Grain Traders Have a Problem: Too Much Grain

By Jacob Bunge Features Dow Jones Newswires

The world's largest grain traders are struggling to boost profits from record-breaking harvests, rattling investors who see more big crops ahead.

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Bunge Ltd., one of the biggest traders and processors of soybeans and corn, cut its profit projection for the year on Wednesday. Executives blamed a standoff between farmers reluctant to sell crops at low prices, and food processors with little incentive to purchase commodities in advance while prices are expected to stay low.

"The system has been frozen," Bunge Chief Executive Soren Schroder said in an interview.

The White Plains, N.Y., company's profit warning on Wednesday came after rival Archer Daniels Midland Co. on Tuesday flagged challenges ahead for its own grain-trading business, after reporting weaker-than-expected profit from the unit.

Shares of both companies dropped on the announcements, with Bunge's stock sliding 9.5% in Wednesday morning trading. ADM shares settled 9% lower Tuesday.

Bumper crops from Iowa to Brazil and Eastern Europe had seemed like a boon to companies like Bunge, ADM, Cargill Inc. and Louis Dreyfus Commodities, which dominate the business of buying crops from farmers and grain cooperatives, and marketing them to food companies. The companies profit by purchasing crops in areas of plenty and shipping them to places where grain is short, or turning commodities into more profitable products.

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Mr. Schroder said that time is on the grain merchants' side. Farmers in Brazil, for example, don't have enough storage space to house all of an expected record soybean and corn crop, he said. Bad weather during North America's growing season could spook food companies into buying.

But for now the standoff between farmers and processors is contributing to lower-than-expected quarterly profits at both Bunge and ADM. Cargill, which in March reported a 42% gain in quarterly profit, said income from grain trading and processing declined from the prior-year period partly due to slow farmer selling in South America.

Bunge now expects its grain-trading unit to earn $800 million to $925 million this year, down from $895 million to $1.05 billion projected in February. ADM executives also projected earnings from grain trading this year would be weaker than expected. They said that weakness could be offset by stronger profits from corn and soybean processing divisions.

ADM Chief Executive Juan Luciano said his company aims to reduce some costs in its international trading division. Mr. Schroder said Bunge is looking at ways to cut expenses across its back-office operations after closing about 20 North American grain facilities in recent years.

Mr. Schroder said the challenges suggest the industry should consolidate. "It can be at any scale," he said, pointing to partnerships the company struck in Canada, Argentina and Vietnam. "We're certainly open to look at anything that creates value for shareholders and makes us more efficient."

Write to Jacob Bunge at jacob.bunge@wsj.com

(END) Dow Jones Newswires

May 03, 2017 12:22 ET (16:22 GMT)