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Grain hedging, canola rally drag Bunge profits below forecasts

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Bunge forecast a recovery in its core agribusiness unit, after elevated rapeseed prices fuelled a 60% drop in the division's profits, and dragged group earnings well below market expectations.

Shares in the soy crusher-to-sugar group – which is, with Archer Daniels Midland, Cargill and Louis Dreyfus, one of the ABCD of crop trading giants – tumbled 6.6% to $80.00 in morning deals in New York.

Bunge unveiled a drop in earnings of 74% to $72m for the April-to-June quarter, on revenues down 36% at $10.78bn.

Earnings per share from continuing operations fell to $0.50, well below the $1.36-per-share result that Wall Street had expected.

"Conditions in the second quarter were more challenging than we expected," said Soren Schroder, the Bunge chief executive.

Canola hit

Profitability fell in all five its operating divisions - with losses reported in Brazilian cane crushing, blamed on lower domestic prices for ethanol and electricity produced, and in edibles oil, hurt by economic weakness in Brazil and Europe.

However, the most significant loss was the drop of 47% to $164m in operating profits at the group's core agribusiness division, undermined by "significantly lower results" in processing of softseeds, such as canola, and in trading and distribution.

Indeed, Bunge's Canadian canola processing margins "were significantly weaker", in a quarter marked by strength in prices of the rapeseed variant, which on Winnipeg's futures market soared 19% during the April-to-June period.

Prices were supported by Prairies dryness which has prompted sharp downgrades to canola production expectations for Canada, the top exporter of the crop.

'Less effective risk management'

The group also highlighted lower softseed processing margins in Europe, the rapeseed grower and consumer, where output hopes have also declined, although Bunge highlighted "slow farmer selling and decreased vegetable oil demand" as behind the pressure on profits.

And while soybean processing margins improved in China and in the US, the benefit was offset by weaker results in Brazil, and in Argentina where strikes in May by oilseed workers "delayed the start of the peak season crushing".

Trading results also fell "significantly" in oilseeds, and were lower in grains too in a decline fuelled by a weaker performance in hedging, with the group flagging a "less effective risk management strategies".

Bunge had in April, unveiling a quadrupling in agribusiness profits in the January-to-March period, underlined "improved risk management" in grains.

'Promising soy crush outlook'

However, Bunge said it expected full-year operating profits in the agribusiness division to "exceed $1bn", despite the setbacks in the April-to-June period.

"Demand for soymeal and soyoil remains solid, supporting a promising soy crush outlook," Mr Burke said, noting also the potential for a boost from a record Brazilian harvest of second crop, or safrinha, corn, the source of the country's export volumes.

"The Brazilian safrinha corn crop is large and current local prices are encouraging famers to sell," he said.

Drew Burke, the Bunge chief financial officer, noted too the potential boosts to grain operations from "large crops" in the Black Sea and the US, and heralded a boost to European oilseed margins from the forthcoming sunflower harvest, which should in raising supplies weigh on prices.

"However, [European] rapeseed margins may continue to be hampered by smaller production and low vegetable oil prices," he added.

The agribusiness division achieved operating profits of $494m in the first half of this year, a rise of 27% year on year, and of $890m for the whole of 2014.

By Agrimoney.com

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