August 1, 2012

 

 

Archer Daniels Midland Co (ADM) profits in the previous quarter were squeezed by tight corn supplies as it handled less grain than expected and endured poor ethanol margins.

 

ADM said net earnings for the fiscal fourth quarter, which ended June 30, dropped 25% from a year earlier to US$0.43 per share, below expectations of US$0.60. Adjusted earnings per share were US$0.38.

 

Shares of ADM slid 4.4% to US$26.27 in midday trading on Tuesday (July 31) as the agribusiness giant warned the historic drought ravaging crops in the US would keep corn inventories low.

 

ADM, among the world's largest grain traders, is one of four large players, known as the ABCD companies, which have traditionally dominated business in agricultural markets. The others are Bunge, Cargill and Louis Dreyfus.

 

Hot, dry weather has strained the companies by reducing the size of the US corn and soy crops, leaving fewer farm products for them to transport, store and process.

 

ADM's merchandising and handling earnings fell US$30 million to US$152 million "due to lower US merchandising results and lower US crop supplies."

 

US corn and soy prices rose to record highs this month on worries about worsening crop damage. The US Midwest, where most of the country's corn and soy are grown, is enduring its worst drought since 1956.

 

ADM is developing contingency plans because of the drought, including adjusting business hours for its grain elevators and plans to hire temporary workers for harvest, said Juan Luciano, executive vice president and chief operating officer.

 

"We certainly have been impacted this quarter with lower volumes," he said on a conference call with analysts.

 

ADM could reap some benefits by transporting US crops from the areas hardest-hit by the drought to areas that were less damaged. However, high grain prices due to crop losses should continue to keep ethanol margins under pressure, analysts said.

 

Operating profits for ADM's corn processing unit in the fourth quarter fell 39% from a year earlier to US$74 million.

 

"The environment for ethanol on the new crop looks to be pretty tough," Citi analyst David Driscoll said.

 

ADM last month said that ethanol margins, which were negative by US$0.13-0.15 per gallon when ADM reported third-quarter earnings on May 1, had declined to "the high 20s negative" during June.

 

Ethanol margins "continue to be extremely volatile" but should turn positive in the current quarter, Luciano said on Tuesday (July 31).

 

Hard-hit US livestock and poultry producers petitioned the government on Monday (July 30) to reduce or cancel the required use of ethanol in gasoline for a year, saying they were having trouble buying corn due to tight supplies.

 

As drought hurts prospects for US crops, ADM is looking for more opportunities abroad by acquiring a port terminal to handle grain in northern Brazil. ADM has cut costs this year by laying off employees in its first ever global workforce reduction.