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Ethanol, grain trading hits drag ADM profits below forecasts

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Archer Daniels Midland revealed a bigger drop in earnings than investors had expected, undermined by a drop in ethanol margins, besides the late-June grains rally which hurt profits at rival Bunge too.

ADM - with Bunge, Cargill and Louis Dreyfus one of the "ABCD" of ag trading giants – unveiled a 28% tumble to $386m in earnings for the April-to-June quarter, on revenues down 20% at $17.19bn.

While Wall Street had expected a drop in profits, underlying earnings per share, at $0.60, came in short of the $0.66 a share that analysts had forecast.

Profits fell in both agricultural services and corn processing divisions, more than offsetting an increased result in oilseeds and in the specialty ingredients operations enhanced by the acquisition of Wild Flavors.

Ethanol dynamics

The corn processing division suffered the biggest drop in operating profits, of 40% to $204m, undermined by "lower ethanol industry margins", weighed by US production of the biofuel, which hit a weekly record in June.

"Increased ethanol exports and record US driving miles supported robust demand, but record industry production resulted in margins lower than the prior year," ADM said.

Juan Luciano, the ADM chief executive, said that "domestic and export demand for ethanol was robust, but record industry production limited margins".

The comments follow an assessment on Monday by Mark Welch at Texas A&M University that, for ethanol producers, "profit margins in 2015 have been much lower, with revenue in June only $0.03 a gallon above total costs.

"Contributing to lower revenue, the price of distillers' grains, or DDGs, a feed ingredient manufactured as a byproduct of ethanol output, "has fallen from $173 per tonne in January to $148 per tonne in June", Dr Welch said.

Grain trading hit

In agricultural services, ADM reported a 17.4% drop to $152m in operating profits, reflecting in part the downside of a strong South American harvests which helped the group's oilseeds division lift its result by 23% to $344m.

"Strong South American exports that benefited the oilseeds business segment reduced margins and volumes of North American exports reflected in agricultural services," ADM said.

For the oilseeds division, "large South American corn and soybean harvests helped drive volumes through the origination and recently-expanded port operations there".

Agricultural services profits were also hurt by the jump in grain and oilseed prices late in the quarter, as concerns mounted over excessive rains in the US Midwest and dryness in Canada and the European Union.

"Global trade desk profits were negatively impacted by the significant end-of-quarter increase in certain commodity prices," the group said.

Bunge's experience

The comments echo those from rival Bunge last week, shares in which tumbled, and have continued to decline, after it unveiled earnings well behind market expectations in part thanks to the grain price revival.

"Grain distribution trading positions were impacted as wheat futures spiked during the last days of the month," Bunge chief executive Soren Schroder told investors on Thursday.

"We got to the end of the quarter, if you look at how we traded - it got extremely volatile and spiked up, and that's what caused us to take a loss" on its positions.

However, he added that "the market settled back down in the first week of July, and all of that loss was recovered. So, we have all of that loss back at the moment".

And investors proved forgiving of ADM's lower-than-expected results too, raising shares in the group by 2.6% to $48.92 in early deals in New York.

By Agrimoney.com

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