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As quickly as the ethanol producer jumped into the cattle business, Green Plains (GPRE: Nasdaq) has sold off half of its Green Plains Cattle Company to a group of investment funds for $77 million. Operating at six locations in Colorado, Kansas, Texas and Missouri, the company has the capacity to feed 355,000 head of cattle each year. The cattle business contributed $271 million to total revenue in the most recently reported quarter ending June 2019, delivering a modest operating profit near $7.3 million.
There has been considerable stress in the feed cattle industry. The number of cattle in feedlots is down compared to last year, an unusual development in recent years. New placements fell short of releases by 3% in early September 2019. As is the case in most industries there is a China trade angle. The Chinese are keenly interested in U.S. agriculture products, but have been frustrated in moving forward with purchase agreements by the tariff bluster of Donald Trump. Nonetheless, a Chinese delegation has been set to tour agriculture operations in Montana and Nebraska this month in hopes of striking a deal even as disputes continue over tariffs and intellectual property protection.
The stress that the China trade dust up has place on the U.S. agriculture sector is beginning to wear on the cattle industry. Everyone is out to protect their profits. Certain beef producers are looking jealously at the profits earned by the packers even as producers are beginning to suffer losses.
Green Plains may have been looking over this environment when choosing to reduce their position in the cattle business. Most likely it was more a matter of adjusting risk and shoring up the company’s overall financial position. In making the announcement Green Plains management was quick to mention the impact of the sale on the company’s balance sheet. Even with an ample bank account balance, few would turn away an incremental $77 million in cash. Green Plains had $193.3 million in cash on its balance sheet at the end of June 2019, but long-term debt of $370.9 million puts the company in a negative net debt situation. Deleveraging must have seemed like a worthwhile goal as management has made a point of using the proceeds of the cattle sale for a pay down in debt.
Reducing the risk on its balance sheet should be a plus for GPRE. The stock hit a 52-week low of $7.01 in mid-August 2019, but has since staged a strong recovery. The shares made a strong move back higher until meeting a line of strong volume-related resistance at the $11.00 price level The stock price movement may be mostly in sympathy with the rest of the small-cap sector that experienced a clear-sell off in the four months ending August 2019. However, the announcement of the cattle-operation sale may have played a part in improving sentiment toward the company.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
This article was first published on the Small Cap Strategist weblog on 9/13/19 as “Green Plains’ Cattle Drive”.