Tickers in this Article: ADM, BG, CPO, ANDE, CZZ, KO, PEP, GIS
Archer Daniels Midland (NYSE:ADM) is a good example of what is wrong about Wall Street today. In the short-term world of sell-side research and institutional investors, there is a great deal of angst over quarter-to-quarter moves and the volatility of commodity prices. Here's the long-term reality, though: processed food is here to stay and ready to explode in emerging markets, agricultural refining is an industry that rewards scale and ADM is one of the biggest fish in the ocean. (For more, check out What Is An Emerging Market Economy?)

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A Tough Third Quarter
ADM reported the sort of quarter that will have some investors doing double-takes. After all, 30% reported net sales growth seems amazing, for a company of this size. Reported growth was strong across the board: oilseed processing revenue rose 29%, corn processing revenue rose 51% and ag services revenue rose 33%.

Profitability was another matter entirely. Gross margin was down just 10 basis points, but that's still pretty substantial in real dollar terms, given the revenue base. Although reported operating profit rose 43%, that's a little misleading, as it contained a lot of "non operating" items. Segment operating profit fell 9% from last year and ADM's EBITDA was down almost 12%.

All in all, ADM missed the Street's target on an adjusted basis. This can't really be called a surprise, though, as Cargill previously reported a year-on-year profit decline and Bunge (NYSE:BG) reported both lower earnings and missed estimates. (To learn more, read Strategies For Quarterly Earnings Season.)

Corn OK, Oilseeds Not so Much
Although corn processing profits fell by almost half, this was more or less in line with expectations. Rising grain prices are a concern for refiners like ADM and Corn Products (NYSE:CPO) and higher net corn costs were largely responsible for the steep 81% drop in profits from sweeteners and starches.

On the oilseed side, profits were down about 28% and the segment saw operating margin fall about 2%. Although biodiesel demand in North America is solid and edible oils are still in demand, overall crush margins were weak around the world and demand for biodiesel was not so strong outside the U.S.

Pushing Higher Prices and Hoping for Government Support
Cargill has talked publicly about trying to push rather sizable price hikes (30%) through on high fructose corn syrup. While HFCS users like Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP) and General Mills (NYSE:GIS) will no doubt fight hard, higher prices are going to be a reality; it's not as though substituting cane/beat sugar or artificial sweeteners wouldn't have costs of its own. Cargill and ADM will likely have to back down from this initial demand, but that's the nature of negotiation, you start high and work your way down.

It is also worth wondering what the future looks like when it comes to government support for biofuels like ethanol. Ethanol producers like ADM and Andersons (Nasdaq:ANDE) have benefited from a host of credits, subsidies and tariffs that have not only artificially boosted demand, but have kept foreign producers, like Cosan (NYSE:CZZ), on the sidelines. As time goes on, though, it seems like there is less and less enthusiasm for this government involvement, at least outside of corn producing states, so it will be interesting to see how this develops over the next few years. (For more on the tariffs and the effect it has on foreign producers, see The Basics Of Tariffs And Trade Barriers.)

The Bottom Line
There is no shortage of agricultural ideas for investors to consider. Along with ADM, Bunge and Corn Products, there are a host of foreign oil producers that may appeal to risk-seeking investors. Likewise, there are Canadian agribusinesses like Alliance Grain Traders and Viterra that are definitely worth a look. Those investors who really enjoy volatility shouldn't forget companies "down on the farm," like Cresud (Nasdaq:CRESY) or Adecoagro (Nasdaq:AGRO).

ADM looks cheap right now, on the basis of both cash flow and the historical range for metrics like P/E and EV/EBITDA. As I said in the intro, this is a stock that likely only makes sense as a long-term play on the growing demand for grain/oilseed processing and the leverage of being one of the largest players in the space. It's not the most exciting company around, but the prospect of beating the market by a few percentage points a year, over the next few years, seems exciting enough.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article

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