ADM’s profit jumps 74% on higher grain prices and demand

Dive Brief:

• Archer Daniels Midland’s earnings jumped 74% in the second quarter of 2022, fueled by higher prices for grains like wheat and soy. The earnings report reflects the quarter ending June 30, before Russia and Ukraine’s deal to reopen grain shipping ports on the Black Sea last week.
• ADM CEO Juan Luciano said during an earnings call with analysts this week that he is optimistic about the prospects of the agreement, but warned of the global impacts if shipments remain blockaded. “If we don’t have access to those inventories and they are not cleared from storage next year, we may have an availability issue for food,” he said.
• The ingredients and commodities giant has seen earnings skyrocket amid high demand as the Ukraine conflict has hobbled global grain supplies and pressured prices for food commodities like wheat and edible oils.

Dive Insight:

The Ukraine-Russia war has upended the world grains market, along with supply chain bottlenecks and weather woes that threaten to push global wheat supplies to a 6-year low. Combined, the two countries produce 29% of global wheat, according to Rabobank.

Ukrainian President Volodymyr Zelenskyy said the blockade has stranded 22 million tons of grain, so the deal has the potential to ease shortages of major food commodities like wheat globally.

However, there are still doubts about whether the agreement to open Black Sea ports will fully come to fruition. Wheat prices shot up Monday after a missile strike from Russia on the Ukrainian port of Odessa, Reuters reported.

At a White House press briefing last week, John Kirby, the National Security Council coordinator for strategic communications, said the Biden administration was realistic about the likelihood of Russia fully removing its blockade in Ukraine’s Black Sea ports.

“We’re hopeful that there can be some sort of arrangement to get that grain out of there, but we’re not looking at it through rose-colored glasses in terms of the success that they’ll ultimately be able to achieve,” Kirby said.

In ADM’s earnings call, Luciano said that while he’s hopeful both countries will keep the ports open, there are logistical difficulties in actually getting shipments out.

The CEO singled out securing access to oil and crews for shipping cargo in the country, along with issues securing backing from financial institutions and insurance on grain purchases. However, Luciano expects there will be a “trickle-down” of exports, where smaller boats will first begin shipping the grain to global markets and then eventually bigger ships will gain access. ADM is preparing to store Ukrainian grain ahead of the country’s September and October harvest, he said.

“We are helping as much as possible,” Luciano said. “So hopefully, we will see the sea exports grow over the next two or three months.”

Some analysts are skeptical much grain can make it out of Ukraine in the short term.

“It is thought to be unlikely that much will move from Ukraine right away as the infrastructure internally and at the ports needs to be rebuilt,” said Jack Scoville of Price Futures Group Inc. in a note shared by Bloomberg.

ADM acknowledged that its earnings in the last quarter were fueled in part by higher prices for commodities. But the Ukraine conflict was just one factor here, Luciano said.

“Some prices have spiked because of the war, then they came back, but they came back to the high levels that we had before the war because it was just supply-demand fundamentals,” Luciano said. “So to a certain degree, we need to keep our eyes on the fundamentals. That’s what matters.”

The USDA expects global wheat stocks to drop to their lowest level since 2017, according to its most recent agricultural supply report, although the agency is expecting consumption to decline for 2022/2023. The tight supply of wheat helped pushed up flour prices by 5.3% in June, according to the Bureau of Labor Statistics, while food-at-home prices saw their largest 12-month jump since 1979.