Grain Giants Expect Higher Profits From Bad Weather
03 May 2018 - 4:05AM
Dow Jones News
By Jacob Bunge
Grain-trading firms are making more money again after struggling
for years against a global oversupply of crops.
Poor weather in South America, changing trade policies and cost
cuts are improving profitability for the world's largest crop
traders and processors after lean years that spurred deal talks and
a reckoning with the consequences of bigger harvests around the
world.
Archer Daniels Midland Co. and Bunge Ltd. reported
better-than-expected earnings this week, building on analyst
projections that tighter commodity supplies could drive crop
trading and processing profits higher this year. Privately owned
Cargill Inc. last month said those forces are lifting its business,
too.
The grain giants buy crops from farmers, trade them to food
manufacturers and process them into animal feed, vegetable oil and
other products.
"Agribusiness is back, strong as ever," Bunge Chief Executive
Soren Schroder said in an interview. "All the dark clouds that
converged at the same time are far behind us now."
Bunge, the world's largest oilseed processor, boosted its
crop-processing profit forecast to between $800 million and $1
billion for the year. ADM projects annual profits from its oilseed
division could reach $1 billion or more in 2018, up from $832
million last year.
"We're seeing the results in our bottom line as headwinds turn
to tailwinds," said ADM CEO Juan Luciano on a conference call with
analysts Tuesday. He added that new expectations for scarcity of
some farm goods has lured buyers of animal feed and other
ingredients back to the bargaining table to lock in longer-term
supply deals.
Dry weather has dented Argentina's soybean harvest by nearly
one-third since December, according to U.S. Department of
Agriculture estimates. A smaller-than-expected crop in one of the
world's most productive countries helped drive soybean prices
higher and whittled down soybean meal stockpiles, an ingredient in
animal feed. Reduced export taxes on Argentine soybeans also
trimmed oilseed supplies, all of which has lifted soybean
processing profit margins.
Weather trends in the U.S. could also push up crop prices this
year. A cold, wet spring has delayed planting across some of the
biggest grain-producing states. That could diminish yields if
farmers can't get crops like corn in the ground over the next
several weeks. Farmers already intend to plant fewer acres with
corn and soybeans this year than last, according to Agriculture
Department projections, shifting some fields toward wheat and
cotton instead.
In recent years, bumper harvests had led farmers to hoard grain
rather than sell it at low rates, while buyers shifted toward
short-term supply deals. Agricultural companies responded by
cutting hundreds of millions of dollars in costs, selling off
assets and revamping logistics operations in places like
Brazil.
"The industry learned a lesson last year," Mr. Schroder
said.
They also explored deals. Bunge and ADM discussed a combination
earlier this year, though the talks stalled over regulatory
concerns, The Wall Street Journal reported in March. Those
discussions came after mining conglomerate Glencore PLC approached
Bunge about a deal, the Journal reported last year.
Despite improving prospects for the sector's biggest players,
U.S. farmers remain glum. Prices for many farm commodities are
stuck at relatively low levels -- as stockpiles remain high -- and
U.S. net farm income is projected to fall 7% in 2018, to the lowest
level since 2006. An index maintained by Purdue University and CME
Group Inc. showed farmer sentiment continued to decline in April,
due to fears of fallout from escalating U.S.-China trade tensions.
China is a major importer of U.S. farm products such as soybeans
and feed grains.
Write to Jacob Bunge at jacob.bunge@wsj.com
(END) Dow Jones Newswires
May 02, 2018 13:50 ET (17:50 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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