Archer Daniels Pressured By Higher Corn Costs

By Greg Sushinsky | August 12, 2011 AAA

Agricultural conglomerate Archer Daniels Midland Co. (NYSE:ADM) reported lower fourth quarter earnings due to higher corn prices and one-time tax items. The agribusiness, seed and grain processor did have a huge jump in sales.

TUTORIAL: Commodities: Corn

Corn Processing Costs Rise
Prices for corn futures have risen nearly 70% in the last 12 months. By contrast, soybean prices, while higher, rose roughly 34 %. The corn prices translated into higher costs, which were keenly felt by ADM's corn processing unit. Operating profits at the unit fell to $118 million from $140 million in the year ago quarter. The oilseed division had a $20 million increase in year-over-year operating profits, to $379 million, while the agricultural services had operating profits of $193 million, compared to $178 million a year ago.

The rise in corn prices affects ADM both positively and negatively. Archer Daniels ships and stores grain, so higher prices benefit that part of the business. The large amount of corn the company has to purchase to process into food products and additives, however, also runs up its costs. In its fourth quarter, Archer Daniels suffered more than gained on corn pricing. Total company revenue for the quarter was $22.87 billion, compared to $15.7 billion in last year's same quarter. Net income was $381 million, or 58 cents per share, compared to $446 million, or 69 cents per share in Q4 last year. Earnings were decreased in the quarter by $65 million due to $280 million in higher income tax expense, which was partially offset by operating profit increases and certain credits. All business units other than corn processing increased operating profits. (For related reading, see Harvesting Crop Production Reports.)

Agribusiness Feeling Some Pressure
Corn refiner Corn Products International (NYSE:CPO) recently reported blowout earnings for its second quarter, with net income more than doubling while raising its guidance for the rest of the year. Still, it delivered an earnings miss as even higher profits had been expected, which were kept down by rising costs. Broadly diversified Bunge Limited (NYSE:BG), with its large, varied agribusiness, including extensive sugar operations in South America, had soaring sales along with robust profits in its latest quarter, but analysts had expected higher margins. Bunge's profits, however, benefited from $77 million in favorable exchange. The company also reduced its estimate of the amount of sugarcane it expects to mill by one million metric tons to 15.5 million metric tons.

The pure play fertilizer stocks such as CF Industries Holdings (NYSE:CF) and Agrium (NYSE:AGU) are doing better than seed companies as the planting and growing economics are more immediately favorable with persistent demand. The fertilizer companies mine and produce the nitrogen, phosphate and potash fertilizers, so as sellers of such commodities, benefit from rising of those commodity prices. There is still a large volume demand expected in the fertilizer trade in important markets such as Brazil, for example, which grows and supplies food to China. Look for continued earnings growth in the fertilizer companies. (For related reading, see Water: The Ultimate Commodity.)

The Bottom Line
Archer Daniels Midland still forecasts high demand for its products, as agribusiness is still strong. The company cited tight supplies for corn and soybeans. It also pointed out industry margins remain under pressure. While commodity prices fluctuate, the demand for food continues to be a strong secular trend that will continue both near term this year and certainly even more in the future. When ADM's margins pick up, the stock should go higher.

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