Low grain prices and big harvests to help drive agribusiness profits

Low prices, hefty reserves and promising US harvests will drive profits for large agribusinesses this year and next, Fitch Ratings says.

Low prices for corn, soybeans and wheat combined with abundant supply and a promising outlook for US harvests will drive profits for large agribusiness players this year and next, according to Fitch Ratings.

Global stocks of soybeans and wheat are expected to increase in 2015 and 2016, while corn stocks are expected to increase this year before declining next year, Fitch said in its October 2015 Agribusiness Dashboard, citing US Department of Agriculture (USDA) data. The ratings agency expects that supply stemming from large crops will keep commodity prices low into the coming year, while giving large agricultural groups the scope to process and sell more goods.

“Fitch expects increased capacity utilisation to drive solid operational performance across the large agribusiness companies, especially as the large US harvests come to market in the second half of the year,” it said in the research note.

The outlook spells good news for the large agribusinesses which have used the period of lower production and reduced draw on working capital to invest in higher-value products. Fitch highlighted agricultural processor ADM’s efforts to build a natural and organic food ingredients business through its purchase of Wild Flavors last year and its more recent deal for Eatem Foods.

Other large groups have been expanding or refocusing, including Bunge which recently agreed to buy Brazilian wheat producer Moinho Pacifico for an undisclosed sum.

However, the collapse in commodity prices has been tougher on farmers. While the prospect of better harvests is welcome, farm sector profitability is forecast to decline, according to USDA data released in August.

Net farm income is forecast to be $58.3 billion in 2015, down 36 percent from 2014’s estimate of $91.1 billion, and the lowest level since 2006. Despite the slump, US Secretary of Agriculture Tom Vilsack described the forecast as “heartening” in the context of the record high of $123.7 billion achieved two years earlier.

“[The] projections provide a snapshot of a rural America that continues to remain stable and resilient,” he said at the time.