Impact of Bad Weather May Spread to China Organic Agriculture

It has been called the worst snow storm in half a century and it is still going on. Many parts of China, especially the central and eastern regions, are paralyzed, due to disruption in transportation leading to brown outs (coal not getting through), a drag on the upcoming Chinese New Year celebrations, and as is becoming more and more evident, a disastrous impact on winter food crops.

According to reports, this is what is happening:
1) Heavy snow is causing many greenhouses to collapse leading to crop destruction;
2) Disrupted rail service is stranding food that cannot be adequately refrigerated thus causing spoilage; and
3) Insufficient produce getting from the hinterlands to the cities leading to skyrocketing food prices and exacerbating out-of-control inflation.

I want to look at what impact this situation has on China Organic Agriculture (CNOA.OB), a leading producer of organic rice in China. On one hand, rice is (fortunately) not a winter crop. In the north, where CNOA operates, rice is planted in May/June and harvested in August/September. It is worthwhile to remember that CNOA is based in Jilin Province (think of this territory as the northern extension of North Korea, which it borders), and the Nen River, which irrigates CNOA's fields, is usually frozen from November to April. When I last looked, the temperature there was minus 25 degree Celsius.

On the other hand, CNOA's newly acquired food transportation company (Huiming Trading) may be in trouble. Huiming distributes food products in northern, central and eastern China, coinciding with the worst affected areas. We know that the company transports beans, corn and processed foods, but that's the extent of my knowledge based on public information. I suspect while Huiming's exposure to perishables may be limited, it does little to mitigate the lost income when apparently only 20% of usual demand is currently getting through to the eastern cities. There's now even talk of the possibility of public unrest, potentially signaling a return to state-enforced food prices, which would be a big blow to food producers indeed.

In a way, this winter has given us an illustration of how vulnerable China's economy is, even if it is growing and morphing like never before. And while the storm's financial impact on CNOA cannot be quantified for now, given that this is one of the peak consumption periods due to the Chinese New Year celebrations, I dare say that the company's foregone revenues will not be insignificant. This is especially so as the weather pattern is expected to sustain and possibly worsen in the northern provinces. What an inauspicious end to the year of the Golden Pig!

My Position: None.

Comments

[drwater:]

how will this affect DBA?

2008 Feb 01 01:25 PM

[Yokohama Kid:]

I am glad to hear that sever winter has distrupted transportation of vegetables from hinterlands where farmers are said to spray heavily insecticides and pestiscdes on vegetables. The reports coming from China via mass media makes us believe that there are no organic vegetables in China. Only heavily contaminated vegetables. Just remember what is happening in Japan where there is a widespread concern over health risks posed by Chinese food products.

2008 Feb 02 05:28 PM

[john haskell:]

there isn't "widespread concern" in Japan. Japanese are being straight-up poisoned by pesticide-contaminated dumplings from China.

2008 Feb 03 06:15 PM

[xlebywek:]

I disagree with the author.
The impact on bottom line from transportation will be very small as the main EPS coming from rice.
And they hyperselling their rice in this season , not growing it , I believe their selling pace raised substantially in last month.
If they report the coming ER with even slight increase in EPS over the last Q , it's all different story and all different stock well above $5. I don't see any reason for them not to beat last Q in terms of rice volumes(not talking about surging rice prices) , since the ended Q and this one are the strongest ,they signed 2 huge distribution deals with 2007 testimonial of full year revenue addition, and next harvesting season brings production expansion as stated.
I wonder ,how much shares the author bought below $1.40 on friday ?

2008 Feb 04 05:13 AM

[littlechumii:]

CNOA 2007 "Overview" merely reiterates and re-confirms numerous events/company information previously communicated via earlier press releases...except for the conspicuous absence of reconfirming thier .29 per share earnings guidance also announced by press release in early December. The "Overview" therfore is redundant and neither positive or negative overall. However it resulted in (or other wise was a "smoke screen to disguise") the sell off of over 600,000+ shares....to avoid future loses due to significant 2007 earnings decline compared to the .29 per share guidance

Strange...very strange???? Any opinions???

2008 Mar 17 01:30 PM

[xlebywek:]

We should buy only after ER , 10-K , 10-Q

2008 Mar 20 07:14 AM

[mojotronic:]

Considering that CNOA deals in rice, I find it highly doubtful that this storm will affect them in any substantive way. It seems far more likely to affect pork dealers and other more perishable goods. Overall it seemed like a silly article, with the author at least admitting he was relying on half-baked speculation to propose a theoretical impact.

2008 Apr 10 02:47 PM