Farmers are willing to wait for higher prices and are cutting out grain handlers by marketing directly to end users
CHICAGO, Ill. (Reuters) — Facing a global grain glut that is crushing profits and raising questions about their long-term prospects, the world’s big grain merchants 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 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 May 2 downgraded its expected return on invested capital — a key performance measurement — by a full percentage point to a projected nine percent annual rate of return.
The next day, Bunge reported an 82 percent drop in first-quarter earnings and lowered its profit outlook for its unit that trades grain and oilseeds. It cut its 2017 capital expenditures budget by $50 million, roughly a seven percent cut, prompting concerns about a possible decline in cash flow.
Spooked investors sent shares of Bunge down more than 11 percent, the steepest drop in 15 months. The previous day, ADM shares posted their biggest drop in eight years, down 8.9 percent to $41.67 a share, with further losses May 3.
Soren Schroder, Bunge’s chief executive officer, said 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.
However, investors are beginning to fear the good times may not return for the grain giants, which have struggled to profit from their core grain trading businesses.
With grain busting out of storage bins all around the world, the 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.
Farmers have invested heavily in new storage, making them less reliant on elevators operated by the trading houses, and the internet provides information that makes farmers 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, 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.
Grain companies are caught between farmers who do not want to sell crops at low prices and end users, such as food companies, hunting for bargains, said Gary Blumenthal, CEO of World Perspectives, a Washington-based agricultural consultancy.
“(They) are caught in the middle,” Blumenthal said.
ADM’s agricultural services division has reported its third quarterly loss in international grain merchandising in five quarters.