Challenging Q2 for agribusiness: Bunge

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The New York-based company released details of its second quarter earnings on Wednesday. The quarter ended June 30.

Bunge reported $81m in net income attributable to it for the quarter, down from $121m last year. It reported $128m in net income for the first six months of 2017, compared to $356m in 2016.

Outside of the agribusiness segment, the company had positive results for its foods and sugar divisions, said Soren Schroder, Bunge’s CEO, on a conference call. The company also continues to grow its platform in oils.

Adjusted earning per share dropped from last year, said Thomas Boehlert, Bunge’s CFO. Total segment earnings before interest and tax (EBIT) were $73m, a drop from the $205m seen last year.

“The agribusiness had a weak second quarter with EBIT of $18m compared to $180m in the second quarter of 2016,” he said. “This resulted from a $54m decrease in oilseeds and a $108m decrease in grains.”

Global crush volumes increased as did soft seed volumes, but that was offset by the reduction in margins, he said. “Results were also negatively impacted by $11m of mark-to-market hedging losses in the quarter compared to a mark-to-market gain of $40m in the same period a year ago,” he added.

Agribusiness segment details

Results for the agribusiness segment, which includes grains and oilseeds, “lagged” behind expected performance, said Schroder.

For the quarter, oilseeds had an EBIT of $2m, down from $56m and grains dropped from $124m in 2016 to $16m, the company stated.

“Agribusiness was the challenge and warrants a look back,” said Schroder. “How could record crops and strong demand translate into multi-year squeeze on margins?”

The soybean industry export programs in Brazil acted early and were based on the expectation that the large and predominately unsold crop would face heavy selling pressure at harvest, he said.

“Take-or-pay commitments were made throughout the industry with freight and terminal providers to support the large export programs,” he said. “Commodity prices dropped during harvest, farmers held back selling and used all means to store their crops, in silo bags, at cooperatives, through commercials and on farms.”

The selling pace was slow enough that transportation costs fell during harvest, he added.

Exporters and crushers working in Brazil had to compete for soybean origination to meet commitments, said Schroder. That practice reduced origination margins to about breakeven and crush margins were at almost full cost.

Similarly, in Argentina, financing options and available storage supported farmer retention of soybeans, he said. “The industry also expected active pricing at harvest, and the crush industry placed export sales of soybean and oil in anticipation,” he said.

“As harvest progressed, farmers became reluctant sellers, as the combination of lower dollar prices, and a stronger peso made local prices unattractive,” he said.  

The consequence of the reduced crush margins meant that the agribusiness industry had little or no contribution margin, he said. “The size of this mismatch between farmer pricing and the industry commitments is unprecedented and challenges the traditional wisdom of farmer marketing patterns,” he added.

The expectation is that there will be a return to more traditional margins for both crush and grain origination, he said. Bunge has worked to be responsive and manage capacity when margins face pressure, along with increasing logistic flexibility and providing farmers “compelling offerings” of crop inputs, risk management and financing to improve pre-harvest crop commitment.

Boehlert said for grains, volumes increased in the US, but margins remained reduced in South America.

“Overall, agribusiness results were lower than the comparable period last year primarily, as weaker margins and negative mark-to-market impacts were only partially offset by higher volumes and improved risk management results,” he said.

North American crush margins are strong and soft seed margins are predicted to see positive development based on canola and rapeseed crops, said Schroder. Crush margins in South America and Europe are expected to improve as meal inventories shrink, and in China the fourth quarter should see a better balance of supply and demand.

“We still have an industry that when everything runs at full speed, can produce more than the market needs,” he said. “We're gradually eating our way towards a better capacity utilization, but when everything runs at full speed, we produce too much, and that is what's happened in South America the first six months of the year.”

The industry moved too quickly on the idea of willing farmer selling, he said. “As a result, we have built a couple of million tons of soybean meal inventories, partly at the origin, partly at destination, that is weighing on margins. And we have to consume, or eat our way into, that through more discipline and reduced crush rates over the next – really the next quarter.”

Looking forward

Looking forward, the company is expecting improvement in agribusiness earnings, said Schroder. Logistics and export commitments in South America have been filled, and the second half of the year is anticipated to be active as there are 30m tons more soybeans and corn available this year, which should improve margins.

“Overall, we expect a better last half of the year, as compared to the prior year, which should give us good momentum going into 2018,” he added.

“Medium- and long-term industry fundamentals remain positive and growth in capacity utilization, especially in crush, will drive margins higher,” he said. “Our views regarding forward margins and volume growth in both agribusiness and food remain very positive.”

However, the company is working to reduce costs and establish new methods of interacting with customers to be more efficient, he said. Bunge also announced a competitiveness program earlier this summer.

Bunge is dropping its full year EBIT to a range of $550m to $650m weighted on the fourth quarter, said Boehlert.   

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