August 1, 2019 / 11:33 AM / 4 months ago

ADM profit plunges as floods, U.S.-China trade war batter grain handler

CHICAGO (Reuters) - Global grain trader and food processor Archer Daniels Midland Co (ADM.N) on Thursday reported a 41.3% drop in second-quarter adjusted profit and missed Wall Street expectations, after being battered by the U.S.-China trade war and severe U.S. weather this spring that disrupted production and transportation.

FILE PHOTO: Juan Luciano, Chairman, President and CEO of Archer Daniels Midland Company listens to testimony to the House Ways and Means Committee on tax reform on Capitol Hill in Washington, U.S., May 23, 2017. REUTERS/Joshua Roberts/File Photo

The Chicago-based company’s performance so far this year represents a sharp reversal of fortunes from last year, when ADM’s profits surged after a drought in Argentina and the U.S.-China trade dispute boosted its trading and oilseed processing businesses.

For the second quarter ended June 30, its adjusted net earnings for the quarter fell to $340 million, or 60 cents per share, from $579 million, or $1.02 per share, a year earlier. Revenue dropped 4.5% to $16.3 billion.

ADM had been expected to earn 61 cents per share, according to the mean Refinitiv estimate from 11 analysts.

The biggest drop was in the company’s origination business, which reported a 63% fall in adjusted operating profit. ADM blamed this on heavy rains that halted barge traffic on the Mississippi River and shuttered some of its plants.

The trade war also caused problems, as corn and other U.S. crops struggled to compete for sales in export markets.

ADM executives had been banking on the dispute to have eased by the second quarter and had based a rebound of the company’s operating performance in the second half on broad grain purchases from China this summer. Such big purchases have not materialized.

The company remains confident in U.S.-China trade resuming, but Chief Executive Juan Luciano acknowledged on Thursday “the timing is uncertain.”

The trade fight is part of why ADM has been expanding into Europe, Brazil and South America, Luciano said on an analysts call on Thursday.

WEATHER WOES

Beyond the trade war, heavy rains and flooding battered ADM during the quarter with “unfavorable weather impacts” of about $65 million to its operating profits. Such extreme weather cost ADM $125 million in lost production for the first half of the year, Luciano said.

ADM and Bunge Ltd (BG.N), as well as peers Cargill Inc [CARG.UL] and Louis Dreyfus Co [LOUDR.UL], known as the ABCDs of global grain trading giants, all have wrestled with weather issues this year.

But ADM was particularly vulnerable to the flooding, analysts say, because unlike its rivals, the concentration of its assets are in the United States.

The company said it faced processing plant downtime and barge shipping delays this spring as historic floods ravaged the central United States.

High water conditions were more severe than originally anticipated at the beginning of the quarter, ADM said in its earning statement, “causing a negative impact of approximately $40 million.”

Meanwhile, its oilseeds’ business North American crush volumes dropped and flooding caused production outages at its Quincy, Illinois, facility, “which had a negative impact of approximately $10 million,” the company said.

ADM South American crushing and origination margins also were down because of higher soybean prices and lower China demand during the quarter.

Severe weather issues affected ADM’s carbohydrate solutions business and reduced segment results by $15 million, in part because of flood-related issues at its Columbus, Nebraska, facility, the company said.

The company, which has been pushing to cut its workforce and streamline operations to curb costs, said on Thursday the results also include non-cash early retirement charges and global workforce restructuring charges of $101 million.

In April, ADM said it was seeking voluntary early retirements by some North American employees and may eliminate individual jobs as part of a restructuring effort.

CHINA AND ASF

The company also pointed out that it is starting to spot economic ripple effects from the outbreak of African swine fever, a fatal hog disease that has killed millions of pigs in China.

FILE PHOTO: The Archer Daniels Midland Co. (ADM) logo is displayed on a screen on the floor of the New York Stock Exchange (NYSE) in New York, U.S., May 3, 2018. REUTERS/Brendan McDermid

As China has increased its imports of poultry and pork, ADM said it has seen meat companies upgrade their production facilities to prepare for increased demand from China, Luciano said on the analysts.

ADM said that it thinks China has lost about 35% of its hog herd and will continue to see a drop in pork production into next year, Luciano said. That will eventually boost demand for soymeal feedstuffs in South America, Europe, the United States and elsewhere, Luciano said.

“This will be a large multiyear event for our industry, and we continue to believe it will support incremental demand for the global crush industry outside China,” Luciano said.

Additional reporting by Taru Jain in Bengaluru; Editing by Steve Orlofsky and Bill Trott

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