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'Adverse market conditions' to last for rest of 2019, says Louis Dreyfus


The “particularly challenging environment” for agricultural traders, marked by trade tensions and “erratic” weather, will last for the rest of 2019, Louis Dreyfus Company said, but forecast “a recovery” in its profitability next year.


The agriculture giant, unveiling a drop in profits for the first half of 2019, flagged “difficult global business conditions”, prompted by factors including trade disputes, the “record low” US corn planting pace, and the African swine fever epidemic which has caused huge shrinkage in China;s hog herd.


“Global trade tensions, erratic weather conditions, the spread of African swine fever in Asia and a general context of oversupply made it difficult to analyse and act upon market fundamentals,” said Ian McIntosh, the long-term Louis Dreyfus employee who became chief executive a year ago.


“We see this adverse market conditions persisting during the second half of 2019,” he said, even as China and the US resume trade talks, although with reports of limited optimism of a breakthrough.


However, Mr McIntosh added that the group expected “a recovery in profitability in 2020, as we continue to implement our business plan”.


‘Trading edge’

The group was strengthening its “edge” in trading, he said, including technological improvements made “both to support farmers and deepen our research capabilities”.


Furthermore, he highlighted the shift by Louis Dreyfus down the food chain, investing in groups associated with processed products.


He highlighted the group’s investment, at their stockmarket listings, into Malaysian poultry and feed company Leong Hup International and Chinese coffee store chain Luckin Coffee.


Louis Dreyfus - which last week unveiled a juice joint venture with Luckin Coffee - has also sealed an agreement over a roasting joint venture in China, “demonstrating once again the potential for growth along the value chain through regional partnerships”.


‘Particularly challenging environment’

The comments came as the group unveiled earnings of $71m for the first half of 2019, a result that Mr McIntosh called “sound… in a particularly challenging environment”, but which represented a 45% drop year on year.


This represented by far the weakest first-half result on readily-available data going back to 2011, although changes to accounting have made direct comparison difficult, with revenues, down 6.1% at $17.50bn, the lowest in that timescale too.


The decline reflected a decline of 30%, to $225m, in operating profits at the Louis Dreyfus value chain division, on which Louis Dreyfus highlighted the knock-on effects on soy operations of the US-China trade war and China’s African swine fever outbreak.


Besides highlighted soy market “volatility”, the group flagged a squeeze on Chinese crush margins from curtailed hog sector feed demand, and the “pressure on Brazil soy prices” earlier in the year after some orders of rival North American supplies by Chinese buyers.


‘Difficult to read the markets’

A lack of clarity over US-China trade, combined with weather upsets in Australia and the US, hit grains results too.


“Uncertain crop forecasts made it difficult to read the markets,” Louis Dreyfus said, noting too that in the US “many producers declined not to market any corn” thanks to the concerns created by a “record low” corn planting pace, amid historic spring wetness.


However, the value chain division received some support from palm oil operations, which “were profitable, taking advantage of a bullish market”.


The group’s biodiesel plants, which use vegetable oils as raw material, “ran at full capacity”.


‘Profitable origination’

The group’s other operating division, merchandising, achieved a 35% jump to $270m in operating profits, led by “significant” improvements in cotton - in which Louis Dreyfus leveraged its global footprint to exploit “volatile” market conditions – and coffee.


In coffee, the group noted “profitable origination in Asia and Africa”, while performing “well” in Brazil too later in the half, as prices recovered from levels which had earlier on encouraged farmer hoarding and limited trading opportunities.


In sugar, Louis Dreyfus reported a “satisfactory level of profitability, with the commercial team gaining significant market share, especially on raw sugar in Africa, the Middle East and Asia”.


However, hedging opportunities had been limited by weaker price volatility than a year before.

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