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Profit Drops 88% at Commodity-Trader Cargill

Cargill Inc., the commodity trader that’s the largest closely held U.S. company, reported fiscal second-quarter profit fell 88 percent because of commodity market “challenges” and the drop in sugar prices.

Earnings declined to $100 million in the three months through November from $832 million a year earlier, the Minneapolis-based company said today in a statement. Sales rose 17 percent to $33.3 billion from $28.5 billion.

“First, commodity and financial markets were driven more by political uncertainties than by underlying supply and demand fundamentals,” Greg Page, Cargill’s chairman and chief executive officer, said in the statement. “Second, our performance in the sugar market was poor.”

Cargill, the world’s largest sugar trader, saw the unit’s results decline after prices for the sweetener rose in early October and then fell “dramatically” by the end of the month, Lisa Clemens, a company spokeswoman, said in an interview today. The company named Ivo Sarjanovic as head of its global sugar business replacing Jonathan Drake, it said on Dec. 7.

Commodity-based trading and asset management were challenged by uncertain growth prospects, and overcapacity in the soybean-processing industry held down margins, Clemens said.

Meat Business

The meat business had “one of their weakest quarters,” Page said in a statement. The drought in Texas and shrinking U.S. cattle supplies pressured beef margins and higher feed costs affected the unit, Clemens said. Poultry processing in Thailand was hurt by floods.

The company incurred one-time costs related to its recall of ground turkey and temporary production shutdown in Springdale, Arkansas, she said.

Commodity traders such as Hong Kong-based Noble Group Ltd., whose CEO stepped down in November after poor results from its cotton and carbon-credits units, have been hurt by rising volatility in commodity markets. Cargill said last month it will cut as much as 1.5 percent of its 138,000 employees in the next six months to reduce costs. Cargill also plans to close its Des Moines, Iowa, soybean crush plant on Feb. 4 amid industry overcapacity in soy-meal production.

Along with facing challenges in several units, Cargill’s profit drop this quarter appears even steeper compared to a year ago because the second quarter of 2011 was its “strongest quarter ever,” Page said.

Global Markets

Global problems such as the European debt crisis and political gridlock in the U.S. also affected the markets more than supply and demand fundamentals, Clemens said.

“Markets have been driven by the daily headlines,” she said. “That doesn’t provide forward visibility.”

While performance in the agricultural-services segment was “solid” in the quarter, the “export pull” for grain wasn’t as strong, Clemens said. The unit includes businesses that buy grain from growers and provide services such as risk management and agronomics to farmers.

Boost to Earnings

Cargill’s food ingredients and applications segment was the largest contributor to earnings in the quarter as several businesses such as cocoa, sweeteners and starches were lifted by stronger volume, Clemens said. Some recent acquisitions such as a condiment business in Brazil and a chocolate company in Europe have been accretive, Clemens said.

Cargill is the largest closely held U.S. company as ranked by Forbes.

Cargill’s results are “undoubtedly positive” for Corn Products International Inc. (CPO), which makes food ingredients such as high fructose corn syrup, said Ken Zaslow, a New York-based analyst for BMO Capital Markets who has an “outperform” rating on the shares.

The company’s performance is “negative” for commodity traders Archer Daniels Midland Co. and, to a lesser extent, Bunge Ltd. (BG), as U.S. export demand and margins narrowed on grain supplies in other regions and amid weak soybean crush margins and lower freight rates, said Zaslow, who has “market perform” ratings on ADM and Bunge.

To contact the reporter on this story: Shruti Singh in Chicago at ssingh28@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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