Grain volatility as force affecting public companies

by Morton Sosland
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It is the rare food company, whether international giant or limited domestic market operator, that has not felt pain from volatile commodity markets in recent months. From the largest global groups have come warnings that sharply higher and, yes, erratic moves have slashed margins and threaten shortfalls from earnings forecasts. In noting “rising input costs,” which is a roundabout way of pointing to upturns in grains and other food ingredients, these companies often face the unhappy task of explaining why earlier guidance has been overly optimistic. In the wake of these disappointments, shares of publicly listed food and grain companies have failed to match surging prices ruling in many major stock sectors. It makes for a difficult time, especially for companies with publicly-owned shares.

Grain markets performing like those of recent months once again reinforce skeptics about anyone’s ability to forecast grain price moves, even when undertaken by the most astute and experienced participants. Not only has record-setting volatility caused earnings disappointments for trading companies, but in the case of one major participant in this market, Bunge Corporation, it led to a new approach in how guidance is provided to shareholders and investment analysts. In an announcement accompanying its recent quarterly earnings release, the group’s chief financial officer revealed that the company “will no longer provide (guidance on) annual earnings per share figures.” He explained, “The natural volatility of our industry makes it difficult to forecast earnings per share with precision.” In taking this action, which makes great sense in light of market moves, Bunge emphasized it will continue with its “commitment to robust disclosure,” including providing “qualitative commentary on our value drivers, strategic initiatives, key metrics and other factors critical to our business and operating environment.”

Anyone watching the share market is aware that earnings guidance issues are front and center. Some of the largest and most highly regarded companies, like Warren Buffett’s Berkshire Hathaway, discontinued giving guidance years ago. Guidance advocates mainly contend that this practice eases share price swings while helping to achieve maximum valuations.

So far as companies with major parts of the business affected by swings in grain prices are concerned, it is becoming increasingly difficult, if not impossible, to forecast results with the specificity usually expected of per-share earnings guidance. Those problems have ruled for a long while. When the first grain trading company to become publicly listed surfaced in the late 1960s, many questions were asked about how such a business would fare in the harsh light of providing earnings guidance and issuing quarterly statements. That pioneer was Cook Industries, which came to the market not by a public offering but through merger with another company, a hardware flooring manufacturer which already had a listing. Cook’s grain business lasted only about a decade. Its demise was not solely caused by pressures of being public, but it is likely that these forces were among the problems the company contended with in fast-moving markets.

As noted, Bunge is not the first publicly-listed company to discontinue the issuance of earnings guidance. Many others have done that over the years for a number of reasons, such as concerns about governmental regulation of what shareholders are told, worries about the influence that such guidance has on senior management priorities, and a growing awareness of how it is better to pursue long-term goals than to work for short-term earnings that have priority in meeting quarterly earnings forecasts. Indeed, it is the latter point that primarily influences global grain trading companies to resist going the public route, regardless of how desirable that might seem in raising new capital and in enhancing returns for family shareholders. In making these sorts of decisions, though, no one may neglect the power of unpredictable grain and other food ingredient markets in upsetting earnings projections. It is a reality that outweighs all others in considering how best to achieve a company’s goals.