Huge stockpiles will eventually force prices down, causing growers to reduce acres, says Bunge official
The head of one of the world’s largest grain companies believes grains and oilseeds are overpriced and a day of reckoning lies ahead.
Soren Schroder, chief executive officer of Bunge Ltd., recently told investment analysts that corn and soybean prices have not reflected the global glut of the commodities.
“For some reason markets have been very, very resilient and not reflected the buildup of stocks that is now three years into the making and with another one coming,” he said.
“And I think there’s a reckoning of that where prices will reflect it.”
That reckoning will drive down prices and bring an end to acreage expansion in South America and the United States.
Schroder blamed the company’s disappointing first quarter crush margins on a reluctance by South American farmers to price their 2017 corn and soybean crops.
Brazil’s farmers had sold 41 percent of their crop by the end of March, which is 18 percent lower than the previous year. The situation was worse in Argentina, where only seven or eight percent of the soybean crop was priced.
“This standoff between supply and demand has reduced forward commercial activity dramatically, translating to a negative effect on our margins this quarter,” he said during a conference call.
Bunge dropped its earnings before interest and taxes guidance for 2017 for its agribusiness segment by $95 million to $125 million because of the poor first quarter results.
Archer Daniels Midland Co. is also hurting. According to a Reuters story, the company’s shares plunged nearly nine percent, the biggest drop in eight years, the day it released its disappointing first quarter numbers.
One investment analyst said this is the third year in a row that grain companies have started the year with high expectations only to have them dashed. He asked Schroder if investors should be concerned that there is a “structural impediment” in the industry that didn’t previously exist.
Schroder said there has been a structural shift in the ability of South American farmers to hold onto their crops, and that is exactly what they are doing in hopes of higher prices.
“Many of them (are) in a position and better capitalized than they were previously with additional storage at the farm and ways of financing crops that they didn’t have,” he said.
However, Schroder said those crops eventually have to come to market, which will drive down corn and soybean prices and spark end user demand.
He expects that 70 percent of Brazil’s crops will be priced by the end of the second quarter as farmers make room for the safrinha, or second crop, of corn.
Argentina’s crops will be slower to come to market. Bunge is forecasting that 50 to 60 percent will be priced by the end of the third quarter because of cash flow needs.
“And that is what we believe will ultimately drive not only volumes but margins in the late part of the second quarter and the third and the fourth,” said Schroder.
He said that with another record U.S. crop in the making, prices will fall to levels where it is “almost silly” for end users not to extend their forward purchasing because they know prices could rise back up in a hurry.
Schroder anticipates prices will fall to the point where growers in South America and the U.S. will cut back on acres next year.
“That, combined with any kind of weather issue, whether it’s in the U.S. or in Europe or South America, I think would quickly ignite a round of forward buying like we haven’t seen, frankly, for years,” he said.