Red-Hot Crop Markets to Give Years-Long Boost to Global Traders
(Bloomberg) -- Voracious crop demand in China and tight global supplies have helped agricultural firms Archer-Daniels-Midland Co. and Bunge Ltd. outperform the broader S&P 500 this year, and the good times may last a bit longer.
With top pork producer China rebuilding its hog herd and adverse weather hitting crop yields, it’s likely supply imbalances will persist and benefit the big traders who buy, store, process and ship grains and oilseeds. ADM, the largest publicly traded crop handler, will provide some insight on its first quarter, when the Chicago-based company reports earnings Tuesday.
“Industry economics are the strongest since 2011-2014,” said Bank of America analyst Luke Washer, who initiated a buy rating on ADM last week. “ADM will be a key benefactor of a renewed ag cycle that is expected to last a few years and potentially much longer.”
ADM shares have climbed about 18% in 2021, compared to the S&P 500 gains of 11%. Shares for Bunge, which reports earnings May 4, are up about 30% year-to-date.
Prices for corn, soybeans and wheat started to climb in the third quarter of 2020 and have barely let up since, with prices extending gains to fresh multiyear peaks in the wake of the U.S. Department of Agriculture’s smaller-than-expected planting outlook on March 31.
China’s crop imports are likely to stay strong until at least the end of the year, with Cargill Inc. saying agricultural commodities are poised for a “mini supercycle.” But a prolonged bull cycle is unlikely are farmers are quick to plant more every year, boosting supplies quicker than in other commodities markets like metals, which have to be mined.
The backdrop of tighter crop supplies is the opposite of the glut that capped trading margins in recent years. China’s expanding hog herd has the U.S. shipping record amounts of corn to the Asian country. More cars and trucks on roads has lifted demand of corn-based ethanol and biodiesel made from soybeans.
“My expectation is for the first quarter and at least the first half of 2021 that we’ll see the continuation of favorable grain-merchandising conditions,” said Seth Goldstein, analyst at Morningstar Inc. in Chicago. “We’re at the point where grain trading is at peak profitability. Just a couple of years ago, we were at the bottom of the cycle and now we’re at the top.”
There are some pressure points, though. Corn and soy supplies are getting tight enough to pinch profits at processing plants. Soybean crush margins are sharply lower from the same time a year ago and the volume of soybeans crushed in the U.S. has declined from 2020 levels two months in a row.
Meanwhile, top global soy producer Brazil cut its requirement for biodiesel blending in diesel fuel to 10% from 13% to ease the impact of high soybean oil prices. That move, according to BofA’s Washer, “threatens soybean crush demand and highlights the risks associated with policy changes in Brazil.”
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