Louis Dreyfus Company unveiled a bounce in earnings, despite a $74m hit from its investment in scandal-hit coffee chain Luckin’ Coffee, citing boosts from stockpiling and price volatility spurred by Covid-19.
The Dutch-based group, which is with Archer Daniels Midland, Bunge and Cargill one of the “ABCD” group of ag trading giants, revealed a 79% jump to $127m in earnings for the January-to-June period, its first improvement in the period in three years.
While net sales fell by 6.8% to $16.30bn - reflecting weaker commodity prices, the sale of Canadian grain elevators and a hit to cotton shipments from the pandemic – Louis Dreyfus Company (LDC) earnings were enhanced by success in exploiting some of the knock-on effects of the coronavirus pandemic.
In fact, “beside the operational challenges it is posed, the pandemic and its consequences hardly affected our activities as governments focused on securing food and feed chains, even during lockdown periods,” the group said.
“Due to the anticipation of large crops and to uncertain demand forecasts, market volatility during the [half year[ continued to improvement in the group’s operational performance.”
The group added that it had exploited its global footprint and “market intelligence to capture profitable origination and sales opportunities in a volatile market”.
The improvement was led by the group’s so-called “value chain” division, which covers operations such as freight, oilseed crushing and grains origination, and which reported a 119% surge to $492m in operating profits, helped by Brazil’s bumper crop exports, helped by strong harvests and a weak currency.
“Sustained flows from Brazil to China created opportunities, supported by our vast grain and oilseeds footprint at both origin and destination,” the group said.
Meanwhile, “fluctuating crop size prospects and uncertainty on global demand for the year fuelled market volatility, particular as Covid-19 spread in the EU and US.”
LDC, like other ag traders, has in recent years blamed a lack of grain market volatility, muted by extensive supplies, for limiting opportunities for hedging and trading operations.
‘Wider range of arbitrage opportunities’
For the merchandising division - which encompasses many soft commodities plus rice - operations profits rose by 13.7% to $270m, constrained in part by a dip in cotton shipping volumes as “textile plants shut down for months following lockdown decisions” and the “entire industry faced a sharp decline in demand”.
However, in sugar, LDC flagged a boost from “further market penetration” in the Middle East and Asia at a time of strong imports to the region from Brazil, where a diversion by mills of cane from making ethanol, amid weak fuel markets, has sent production of the sweetener soaring.
And in coffee, the group said it had “significantly improved” its financial performance, “thanks to both profitable origination and an increase in the volumes executed to customers”.
Against a backdrop of weak prices for much of the period, “origination margins improved in all the main origins where the group sources coffee”, while extra volatility injected by the pandemic “offered a wider range of arbitrage opportunities”.
LDC said its coffee operation was also “well positioned” to exploit the shift by lockdown-beset consumers to at home blends, heavier in robusta beans, from the out-of-home offerings richer in arabica.
The group’s operational improvement in coffee helped to soften the blow from a soured investment in the sector, in Luckin’ Coffee, the Chinese coffee chain which saw its market values plunge, and was delisted by the Nasdaq, after admitting accounting fraud six months ago.
It appears that LDC’s loss would have been worse if had it not “in the first weeks of the year… sold part of its participation for $37m”, a deal on which it took a $3m loss, while swallowing a $71m hit on the rump of its investment.
The accounts also revealed a $302m dividend to the group’s shareholders, led by Margarita Louis-Dreyfus, who borrowed heavily to finance the buyout of other family investors from LDC.
The group reported an increase of $400m in net debt over the half year, to $3.0bn as of the end of June, a factor it said reflected a “seasonality effect”, with “June traditionally a peak season in terms of inventories”, meaning extra cash tied up in physical commodities.