Grain companies prep for liftoff

Top executives of two of the world’s largest grain companies say the industry has finally turned the corner after years of wallowing in the doldrums.

The oilseed sector is leading the charge. Crush margins have dramatically improved and along with them the financial fortunes of many grain companies.

Bunge chief executive officer Soren Schroder told investment analysts that Argentina’s short soybean crop is all it took to tip the scales.

“The outlook for this year is very good for Bunge because underlying demand for agricultural products is so strong it only takes very small changes in supply or demand to have significant impact,” he said.

The company increased its 2018 earnings outlook for the agribusiness segment to US$800 million-$1 billion from earlier estimate of $550-$700 million.

“So we feel very good about that,” Schroder said during a webcast announcing the company’s first quarter 2018 results. “I mean, I think agribusiness is back in a big way and it’s not just crush, it’s the entire chain.”

Ray Young, chief financial officer of Archer Daniels Midland, had a similar story to share with analysts.

“Global market dynamics continue to push soybean crush margins higher, and the business set record soy crush volumes,” he said during ADM’s first quarter webcast.

The company believes its oilseeds business segment could achieve an operating profit of more than $1 billion in 2018, up from about $850 million last year.

Grain company executives have for years been using the term “headwinds” to explain away poor financial results, so it was refreshing when ADM chair Juan Luciano chose a different word.

“As these headwinds kind of subside and become tailwinds, more like tailwinds, you’re going to see strong recoveries, particularly in the oilseeds segment,” he said.

Schroder said crush margins that were $25 per tonne in early 2018 have climbed to about $40 per tonne.

Strong meal prices are responsible for most of the increase. There is a concern that rising soybean meal prices will eventually drive feed manufacturers to alternative protein ingredients.

“There is a point, but it is not yet, where competing proteins will eat into soybean meal demand. I think we are still quite a ways from that point,” said Schroder.

Soybean meal demand outside of China is growing by about five million tonnes per year, which is why he believes this won’t be a short-lived turnaround.

“The underlying health of the crushing business is absolutely there beyond this year. And we feel that 2019 in crush should be a very good year and beyond,” said Schroder.

Luciano agreed that the “very, very healthy margins” will be sustained for years to come.

“The drought in Argentina certainly contributed to the increase in soy crush margins, but we foresaw these crush margins expanding even before the extent of the Argentine drought was known,” he said.

Luciano cited a number of factors, including a U.S. tariff on Argentine biodiesel, monthly reductions in Argentina’s soybean export tax and a shift from hand-to-mouth buying to buyers wanting to lock in their costs as other reasons behind improving margins.

Chris Vervaet, executive director of the Canadian Oilseed Processors Association, said soybean and canola crush margins have been on the rise in Canada as well over the past six months or so.

“There has certainly been enough of an incentive for our members to crush,” he said.

However, since January railway transportation problems have prevented crushers from being able to reap the rewards of improved margins.

And what about farmers? Are they participating in the revival of the agribusiness sector?

Arlan Suderman, chief commodities economist for INTL FCStone, said they are but to a lesser degree than the grain companies.

The increased crush activity is helping to gradually push oilseed prices higher.

“When the crush margins are strong, (crushers) have incentive to pay a higher price in order to get enough soybeans to push through their plant,” he said.

The problem is there is an excess supply of the crop and until that is mopped up prices won’t really take off.

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