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Cargill profits slump, grain sector hit by 2012 drought

By Christine Stebbins

CHICAGO (Reuters) - U.S. agribusiness company Cargill Inc on Wednesday reported a 41 percent drop in quarterly profits as the lingering effects of the 2012 severe drought in the United States reduced grain-handling opportunities.

The company struggled with razor-thin inventories in the world's top farm exporter, which kept grain pricey and lowered processing volume and export demand during the summer months.

Minneapolis-based Cargill, one of the world's largest privately held corporations and a top commodities trader, reported $571 million in net earnings for the first quarter ended August 31, down from last year's record quarter of $975 million.

First-quarter revenues of $33.8 billion matched the year-ago period.

"Our agricultural supply chain and food ingredient businesses were focused on helping customers and the company to successfully manage their raw material purchases and inventories during the market uncertainty that precedes the transition to new crops in the northern hemisphere," Cargill's CEO Greg Page, said in a statement.

A big U.S. corn and soybean harvest now under way is expected to replenish supplies, thus boosting export prospects and processing volumes for Cargill as well as rivals such as Archer Daniels Midland and Bunge . ADM and Bunge also reported disappointing earnings for the quarter ended June 30 tied to short corn and soybean supplies. Both will report quarterly earnings in the coming weeks.

U.S. exports for corn, wheat and soybeans for the quarter ended August 31 were down nearly 30 percent from a year ago, dragged lower by corn and soy shipments, according to data from the U.S. Department of Agriculture.

"We were dealing with dwindling corn and soybean stocks and strong immediate demand for cash grain, and in North America, gyrations in the weather which really made the harvest expectations difficult to ascertain. All of that caused the markets to invert," said Cargill spokeswoman Lisa Clemens.

"When you're looking at inverted markets, where your nearby prices are much higher than more distant contracts, you have to do an excellent job managing your purchases and your inventories," Clemens added.

BETTER MARGINS IN MEAT BUSINESS

Standard & Poor's ratings analyst Chris Johnson said Cargill's lower earnings were expected, given the strength of earnings a year ago.

"We're looking at continued stabilization in their beef and animal protein business. That continued to be the trend line," said Johnson, noting that S&P upgraded Cargill's debt rating to stable last month from a negative outlook after its beef segment showed signs of improvement last quarter.

First quarterly results fell in three of four business segments. Cargill's animal protein unit - which had been under stress in the past year amid a 60-year low in the U.S. cattle supply and high feed costs - posted a rise due to improved margins, the company said.

"We're looking to see cash flow generation to still be good over this year, so we're not too concerned about inventories and working capital resulting in higher debt balances," Johnson added.

While earnings fell in the company's grain origination and processing unit, it was the largest contributor to first-quarter results.

"The segment's South American-based supply chains performed well, utilizing the region's big crops to serve strong export demand. Conversely, in North American farm services, the remaining impact of last year's severe drought in the U.S. Midwest reduced grain handling opportunities in the first quarter," Cargill said.

The company's food and ingredient earnings were disappointing and its energy business, which includes trading in petroleum, coal, power and gas, declined. Despite the poor performance, Cargill plans to expand their energy business to include more physical trade.

"Cargill looks long-term and understands the markets are cyclical, and in this instance we had the combined effects of mild weather, soft demand, low market volatility, so we did not have good performance. But our decisions are made on many factors beyond immediate or most recent performance," said Clemens.

Asked about the rumored Cargill purchase of ADM's cocoa business, which has been valued as much as $2 billion, Clemens would not comment.

Cargill's size and scope continued to expand in the 67 countries it operates and employs 143,000 people. The company said its acquisition of Joe White Maltings in Australia was expected to be completed by year end. Cargill also purchased full ownership of the Prairie Malt joint venture in Saskatchewan and acquired a shrimp feed manufacturer in Thailand.

(Reporting by Christine Stebbins; Editing by Gerald E. McCormick, Nick Zieminski, Marguerita Choy and Kenneth Barry)

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