The drought continues to have an impact on a growing number of Australian companies.

Australasia’s biggest food group, Goodman Fielder saw its shares sold off by more than 5% this morning after revealing that the drought and soaring world commodity prices would cut earnings to a flat result for the year to next June.

The shares fell 11.5c to $1.985 at 11.30am, after directors informed the market that: “Present indications are that commodity costs for this financial year will be up by around $180 million, an increase of just under 40 per cent on last financial year.”

This compared to the earlier forecast of a rise in profit for the full year, although the company cautioned that there could be an impact from rising commodity prices. Goodman Fielder made a net profit, including significant items, of $243.2 million in the 2007 financial year.

Goodman is a major consumer of wheat and canola in particular. Both have been hurt by the drought with production cut and prices up. Wheat is in short supply around the world and its price is also being boosted by the rise in corn prices caused by the push into ethanol in the US.

Canola prices are also being boosted by the growing demand from the biodiesel industry, especially in Europe, though the record prices have hurt demand and caused some plants to be shut.

The company joins the likes of Ridley, Timbercorp, Futuris, McGuigan Simeon Wines, Fosters (more currency than drought, but there’s still been an impact on beer and wine businesses), Grain Corp, ABB and Australian Agricultural Company. Futuris is selling its 43% stake in Aust Ag because people think it’s drought affected, even though most of its properties enjoying very good growing seasons this year. But meat prices have been hit by drought-induced sales of stock by farmers cutting herd sizes and flock numbers.

Major retailer, Woolworths, referred to the rising cost of food at Friday’s AGM when CEO Michael Luscombe said:

It is important to point out that Australia, just like most other countries around the world, is in the grip of extreme upward pressure on food prices.

The increasing price of transport and commodities such as grain is compounding the effects of our own drought and causing widespread price rises by manufacturers.

We have been warning of this for over a year now and working hard behind the scenes to mitigate and absorb cost increases to us so that they don’t flow through to the customer.

Again, there is some political pressure for a regulatory body to monitor the reasons for these rising prices and we would welcome this wholeheartedly.

It’s important for Australians to reach a more complete understanding of how the drought and global supply issues affect the food that we eat and the prices we pay.

I just want to continue on the subject of the drought in a bit more detail.

It’s been a constant issue for Woolworths all year, as it has for a great many of our suppliers and it shows no signs of abating anytime soon.

Woolies shares rose 30c this morning to $32.50, so the market has worked out where the profits are in the drought!

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Peter Fray
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