Bull Crop Markets Drive Record Profits for Cargill in Brazil
(Bloomberg) -- A bull market that sent agricultural commodities soaring has driven record profits for Cargill Inc. in Brazil, the top soybean exporter.
The Brazilian unit of the world’s largest crop trader posted net profit of more than 2.1 billion reais ($385 million) and revenue of 68.6 billion reais last year, an all-time high. The company benefited from higher prices in the global market, a devaluation of the Brazilian real, strong demand and tighter supplies around the world, said Paulo Sousa, chief executive officer of Cargill in Brazil.
The results offer an insight into how the trader benefited from a renaissance in the business of buying and selling crops, which had struggled with thin margins for years. Cargill, one of America’s largest private firms, last year stopped publishing profit figures for the overall group, ending decades of disclosure.
“The Brazilian producer saw prices climbing in dollars and in reais at the same time,” Sousa said in an interview. “The stars aligned, with good crops, high prices and the tailwind from the real devaluation.”
Cargill’s profits in Brazil saw a five-fold increase last year, while revenue jumped 38%, the company said. The Minneapolis-based trader invested 3.7 billion reais in its Brazilian operations over the past five years and wants to continue growing in the South American nation, an agriculture powerhouse.
Rising crop prices come as China is scooping up American crops to feed a hog herd that’s recovering from a deadly pig disease faster than most traders expected. That added to cuts in last year’s American production and rising demand as countries stock up on food-security concerns. A gauge of grain prices this year rallied to an 8-year high helped by adverse weather in Brazil.
Brazil’s soybean harvest, now on its final lap, was planted and gathered late, but the crop turned out to be good, Sousa said, declining to provide Cargill’s estimate. The delay has meant that the corn crop known as safrinha missed its ideal planting window, he said.
“Unfortunately, we are also facing a lack of rain, drier weather than ideal in the center south,” he said. “Especially Parana, Mato Grosso do Sul, Sao Paulo and parts of Minas Gerais and Goias are all in a scenario where production expectations are being reduced.”
High prices are starting to cut into margins for poultry and pig producers in Brazil, but prices aren’t yet high enough to curb demand, according to Sousa. While there’s been talk of Brazilian feed makers turning to wheat, Cargill says any switching in the South American nation is limited.
“Corn and soybean meal are the big components of animal feed, so there aren’t a lot of options,” he said. “One feed producer or the other could maybe use another ingredient to reduce the use in formulations, but overall these are the two main basic ingredients in Brazil.”
Brazil’s agriculture industry is profitable and will continue to expand, with increasing planted areas, he said. The biggest risk is the international perception that the country lacks in its sustainability standards when it comes to deforestation, whether that perception is true or not, Sousa said.
“If Brazilian agriculture can’t change that perception, it’s going to suffer in the future, especially in more developed markets like the European Union, which has strict requirements for a reduction in emissions from food,” he said, adding that some of the top farmers are aware of that and have already started adopting low-carbon practices.
Chinese demand remains “healthy” as the hog herd continues to expand, a positive scenario for soybeans in general, he said.
“Neither the U.S. nor Brazil can alone meet China’s demand, which is huge,” Sousa said. “The regular supply switching from the two main exporters is normal, healthy and needed. Any concentration on one or the other generates imbalances.”
©2021 Bloomberg L.P.