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Loss-making Bunge caught out by crop price rebound

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Bunge revealed it had been badly wrong-footed by the revival in grain prices, which dragged its trading operations into the red, as it unveiled a surprise loss, hurt by losses on hedges in sugar too.

The sugar-to-fertilizer group, which is with Archer Daniels Midland, Cargill and Louis Dreyfus one of the ABCD group of agricultural trading giants, revealed it had fallen to a loss of $27m in the January-to-March quarter, from earnings of $170m a year before.

The loss – equivalent to $0.18 per share, compared with earnings of $1.40 per share that analysts had expected, according to a ThomsonReuters survey – reflected a wrong bet by its traders on falling grain values.

It reflects the second set of below-forecast results from an agricultural trading major in three days, after Archer Daniels Midland, on Tuesday unveiled earnings per share of $0.55, below Wall Street forecasts of $0.77, depressed by "weak results" at its agricultural services unit, its largest division by revenue.

Bunge shares stood down 5.4% at $75.34 in closing deals in New York, wiping some $630m from the group's stockmarket value.

'Pressuring margins'

Bunge said: "Our commercial and risk management strategies anticipated lower grain prices."

However, the "combination of deteriorating US winter wheat conditions and Black Sea political volatility caused prices to rise, pressuring margins", and landing the group's trading and distribution operations with a loss.

These operations were also hurt by "above market" freight costs, as Bunge "executed higher priced vessels that were toward the end of their time charter contracts".

Many commentators at the turn of the year forecast a weak 2014 for crop prices, only for futures in many contracts to revive from late January, boosted by factors such as drought damage to US hard red winter wheat, besides to Brazilian coffee and sugar cane crops, as well as concerns over the implications of Ukraine's crisis for regional grain exports.

Hedge hit

The group also unveiled a profits decline of 42%, to $22m, in edible oils, as a drive to boost margins in Brazil and Canada resulted in lower volumes.

And in sugar, the division which Bunge is trying to sell, the group reported a slide to a $64m operating loss, from a $23 profit a year before, reflecting a worse performance in both cane milling and sugar trading.

The cane milling side took a $31m mark-to-market loss on hedges against forward sales of sugar, the price of which has rebounded sharply since late January, lifted by concerns over drought in Brazil's key Centre South district.

The deterioration in milling also reflected start-up costs for the new season, which Bunge has begun earlier this year.

'Slower than expected'

The quarter was, for the group, "slower than expected," said Soren Schroder, the Bunge chief executive.

However, Bunge has a "positive" outlook for the rest of 2014, helped by factors such as improvement at its South American operations as the region's harvest proceeds.

"With the recent pick-up in pace of farmer selling and strong export demand for soymeal, crush margins and utilisations in South America should remain strong through September when export demand begins to shift back to North America," Mr Schroder said.

He added that "demand for our products in most regions has been strong, and we expect these conditions to persist throughout the year".

However, he cautioned of a "challenging" current quarter in China "as the industry works through the excess supply of soybeans" which has depressed margins, and led to a series of Chinese import order cancellations.

"However, we expect margins in the second half of the year to improve significantly as supply and demand come into balance."

By Agrimoney.com

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