CIC Chairman takes on macro issues

CIC Holdings Chairman B.R.L. Fernando in the Company’s 2012 Annual Report has addressed key macro issues facing both the agriculture and other sectors.

Agriculture

He said that whilst the expansion in the agricultural sector in 2011/12 could be attributed to the strong support by the Government, the paddy and vegetable production has now generated surpluses but lacks the quality assurance, processing and handling infrastructure, education and cost control to access export markets.

“It has now become mandatory to invest on a platform to plan production and productivity improvements to ensure price stability to farmers,” he added.

Fernando welcomed the Government’s program to encourage fruit and vegetable exports while at the same time directing resources to enhance local production focusing on import substitution. Fresh Milk, Dried Chilli, Big Onion and Potatoes are identified as products with potential for local production.

Agri chemicals and fertiliser

Fernando also noted that the agricultural chemicals market continues to pose challenges.

“The industry globally has continued to innovate and develop stewardship methodology encompassing safety, health and environmental concerns in the face of tightened registration requirements. All new products entering the market are target specific with a ever shrinking environmental footprint, approved for marketing, after extensive studies and evaluations.”

“We have also to keep in mind the fact that global agriculture has progressed on the back of cheap fertiliser, adequate water and the judicious use of pesticides. This model is certainly undergoing changes. Water is in short supply and fertiliser more expensive. Pesticides are under pressure by interested groups, sometimes with no proper scientific evaluation,” the CIC Chairman said.

CIC’s Research and Development efforts are directed to fertiliser application technology and water management. “We are dependent on the global pesticides industry for responsible management of inputs for weed and pest control,” he added.

According to Fernando, the agriculture sector is also changing with the advent of peace.

“We are no longer looking to achieve self-sufficiency in rice production. A surplus is now available making it mandatory to access export markets. With the development of new quality rice varieties with which we tapped ethnic markets in US, Australia and Europe. We are ideally positioned to export rice to discerning and accessible markets. This is an opportunity stemming from our Research and Development and productivity improvements,” he added.

As a parallel comparison, our rice yields now exceed 8 tons per hectare which is double the national average and certainly the highest in the region. Research and Development at our farms also encompasses Hybrid Seed production of rice and selected varieties of vegetables. We have also invested in a seed coating machine to ensure quality seed to farmers. The major thrusts are the big onion seed production facility at Pelwehera, fruit cultivation and development of protocols to get product to market. Banana, mango, pineapple and papaya are receiving considerable attention and results are expected in the short term. Overall our agriculture business continues on a growth trajectory which augurs well afor ourselves and the farming community. We continue to nurture the farming community and rural population in the belief that their prosperity will be our growth.

Fernando said fertiliser margins however remain difficult due to the ever increasing price of fertilisers and the delay in the subsidy reimbursements. Farmers, suppliers and Government need to focus on the fertiliser utilisation efficiency and drive benefits from each unit of fertiliser recommended and applied. Seed, equipment and distribution which grew on the back of the fertiliser business now can stand on its own and generate results for the future.

Dairy

The CIC Chief also said that Group investments in the dairy sector, quality seed production, fruit and vegetable production, a near doubling of capacity in the poultry facilities with further improvements in quality standards would provide CIC the leverage with market expansion.

CIC’s expansion to the dairy sector via the Mahaweli Livestock farms is a step in the right direction, he said. “Though the land allocation has not been resolved we have continued to invest in additional livestock, while focusing on improving nutrition needs of the herds under our control. We are now obtaining milk yields comparable to international standards which could be further increased with the implementation of our plans,” Fernando added.

In the feed and poultry business we have continued to record improvements year on year. We have now earned the trust and respect of our many customers as we excel in our service levels expanding our core customer base. Considering projected increase in per capita consumption of chicken, our feed and poultry business is now targeting substantial investment with a doubling of capacities all round. On an optimistic note we will double our revenue and profits over the next five years. The feed mill, hatchery, breeder farms and the poultry farms are now being got ready to benefit from the opportunity available with our current level of investment.

Interest rates

Focusing on monetary policy issues, CIC Holdings Chief said low interest rates and a stable exchange rate coupled with credit growth increased the demand for imports which grew by over 50% compared to the growth in exports of 22.4%. Consequently, the current account deficit increased to 7.8% compared to the 2.2% in the previous year. This prompted control on credit expansion which proved inadequate and hence was followed by depreciation of the rupee and a hike in interest rates.

“With a large import portfolio in trading operations encompassing high working capital, our costs will see substantial increase in the coming year. It may not be possible to pass the entirety of these costs to our customers in the short term,” Fernando said.

“However, the reduced corporate tax rates coupled with our own import substitution efforts should help cover the deficit to some extent,” he added.

Anti-dumping legislation

Focusing on the key raw materials including Latices manufactured at CIC factory in Ratmalana, the Chairman said the production of Latices now enjoys minimum protection and consequently margins are difficult due to dumping of material by foreign suppliers.

“It would be timely now for Government to consider and implement Anti-Dumping Legislature to ensure a level playing field for the future,” he added.

Commenting on the overall CIC Group performance I FY12, Chairman Fernando said it must be viewed in a scenario of stability and tranquillity that prevailed in the country with the end of the war.

“Favourable weather resulted in good harvests benefitting agricultural producers and rural communities countrywide. The economy maintained a growth propensity which contributed to volume increases in the full spectrum of business in which we participate. Consequently, our Group turnover for the year recorded a marginal improvement of 6.8% to Rs. 22.47 billion while gross profit improved by 17.43% to Rs. 5.64 billion. Net profit after tax however, dipped by 5.38% to Rs. 1.1 billion due to escalating distribution and administration expenses and an exchange loss of Rs. 82 million,” CIC Chief Fernando said.

Net profit attributable to equity holders of the company was Rs. 916.4 million, down marginally from Rs. 926.5 million in FY11.