UPDATE 3-Cargill profits rebound, but drought to challenge

Thu Oct 11, 2012 6:15pm EDT

* 1st-qtr earnings $975 million vs $236 million a year ago

* All five business segments up

* Impact of U.S. drought still unfolding

By Christine Stebbins

Oct 11 (Reuters) - Cargill Inc said on Thursday quarterly earnings more than quadrupled from a year ago following its worst quarter in two decades and the agribusiness giant expressed confidence it will handle continuing fallout from historic droughts in the United States and elsewhere.

Minneapolis-based Cargill, one of the world's largest privately held corporations and a bellwether of world commodity markets, said net earnings totaled $975 million for the first quarter of fiscal 2013, ended Aug. 31, compared with $236 million a year ago.

Profit rebounded from $73 million for the March-May quarter, the company's lowest quarterly earnings since 1991.

"We are cautiously optimistic about the rest of the year," said Cargill spokesman Mark Klein. "We're pleased with the improvement in the first quarter. We expect challenges ahead. But we think we are in a good position to help customers manage tighter supplies and volatility in markets."

Standard & Poor's analyst Chris Johnson, who downgraded Cargill's outlook to "negative" in August, said a rebound had been expected but last year's unusually weak quarter meant the company still faced stiff hurdles.

"When you compare this quarter to last year, you are going to have a good rebound. That was the majority of the positive momentum," Johnson said. "One quarter doesn't necessarily indicate that they have fully come back."

Cargill reported weak results in three of the four quarters in fiscal 2012, citing volatile commodity markets and soft world economic growth, even before the drought began hurting crops and livestock across the United States, the largest exporter of corn, soybeans and wheat.

Revenue for the first quarter dipped to $33.8 billion from $34.6 billion a year earlier, the company said in a statement. Revenue was $34 billion in the prior quarter.

Cargill Chief Executive Greg Page in a statement attributed the improved performance to the company's broad reach into most major areas of the world's food production systems.

Cargill operates as both an agricultural supplier and consumer - a leading crop processor and exporter, a maker of livestock feeds as well as a livestock feeder, a manufacturer of meats and cocoa and ethanol, a global commodity trader, and a risk manager in world financial markets.

So the company can tap its advantages up and down the food supply chain, as well as its shipping, banking and hedging expertise in dozens of markets.

"By investing steadily, we've been able to significantly boost the breadth and depth of the products and services we offer our customers," Page said. "And that has strengthened the balance, diversification and resilience we strive for in our business."

Page warned, however, that the full effects of drought and other weather-related damage to U.S. and world crops were still working through the supply chain and would challenge food processors, livestock feeders and exporters in the months ahead.

The company said it expects more "atypical" trade flows as the weather has altered the normal distribution of raw materials around the world, pushing more international buyers to non-U.S. origins.

"Cargill's North American grain handling volumes for exports are anticipated to be lower than pre-drought expectations, and it may be a challenging year for the company's animal protein businesses globally," it said.

The U.S. Agriculture Department on Thursday said that U.S. corn stockpiles will fall to the lowest level in 17 years before the next harvest - a bare three weeks supply. U.S. soybean stocks will be the lowest in eight years.

USDA also cut its estimate for Australia's wheat crop by 12 percent due to drought, a reminder of the challenges Cargill faces in finding grain to fill its giant export pipelines for Asia, Europe and the Middle East. Russia and notably the Black Sea region have also been hit hard by drought.

COST-CUTTING, STRONGER GLOBAL MARKETS PAY OFF

Cargill's top competitors in world grain markets, like ADM and Bunge, have also been pressured in the last year by volatile markets.

ADM said in February it was cutting 1,200 jobs worldwide to reduce costs. Bunge is slowly recovering from hits to its sugar, fertilizer and biofuels businesses. Both are due to report quarterly earnings in coming weeks.

Cargill is much larger and more diversified than those companies, with 142,000 people in 65 countries.

On Aug. 15, Standard and Poor's revised its outlook for Cargill to negative from stable, citing doubts about a 2013 earnings rebound. But S&P reaffirmed Cargill's strong credit ratings.

"They still have a couple headwinds," S&P analyst Johnson said on Thursday. "The biggest headwind, which is the main driver for our negative outlook, is their animal nutrition, beef business and other animal protein businesses are still weak given the drought. The other headwind is that the drought will mean less volume out of North America to either handle or process but that's probably not as big of an impact as beef."

Cargill said its latest quarterly results were balanced, with improved earnings across all five business segments -- agricultural services, food ingredients, food and crop processing, risk management and an industrial sector that includes metals, salt and other commodities.

There were no significant losses in any one business unit and results were aided by efforts in the past 12 months to lower costs, streamline work flows and reassess capital spending. Page said Cargill spent $8.1 billion on supply-chain investments in the last two years.

The company's big risk management and fund investment businesses, closely watched by analysts, also posted positive results. Cargill's operations in the euro zone in particular have been hit by turmoil in the region's currency and domestic markets, analysts say.

"Risk management and financial sector, like the other four, improved," said Cargill's Klein. "The sector was aided in part by strengthening global financial markets."

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