How the U.S.- China trade war has impacted grain traders, especially Bunge

Date:02-25-2019

U.S. President Donald Trump's trade war with China has roiled agricultural markets and given the world's top grain merchants the one thing they have long claimed was essential to turn a trading profit: volatility.

And yet, Archer Daniels Midland Co, Bunge Ltd, Cargill Inc and Louis Dreyfus Co, the so-called ABCDs of grain, have not performed as well as expected - and, in some cases, failed to deliver the profit windfall promised by company executives, investors and analysts said.

If anyone should have been a winner in the Trump administration's sweeping trade war, it should have been the ABCDs, said industry analysts. Investors had expected these international grain traders to benefit from market volatility and shifts in global grain flows resulting from a trade war between the world's two largest economies.

But as China imposed steep tariffs on a raft of U.S. goods including grain and soybeans in July, the traders have struggled to capitalize on moving goods from areas of surplus to areas in need. The reasons are varied and company-specific, from bad political bets to supply-chain gaffes.

If not for the silver lining of solid soy processing results due to strong global crush margins in 2018, their earnings would have been far worse.

"Benefiting from trading opportunities and arbitrage and dislocations around trade ... that, overall, turned out to be a more difficult landscape to navigate, which ultimately hurt these companies," said Chris Johnson, director and agribusiness lead for Standard & Poor's.

Bunge, which reports its fourth-quarter results on Thursday, has arguably fared the worst of all as at least two trade-war-related bets backfired, leading to the removal in December of the company's chief executive, Soren Schroder.

Bunge had already been conducting a strategic review after pressure from activist investors, and was the target of takeover attempts from ADM and global commodities trader Glencore Plc after an earlier string of weak profits.

Bad Bets

In its first notable trade war misstep, Bunge took long positions in soybean futures, betting on a prompt end to Chinese tariffs on U.S. soybeans in the second quarter of 2018. It led to a $125 million mark-to-market loss in the quarter.

Then, as the trade war dragged on, Bunge increased purchases of Brazilian soybeans to meet accelerated demand from China, only to see their value drop as U.S.-China tensions eased following a trade detente on Dec. 1. That strategy led Bunge to cut full-year earnings for its large agribusiness segment, historically responsible for about 80 percent of company revenue, estimating earnings would come in $90 million to $100 million below the low end of its earlier forecast.

The troubles came after Schroder said in May that "our global footprint is built for this type of environment" and the shifts in trade flows "play to our strengths."

Fitch Ratings and Moody's have since both downgraded Bunge's long-term debt rating to one notch above junk, while S&P Global Ratings revised its outlook for the company to negative from stable.

Bunge's ill-timed bets frustrated investors.

Bunge shares are down more than 32 percent from a year ago, compared with a 3 percent loss in that time by its publicly traded peer ADM.

"If you can't control the variables, don't make big bets," said Michael Underhill, chief investment officer for Capital Innovations, which holds shares of both Bunge and ADM.

Still, Capital Innovations expanded its position in Bunge in the past quarter, expecting a turnaround at the 200-year-old company. Underhill has a share price target of $70 for the stock, which is currently trading in the low $50s.

Analysts, on average, expect Bunge to report fourth-quarter earnings of 20 cents per share on Thursday, according to Refinitiv Eikon data. That compares with a loss of 48 cents per share a year earlier, which included restructuring charges.

Rivals Stumble

Bunge was not alone in its trade war stumbles.

ADM's CEO Juan Luciano had been more cautious in its forward-looking statements, calling the trade tensions "manageable in the near term." The company's chief financial officer, Ray Young, was more emphatic: "We actually feel very, very confident about our prospects."

Still, the company's fourth-quarter net income dropped by more than half to $315 million due to "rapidly changing trade, geopolitical and market conditions," its worst fourth-quarter result in seven years.

Cargill last month reported a 20 percent drop in fiscal second-quarter profit due partly to global trade war tensions that hurt its global shipping business.

Louis Dreyfus posted lower profits for the first half of 2018, citing a negative $65 million mark-to-market hit from oilseed hedging along with greater unpredictability in markets as the U.S.-China trade war began. The company said a stronger second half would boost full-year earnings.