November 3, 2010

 

ADM's Q1 profit down 30% on inventory valuation 

Archer Daniels Midland Co. (ADM) reported on Tuesday (Nov 2) its fiscal first-quarter profit fell by 30% due to a drop in inventory valuation and weaker-than-expected grain merchandising earnings.

 

The US agribusiness group's transport and processing arms had been expected to benefit from a Russian ban on grain exports, but earnings fell 25% at its agricultural services segment, due to the block and a Black Sea drought that decimated wheat supplies.

 

Based in Decatur, Illinois, ADM's stock fell by as much as 9% in early trade. It was recently down 6.77% at US$31.13 a share.

 

Executives didn't detail why its merchandising profit fell, and whether it had failed to secure enough supplies prior to the crop failure, but said they didn't expect a repeat in the second quarter.

 

The company's problems appeared to stem from wheat merchandising, as Chief Executive Patricia Woertz said the company was "positioned well" in oilseeds and corn.

 

Analysts had expected large grain merchandisers such as ADM, Cargill Inc. and Bunge Ltd. to benefit from the Russian export ban, as would-be Russian customers were forced to turn elsewhere to secure supplies. Prior to Tuesday (Nov 2), ADM stock had climbed 16.7% since the Russian ban was announced August 5, and recently hit a 52-week high.

 

Company officials said Tuesday (Nov 2) the company would see more opportunities going forward to export ample US crops, which will be in demand because of the Black Sea region shortfall.

 

The company was also hit by a US$124 million shift in inventory valuations based on "last in, first out" accounting principles. The hit was caused by sharply higher commodity prices, which have surged because of the Russian drought and smaller-than-expected US crops.

 

For the quarter ended September 30, ADM reported a profit of US$345 million, or US$0.54 a share, down from US$496 million, or US$0.77 a share, a year earlier. Revenue grew 13% to US$16.8 billion.

 

Analysts expected a profit of US$0.75 a share on revenue of US$15.66 billion. Gross margin narrowed to 4.8% from 6.5%.

 

While ADM's agricultural services earnings fell, revenue was up 23%. The business trades and transports grain from farm to market before it is processed into products such as cooking oil, animal feed and sweeteners and is one of the company's largest segments by net sales.

 

The agricultural services results were "disappointing," said Credit Suisse analyst Robert Moskow. But he added that "ADM management deserves some credit here for giving a consistent message throughout the quarter."

 

ADM's much smaller bioproducts division - which includes ethanol - swung to a profit on improved ethanol and lysine margins, as well as higher ethanol sales volumes.

 

The sweeteners and starches operations posted a 25% decline in profit on lower selling prices that were only partially offset by lower net corn costs.

 

The company last week announced a management reshuffle, hiring former General Motors Co. Chief Financial Officer Ray Young to lead its finance function and placing renewed emphasis on acquisitions.