World’s Top Crop Traders Set for Profit Slump on Ample Supply

(Bloomberg) -- The earnings downturn slamming agricultural trading giants is poised to deepen as the food inflation that lifted profits to record levels in recent years fades. 

Archer-Daniels-Midland Co. and Bunge Global SA are expected to report their weakest second quarter in four years, with shrinking margins for most of their businesses, according to analyst estimates compiled by Bloomberg.

Markets have experienced a stark reversal since crop losses and disruptions caused by the war in Ukraine sent grain prices to all-time highs in 2022, creating a windfall for the companies handling the supplies. Futures for soybeans, corn and wheat have plunged as production rebounds, easing buyers’ urge to secure supplies and making farmers more reluctant to sell. Price swings have also softened, making it harder to profit from trading. 

“The ag processing and distribution environment has changed, especially during the second quarter, relative to what we have seen in the past few years,” Thomas Palmer, a senior equity research analyst at Citigroup Inc., said in an interview. “The premium these companies are receiving for distributing products around the world has gone down.”

ADM is expected to report a profit of $1.24 a share for the second quarter, 34% less than a year earlier and the lowest since 2020 for a similar period, according to the average of analyst estimates compiled by Bloomberg. Bunge’s earnings per share are seen down 48% to $1.92, the lowest for any period since the first quarter of 2020. 

Chicago-based ADM is the ‘A’ and Bunge is the ‘B’ in the ABCD storied quartet of traders that have dominated crop markets for more than a century. Their rivals Cargill Inc. and Louis Dreyfus Co. — the ‘C’ and the ‘D,’ respectively — are privately held and don’t report earnings.

ADM is set to disclose its results on Tuesday, with Bunge’s expected on Wednesday. Investors will be closely watching Bunge for an updated outlook on the conclusion of its $8 billion acquisition of Viterra. The company’s shares have climbed about 13% this year, while ADM’s have dropped 11%.

In addition to the shift in grain prices, the crop traders are hurting as the profits they make from processing soybeans into meal and oil — a key earnings driver — have eroded. 

Increasing crushing capacity in the US has been met with slower growth in demand for oil for renewable diesel production. That’s in part because of a surge in imports of alternative feedstocks such as used cooking oil and beef tallow into the US. A supply rebound in Argentina — the largest soy oil and meal exporter — after last year’s drought has also weighed on margins. 

US corn ethanol profit margins were also significantly lower in the second quarter, according to data compiled by Bloomberg, which is particularly bearish for ADM. 

To be sure, Bunge and ADM’s profits have exceeded the average of analyst estimates almost every quarter for the past several years. What’s more, US soybean crushing margins began to spike in June, supported by slower-than-expected farmer selling in Argentina and some US processors starting earlier than usual on seasonal maintenance. That has raised the prospect for another earnings beat in the second quarter while signaling a stronger third quarter. 

The improved outlook has prompted analysts to raise their forecast for Bunge’s full-year earnings, to an average $9.54 a share from as low as $9.39 last month, and above the company’s guidance of “approximately $9.” That compares with $13.66 a share last year. 

There is “increasing potential” for Bunge to raise its full-year profit estimate as processing margins improve, Andrew Strelzik, an analyst at BMO Financial Group, said last week in a note to clients. 

Still, the outlook for another bumper harvest in the US and new processing capacity additions in the US through 2025 mean the recent improvement in margins may not last. 

“We have been assuming some incremental pressure as we look at next year,” Palmer said. 

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