Grain Traders’ Profits Rise as Ukraine War Tightens Global Food Supply

Those factors have helped push global food prices to record levels in recent weeks. For grain-trading giants such as Archer Daniels Midland Co., Bunge Ltd. BG 5.58% and Cargill Inc., which help direct the flow of corn, soybeans, wheat and other food commodities around the world, the crop-supply crunch and higher prices that follow have been a benefit.

“These market disruptions are rerouting many traditional trade flows and contributing to crop price inflation,” Bunge Chief Executive Greg Heckman said on a call with analysts. “Industry margins spiked globally due to the combination of continued strong demand and an even tighter supply outlook.”

St. Louis-based Bunge on Wednesday posted a higher first-quarter adjusted profit and raised its full-year earnings forecast. ADM ADM 5.17% on Tuesday reported a 53% profit increase for the three-month period ended March 31, helped by higher trading margins. Both companies’ quarterly results outpaced Wall Street analysts’ expectations.

Bunge’s agribusiness unit reported an about 7% decline in volumes and a nearly 15% rise in sales, due to smaller soybean crops in South America and tightening global supplies of various vegetable oils.

Illinois-based ADM said it expects the tight supply of crops to continue for the next few years because of the drought conditions in South America, a weak Canadian canola crop and the war in Ukraine.

“From a global pandemic to the short crop in South America to the conflict in Ukraine, it has become clear that we cannot take an abundant and efficient supply of food for granted,” said company CEO Juan Luciano on a Tuesday conference call.

Russia’s war in Ukraine involves two of the world’s major grain-producing powers, upending a region that has become increasingly critical to feeding a growing and more affluent global population. Global food prices hit a record high in March, the United Nations said earlier this month, as the war threatens to cause food shortages in some of the world’s poorest countries.

The dent in exports from the Black Sea region has pushed the price of wheat up about 40% this year. At least two crops are likely to be needed to fill the projected crop shortfall created by Russia’s invasion of Ukraine, according to BMO Capital Markets analysts.

ADM posted quarterly earnings of $1.05 billion, or $1.86 per share, compared with $689 million, or $1.22 per share, a year ago. Bunge reported quarterly adjusted earnings of $4.26 per share for the quarter ended in March, compared with $3.13 the same period a year ago. The company said an adjusted measure of profits, which strips out some one-time items, rose to $800 million from $671 million a year ago.

Shares of ADM are up more than 30% this year, while Bunge is up more than 20%. Cargill is closely held and doesn’t report quarterly results.

Shifting trade flows, high wheat prices and rising demand for U.S. grains are boosting other agricultural companies. Farmer cooperative CHS Inc., which has a large grain-trading business, earlier this year posted a quarterly profit of $219 million for the three months ended Feb. 28, compared with a loss of $38.2 million a year earlier. Jay Debertin, CEO of CHS, said strong demand and global market volatility contributed to CHS’s higher earnings.

Grain-trading companies including Cargill have said they plan to continue to ship grain from Russia. Bunge and ADM said they are seeking alternate routes to move crops out of war-torn Ukraine to get as much of the region’s crop production as possible exported into world markets.

ADM has about 650 employees in Ukraine, while Bunge has about 1,000 workers, two oilseed processing facilities, a port, several grain elevators and an office in Kyiv. Bunge restarted certain commercial and operational activities in Ukraine in late March, mainly exporting grain via rail and truck, though only limited amounts, said Mr. Heckman.

Higher commodity prices and rising global food costs aren’t likely to derail growing consumer demand coming out of the Covid-19 pandemic, ADM executives said. Sales for alternative meats and dairy products that ADM produces are expected to increase 14% annually, the company said.

“Pent-up demand remained solid, even in the face of higher prices,” said Mr. Luciano. “There has also been salary inflation and wages inflation that has put money in the pockets of customers.”

Some analysts have cautioned that a recession in the U.S. or Europe caused by higher inflation could dampen demand over time.

“Rapid inflation across the world could cause demand destruction in certain industries, and since agribusinesses serve a wide array of customers and industries, including food, feed, fuel, and industrial companies, a recession could significantly impact financial results,” said Arun Sundaram, a senior equity analyst at CFRA Research.

Write to Patrick Thomas at [email protected]