ADM Earnings Down

ADM Execs See Stronger Second Half of 2019 on China Trade Recovery

Chris Clayton
By  Chris Clayton , DTN Ag Policy Editor
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ADM expects the resolution of U.S.-China trade talks to lead to a recovery of U.S. exports to China by the time the 2019 crops are harvested next fall. A set of ADM grain bins near Niantic, Illinois. (DTN photo by Pamela Smith)

OMAHA (DTN) -- Archer Daniels Midland saw lower first-quarter profits this year because of poor ethanol margins and roughly $60 million in weather impacts from Midwest floods. Still, Juan Luciano, ADM's chairman and CEO, sees a strong second-half of the year for the commodity company because of an expected resolution of the U.S.-China trade dispute.

ADM reported 41 cents a share for its first quarter, compared to 70 cents a year earlier. The company's "adjusted segment operating profit" was $608 million for the quarter, compared to $717 million from a year ago, down $109 million.

ADM cited weather challenges, poor ethanol margins and the continuing trade disputes as the main reasons pulling down their numbers. "It was a more challenging quarter than we initially expected," Luciano said.

With the low ethanol margins, ADM is planning to create an ethanol subsidiary that will report as an independent unit to the parent company. ADM is also repurposing a Minnesota wet mill for higher food-grade starches and phase out production of high-fructose corn syrup at the plant.

ADM also has announced it is closing older flour mills in Minneapolis, Minnesota, and Salina, Kansas, because of a newer facility opening in Oklahoma and a facility being built in Illinois.

ADM also is offering early retirement packages to workers in the U.S. and Canada. ADM executives said grain facilities in Columbus, Nebraska, were hit hard, and the company took about $60 million in losses to both grain and ethanol segments because of the floods.

ADM is optimistic the U.S.-China trade dispute will come to an end before the fall harvest, and the company expects to see increased exports in most commodities, including ethanol. Resolving the trade dispute should translate to better margins on soybeans, corn and ethanol trade flows "as China moves to national implementation of E10."

Luciano also said "we are rapidly waking up to the significance" of African swine fever, which could destroy 20% to 30% of China's pork production -- roughly equivalent to the entire U.S. pork production. China could be looking at a 10-million-metric-ton "gap" in pork. Some of that will be made up with imports of poultry, but Luciano said the pork industries in the U.S., Brazil and Europe are all anticipating China will be importing significantly higher volumes of pork as well.

"China will clearly need to import substantial levels of pork and other proteins," Luciano said.

China has made some pork buys recently despite import tariffs set at 62% for now on U.S. pork due to the U.S.-China trade dispute. The higher feeding of those hogs and poultry also lends to stronger crush margins for soybeans, ADM executives said.

"We think that's very constructive for margins in the second half of the year," Luciano said.

A return in trade with the China market could translate into the U.S. selling as much as 40 million metric tons of soybeans in the 2019-20 crop, but African swine fever also will translate into China importing less soybeans in 2019 "simply because they will have less animals to feed," Luciano said.

Ethanol is in a "continued weak industry environment" right now, but the industry is seeing margins rise as the summer driving season approaches, said Ray Young, ADM's executive vice president and chief financial officer. Resolution of the U.S.-China trade dispute also would be a positive catalyst for the ethanol industry, ADM executives said. China will require as much as 5 billion gallons of ethanol use in 2020 to hit its E10 requirements. This will translate into more demand for both corn and ethanol because China right now is expected to have only about 2 billion gallons of domestic ethanol production.

"That would be a positive catalyst for (ethanol) industry margins in the back half of the year," Young said. The U.S. could ship 1 billion gallons of ethanol to China. "That's not an unrealistic goal for us to think about."

Because of expected growth in the second half of the year, Luciano vowed that ADM was committed to bringing full-year 2019 earnings comparable to 2018 numbers, despite a poorer first-quarter performance.

"We are confident that our initial assumptions, costs, revenue and margin opportunities will be realized," Luciano said.

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Chris Clayton