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Weak Adecoagro soy crop overshadows sugar progress

Adecoagro shares tumbled 5% after the South American farm operator, in which George Soros is the biggest investor, revealed disappointing soybean yields, overshadowing a sharp improvement in sugar fortunes.

The group, which farms crops from cotton to cane on more than 300,000 hectares of Argentina and Brazil, revealed a jump of 91% to $25.8m in earnings before interest, taxation, depreciation and amortisation (ebitda) in sugar in the April-to-June quarter, on revenues up 44% at $78.1m.

The improvement reflected an earlier start to the crushing season this year in Brazil's key Centre South region, where the division operates, besides the ramping-up of a new mill.

However, Adecoagro has also, like peers, switched cane volumes towards making ethanol rather than sugar, which has proved less profitable thanks to a collapse in market prices.

The proportion of cane the group turned into sugar fell to 38.7% during the quarter, down from 42.1% a year before, and well below the Centre South average.

In ethanol, Adecoagro, echoing rival cane processor Sao Martinho, said it "focused on producing anhydrous ethanol, which offered better margins".

Anhydrous ethanol, the type mixed with gasoline, has been favoured by a lift to 25%, from 20%, in Brazil's government-mandated blend rate into gasoline.

'Significant yield reduction'

But, the group disappointed many investors by reporting a 2.0% drop to $14.3m in ebitda on farming, reflecting a dent from drought to soybean yields at Argentine operations.

"Yields were primarily affected by the drought experienced in the Humid Pampas during January and February and the north of Argentina throughout January to April," the group said.

"The drought affected the crop during the critical periods of its growth cycle, which led to a significant yield reduction compared to our initial estimates."

Group yields from first crop soybeans, at 2.2 tonnes per hectare, were down 10% year on year, with yields on second crop beans, for which the harvest finished last month, dropping 15% year on year to 1.3 tonnes per hectare.

Market reaction

Factoring in $27.2m in foreign exchange losses, Adecoagro posted near-doubled losses for the quarter to $26.9m.

Analysts had expected a loss of $17.7m, according to a ThomsonReuters poll.

Adecoagro shares fell to $6.74 in early deals in New York, before recovering some ground to stand at $6.83 in late-morning trading, down 4.1%.

ItauBBA maintained an "outperform" rating on the stock, with a target price of $15.30, saying that "despite poor farming results, we believe that Adecoagro will be able to deliver strong year on year growth in 2013".

"At current trading levels, the company's assets in Argentina are almost for free," when valuing the company on a sum-of-the-parts basis.

George Soros's Soros Fund Management owns 21.2% of the group.

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