Cargill Profit Plunges 88% on Commodity-Trading ‘Challenges’

Cargill Inc., the commodity trader that’s the largest closely held U.S. company, said fiscal second-quarter profit fell 88 percent because of commodity market “challenges” and a 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,” Chairman and Chief Executive Officer Greg Page said in the statement. “Second, our performance in the sugar market was poor.”

Cargill is among trading companies that have been hurt by by rising commodity-market volatility. The closely held firm is the world’s largest sugar trader. Its sugar unit’s earnings declined 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. Cargill said Dec. 7 that Ivo Sarjanovic replaced Jonathan Drake as head of its global sugar business.

The company, which was founded in 1865 and is in its seventh generation of family ownership, said last month it would 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.

‘Difficult Cycles’

“Cargill has been through difficult cycles before, made changes and emerged stronger for it,” Page said.

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

The meat business had “one of their weakest quarters,” Page said. The Texan drought and shrinking U.S. cattle supplies pressured beef margins and higher feed costs affected the unit, Clemens said. Cargill and Tyson Foods Inc. are tied as the top two U.S. beef processors, according to Tyson’s website.

Poultry processing in Thailand was hurt by floods. Cargill incurred one-time costs related to its recall of ground turkey and a temporary shutdown of a plant in Springdale, Arkansas, Clemens said.

Debt Crisis

Earnings also suffered from comparison with the fiscal second quarter of 2011, which was its “strongest quarter ever,” Page said. The European debt crisis and political gridlock in the U.S. 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.”

Other commodity-trading companies have been caught out by market gyrations. Bunge Ltd., the second-largest sugar trader, said in October it was hindered in the third quarter of 2011 by a “very rare” combination of factors including the European debt crisis and surprise crop reports.

The CEO of Noble Group Ltd., a Hong Kong-based commodity trading company, stepped down in November after poor results from its cotton and carbon-credits units.

The difficulty Cargill faced in the beef business raises concerns for Tyson, Ann Gurkin, a Richmond, Virginia-based analyst for Davenport & Co., said in an interview.

Impact on Bunge

Cargill’s results are “negative” for U.S. trader Archer Daniels Midland Co. and, to a lesser extent, Bunge, as they show demand for U.S. grain exports has declined and soybean crush margins are weaker, said Ken Zaslow, a New York-based analyst for BMO Capital Markets.

The earnings are “undoubtedly positive” for Corn Products International Inc., which makes food ingredients such as high fructose corn syrup, Zaslow said in a report today. He cited favorable U.S. corn milling performance.

Cargill’s food-ingredients and applications segment was the largest contributor to its 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. It’s also the world’s largest oilseed processor followed by Bunge and ADM, according to Rabobank.

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