In the face of a global grain glut that is crushing profits and raising questions about long-term prospects for the world's big grain merchants, the companies maintain they need only a drought or other supply shock to return to the riches of the past.
But a two-day rout on Wall Street earlier this week for two of the industry's biggest firms - Archer Daniels Midland Co and Bunge Ltd - underscores concerns that poor recent profits may be more than just a leg of a cyclical downturn and instead point to fundamental change. ADM on Tuesday warned investors it was downgrading its expected return on invested capital - a key performance metric - by a full percentage point, to a projected 9 percent annual rate of return.
On Wednesday, Bunge reported an 82 percent drop in first-quarter earnings and lowered its profit outlook for its unit that trades grain and oilseeds. It also reduced its budget for 2017 capital expenditures by $50 million, roughly a 7 percent cut, prompting concerns about a possible decline in cash flow. Spooked investors sent shares of White Plains, New York-based Bunge down more than 11 percent on the news on Wednesday, the steepest drop in 15 months. The prior day, ADM shares posted their biggest drop in eight years, down 8.9 percent to $41.67,
with further losses on Wednesday. Bunge and ADM shares were up 3.2 percent and 2.4 percent, respectively, on Thursday afternoon. Soren Schroder, Bunge's chief executive, told Reuters the dour outlook is as impermanent as weather. "All we really need for this to change is three weeks of hot and dry weather in the Midwest in July and the same in August and you're back to markets that don't have enough. It can change quickly," Schroder said in an interview on Wednesday.
But investors are beginning to fear the good times may not return for the global grain giants known as the ABCDs, a group that in addition to ADM and Bunge also includes privately held Cargill Inc and Netherlands-based Louis Dreyfus Corp. All of the ABCDs - which move corn, soybeans and other crops from regions of surplus to areas of tight supply - have struggled to profit from their core grain trading businesses lately. With grain busting out of storage bins all around the world, the big grain merchants have fewer opportunities to capitalize on "dislocation" of supplies, the companies say.
"Everybody is wondering if there's some fundamental issue across the board for these grain processors," said Brett Wong, senior research analyst with Piper Jaffray & Co Grain markets are notoriously cyclical, but some industry participants and observers say some of the changes are more permanent, making the industry ripe for consolidation.
"There's plenty of room to consolidate. And we're happy to participate and ... can lead it," Bunge's Schroder told analysts in a conference call on Tuesday. Farmers have invested heavily in new storage, making them less reliant on the grain elevators operated by the trading houses, and the Internet has empowered farmers with information that makes them much smarter about marketing their grain.
Mike Boland, an agricultural economics professor at the University of Minnesota, said farmers increasingly are cutting out the grain handlers altogether, selling directly to ethanol plants and other end users. "The grain trading companies may never get their hands on those bushels to move it along," Boland said. ADM, Bunge and others are caught between farmers who do not want to sell crops at low prices and end users, such as food companies, hunting for bargains amidst global oversupply, said Gary Blumenthal, chief executive for World Perspectives, a Washington-based agricultural consultancy.
"The ABCDs are caught in the middle," Blumenthal said. ADM's agricultural services division, which has seen turnover in the executive ranks, this quarter reported its third quarterly loss in international grain merchandising in five quarters. "We cannot help but wonder if ag services faces a structural challenge with the balance of power shifting to farmers and ADM's more limited approach to capitalize on intellectual capital in the ag markets," BMO Capital Markets analyst Kenneth Zaslow said in a note to clients.
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