High Impact Grain Prices

Most Americans are relatively shielded from short-term moves in grain prices – after all, retail prices trend up slowly at the rate of inflation, but are not typically subject to fast price swings (unless you live in Venezuela, Sudan, or Argentina).  However, commodity price swings have huge impacts on many businesses, from bakers and hog farmers to consumer packaged goods firms.  Some firms I have worked with recently indicate that they have had huge challenges with eggs (due to Avian Flu) over the past year.  If you ask me (and this is totally my own opinion), Avian Flu will return sooner rather than later and poultry and egg farmers should geographically diversify now.

This article from the Wall Street Journal is interesting, although like all articles from mainstream news sources regarding agribusiness, it is only cursory (click the title for the link to the original).

How Whipsawing Grain Prices Are Affecting ADM, Cargill

Earnings expected to offer insight into the changing farm economy

Investors will also be looking to ADM executives for guidance about the outlook for the rest of the year.

Aug. 1, 2015 5:33 a.m. ET

Several of the largest agribusiness companies are set to announce quarterly results, providing insight into how whipsawing grain prices are affecting the farm economy.

The readouts from companies including Archer Daniels Midland Co., the grain trading and processing giant, and Cargill Inc., the agriculture and food conglomerate, come after futures prices for corn, soybeans and other commodity crops started spiking in late June on fears that heavy rains in the Midwest would crimp harvests. Futures then dropped sharply in the second half of July as weather concerns eased and farmers looked headed for a huge harvest for the third straight year.

Cheaper grain generally benefits companies like ADM that purchase crops and resell them or process them into everything from food ingredients like soy lecithin to fuel additives like corn-based ethanol. Conversely, the higher grain prices last quarter—along with weak ethanol prices—are expected to have eaten into ADM’s earnings.

Analysts expect ADM on Tuesday to report that earnings in the three months through June fell 17% to 67 cents a share, while revenue slid 3% to $20.87 billion.

Investors will also be looking to ADM executives for guidance about the outlook for the rest of the year, which is expected to be rosier now that grain prices have subsided and experts are once more projecting huge grain production this year.

“This is a good environment for an ADM,” said Heather Jones, managing director of food and agribusiness for BB&T. “You want a lot of volume because you have a fixed-cost asset base.”

Cargill, which isn’t publicly traded, has so many different operations that the impact of recent futures swings isn’t likely to be evident in its results. But its executives also may offer insight into where the agricultural economy is headed. In addition, executives from Tyson Foods Inc., the largest U.S. meatpacker, which feeds grains to its livestock, could offer some perspective on the farm sector when it reports results on Monday.

ADM rival Bunge Ltd. last week reported a 71% decline in second-quarter earnings, hit in part by economic struggles in Brazil that hurt Bunge’s food-ingredient business.

But Bunge forecast its grain trading and processing operations this year will generate $1 billion in earnings before taxes and interest, compared with $890 million last year. This year’s harvest will likely come in “a shade lower” than last year’s record U.S. corn and soybean crops, said Soren Schroder, chief executive of Bunge. For the firms that deal crops to food companies and governments and process them into other products, Mr. Schroder said, “big crops are good.”

“Low prices stimulate demand and growth in consumption,” he said.

The June futures surge was driven by concerns that heavy downpours across the eastern Corn Belt—encompassing parts of Indiana, Illinois, Iowa and Ohio—would drown out much of the crop. The late June spike left corn futures prices up 10% for the second quarter, and soybean futures up 8.5%. But prices for both are now back down to near their levels at the end of March.

For corn, June’s rain was counteracted by good weather in states like Minnesota and North and South Dakota.

“The western corn belt is going to make up for some of the losses in the eastern corn belt,” said Craig Turner, an analyst for futures brokerage Daniels Ag Services in Chicago. He said this realization is what led prices to go back down in July.

Soybeans are typically planted slightly later, in late May and early June, meaning the rain conflicted more directly with planting. “We’re hearing about farmers who tried to replant two, three, four times—and each time, it gets drowned out again,” said Scott Irwin, professor of agricultural economics at the University of Illinois.

Even so, farmers planted the highest number of acres in soybeans on record this year, according to Terry Reilly, an analyst with brokerage Futures International LLC. Experts say the exact yield will now depend largely on good August weather.

Though the low prices bode well for grain traders and processors, they are likely to hit farmers hard for the third year in a row, meaning farmers must either sell their crop for slimmer profits, or even losses, or hold it in storage, hoping to sell later.

“They’re kind of out of luck,” Mr. Turner said.

That also leaves suppliers of items like farm tractors and seeds in a tough spot. DuPont Co. and Syngenta AG, two of the biggest sellers of seeds and pesticides, both in July reported declines in earnings for their latest reporting periods. Analysts expect Deere & Co., the world’s largest seller of farm equipment, also to report a profit drop when it discloses results later in August.