Bunge's Profit Fall - Fertilizer & Agriculture crash boom bang! (Update 1)

According to Marketwatch, Bunge (BG) , the agribusiness firm, said third-quarter net income fell 33% to $234 million, or $1.70 a share, while sales shot up 52% to $14.8 billion. It still sees 2008 earnings between $11.60 and $11.90 per share. Bunge saw fertilizer sales fall in Brazil, where farmers were having more difficulty getting credit. Agribusiness earnings suffered as a nearly 50 percent drop in corn and soybean prices slowed farmers' sales to Bunge in both Brazil and the United States. The company also reported foreign exchange losses of $471 million, compared with a year-earlier gain of $56 million. The Brazilian real fell 17 percent against the U.S. dollar in the third quarter. I have written this problem prediction since July 29 that the real problem is not the price, but costs and the currency exchange. See the article here.

The investors have been totally irrational when bought the shares was due to too high expectation of Corn Product Company (CPO) acquisition. As result, the prices went up from the April low to the June high. According to its negative cash flow, there were just few peoples who asked Bunge's capabilities to buy CPO. If the company had cash, it was not going to use its shares as currency to buy CPO. ( Bunge used its shares as currency to buy Corn Products (CPO). Each share of Corn Products common stock will be exchanged for 0.4207 of a Bunge common share, and if this average closing price is equal to or less than $108.90, each share of Corn Products common stock will be exchanged for 0.5142 of a Bunge common share.)

The company has a huge amount of debt tied to its fails when gave fertilizers loan to Mato Grosso’s farmers in Brazil.

Here is what I wrote on July 15:

Bunge (BG)’s Negative Cash Flow and Credit Delinquencies

Bunge has given fertilizers loan to Mato Grosso’s farmers in Brazil and they obligated that the harvest of Soybean would be delivered to pay their debt. Because the farmers are paying the company in soybeans - which amounted to a bet on rising soybean prices - Bunge hedged its exposure by selling short soybean futures. That's a standard practice for commodities producers. In normal markets, the strategy works, providing Bunge with protection should the price of soybeans decline.

But with soybean futures shooting up nearly 75% at various points last year, Bunge's hedges have absorbed even more of its precious cash. (As the contracts increase in price, the company is hit with margin calls requiring it to put up more cash to keep the contract open in the hopes prices will drop later.)

That negative-$411 million in cash flow doesn't even include the unpaid debts from farmers, which Bunge has yet to take charges for. Should Bunge write down its troubled uncollectible accounts receivable by, say, $500 million, that could wipe out almost half of next year's projected earnings.

Now, the share prices have plunged by 70.6% since the June high.

Chart courtesy of StockCharts (Click to enlarge)
Related Posts :

1. The Agriculture's Bear Market
2. Forget Oil, the New Bubble Burst is Agriculture
3. Dennis Gartman Predicts Corn Ethanol Producers Bankruptcy
4. More Bearish Alert on Bunge(BG)
5. Bunge (BG)’s Negative Cash Flow and Credit Delinquencies

Sources :

Reuters: Bunge profit weighed down by forex, fertilizer, October 23, 2008 09:16 AM ET

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