Among the victims of Europe's debt crisis, count Canada's prince of pulses.
Regina-based Alliance Grain Traders Inc., the world's largest processor of lentils and a major player in other pulse grains, including chickpeas, peas and beans, has seen its shares sag after reporting that profits and margins collapsed in the fourth quarter.
Its energetic 39-year-old founder and chief executive officer Murad Al-Katib blames the lentil lull on an unexpected culprit – European banks, which have cut back on loans to food importers in the developing world. "This crisis has hit the emerging markets quite significantly," he said in an interview Wednesday.
Alliance's situation spotlights the wide ranging effects of Europe's economic crisis, which has not only crimped demand on the continent but has also hurt seemingly far removed firms such as Alliance. Winnipeg pulse producer Legumex Walker Inc, which reports earnings Thursday, has also warned the economic turmoil in Europe had a similar impact on its business.
Alliance has been one of the shining lights of the Canadian agricultural sector in recent years. Mr. Al-Katib, a second-generation Turkish-Canadian from Davidson, Sask., started a pulse trading company in his basement in 2001 after spending much of his twenties selling crops for the provincial government in emerging markets. His goal was to build a global processor of pulses – crops that were barely known in Saskatchewan 20 years ago but are now produced in such abundance that Canada is the world's largest exporter of lentils and peas.
The young entrepreneur achieved his goal over the next 11 years, buying operations in Turkey, Australia, China and South Africa. Last October, Prime Minister Stephen Harper was on hand when Mr. Al-Katib announced plans to build a $50-million pasta plant in Regina.
People in Alliance's key markets in the Middle East, North Africa and the Indian subcontinent are as fond as ever of the company's protein-rich grains, Mr. Al-Katib said Wednesday. But importers in those key markets have been squeezed by European banks that finance their purchases.
With less financing available, many Alliance customers have resorted to running down pulse inventories and buying on an as-needed basis. That has cut into demand and forced Alliance to lower its prices and substitute commodities with lower profit margins, such as peas and flax, to keep its facilities busy.
Alliance was also hurt by the Arab Spring revolutions, which disrupted trade in its products, and by currency devaluations, particularly in Turkey and India. "All of these factors layered one on top of the other created a multiplier effect," Mr. Al-Katib said.
Alliance reported Tuesday that its revenues in the quarter ended Dec. 31 rose by 37 per cent to $231.4-million from the same period a year earlier, but the company earned just 4 cents per share, a fraction of the 42 cents analysts had expected, and well down from the 53 cents the company earned the same period in 2010.
Some analysts had already predicted a rough ride in the quarter, after Statistics Canada reported lentil exports in the last three months of 2011 fell by 13.1 per cent year-over-year. "But the magnitude was worse than expected," National Bank Financial analyst Robert Winslow said. The company's shares have lost 8 per cent since the earnings announcement.
"This is supposed to be a seasonally strong quarter. More importantly, we think the same thing is happening in the first quarter" as lentil exports in January were down 38 per cent, Mr. Winslow said.
Despite the poor results, Mr. Al-Katib said that he's positive demand will pick up in the second half of the year. Buyers "have drawn stocks down to what we consider to be unsustainable levels," he said. "These aren't discretionary goods. People will consume them and there is no apparent substitute. Capital will flow to staple foods because they're a need-to-have."