As profits from record-high prices during the food inflation boom begin to fade, agricultural trading giants like Archer-Daniels-Midland Co. and Bunge Global SA are preparing for their weakest second quarter in four years. Analyst estimates compiled by Bloomberg indicate shrinking margins across most of their businesses as the market experiences a stark reversal from the highs seen in 2022 due to crop losses and disruptions caused by the war in Ukraine.
The surge in grain prices last year generated windfall profits for companies handling supplies, but the situation has changed drastically as prices for soybeans, corn, and wheat have plummeted with increased production. This has reduced buyers' urgency to secure supplies and made farmers more hesitant to sell, while softer price swings have made trading less profitable.
Thomas Palmer, a senior equity research analyst at Citigroup Inc., noted that the premium these companies receive for distributing products globally has decreased significantly during the second quarter relative to recent years. The expected earnings per share for ADM and Bunge are substantially lower than in previous years, reflecting the challenging market environment.
The profits from processing soybeans into meal and oil, a key revenue driver for these companies, have also declined. The slow growth in demand for oil for renewable diesel production and increased competition from alternative feedstocks have added to the pressure on margins. Furthermore, US corn ethanol profit margins have been notably lower, particularly impacting ADM.
Despite the obstacles, both Bunge and ADM have consistently surpassed analyst estimates in recent years. Soybean crushing margins in the US began to rise in June, potentially leading to another earnings beat in the second quarter and a stronger third quarter. As a result, analysts have raised their full-year earnings forecast for Bunge, anticipating a potential profit increase given the improving processing margins.
However, the possibility of another bumper harvest in the US and upcoming additions to processing capacity through 2025 suggest that the recent margin improvements may not be sustainable long-term. Palmer noted that there could be additional pressure in the coming year, highlighting the volatile nature of the agricultural trading industry. Investors will be closely monitoring the earnings reports from ADM and Bunge to gain insights into how these companies are navigating the evolving market landscape.