UPDATE 3-Cargill profits sink as U.S. drought hits meat business

Tue Apr 9, 2013 3:08pm EDT
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* Earnings drop 42 percent from record year-ago 3rd quarter
    * Cargill notes "prolonged impact" of historic dryness
    * Company took one-time charge for idling Texas beef plant
    * Nine-month earnings still up 66 percent from prior year

    By Tom Polansek
    April 9 (Reuters) - Agribusiness company Cargill Inc
 said on Tuesday that lingering pressure from a
historic U.S. drought hurt its meat and grain operations,
knocking quarterly earnings down 42 percent.
    The worst drought in more than half a century last year
devastated the corn harvest in the United States, the world's
top grain producer, and catapulted prices for grain fed to
    Recent rains and snow have improved conditions for the next
corn crop, which is starting to be planted in the Midwest, and
grain prices have weakened.
    However, Cargill, one of the world's largest privately held
corporations, said the drought had a "prolonged impact."
    Poor harvests can snag Cargill because it is a leading crop
processor and exporter, a maker of livestock feeds and a
livestock feeder, and a producer of meats and ethanol. The
company also operates as a global commodity trader and risk
manager in world financial markets.
    "Whenever you have a short crop, it just affects your whole
system," company spokeswoman Lisa Clemens said. 
    Cargill is among four large players, known as the "ABCD"
companies, that dominate the flow of agricultural goods around
the world. Its performance is often studied for clues about the
conditions impacting rivals Archer Daniels Midland Co,
Bunge Ltd and Louis Dreyfus Corp. 
    ADM is set to issue quarterly earnings results on April 30.
    Minneapolis-based Cargill, one of the nation's largest beef
processors, has been warning since last summer that the drought
would hurt its meat operations by tightening cattle supplies and
raising production costs.
    In February, Cargill idled a beef plant in Plainview, Texas,
as the U.S. cattle herd fell to its lowest level in 61 years.
Some of the plant's 2,000 employees were laid off.
    Cargill took a one-time financial charge from the closure,
but does not expect it to have a "material adverse impact" on
2013 performance, Clemens said.
    The company reported net earnings of $445 million for the
fiscal 2013 third quarter ended Feb. 28, compared with a record
$766 million for the same quarter a year before. 
    Revenue for the third quarter edged up 1 percent to $32.2
billion, the company said in a statement. 
    Improved crop weather and a rebound in U.S. grain production
this year would likely give Cargill a boost by increasing the
amount of grain available for the company to purchase, handle
and store.
    The U.S. Department of Agriculture, in a crop report on
March 28, indicated farmers will harvest a record 14.6 billion
bushels of corn - a bumper crop that would help replenish
razor-tight supplies. 
    The USDA, in the report, also said corn supplies as of March
1 were larger than expected. 
    Prices for December corn, which represent the crop
that will be harvested next year, have since dropped by almost 6
percent at the Chicago Board of Trade.
    However, the decline in corn prices, if it persists, will
not do much to help Cargill's meat processing business because
cattle supplies will remain tight for at least two years, said
Jim Robb, director of the Livestock Marketing Information
    "They're very shrewd pencil pushers," Robb said about
Cargill. "They clearly looked at that Plainview plant and they
recognized that things are not going to change on the cattle
    Standard & Poor's analyst Chris Johnson agreed the plant
closure was a good move for Cargill.
    Clemens declined to comment on how the company will be
affected by the drop in corn prices.

    Cargill's earnings fell after rising for the first two
quarters of the fiscal year. Of its five segments, four reported
weaker performance than a year earlier - Agriculture Services,
Food Ingredients, Origination and Processing, and Risk
Management and Financial.
    The company's position as an agribusiness leader often helps
it cope with challenging conditions because it can tap markets
around the world for supplies.
    Cargill said it benefited from strong global demand for U.S.
soybeans and soybean meal during the third quarter, even as poor
weather and logistical problems hurt its ability to export soy
from Brazil.
    In the Food Ingredients segment, which includes beef
processing, pressure from tight cattle supplies was offset
somewhat by strength in operations involving cocoa, sweeteners
and other ingredients, according to the company.
    "The company is performing well on a year over year basis,"
said Carla Norfleet Taylor, a director of corporate finance for
Fitch Ratings. "That is really the key that is important for
investors and analysts to focus on given the volatility quarter
to quarter."
    Nine-month earnings totaled $1.83 billion, up 66 percent
from a year ago, according to Cargill.