Grain Giants Expect Higher Profits From Bad Weather
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. ADM -1.33% and Bunge Ltd. BG 2.30% 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.