"Crop Sales Surge: How Farmers' Bargain Prices Boost ADM and Bunge's Profits"
By Tom Polansek and P.J. Huffstutter
CHICAGO (Multibagger) - A recent spike in low-cost crop sales by U.S. farmers, driven by the need to clear storage for the upcoming autumn harvest, is set to enhance profitability for major grain handlers such as Archer-Daniels-Midland (ADM) and Bunge Global (NYSE: BG).
Both companies, which trade and process soybeans and corn, recently noted that slow farmer sales had negatively impacted their second-quarter earnings. However, this trend is expected to reverse as farmers in key Midwestern states like Iowa, Indiana, Illinois, and Ohio begin emptying their storage bins of corn and soybeans harvested in 2023. Favorable weather conditions dashed farmers' hopes for higher prices, prompting this move.
Earlier in the year, many farmers withheld sales as corn and soy futures plummeted to 2020 lows due to an oversupply. These low prices have also led some farmers to cut back on crop chemicals, creating a short-term challenge for agribusinesses like Corteva (NYSE: CTVA) and Syngenta.
Key Insights:
- Increased Crop Sales: The surge in crop sales will allow ADM and Bunge to acquire soybeans at lower prices, which they process into soybean oil and meal for livestock feed.
- Operational Efficiency: More sales enable ADM and Bunge to utilize their manufacturing capacity more effectively, crucial for managing overheads and maintaining profit margins.
- Farmer Challenges: Farmers are expected to face a significant year-over-year drop in farm income in 2024, partly due to the current low prices and weather conditions not favoring a price rally.
The "Haul of Shame" and Financial Strain
Many growers, such as Ron Heck from Perry, Iowa, are selling their crops to make space for the new harvest. With the U.S. government forecasting the third-largest corn crop and second-largest soybean crop, farmers are under pressure. Heck recently sold corn at a local POET LLC plant at prices 10% higher than futures.
However, the market remains volatile. For instance, corn prices saw a brief uptick in late July due to hot, dry weather forecasts but soon collapsed to 2020 lows. This volatility has led to what some farmers call the "haul of shame," as they sell at prices lower than desired.
Economic Impact
Farmers like Justin Campbell from Indiana are selling even at a loss to manage cash flow and meet loan obligations. Bunge's CEO, Greg Heckman, has indicated that increased farmer sales will improve profit margins, as seen from the company's revised full-year outlook despite a significant drop in adjusted second-quarter agribusiness earnings.
Reduced Spending on Crop Care
With limited income from crop sales, farmers are scaling back on purchases of fungicides, insecticides, and fertilizers. For example, Ohio farmer Chris Gibbs is forgoing fungicide treatments unless absolutely necessary, while Illinois farmer Dave Kestel is reducing his use of Corteva's Aproach fungicide.
Financial Analysis
- ADM and Bunge: Expect improved profitability due to lower soybean costs and better utilization of manufacturing capacity.
- Farmers: Facing financial strain, leading to reduced spending on crop chemicals and potentially lower yields.
- Agribusinesses: Companies like Corteva and Syngenta may experience short-term revenue drops due to reduced chemical sales.
Breaking It Down
Even if you're new to finance or farming, here's what you need to know:
- Farmers are selling crops at lower prices: They need to make room for new harvests and can't wait for higher prices due to unfavorable weather.
- Grain handlers like ADM and Bunge benefit: They get to buy crops cheaply, process them, and maintain their profit margins.
- Farmers are spending less on crop care: Due to low income, they're cutting back on chemicals, which might affect future crop yields.
How It Affects You:
- Consumer Impact: Lower crop prices might not immediately translate to cheaper groceries, but they could affect the livestock feed market, potentially impacting meat prices.
- Investor Insight: Companies like ADM and Bunge might see short-term profit increases, making them attractive for investment.
- Farmer Finances: Farmers may struggle financially, leading to potential long-term impacts on agricultural productivity and sustainability.
Understanding these dynamics can help you make informed decisions, whether you're investing in agribusiness stocks, managing a farm, or simply interested in how these factors might influence the cost of your groceries.