Cargill reports worst quarter since 2001

Tue Jan 10, 2012 4:07pm EST

A logo is pictured on the building of Cargill International SA in Geneva August 4, 2009. REUTERS/Denis Balibouse

A logo is pictured on the building of Cargill International SA in Geneva August 4, 2009.

Credit: Reuters/Denis Balibouse

(Reuters) - U.S. agribusiness giant Cargill Inc CARG.UL reported a third consecutive slump in quarterly earnings on Tuesday, as one of the world's largest commodity traders took a beating from sugar losses and volatility in financial markets.

Minneapolis-based Cargill, a family-owned enterprise with a century-long history of dominating global grain markets, reported $100 million in earnings from continuing operations for its second quarter ended November 30, down 88 percent from $832 million a year earlier and the worst quarter since 2001.

Revenues rose 17 percent to $33.3 billion from $28.5 billion.

For the second time, the company singled out its trading operations as dragging down stronger earnings in its food and agricultural services divisions. It said Europe's debt crisis had walloped equity and distressed-asset trades in its hedge fund division, while sugar trading recorded a loss.

The company, which has announced plans to lay off 1.5 percent of its staff and seen its top sugar trader leave, is suffering alongside other commodity veterans including Goldman Sachs (GS.N) and Asia-based Noble Group (NOBG.SI) that have struggled to profit amid a year of exceptional volatility.

"The second quarter was significantly below expectations, especially in contrast to last year when we posted our strongest quarter ever," Cargill Chief Executive Greg Page said in a statement. He said the company was working to cut costs and simplify work processes.

He said the meat business had "one of their weakest quarters" after a turkey recall, the third-largest meat recall in U.S. history, and poor beef margins.

"Our food ingredients and agriculture services businesses generated solid earnings. At the same time, our commodity-based trading and asset management businesses faced significant challenges," Page said.

Concentrated on agricultural markets, particularly grains and oilseeds, Cargill's commodity trading operation is one of the world's largest. Last year, however, the firm appeared to rein in some of its desks, reorganizing coal and power/gas and quitting steel.

Cargill said its risk management and financial segment was hardest hit due to investments made in equity markets and distressed assets. That was an apparent reference to Black River, the hedge fund it operates with a global staff of 90.

"We were negatively affected by the stress in world financial markets, particularly with what was happening in October," Cargill spokeswoman Lisa Clemens said.

"It was a period when the markets were gyrating up and down sharply - coming from the debt crisis, from the exposure risk carried by the European banks, worries where the fallout would come. All of that made a difficult period for that business."

CYCLICAL TROUGH

Chris Johnson, a credit analyst for ratings agency Standard and Poor's, said Cargill was in a "cyclical trough".

"Some of that has been driven by their merchandising activities in certain commodities, some of that has been driven by ocean freight industry conditions and some of it has been driven by some of their more core businesses, most particularly beef and a weak sobyean crushing environment in North America," he said in an interview.

Johnson said he had expected weak first-quarter earnings to persist in the second quarter, noting that Tuesday's news had not prompted S&P to change its rating of Cargill "as of yet". The company continues to have strong liquidity and its recent acquisitions should improve cash flow, he said.

"Our ratings to a certain degree for all agribusiness companies incorporate a degree of cyclicality and we recognize that Cargill is currently in a cyclical trough in addition to having suffered some other losses related to some weak cotton merchandising environment in the first quarter," Johnson added.

Results fell in all five basic business units for the quarter.

Cargill's food ingredients and agriculture services businesses had the strongest results. Its food ingredient business nearly matched year-ago record performance but Cargill's meat unit was hurt by a smaller U.S. fed cattle supply, which pressured beef margins.

Cargill's results were also hurt by the recall last August of 36 million pounds of turkey and the related shutdown of its Springdale-Arkansas plant during the quarter. The plant reopened on December 19.

Cargill's $2 billion acquisition of Provimi, a leading global animal nutrition company, was its largest in recent months and completed in November.

(Reporting by Christine Stebbins; Editing by Derek Caney, Bob Burgdorfer and Dale Hudson)

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