High prices damage ADM earnings

Agribusiness giant Archer Daniels Midland said on Wednesday that quarterly earnings fell almost 18 per cent because of high commodity prices that cut into its corn and oilseed processing margins, but the results beat analysts' estimates.

An extreme drought in the US Midwest this summer depleted the corn and soybean crops and pushed prices for those commodities higher this fall. As a result, soybean crush margins, the profit from crushing soybeans into meal and oil, have suffered.

ADM's oilseed processing profits dropped about 10 per cent in the quarter.

"Soybean prices have outpaced meal and oil price gains, and this has put pressure and squeezed crush margins in soybean processing,"​ ADM senior vice president Larry Cunningham told analysts on a conference call.

ADM, one of the world's largest processors of soybeans, corn, wheat and cocoa, said earnings in its fiscal first quarter ended 30 September fell to $108.08 million (€110.6m), or 17 cents per share, down from $131.62 million, or 20 cents a share, last year. Net sales rose to $7.51 billion from $5.50 billion.

Decatur, Illinois-based ADM had been expected to earn 8 cents to 16 cents per share in the quarter, with a mean at 12 cents, according to Thomson First Call, which tracks these estimates.

ADM's corn wet milling operations were hurt by a drop in the price of ethanol, the gasoline additive derived from corn.

Ethanol production continued to grow during the year as corn processors and new, farmer-owned ethanol co-ops ramped up production in anticipation of increased demand.

But government mandates for ethanol use did not come through as planned, and demand did not increase as much as expected.

In March, California Governor Gray Davis postponed by one year a state ban on MTBE, a gas additive that competes with ethanol. That ban would have mandated statewide ethanol use starting in 2003.

And a proposed US energy bill that would mandate a tripling of ethanol use over the next decade is stalled in the US Congress.

Despite the California delay, four of California's five biggest gasoline refineries have said they will switch to ethanol by the start of 2003.

"Profits on ethanol were down significantly. Our volumes were essentially flat, but pricing was down about 20 cents a gallon. However, both demand and pricing are strongly recovering,"​ Cunningham said.

ADM is the number one US ethanol producer with about 40 per cent of the country's total production capacity.

Shares of ADM closed up 43 cents, or more than 3 per cent, to $13.23 on the New York Stock Exchange as the company's earnings beat Wall Street expectations.

"I think they got through the period reasonably well. These earnings were better than expected, particularly for those who feared the double whammy of higher corn prices and lower ethanol prices,"​ said John McMillin, analyst with Prudential Securities.

"Ethanol prices have rebounded, and after some fears the corn crop turned out to be not as bad as some had worried about,"​ he said.

In September ADM acquired its chief ethanol competitor, Minnesota Corn Processors, further strengthening its position in the ethanol market.

"ADM will show people that they bought MCP at the bottom of the cycle, because both corn sweetener and ethanol prices look to be getting better in the years ahead,"​ McMillin said.

The decline in processing earnings was partially offset by profits in the company's agricultural services operations, including grain storage, transportation, and merchandising and trading operations, which increased more than twofold to $40.1 million.

"Their ability to buy and originate grain was better than expected. And I think they're going to be able to do it quarter after quarter,"​said Leonard Teitelbaum, analyst with Merrill Lynch.

ADM was the third of the three big agribusiness companies to report earnings this quarter.

The number three North American food processor Bunge on Monday said its quarterly earnings rose 67 per cent on the back of the company's South American agribusiness holdings and a steep decline in the Brazilian currency.

Privately held Cargill, the number two processor, said last week that quarterly net profit more than doubled, helped by a gain from the sale of one of its divisions and strong grain demand.