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Cargill Q2 performance impacted by trade turbulence, mixed results for ingredients businesses

Zoom in font  Zoom out font Published: 2019-01-07  Views: 39
Core Tip: Agricultural commodities supplier Cargill has reported weakening Q2 results in some divisions, including food ingredients.
Agricultural commodities supplier Cargill has reported weakening Q2 results in some divisions, including food ingredients. Adjusted operating earnings were US$853 million for the fiscal 2019 second quarter and first half ended November 30, 2018, down 10 percent from the US$948 million earned in last year’s strong comparative period. This brought first-half earnings to US$1.74 billion, a 5 percent decrease from the prior year. The company reports a reliable performance in an uncertain environment, navigating volatile agricultural markets that have been disrupted by trade conflicts such as the US-China disputes.

Net earnings on a US GAAP basis for the quarter were US$741 million, a 20 percent decline from US$924 million in the year-ago period. For the half, net earnings dipped 7 percent to US$1.76 billion. Second-quarter revenues decreased 4 percent to US$28 billion, bringing the year-to-date figure to US$56.7 billion.

Cargill’s Chairman and CEO, Dave MacLennan, points toward uncertainty caused by ongoing trade conflicts between the US and China which have impacted major commodities such as soybeans.

China upped the severity of its sanctions against the US as the trade war between the world's two largest economies escalated last year. US soybeans were targeted for 25 percent retaliatory tariffs, after initially not being included in sanctions. However, as the trade dispute between the two countries intensified, China added soybeans to a long list of food products that are subject to tariffs. This unsettled the soybean markets which were reshaped as soybeans went to other markets instead.

Amid this uncertain and fluctuating market, the US overtook Brazil as the leading soybean supplier to the European Union with a 52 percent market share, benefiting suppliers such as Cargill.

“Our teams executed in a world of uncertainty to bring the best solutions to our customers and the consumers they serve,” MacLennan says.

He references Cargill’s ability to adjust rapidly to changing market conditions throughout the quarter and deliver safe, reliable and sustainably produced foods to their destinations. “Now, we are pushing to ready our businesses for the future with continuous improvement, financial discipline and a disruptive mindset.”

Animal Nutrition & Protein was the largest contributor to Cargill’s adjusted operating earnings, with results just below last year’s strong comparative quarter. Performance in North American protein moved higher, as robust demand for beef and large supplies of fed cattle boosted beef production and sales to domestic and export markets. Demand for egg products also drove protein earnings.

Continued political instability in Central America and market challenges in Southeast Asia reduced results in the segment’s global poultry business. Sales volumes for salmon and shrimp feeds in the North Sea region and Mexico, respectively, were up, but animal nutrition earnings trailed the prior year due to adverse market conditions in several regions. This included lower hog volumes in China and Vietnam and unfavorable dairy and poultry economics in the US.

Cargill expanded in Colombia with the acquisition of Campollo, one of the country’s leading makers of chicken and protein products. The deal complements the purchase of Colombia-based Pollos El Bucanero last fiscal year and advances the segment’s strategy to serve growing protein demand in emerging markets with world-class poultry products.

Food Ingredients & Applications decreased on mixed results across the segment. Starches and sweeteners earnings decreased on historically low ethanol prices in North America and higher energy and raw material costs in Europe. Lower sales volume and higher operating costs in North America trimmed otherwise strong cocoa and chocolate performance in other regions.

Good positioning helped lift edible oils above last year. Bioindustrial posted a solid gain, while salt earnings edged ahead as higher road salt production costs were offset by increased results in food and water quality.

The segment announced Avansya, a new joint venture with Royal DSM that will produce zero-calorie sweetness solutions through fermentation. These products, such as steviol glycosides Reb M and Reb D, will give food and beverage companies a more scalable, sustainable and cost-effective alternative to extracting them from stevia plants. Avansya will market these products under the EverSweet brand. Subject to regulatory approvals, the venture is expected to launch in the first quarter of calendar 2019.

Origination & Processing earnings rose as the segment leveraged its global network to keep products moving while navigating volatile agricultural markets disrupted by trade turbulence. Oilseed processing stayed strong in North America and Europe, bolstered by growing protein consumption that drove global demand for soybean meal for livestock feeds. Grain exports from the US and Canada and biodiesel production in Europe also contributed to the strong quarter.  Better-than-anticipated crops in Argentina supported a gain for the segment in South America.

Cargill announced two new projects to further digitalize the agricultural supply chain to the benefit of farmers and end users.

Together with Archer Daniels Midland (ADM), Cargill agreed to form Grainbridge, a technology joint venture that intends to provide support to North American farmers on grain marketing decisions, e-commerce and account management software. The venture will consolidate information on production and grain marketing into a single digital platform for farmers at no cost to them.

Cargill also announced a collaboration with ADM, Bunge and Louis Dreyfus to investigate ways to standardize and digitalize global agricultural shipping transactions, leveraging technology to the benefit of the entire industry. This will reduce time- and resource-intensive processes, lowering costs and increasing transparency for customers in supply chains. In late December, COFCO International joined the initiative. The companies are seeking broad-based industry participation to promote global access and adoption.
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