Russian ban knocks FrieslandCampina profits

The Russian ban on Western agricultural produce hit the profits of the Dutch dairy cooperative FrieslandCampina to the tune of €80m in 2014.

Friesland’s branded cheese volumes declined 14.5% due to the Russian boycott and increased competition on the European market as companies needed to find new customers for cheese previously destined for the Russian market.

This demonstrates how geopolitical tensions can have a significant influence on operations and performance. Despite its size as the fifth largest dairy company in the world, these factors are all outside its control and show the importance of having diversified markets and products to better insulate the business.

Lower energy prices boost profits at Yara

Yara, Europe’s largest producer of nitrogen, enjoyed a strong fourth quarter thanks to falling energy prices. The fourfold increase in profits was a direct result of improved margins due to lower natural gas prices. Average European gas and oil costs were down 24% compared with the same period the previous year. Energy costs make up 80% of the cost of producing fertiliser.

European stocks boosted by weak currency

Over the past 12 months, the Glanbia share price has increased some 50%. This values Glanbia PLC at just over €5bn today and values the co-op’s 41% holding at €2bn. Currency movement is one of the factors in the share price surge as the dollar has strengthened against a weakening euro. Glanbia has become more exposed in America recently, with €1.8bn or 52% of group revenue now coming from the US. This has increased from 43% in 2011.

The group processes almost 5bn litres of milk and 40,000t of cheese in the US. In 2013, currency headwinds saw the euro strengthening against the dollar by 4% and this reduced group revenues by 2.5%. However, in 2014, these headwinds turned into tailwinds and boosted reported revenues by 0.4%.

But it is not only Glanbia that is performing. The EU quantitative easing programme has injected new life across the continent’s equities as foreign investors pour money out of the US and into the EU. Germany’s DAX index has surged 16.8% since the start of the year and many other European indexes have also enjoyed double-digit gains. The rally has been driven in part by the appealing valuations of many European stocks.

Company agenda

If there is anything to be taken from the Russian trade embargo, it’s the perils of placing all your eggs in one basket. European food companies with a major exposure to the Russian market were hard hit by the ban, emphasising the need to operate in a diversified range of markets.

With a number of mega regional trade deals under negotiation at the moment, the global trading environment looks set to become more open. As an exporting nation, this is undoubtedly positive for Ireland but businesses need to be prepared to deal with new competitors, often large-scale ones.

Even though businesses are reaping the rewards of currency tailwinds at the moment, it is important to be aware that tailwinds can turn into headwinds quite quickly and are outside the control of the industry. Tailwinds provide comfort but management must remain aware of cost at all times.

Read more from this year's KPMG/Irish Farmers Journal Agribusiness report here.