Despite contending with drought, bird flu and flooding in the last year, agribusiness giant Cargill is seen weathering the storm thanks to trends in commodity prices and the company's sheer breadth. (Tweet This)
Cargill's outlook for its recently ended fiscal year is positive, and the agricultural giant is seen generating strong margins from its beef operations and upside in its grain processing, say people who follow the closely held company.
"Backstopping everything is the commodity pricing environment for key crops—soy and corn in particular," said C, an analyst at Fitch Ratings in Chicago. "You see in this year's North American planting that there's more of a shift to soy from corn just because the fact that soy you're getting a better pricing, and Cargill is big in both."
Cargill, one of America's largest, privately held companies, both buys and sells the two crop markets. Corn is down more than 25 percent in the last 12 months, while soy is more than 21 percent lower. The large corn crops have reduced prices but also led to greater volume in the market, and the company has improved its processing margins as it utilizes more of its capacity. On the trading side, however, the lower prices and lack of volatility in corn prices haven't been as positive for the company.
Cargill is in everything from meat and egg production to global commodities trading. The Minneapolis-based company ended its fiscal year May 31 and is expected to report fiscal fourth-quarter and full-year results on August 6.
It's been a year of challenges. In March, one of Cargill's contract turkey farms in Missouri was known as highly pathogenic avian influenza.
"Cargill was minimally impacted on the turkey side in March, and (there have been) no other infected flocks since then," said Cargill spokesman Mike Martin. "Cargill, like other turkey producers, immediately increased biosecurity measures at its turkey operations and adopted stricter sanitation procedures."
The bird flu outbreak has been confirmed in at least 21 states and also has affected other leading poultry companies, including Tyson Foods and Hormel Foods, among others. Besides turkey production, Cargill supplies eggs to fast-food chains such as McDonald's as well as food processors, though Cargill doesn't have a broiler chicken business like many others.
Bird flu has led to a jump in egg prices at the supermarket, but Cargill's spokesman said the avian influenza has "subsided some as weather warms up." Hormel also recently told analysts at its Investor Day conference that the outbreak has slowed in key states, particularly Minnesota and Wisconsin.
Meanwhile, Cargill has a significant presence in the beef market and owns feed lots and cattle processing plants in areas affected by severe drought in recent years, including California, the Great Plains and Texas. The company's processing plant in Fresno, California, has its own water supply from wells, but Cargill's spokesman said the conditions given the continued drought mean "that's a tough business for ag in general."
The company's Fresno plant is the largest beef processing facility in the Golden State and has a daily operating capacity to process about 1,700 head of cattle a day, according to Steve Kay, editor and publisher of California-based Cattle Buyers Weekly.
"It's inevitable that both the beef cow herd in California and the dairy herd in the state will continue to decline, because feed costs will continue to be under pressure because of the drought," said Kay.
Cargill has larger beef facilities in Texas, Kansas and Nebraska—and analysts say those operations have a strong outlook, given continued high beef prices, reduced feed costs, and a series of storms starting last month that have eased the five-year drought.
That said, the storms led to flooding in parts of Texas, and now there's a fear that fungal problems in the soils could threaten planted crops that went underwater, particularly corn.
Elsewhere, flooding on the Illinois River impacted grain shipping last week, according to Reuters. Companies such as Cargill and Archer Daniels Midland ship corn and soy along the river. The situation prompted the CME Group to declare force majeure Wednesday for all the affected corn and soybean shipping stations, which serve as delivery points for crops traded on CME's Chicago Board of Trade.