Global Oversupply of Grains Puts a Squeeze on Giant Processors

By Jacob Bunge and Jesse Newman Features Dow Jones Newswires

Farmers have spent the past few years cutting their spending to cope with a global glut of crops. Now it's commodity traders' turn.

Continue Reading Below

Archer Daniels Midland Co. and Bunge Ltd., among the companies that dominate world-wide grain trading and processing, said this week that they are slashing hundreds of millions of dollars in annual spending and restructuring operations to navigate a world awash in corn, soybeans and wheat.

For grain traders, "this has been a humbling year," said Soren Schroder, Bunge's chief executive, in an interview Wednesday as after the company reported a decline in quarterly profit.

Five years of back-to-back bumper crops in markets across the globe have kept grain prices low and upended traditional dynamics in the farm sector. Trading giants like ADM, Bunge and Cargill Inc., which buy farmers' crops to market and process, are being squeezed.

Farmers are opting to store grain rather than sell it to grain companies at low prices. Some food companies, meanwhile, are placing fewer long-term orders for grain and ingredients since prices are expected to stay cheap. As low prices persist, the situation grows more difficult for the grain trading giants.

Bunge, based in White Plains, N.Y., Wednesday reported a 22% decline in quarterly profits due to pressure on its crop-trading and soybean-processing businesses; the company reduced the earnings projection for its grain-trading division for the third time this year.

Continue Reading Below

Chicago-based ADM on Tuesday said its quarterly net income dropped by 44%, weighed down by declining U.S. grain exports, as cheap Brazilian corn undercut U.S. shipments.

Cargill, a top commodities dealer based in suburban Minneapolis, said in September its quarterly grain-trading and processing results declined compared with the same period a year ago and blamed slower grain markets and weak prices.

Agribusinesses have to adjust to the shifting global marketplace for basic foodstuffs. Farmers in South America and other international breadbaskets are harvesting bumper crops, generating fierce new competition to U.S. grain. Russia recently claimed the world-wide lead in wheat exports, and Brazil dethroned the U.S. in soybean shipments five years ago.

The U.S. remains the largest corn exporter, but its dominance is waning. U.S. corn exports this season are projected to fall nearly 20% from a year earlier, hitting their lowest level since a drought in 2012 shriveled fields, according to the U.S. Agriculture Department. South American farmers' massive corn harvest this year, along with currency shifts that have made those crops cheaper, have enabled Brazil and Argentina grain to encroach on the U.S. corn's traditional period to supply international buyers, trading-firm executives said.

"The operating environment in the third quarter was more challenging than we have anticipated even three months ago," said Juan Luciano, ADM's chief executive, citing U.S. crops' "lack of competitiveness" against Brazilian varieties.

In response, ADM has been restructuring to reduce expenses. Mr. Luciano said the company will trim about $200 million in annual capital spending in 2018, with less investment in its crop trading and shipping operations. Bunge in July unveiled a restructuring plan to cut $250 million in annual expenses, and executives this week said the company eliminated 150 jobs in the most recent quarter. "We all have to get leaner," Mr. Schroder said.

Other farm giants feel pressure, too. Mosaic Co., one of the world's largest fertilizer makers, is grappling with a global oversupply of crop nutrients, exacerbated by weak crop prices and farm incomes. The company on Tuesday slashed its dividend for a second time this year and said it would idle a high-cost Florida plant as it weathers a difficult agricultural market. Its stock has tumbled 23% in 2017.

Farm cooperative company CHS Inc., which trades grain and sells supplies to farmers, this week agreed to deals selling its Canadian retail locations to Winnipeg-based agricultural firm Richardson International Ltd. and to United Farmers of Alberta Co-operative Ltd. Over the first three quarters of CHS' financial year, the company's earnings declined by 58%.

Bunge's Mr. Schroder said that the oversupply problem could ease if U.S. farmers respond to persistently low grain prices by planting fewer acres, and producing less grain.

But many farmers, trudging through the deepest farm-economy slump since the 1980s, are doing the opposite. Many are focused on boosting crop yields to combat low prices. That strategy could keep domestic stockpiles elevated, holding down prices and continuing farmers' dependence on crowded export markets.

"The producer only has one choice with price levels where they're at, and that's to try to outrun this low commodity situation by producing as many bushels he can," said Matt Bennett, 43, who farms 3,000 acres in Windsor, Ill. "If things don't change, they're going to continue to get worse."

(END) Dow Jones Newswires

November 02, 2017 07:14 ET (11:14 GMT)