US olive oil supply chain problems crush Cobram Estate's bottom line

Cobram Estate Olives (ASX: CBO) has reported a $5.2 million loss in net profit after tax for the first half of FY22, with the expense reflecting a 26 per cent improvement year-on-year as the Melbourne-based company endeavours to grow its US presence. 

Known as Australia's largest olive oil producer, the company saw earnings more than double to $4.8 million, and would have been greater still by another $1 million if it weren't for investments into innovation and value-add products as well as the US market. 

Group sales for the half were down by 3 per cent at $70.3 million, which belies a positive Australian performance. On the other side of the Pacific Ocean however, US sales declined by almost 20 per cent to $15.9 million because of difficulties in securing Californian olive oil in bulk from third-party millers.

Although Cobram's board is optimistic the group can secure “reasonable volumes” from third parties in the United States 2022, it will be unlikely to match last year’s volumes of approximately 29 per cent of total supply.

It has now signed a number of new grower supply contracts in the US ranging from three to five years, and now has 2,100 hectares under contract overseas. It also owns 306 hectares of planted olive groves in California, which are yet to reach maturity.  

“As we've foreshadowed the growth in sales has been constrained,” Cobram joint-CEO (finance and commercial) and executive director Sam Beaton said with regards to Californian operations.

“We're seeing really strong demand from customers and retailers for Californian olive oil - both through branded and private label. We're having some really good wins in terms of additional distribution," he said.

“Our volume in California will be flat for this coming harvest as well and then we'll start to see an increase. We anticipate that the volume we harvest and process will roughly double in the next five years.”

The company noted that while costs such as fertiliser, diesel and freight grew due to ongoing supply chain issues caused by COVID-19, they were offset by short-term low prices for electricity and water.

In December 2021, $9.4 million was invested towards the purchase of two new parcels of land in the USA, which is set to be planted in FY23 and deliver an estimated 182 additional hectares for the plantation of olives.

For the six-month period to 31 December 2021, in Australia Cobram used 16 per cent less water than budgeted for its northern Victorian groves and 37 per cent less water for its Boort grove.

The $15 million 380-hecatre development of Cobram's Boort groves in Victoria is expected to commence after the completion of its 2022 olive harvest, with the revamped mill to be operational by FY23.

When Cobram began trading on the ASX in August 2021, the company had already owned 18,500 hectares of farmland in Australia of which around a third had olive grove plantings. 

Joint-CEO and executive director Leandro Ravetti noted the purchase of US land included water supply, whereas Australia's regulations would require water to be purchased on an ongoing or temporary basis.

“There's a canal or a channel that runs through the property that allows you to have access to district water or surface water - it pretty much comes with a small admin fee,” he explained.

“At the same time, this property has its own bores, with a history and well-known yields of underground water to supplement that. The price of a property relates to the amount of water you can access through the channel but also the yields of underground water you can get from the existing bores.

“Whenever we purchase a property, we make sure that it allows us to access enough water to fully irrigate the olives that we plan to plant into that property. Certainly, that has been the case with this [purchase] and any other property that we purchased in the US.”

As of 31 December 2021, the company had $51.2 million in cash and undrawn debt facilities, which are available for funding growth in the medium term.

Cobram's net assets have grown by $11.4 million – jumping from $448.6 million to $460 million.

“When we first started here in Australia, nearly all of the oil was imported. We've since expanded groves invest and educated the market," chair and non-executive director Robert McGavin said.

There's just a massive difference in the consumer value between poor quality or average extra virgin olive oil and high quality - the science is very clear that the health benefits come from high-quality extra virgin olive oil,”

“I don't think there's any reason that olive oil can’t become a really major crop in the US and be supplying similar levels to Australia in 10-20 years’ time because the climate’s really good - there’s lots of available land and water.”