At harvest however, inventory is to be recorded at Fair Value (FV)-Costs to Sell (CTS) and not its pure cost base as per other industries. This FV-CTS therefore becomes the inventories deemed cost base. Post-harvest costs (processing, value-add etc.) are then added to inventory at cost, flowing to COGS upon sale.
Hence, upon the revaluation of biological assets from capitalized costs to FV-CTS (which occurs only when biological transformation is significant), these costs must be ‘tested’ against FV-CTS such that:
- If FV-CTS > costs: We record a revaluation gain in the P&L (due to market/growth premium). These costs therefore get embedded within the inventory account upon transfer from biological assets at FV-CTS (and are thus embedded within cost of sales upon the sale of this inventory).
- If FV-CTS < costs: A revaluation loss is recorded in the P&L (i.e. due to a market devaluation). In this case, the excess costs when compared against market value are expensed via this negative fair value adjustment on the income statement.
The bottom-line result on the I.S is that the actual costs of production are shown but indirectly. They flow through via fair value adjustments or are embedded within COGS depending on market value movement of the commodity and how this compares against these capitalized costs.
Cost of Sales = Opening Inventory + Transfers from Biological Assets at FV-CTS + Post-Harvest Costs/Purchases - Closing Inventory.
So it is therefore wrong to use Cost of Sales as a proxy for production costs.
In Note 3.3 to the Financial Statements in SHV’s FY24 Annual Report, you can see via the “Increases due to purchases/growing costs (including capitalised depreciation and interest)” line that production costs were $195.7M in line with the $6.60/KG production costs for the year, given production of 29,527MT.
These production costs incorporate growing, harvest, processing, lease and bearer plant depreciation costs.
This does not include admin costs as these are not production costs.
I am not sure where you got processing costs of $178.4M but total production costs were $195.692M in FY24 as per note 3.3 of the annual report and these costs are therefore embedded within the Income Statement one way or another as described above.
Re Q2:
I don’t think too hard about these value-add revenues. I have instead taken the conservative route and assumed future revenues in line with an average almond price SHV could realize.
Hi mate, thankyou for the detailed response, very much appreciated. Yes the accounting vagaries of biological Assets and Liabs can be perplexing. Which is why I ultimately model this thing on a Cash Flow Basis, as these "accounting issues" should wash out over time. Unfortunately this never seems to happen for SHV. If we use Payments to Suppliers and Staff (from the Cash Flow statement) as a proxy for Production Costs (remembering this line does not capture lease payments!!), on a per kg basis, Costs were $10.13 in FY19, $8.16 in FY20, $7.60 in FY21, $7.93 in FY22, $10.15 in FY23, $8.47 FY24. They never get to the magical Production Costs quoted by management. And consequently, the thing never produces FCF either.
PS my proxy for "production costs" of $178.4M in FY24 (on a P&L basis) is merely Cost of Sales $331 minus D&A $33.5 minus Staff Costs $42.1 minus Lease Costs $34M.
No problem at all. Great to see you've gone deep on this.
Agreed re modelling on a CF basis. However, my view is that it's incorrect to use the "Payments to Suppliers and Staff" to isolate for Production costs.
This payments line item is net of what are usually significant Working Capital investments for the following years crop and is also inclusive of Admin and Corp expenses which sit outside of production costs.
The payments line just captures actual cash paid out during the fiscal year with no reference to whether these payments are indeed for current year production, while the production cost KPI is a figure focused solely on the costs attributed to the current year's harvested crop.
The cyclical nature of maintaining perennial crops such as almonds means that in any given year a significant amount of funds must be deployed in the current FY to prepare for the following years crop. So large WC builds (e.g. prepaying suppliers for next year's fertilizers or building inventory) inflate payments without affecting current year production costs. For example in FY24, SHV's WC build was $47M. Hence, by using this payments line as a proxy for production you aren't differentiating costs for this years versus next years crop (usually significant), timing differences and are also not taking into account the Admin/Corp expense costs which sit outside of cost of production.
Clearly FCFs have been largely absent of recent times as a function of how depressed almond markets have been the last 4-5 years and the cyclical nature of investing in almonds. In saying this, the company did produce FCFs in FY16 of $56M and in FY19 of $44M.
My view is that we are now on the cusp of structurally broken supply that will lead to an inflecting almond price and subsequent significant FCF's as detailed in the write-up.
Agree with most of this, but will disagree re wking cap movements, these are a genuine "cash" cost to any business. And I also believe that the CF Statement never lies, particularly when assessed over time (ie as wking cap draws down and unwinds over time). However, ultimately I agree with your macro thesis. I just don't think the operating leverage is from a A$7/kg cost basis, history suggests its much closer to $10/kg, particularly from a FCF basis (which is what we should all ultimately care about). Thanks again for your thoughts, it is great to bounce these ideas around.
Good discussion. I agree WC movements are a genuine cash cost to any business. They are important to monitor and keep track of. Yet we can still delineate b/w what strictly falls under cost of production for any given year versus other cash costs of the business that happen to be incurred within the same year. This isn’t saying these costs shouldn’t be accounted for (as they definitely should) but that they should be categorised appropriately for what they are.
Really appreciate your thoughts and the back and forth!
Very interesting read and prompted me to do some digging of my own. I see the play in the regional disparities, but I’d be concerned that management would hedge away exactly what you are trying to capture. Were you able to get any comfort around their hedging strategy?
Thanks for your question. The thesis does not hinge upon regional disparities in price. Australia gets very similar prices to the U.S. (in fact a slight premium at the moment). The company hedges are in place because the majority of their revenues are generated in USD. The company enters into currency Forward Exchange Contracts (FECs) with the objective to control for the value of these future revenues by protecting against unfavourable exchange rate movements/volatility in the AUD/USD fx rate for highly probable contracts that they've entered into.
For example in the 1H25 results, the company announced they had hedged coverage over 86% of the FY25 crop at an average AUD/USD rate of 0.648, reducing any possibility of exchange rate volatility between the time period from when this was contracted and when the exchange of goods actually takes place (granted they obviously still have counterparty credit risk).
I am comfortable with managements hedging strategy. They don't take on any long duration hedging risk but seem to be somewhat strategic around locking in contracts. For the FY25 crop, the company took advantage of a strong USD to hedge at a forward rate which is now more attractive than today's spot rate (meaning you couldn't lock in a forward price of 0.648 today for the FY25 crop). They also seemed to take advantage of USD strength in Oct 2023 locking in an FEC for just under 2 years. All in all, I don't have any issues with it.
Clearly, there is LT exposure to a weakening USD but given how far prices need to move to incentivize new supply, I believe this should be more than offset by the absolute % change in the underlying commodity price.
Thanks for answer and sorry I could have been more specific in the question - I meant hedging in terms of selling price if they are selling forward the crop before harvest. The way I am framing it myself kind of from an event perspective, is that Select may benefit disproportionately should there be a shock to the California supply, but if the crop is sold forward, the benefit won’t be realised in year 1. This issue, plus carry in supply will dilute the benefit of a supply shock driven increase in price.
Firstly, this works both ways. For example, Select had the majority of their crop already covered at much higher prices for FY25 prior to the objective estimate release which lowered the almond price. On the other hand, Californian farmers are faced with the prospect of selling the majority of their crop into these lower prices.
Secondly, I am not viewing this playing out with some temporary price spike that will see imminent recovery with 12 months.
The important question to ask is where incremental supply will come from to bring prices back down?
Look at what happened to the almond price during the last droughts in California (2012-2015 period) which critically only involved a temporary dislocation in water access. (Prices went a lot higher).
SGMA fundamentally creates these starved water conditions but on a permanent basis.
On top of this, it takes 3 years for new plantings to produce even a single nut.
So I'm not too worried if for whatever reason Select don't fully capture the entirety of the price spike in year 1 and believe that when the price spike does come, it will be sustained for some time until prices reach a level that would incentivize new supply - much higher than where we are today as detailed in the write-up.
however, as much as we want to be convinced of the upside potential, I would love to hear your opinion on how SHV got to these low prices, well below the capital raising just last year. I have difficulty having unbridled conviction when the market has such a negative view, despite all the positive factors.
My view is that markets are often short-sighted and irrational. I don't believe there's necessarily a logical answer other than this. I.e. the time horizon in focus is usually only the next 6-12 months and in today's world this time horizon is getting shorter and shorter. The Obj. Estimate clearly didn't help but the price was already somewhat depressed prior to that.
In saying this, a major part of my approach is understanding exactly how I am going to extract value and get paid.
In this spirit, if we reverse-engineer the question and focus on what the market will do in a world where the almond price has materially increased because supply hasn’t grown for 3-5 years (and has in fact very likely shrunk) with steady demand growth; I believe the resultant material earnings and FCF inflection will very quickly flip the markets’ attitude from one of pessimism to raging optimism with the stock responding accordingly.
So I really try to remain focussed on the qualitative inputs, monitoring them consistently to ensure the thesis is still on track and then try to deduce how these qualitative inputs – i.e. the lack of supply due to water shortages in California – will impact the almond price and therefore flow through to future Earnings and Free Cash Flows and how the market will therefore value these.
Very detailed and great reading.
Much appreciated Nick!
Great article. Do you have any concerns about the impact of the 'tax summit' being held next week by the government? In particular the impact of the proposed 5% cashflow tax.
Thank you Craig - much appreciated!
The reality is if SHV revenues tick over $1B (the proposed threshold), this would be the least of our problems and the thesis would have already well and truly played out.
Otherwise, the proposal would see SHV's corporate tax rate drop from 30% to 20% plus a 5% annual 'cashflow tax' - meaning a lower effective rate than current (granted there are differences with treatment of CAPEX that will be fully deductible and interest which wouldn't).
Very interesting. Thank you for your work.
I love the reverse engineering thesis.
"The enemy of my enemy is my friend" playbook.
A few questions:
- What 2-3 concrete facts in the next 1-2 years would disprove your structural bull case (e.g., SGMA carve-outs, carry-in collapsing, plantings inflecting)?
- Beyond SHV, who are the next best two vehicles (by torque vs risk) and why not own those instead?
Appreciate the kind words Silba.
An inflection in new plantings is the primary metric to watch for any signs of thesis break in my view. Carry-in expanding wouldn't disprove the stuctural bull case over the next 1-2 years and would likely instead serve to depress prices in the short-term whilst reinforcing the long-term bull case as outlined in the write-up.
Other players like Olam Group and JBSS have broader exposure to this theme but the bottom line is they do not provide pure-play almond exposure and are exposed to downturns in unrelated commodities. SHV is the only publicly listed company in the world which offers this pure play exposure to almonds and that is what I am looking to isolate for.
Another great post, thank you! I guess in a way it is the delta of the water dynamics in both locations that this hinges on. Is the SGMA regulation/situation entrenched enough and deemed immovable as such? Not an expert in this area as you can tell from my comment, but I wonder if regulation can be reversed/delayed if farmers make loud enough noise specially with Trump in office, as far as precedents is concerned? The 2nd question is do you think demand holds up even if price jumps? For example consumers/producers bring in pistachios or cashews into their products as substitutes of sort?
Thanks for the kind words Adham!
The State of California's stance is unlikely to be moveable in my view given they have already spent close to $1B in SGMA-related activities. In the Western SJV, reductions in system capacity to move water due to land subsidence is already at 46%. The potential cost for re-establishing this system capacity due to land subsidence (as a result of over-draft) is likely to span Billions of dollars over the next 20 years as is. Delays in enforcement are more of a risk in my view and something to continue monitoring.
Re Demand: multiple studies have been conducted on the elasticity of demand with a wide range b/w 0.47-0.83. The average is 0.646 and consensus for all studies points to demand being inelastic. So if price gets to a point where we see meaningful demand destruction then I believe the thesis would have already well and truly played out.
Brilliant, thank you, makes a lot of sense!
Great write up! originally looked into SHV as a niche tariff play that the Indian and Chinese market would choose to purchase AU stock in response, unsure if the run-up from 3.70 to 5 was Trump driven or not. Interesting again now that the price has come back below where it was November last year.
Thank you! Agreed - the tariff related set-up is highly attractive for SHV relative to Californian competition.
Great post!
Appreciate it Dan!
https://agnetwest.com/california-almond-harvest-2025/
Another report consolidating your thesis. Bought more on Friday.
California August25 report out. Would you like to comment on how this impacts your thesis. Thanks
Hi Gabriel,
I just sent out a note on my takeaways.
When can we expect an update on the Californian Almond market?
Hi Gabriel, we should see the first update on how the 2025 crop is tracking in mid-September with the release of the August Position Report from the Almond Board of California.
In saying that, it will still be too early to draw any definitive conclusions as to whether the crop size will fall short of the Objective Estimate and we will probably only get a good idea on this around November/December.
Hello:
Amazing report, thanks for sharing.
I have questions if I may:
Regarding the company:
1. Does replanting to replace current production have a big capex requirement?
2. Does the company plan to plant more to increase production?
3. Are they planning on expanding to other areas in Australia or elsewhere?
Regarding the industry:
“Buybacks reduce the total volume of water available for irrigation and other productive uses by permanently transferring purchased entitlements to the Commonwealth Environmental Water Holder (CEWH), who use these for ecological benefits rather than agriculture.”
4. Does this increase costs for Select as water rights become more expensive?
5. Do water right owners have the right to refuse a bid from CEWH for their rights?
“Consider that if the 3B lbs proves out with a 550M lb carry-in to the 25’ year, then net saleable supply would be 3.55B lbs for the ’25 crop year. Given 2.7M lbs in total shipments, this could feasibly lead to the highest carry-in on record heading into the ’26 crop year of 850M lbs; a highly bearish signal for near-term price and Californian growers.”
6. Is this due to higher storage costs for that 550M lb carry-in?
Thanks
Thank you for the kind words Alberto - much appreciated!
1: You can get a pretty good grasp of the general CAPEX requirements via the UC Davis study I have attached in the write-up which assumes replanting (https://coststudyfiles.ucdavis.edu/2024/09/30/AlmondsSJVNorth%20Final%20draft4.pdf). If done in a balanced and targetted manner, major CAPEX uplifts should be largely mitigated.
2 and 3: No current plans to increase acreage. The focus is on enhancing yields and efficiency. They are also increasing their processing capacity.
4: Long-term, yes it would. Hence, the importance of increasing Select's permanent water entitlements.
5: Yes of course. The buybacks function in the same manner as public markets and require willing sellers.
6: No, it's more due to the emotive role of the carry-in and what this signals about supply. I wrote about this earlier in the piece under the sub-title 'Importance of Carry-in."
Hope this helps!
Hi TC, another great write-up. And totally agree with the macro outlook for Almonds. Although could you comment on a couple of issues I have with the stock:
1. Production costs of ~$6.60/kg in FY24 do not reconcile with the P&L Statement. By way of example, FY24 Cost of Sales (as per the P&L Statement) were $288M*. This includes Lease costs of $34.0M, Staff costs of $42.1M, Processing Costs of $178.4M and D&A of PP&E of $33.5M (which has been a decent proxy for SHV's SIB Cap Ex). As such, true Production Costs (including SIB Cap Ex) is more like $8.62 in FY24! And this calc excludes $18m in Admin Costs. If we gross up for the Admin Costs, Break Even Production Costs are $9.24/kg.
* NB FY24 Revenue and COGS were restated by $43M for another accounting F*** up by management (Note 1.3 of the 1H25 accounts).
2. Revenues - I have never been able to accurately forecast Revenues (nor can the analysts in this market), largely due to "Value Add" revenues. How do you allow for the variably in "Value Add" revenues?
Hi Paul,
Thank you for the kind words!
Re Q1:
This accounting method used - mandated via AASB 141 - separates the unrealized value attributable to biological transformation and market dynamics during the growth phase of the almond (captured via unrealized fair value adjustments on the income statement) from any post-harvest value adds and sales realization. This results in a P&L that functions differently from non-agricultural companies.
As such, under IFRS/AASB accounting, Cost of Sales in agriculture companies is not the same as Cost of Sales for companies in other industries and cannot be inferred as the companies cost of production.
The accounting works in the following manner:
Actual input costs (growing, harvest, processing, lease, bearer depreciation) are initially capitalized to biological assets at cost (where they later unwind via the I.S. as I’ll soon get to). For SHV, we can see these costs in the breakdown of biological assets in Note 3.3 to the Financial Statements of the FY24 annual report at $195.7M.
At harvest however, inventory is to be recorded at Fair Value (FV)-Costs to Sell (CTS) and not its pure cost base as per other industries. This FV-CTS therefore becomes the inventories deemed cost base. Post-harvest costs (processing, value-add etc.) are then added to inventory at cost, flowing to COGS upon sale.
Hence, upon the revaluation of biological assets from capitalized costs to FV-CTS (which occurs only when biological transformation is significant), these costs must be ‘tested’ against FV-CTS such that:
- If FV-CTS > costs: We record a revaluation gain in the P&L (due to market/growth premium). These costs therefore get embedded within the inventory account upon transfer from biological assets at FV-CTS (and are thus embedded within cost of sales upon the sale of this inventory).
- If FV-CTS < costs: A revaluation loss is recorded in the P&L (i.e. due to a market devaluation). In this case, the excess costs when compared against market value are expensed via this negative fair value adjustment on the income statement.
The bottom-line result on the I.S is that the actual costs of production are shown but indirectly. They flow through via fair value adjustments or are embedded within COGS depending on market value movement of the commodity and how this compares against these capitalized costs.
Cost of Sales = Opening Inventory + Transfers from Biological Assets at FV-CTS + Post-Harvest Costs/Purchases - Closing Inventory.
So it is therefore wrong to use Cost of Sales as a proxy for production costs.
In Note 3.3 to the Financial Statements in SHV’s FY24 Annual Report, you can see via the “Increases due to purchases/growing costs (including capitalised depreciation and interest)” line that production costs were $195.7M in line with the $6.60/KG production costs for the year, given production of 29,527MT.
These production costs incorporate growing, harvest, processing, lease and bearer plant depreciation costs.
This does not include admin costs as these are not production costs.
I am not sure where you got processing costs of $178.4M but total production costs were $195.692M in FY24 as per note 3.3 of the annual report and these costs are therefore embedded within the Income Statement one way or another as described above.
Re Q2:
I don’t think too hard about these value-add revenues. I have instead taken the conservative route and assumed future revenues in line with an average almond price SHV could realize.
Hope this helps!
Hi mate, thankyou for the detailed response, very much appreciated. Yes the accounting vagaries of biological Assets and Liabs can be perplexing. Which is why I ultimately model this thing on a Cash Flow Basis, as these "accounting issues" should wash out over time. Unfortunately this never seems to happen for SHV. If we use Payments to Suppliers and Staff (from the Cash Flow statement) as a proxy for Production Costs (remembering this line does not capture lease payments!!), on a per kg basis, Costs were $10.13 in FY19, $8.16 in FY20, $7.60 in FY21, $7.93 in FY22, $10.15 in FY23, $8.47 FY24. They never get to the magical Production Costs quoted by management. And consequently, the thing never produces FCF either.
PS my proxy for "production costs" of $178.4M in FY24 (on a P&L basis) is merely Cost of Sales $331 minus D&A $33.5 minus Staff Costs $42.1 minus Lease Costs $34M.
Hi Paul,
No problem at all. Great to see you've gone deep on this.
Agreed re modelling on a CF basis. However, my view is that it's incorrect to use the "Payments to Suppliers and Staff" to isolate for Production costs.
This payments line item is net of what are usually significant Working Capital investments for the following years crop and is also inclusive of Admin and Corp expenses which sit outside of production costs.
The payments line just captures actual cash paid out during the fiscal year with no reference to whether these payments are indeed for current year production, while the production cost KPI is a figure focused solely on the costs attributed to the current year's harvested crop.
The cyclical nature of maintaining perennial crops such as almonds means that in any given year a significant amount of funds must be deployed in the current FY to prepare for the following years crop. So large WC builds (e.g. prepaying suppliers for next year's fertilizers or building inventory) inflate payments without affecting current year production costs. For example in FY24, SHV's WC build was $47M. Hence, by using this payments line as a proxy for production you aren't differentiating costs for this years versus next years crop (usually significant), timing differences and are also not taking into account the Admin/Corp expense costs which sit outside of cost of production.
Clearly FCFs have been largely absent of recent times as a function of how depressed almond markets have been the last 4-5 years and the cyclical nature of investing in almonds. In saying this, the company did produce FCFs in FY16 of $56M and in FY19 of $44M.
My view is that we are now on the cusp of structurally broken supply that will lead to an inflecting almond price and subsequent significant FCF's as detailed in the write-up.
Agree with most of this, but will disagree re wking cap movements, these are a genuine "cash" cost to any business. And I also believe that the CF Statement never lies, particularly when assessed over time (ie as wking cap draws down and unwinds over time). However, ultimately I agree with your macro thesis. I just don't think the operating leverage is from a A$7/kg cost basis, history suggests its much closer to $10/kg, particularly from a FCF basis (which is what we should all ultimately care about). Thanks again for your thoughts, it is great to bounce these ideas around.
Good discussion. I agree WC movements are a genuine cash cost to any business. They are important to monitor and keep track of. Yet we can still delineate b/w what strictly falls under cost of production for any given year versus other cash costs of the business that happen to be incurred within the same year. This isn’t saying these costs shouldn’t be accounted for (as they definitely should) but that they should be categorised appropriately for what they are.
Really appreciate your thoughts and the back and forth!
Very interesting read and prompted me to do some digging of my own. I see the play in the regional disparities, but I’d be concerned that management would hedge away exactly what you are trying to capture. Were you able to get any comfort around their hedging strategy?
Hi Stephen,
Thanks for your question. The thesis does not hinge upon regional disparities in price. Australia gets very similar prices to the U.S. (in fact a slight premium at the moment). The company hedges are in place because the majority of their revenues are generated in USD. The company enters into currency Forward Exchange Contracts (FECs) with the objective to control for the value of these future revenues by protecting against unfavourable exchange rate movements/volatility in the AUD/USD fx rate for highly probable contracts that they've entered into.
For example in the 1H25 results, the company announced they had hedged coverage over 86% of the FY25 crop at an average AUD/USD rate of 0.648, reducing any possibility of exchange rate volatility between the time period from when this was contracted and when the exchange of goods actually takes place (granted they obviously still have counterparty credit risk).
I am comfortable with managements hedging strategy. They don't take on any long duration hedging risk but seem to be somewhat strategic around locking in contracts. For the FY25 crop, the company took advantage of a strong USD to hedge at a forward rate which is now more attractive than today's spot rate (meaning you couldn't lock in a forward price of 0.648 today for the FY25 crop). They also seemed to take advantage of USD strength in Oct 2023 locking in an FEC for just under 2 years. All in all, I don't have any issues with it.
Clearly, there is LT exposure to a weakening USD but given how far prices need to move to incentivize new supply, I believe this should be more than offset by the absolute % change in the underlying commodity price.
Thanks for answer and sorry I could have been more specific in the question - I meant hedging in terms of selling price if they are selling forward the crop before harvest. The way I am framing it myself kind of from an event perspective, is that Select may benefit disproportionately should there be a shock to the California supply, but if the crop is sold forward, the benefit won’t be realised in year 1. This issue, plus carry in supply will dilute the benefit of a supply shock driven increase in price.
No problem - appreciate the clarification!
Firstly, this works both ways. For example, Select had the majority of their crop already covered at much higher prices for FY25 prior to the objective estimate release which lowered the almond price. On the other hand, Californian farmers are faced with the prospect of selling the majority of their crop into these lower prices.
Secondly, I am not viewing this playing out with some temporary price spike that will see imminent recovery with 12 months.
The important question to ask is where incremental supply will come from to bring prices back down?
Look at what happened to the almond price during the last droughts in California (2012-2015 period) which critically only involved a temporary dislocation in water access. (Prices went a lot higher).
SGMA fundamentally creates these starved water conditions but on a permanent basis.
On top of this, it takes 3 years for new plantings to produce even a single nut.
So I'm not too worried if for whatever reason Select don't fully capture the entirety of the price spike in year 1 and believe that when the price spike does come, it will be sustained for some time until prices reach a level that would incentivize new supply - much higher than where we are today as detailed in the write-up.
Brilliant. Appreciate all the work you put in!
Thank you!
Super interesting and well written, thank you very much!
Much appreciated Niklas! No problem!
Loved the additional angle on SHV.
https://substack.com/@tenvacapital/note/c-143911692?r=ry6dl&utm_medium=ios&utm_source=notes-share-action
you provided.
Just another supportive and compelling argument.
however, as much as we want to be convinced of the upside potential, I would love to hear your opinion on how SHV got to these low prices, well below the capital raising just last year. I have difficulty having unbridled conviction when the market has such a negative view, despite all the positive factors.
Thanks very much Gabriel!
My view is that markets are often short-sighted and irrational. I don't believe there's necessarily a logical answer other than this. I.e. the time horizon in focus is usually only the next 6-12 months and in today's world this time horizon is getting shorter and shorter. The Obj. Estimate clearly didn't help but the price was already somewhat depressed prior to that.
In saying this, a major part of my approach is understanding exactly how I am going to extract value and get paid.
In this spirit, if we reverse-engineer the question and focus on what the market will do in a world where the almond price has materially increased because supply hasn’t grown for 3-5 years (and has in fact very likely shrunk) with steady demand growth; I believe the resultant material earnings and FCF inflection will very quickly flip the markets’ attitude from one of pessimism to raging optimism with the stock responding accordingly.
So I really try to remain focussed on the qualitative inputs, monitoring them consistently to ensure the thesis is still on track and then try to deduce how these qualitative inputs – i.e. the lack of supply due to water shortages in California – will impact the almond price and therefore flow through to future Earnings and Free Cash Flows and how the market will therefore value these.
I hope that helps.
Lots of detail and thought put into this. Nice work.
Thanks for kind words AJ!