* Companies say crop failure would spur profit rebound
* Industry consolidation possible
* ADM, Bunge shares bounce on Thursday after two-day plunge
(Adds Bunge CEO comment on industry consolidation paragraph 13,
updates stock prices, paragraph 5)
By Karl Plume
CHICAGO, May 4 In the face of a global grain
glut that is crushing profits and raising questions about
long-term prospects for the world's big grain merchants, the
companies maintain they need only a drought or other supply
shock to return to the riches of the past.
But a two-day rout on Wall Street earlier this week for two
of the industry's biggest firms - Archer Daniels Midland Co
and Bunge Ltd - underscores concerns that poor
recent profits may be more than just a leg of a cyclical
downturn and instead point to fundamental change.
ADM on Tuesday warned investors it was downgrading its
expected return on invested capital — a key performance metric —
by a full percentage point, to a projected 9 percent annual rate
On Wednesday, Bunge reported an 82 percent drop in
first-quarter earnings and lowered its profit outlook for its
unit that trades grain and oilseeds. It also reduced its budget
for 2017 capital expenditures by $50 million, roughly a 7
percent cut, prompting concerns about a possible decline in cash
Spooked investors sent shares of White Plains, New
York-based Bunge down more than 11 percent on the news on
Wednesday, the steepest drop in 15 months. The prior day, ADM
shares posted their biggest drop in eight years, down 8.9
percent to $41.67, with further losses on Wednesday. Bunge and
ADM shares were up 3.2 percent and 2.4 percent, respectively, on
Soren Schroder, Bunge's chief executive, told Reuters the
dour outlook is as impermanent as weather.
"All we really need for this to change is three weeks of hot
and dry weather in the Midwest in July and the same in August
and you're back to markets that don't have enough. It can change
quickly," Schroder said in an interview on Wednesday.
But investors are beginning to fear the good times may not
return for the global grain giants known as the ABCDs, a group
that in addition to ADM and Bunge also includes privately held
Cargill Inc and Netherlands-based Louis Dreyfus Corp
All of the ABCDs - which move corn, soybeans and other crops
from regions of surplus to areas of tight supply — have
struggled to profit from their core grain trading businesses
lately. With grain busting out of storage bins all around the
world, the big grain merchants have fewer
opportunities to capitalize on "dislocation" of supplies, the
"Everybody is wondering if there's some fundamental issue
across the board for these grain processors," said Brett Wong,
senior research analyst with Piper Jaffray & Co.
FARMERS HOLDING TIGHT
Grain markets are notoriously cyclical, but some industry
participants and observers say some of the changes are more
permanent, making the industry ripe for consolidation.
"There's plenty of room to consolidate. And we're happy to
participate and ... can lead it," Bunge's Schroder told analysts
in a conference call on Tuesday.
Farmers have invested heavily in new storage, making them
less reliant on the grain elevators operated by the trading
houses, and the Internet has empowered farmers with information
that makes them much smarter about marketing their grain.
Mike Boland, an agricultural economics professor at the
University of Minnesota, said farmers increasingly are cutting
out the grain handlers altogether, selling directly to ethanol
plants and other end users.
"The grain trading companies may never get their hands on
those bushels to move it along," Boland said.
ADM, Bunge and others are caught between farmers who do not
want to sell crops at low prices and end users, such as food
companies, hunting for bargains amidst global oversupply, said
Gary Blumenthal, chief executive for World Perspectives, a
Washington-based agricultural consultancy.
"The ABCDs are caught in the middle," Blumenthal said.
ADM's agricultural services division, which has seen
turnover in the executive ranks, this quarter reported its third
quarterly loss in international grain merchandising in five
"We cannot help but wonder if ag services faces a structural
challenge with the balance of power shifting to farmers and
ADM's more limited approach to capitalize on intellectual
capital in the ag markets," BMO Capital Markets analyst Kenneth
Zaslow said in a note to clients.
(Additional reporting by Tom Polansek in Chicago; Editing by
Richard Pullin and Matthew Lewis)