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Agribusiness Giants Can’t Escape Market Volatility

You know commodity trading conditions are tough when even firms that sit on both the buy and sell sides of a market still suffer hefty losses.

Such was the case with 140-year-old agribusiness giant Cargill, which recently reported a 66 per cent drop in earnings in the latest quarter over year-ago levels due to global economic uncertainty and turbulent markets. But Cargill was far from being the only agribusiness on the receiving end of a thumping in the July-September quarter, which goes to show that the old adage that such firms thrive during times of high and volatile crop prices doesn t always ring true.

Cargill s profit-drop shocker captured the attention it did because it highlighted how even expert traders can get stumped from time to time. After all, if a fully integrated agri-giant that controls the entire stream of agricultural production from grain acquisition through to processing and distribution can t make money in these markets, how can anyone else?

But all the agribusiness majors including Archer Daniels Midland, Bunge, Monsanto, and Deere &Co. suffered share price setbacks during the three months to October 1 as uncertain global markets took a bite out of corporate performance in the sector.

Even Glencore arguably the most famous commodities trading firm in the world and supposedly still in a honeymoon period with investors following its mid-May IPO couldn t swim against the bearish tides. The Swiss-based outfit lost more than 17 per cent in share value over the quarter and at one point in August traded more than 34 per cent below its IPO launch price amid the broad commodity market meltdown.

Of course, much of the weakness seen in commodities businesses merely reflected the downswing in the broader stock market over the summer. But in many ways agri-related firms performed more poorly than the broader stock market, thanks to the accompanying decline in the commodities, especially corn. Indeed, a rebound in corn prices is again pushing stock prices for big ag firms.

In recent sessions, nearly all of the firms that underperformed the stock market during the late-September corn slump have recently outperformed their benchmarked peers thanks to corn s robust performance. (The obvious exception has been Bunge, which is more focused on soybeans.)

In all, the fate of agribusinesses is clearly tied up with the performance and price direction of the crops in which they are all heavily involved. And given the ongoing need for continued crop production expansion on nearly all fronts as the planet grapples with declining crop inventories, the prospects for firms dedicated to the production and distribution of these commodities should continue to improve as long as crop prices remain on a rising trajectory.

Rough patches such as those seen in recent months will still appear from time to time, but as long as the world generally consumes more grain and oilseeds than it produces, the longer-term bias of agribusiness earnings should stay to the upside.

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