On Thursday morning, grain merchant and processor Bunge Limited (BG) reported that its third-quarter net income increased to $297 million or $1.92 per share, from $140 million or 89 cents a share in the same period a year earlier. Bunge's net revenue increased 10.7% to $17.293 billion, which fell below average Wall Street estimates of about $17.75 billion. Similarly, adjusted earnings were $2.08 per share versus $0.86 cents, which fell below average estimates of $2.17.
Alberto Weisser, Bunge's Chairman and Chief Executive Officer, commented:
"The current market environment, shaped most notably by the severe U.S. drought, has been and will continue to be volatile and complex for everyone who participates in our industry. Stocks of corn and soybeans are tight, and the world is adjusting typical trade flows."
This miss will probably weigh slightly on the shares, and may cause some analysts to downgrade future expectations for Bunge, as well as other competing Agribusiness companies, such as Archer Daniels Midland Co. (ADM). Nonetheless, the reality is that many were likely expecting a complicated quarter for agribusiness.
Bunge had declined substantially during the second quarter of 2012, as the U.S. drought situation became a cause for concern; the company subsequently lost about one-fifth of its market value. The company has since recouped those losses, and is now about up about 19% since the start of 2012. The following is a recent performance chart:
Some of this recent strength is likely based on Bunge increasing its quarterly dividend from $0.25 to $0.27 last quarter. Archer Daniels has underperformed Bunge this year, and has not increased its dividend, though it may do so shortly. Archer Daniels is a dividend aristocrat, making a dividend increase before the end of 2012 probable.
Another reason for Archer Daniels's underperformance may be its more substantial exposure to the domestic agribusiness. Due to this, as well as growing global demand for food, last week Archer Daniels purchased 10% of GrainCorp, Australia's largest grain handler, and now controls 14.9 percent of the company.
Immediately following the deal, Archer Daniels made a $2.8 billion cash offer for GrainCorp, which would value the company at about the same price Archer Daniels paid for the 10% stake it just acquired. While Archer Daniels is looking to Australia, Bunge may be looking to South America. Bunge's CEO also commented that:
"The world needs record crops to rebuild stocks, and today's high prices are sending a strong signal to farmers, especially in South America, to plant. Early indications are that soybean production will be at record levels. As new crops are harvested, we should see a more balanced supply-demand situation, which will be good for consumers and for the market overall."
This could be a signal that Bunge is looking to acquire farmland and providing a substantiation for making such an acquisition in South America. Whether or not Bunge is looking to acquire farmland there, increased planting by South American farmers would appear likely to at least temporarily cause the region to gain global market share, in addition to strategic importance. Companies that could benefit from such a trend would include Cresud Sociedad (CRESY) and Adecoagro (AGRO).
These companies and the farms they own could become acquisition targets by larger global enterprises, though some may remain wary of exposure to the region due to concerns that would include political uncertainty. The potential for socialized nationalization of corporate entities, and particularly of foreign-owned domestic assets, may deem some nations too risky for an ownership interest.
Commodity price fluctuations have once again increased, with many long-term investors continuing to anticipate substantial additional volatility in the future. Additionally, many consumers are noticing higher and ever-increasing food prices. For investors that are expecting further commodity-based inflation, agricultural commodities and the farmland necessary to produce them are a potential hedge against currency devaluation and/or future food price spikes.
Disclosure: I am long ADM.