Ceylon Grain Elevators PLC (CGE), the country’s largest player in the poultry industry and the major animal feed producer, had faced daunting challenges in 2008 leading to a group loss of Rs.125.4 million in the year ended December 31, 2008, down from a profit of Rs.94.7 million the previous year.

At company level, CGE posted a loss of Rs.114.5 million against the previous year’s profit of Rs.4.4 million.

CGE Chairman Primus Cheng Chih Kwong, said that escalating fuel prices in the first two quarters in the year and a depreciation of the rupee by 6.5% in the third quarter had a direct bearing on the cost of production in their core feed milling business.

Explaining that the major ingredient used in animal feed was imported maize, he said that skyrocketing prices of fossil fuel led to a demand for bio-fuel produced from maize.

This resulted in a shortage of the commodity for use as human and animal feed with growers choosing to sell their crops to large ethanol manufacturers.

"The extraordinary situation drove maize prices up compelling CGE and other feed millers to import the crop at a much higher cost," Cheng said.

When crude oil prices declined drastically later in the year, the demand for maize eased but an Indian ban on maize export, which had since been lifted, shut off the cheapest source of maize for their feed mill.

"Most recently, however, the government (of Sri Lanka) has imposed a ban on import of maize. In the light of this and the weakening Sri Lanka rupee, the group is looking increasingly at local sources of raw materials and re-formulating its feeds," he said.

Cheng said that processed chicken sales were seriously affected by the overall economic gloom prevalent in the country and the resulting decrease in consumer purchasing power.

"Stringent government pricing controls intensified the problem together with restrictive state levies on imported raw material," he said.

The budget for 2009 increased the cess on imported maize from 20% to 25% and then to 35% two months later. The increased Ports Authority levy on imported products from 3% to 5% further increased the burden on the industry.

Several other relevant taxes and tariffs had also increased during the year and interest rates too moved up costing CGE an additional Rs.40 million as interest on borrowings.

"In light of these tough conditions, the group decided to hold back on major investments during the year under review, focusing instead on streamlining and optimizing our newly commissioned integrated management and accounting system and the ongoing modernization of our farms," Cheng said.

Turnover during the year was up 25% to Rs.7.2 billion but this gain was dampened by the increase in the cost of raw materials pushing up the cost of sales 31% to Rs.6.9 billion.

Their gross profit which fell to Rs.279 million from Rs.462 million the previous year could not absorb a significant exchange loss of Rs.83 million and a 152% increase in finance cost to Rs.218 million.

"As a result of the multitude of external global and local economic challenges the group made a net loss of Rs.125 million for the year ended 2008," Cheng said.

But he was confident that the group’s strong fundamentals would help them to ride "this rough patch and effect a turnaround in the year ahead."

"The company and its subsidiaries have a strong balance sheet with assets totaling Rs.4.9 billion. Of this property, plant and equipment constitute Rs.1.5 billion. Long term liabilities represent only 24% of group’s assets, while shareholders equity is worth Rs.1.34 billion," he noted.

Despite the disappointing year they faced, CGE remained convinced that adversity offers seeds of opportunity for the future. The extraordinary events of the past year had clearly demonstrated the companies with sound business models are able to remain stable even through immensely challenging times, the chairman said.

He remained "cautiously optimistic" for the future. Stating that government taxation and global markets remained unpredictable and volatile, Cheng said that it remained to be seen if the softening of commodity prices will be a long-term phenomenon.

Locally they looked forward to the conclusion of military operations in the North and hoped that the end of violence will usher in a new era and opportunities to the corporate world.

"The North and East of Sri Lanka remains a vast untapped agricultural hotspot and hopefully, with the dawn of peace, your company and its subsidiaries will be able to break ground in the region, further expanding our operations," he said.

CGE has a stated capital of Rs.1.02 billion and a share premium on subsidiaries of Rs.213.1 million together with a revaluation reserve of Rs.61.2 million and retained earnings of Rs.44.9 million in its books.

The company’s total assets amounted to Rs.4.9 billion and liabilities to Rs.3.5 million.

A five-year summary in the annual report indicates three profit making years from 2005 to 2007 before the last loss making year.

Prima Limited of Singapore with 45.45% followed by Japfa Comfeed International Pte Ltd., Singapore (10.09%), Supra Limited, Hong Kong (8.63%), Eka Limited, Singapore (3.78%), NSB 2.91% and ETF (1.59%) are the major shareholders of the company.

Net assets per share in 2008 stood at Rs.20.50, down from Rs.22.41 the previous year.