Credit Suisse: ADM, Bunge face challenging conditions

by Eric Schroeder
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grain handling
 
NEW YORK, NEW YORK, U.S. — Credit Suisse on Jan. 16 lowered its fourth-quarter earnings-per-share estimates for Bunge Ltd. and Archer Daniels Midland Co. (ADM), noting that business conditions for grain handlers remained negative during the quarter.

Robert Moskow
Robert Moskow, research analyst

In the Jan. 16 reports, Robert Moskow, research analyst, wrote that the flood of Argentinian exports into the global markets eased recently, but they still hurt Bunge and ADM’s global oilseed margins and its grain exports out of the United States for the first two months of the year.

“We expect Bunge, ADM and other grain handlers to forecast below-normal agribusiness margins for 2018,” Moskow said. “The aggressive commitments they made to customers in 2017 to lock in volume ended up squeezing margins because the farmers delayed pricing their crops for so long. Attractive debt financing from the Argentine government gave the farmers more bargaining power than the grain handlers expected. For 2018, we expect the grain handlers to reduce risk (and reward) by cutting back on forward commitments to customers and buying more of their grain on a spot basis. This will make it more difficult to lock in attractive margins on a forward basis.”

Credit Suisse lowered its fourth-quarter EPS for Bunge to $1.30, which compares with an industry consensus of $1.53, and its 2018 EPS to $4.50, which compares with a consensus of $4.70.

Bunge
 
Moskow said Credit Suisse expects Bunge to achieve and perhaps exceed the $100 million in savings it has targeted for 2018 as part of its $250 million cost savings plan. But the ratings agency does not expect the savings to sufficiently offset the weak environment for gross margins, he said.

“In our view, the worse it gets for Bunge fundamentally in 2018, the higher the probability of the board opening the door for a strategic acquirer,” Moskow said. “The standstill agreement with Glencore will expire ‘early in 2018’ according to the Wall Street Journal. We would not be surprised to see Glencore make a more formal overture soon after Bunge releases results on Feb. 13.”

ADM
 
Meanwhile, Credit Suisse lowered its fourth-quarter EPS for ADM to 70¢, which compares with the industry consensus of 71¢, and maintained its 2018 EPS at $2.60, which compares with the consensus of $2.71.

“Weak pricing caused farmer selling in Brazil to track behind the prior year and the multi-year average,” Moskow wrote. “Corn sweetener margins remained robust due to strong pricing, but ethanol margins plummeted due to falling prices caused by excess industry production. Our forecast for 4Q assumes a $50 million biodiesel credit in the Oilseeds division.” 
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