Archer Daniels Midland shares suffered a sharp fall Tuesday after the food commodities company indicated a persistent surplus of grain supplies would weigh on investor returns.
The Chicago-based company is one of the world’s leading processors and shippers of corn, soyabeans and other agricultural commodities. As bumper crops pile up across the globe, however, it has curtailed opportunities to trade.
ADM’s difficulties have been particularly pronounced at its global trade desk, based in Switzerland. The company recently announced a new head for the unit, Gary McGuigan, and on Tuesday said it would take $7m in impairment and restructuring charges in the first quarter primarily connected to restructuring the desk.
Juan Luciano, chief executives, told analysts that “with ample stocks around the world, there is a very subdued environment for us to make profitable international trades.”
As trading profits suffer, the company aims to reduce its cost per tonne traded. It shut down an office in South Africa and merged offices in Argentina. It also aims to build “destination marketing,” such as a joint venture with Cairo-based Medsofts, that would bring ADM in closer contact with customers and could increase trading profit margins from about $2-$4 per tonne to roughly $8-$10 per tonne, Mr Luciano said.
Mr Luciano acknowledged that the company’s agricultural services business, which encompasses trading, has been generating profits “short of the range we used to hit, and we’re not going to hit it this year.” Adjusted operating profit in the division was $88m in the first quarter, up from $76m in the same quarter a year before.
ADM’s net profit in the quarter rose to $339m, or 59 cents a share, from $230m, or 39 cents a share, in the same period a year before.
The company also reduced its estimated cost of capital to 7 per cent from 8 per cent while maintaining a goal for return on invested capital of 2 percentage points above its cost of capital, “effectively lowering” its implied return target to 9 per cent from 10 per cent, said Ann Duignan, an analyst at JPMorgan.
Shares in ADM were down 8.7 per cent to $41.77 in the New York afternoon.