Bunge's losses show heightened risks in U.S. grains Fri Apr 27, 2007 3:43PM EDT
By Sam Nelson - Analysis
CHICAGO - Big trading losses suffered by agribusiness company Bunge Ltd. (BG.N: Quote, Profile, Research show the financial risks of volatile U.S. grain markets that have been heightened by the massive flows of speculative funds the past two years.
Analysts said other companies could also have lost money, although in smaller amounts, as prices for grains and oilseeds swing wildly, driven by the ebb and flow of managed money and the fast-growing demand from producers of renewable fuels.
As the ethanol industry gained traction, corn supplies started to dwindle, investment funds began buying huge volumes of corn futures and the unprecedented demand boosted not only corn prices but wheat and soy as well. Reuters Pictures Photo
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"It's still a corn story, and how you adjust to that depends on your profitability," said Don Roose, analyst and president of U.S. Commodities, Des Moines, Iowa. "These are tough markets, and you can look silly from one day to the next."
Top oilseed processor Bunge on Thursday said quarterly profit fell 76 percent largely due to a big short position in Chicago Board of Trade soybean futures.
"We had the largest stocks ever in soybeans, plus a huge crop," said Bunge Chief Executive Alberto Weisser. "Normally, when we have a situation like this, you would see a drop in prices."
Instead, soybean futures prices rallied to their highest level in over two years, led by the soaring corn futures market and by investment funds who bought soybeans as a long hedge against the potential future growth of the biofuels industry.
"Biodiesel has been a tough business and in soybeans there should be profitability, there should be opportunities there, but it isn't easy right now," Roose said.
Bunge's quarterly losses have stirred talk that other big grain companies such as Cargill Inc. (CARG.UL: Quote, Profile, Research and Archer Daniels Midland Co. (ADM.N: Quote, Profile, Research might have struggled too.
But Roose said there are big differences in the structure of each company.
"When you look at a Cargill and at ADM there's no doubt that their ethanol division should be very strong," Roose said. "That's a big profitable zone where Bunge, I don't think they're really pushing in that direction," Roose said.
On April 16, Cargill said it earned $553 million in the fiscal third quarter ended February 28, up 49 percent from $370 million a year earlier. Reuters Pictures Photo
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ADM is due to report quarterly earnings next week.
"Being heavily invested in ethanol will definitely smooth out the earnings cycle," said Jeff Thompson, analyst for Fortis Clearing Americas referring to his optimistic view about ADM's potential earnings.
However, Thompson also cautioned that traders large and small need to be prepared for huge price swings in the grains and energy sectors this year.
"The volatility hasn't even started yet and anyone having problems now needs to reassess their game plan," Thompson said. "These markets are exciting but not scary, and there's the potential for good volatility this summer," he said.
Added Roose: "This is definitely an opportunistic market, it gives you a chance to make right and wrong decisions, and within that you can have huge profitability swings from one organization to another."
Bankers say that money managers have directly invested from $70 billion to $200 billion in commodity indexes and commodity-linked securities, up from less than $10 billion five years ago.
