Why Did ADM’s Agricultural Services Segment Suffer in 1Q16?

As we mentioned in the previous part, Archer Daniels Midland (ADM) operates through its four segments—Agricultural Services, Corn Processing, Oilseeds Processing, WILD Flavors and Specialty Ingredients, and Others. The Agricultural Services segment’s operating profit took a toll in the first quarter.

It fell by $118 million from the quarter last year to $75 million. It suffered due to lower US export volumes, significantly lower margins, and unfavorable merchandising positions from the Global Trade Desk. These factors caused a $83 million decline in merchandising and handling earnings.

Low US exports and high water conditions resulted in lower barge volumes and higher operating costs. Ultimately, this caused a $28 million fall in transportation results. Lower grain and feed margins reduced the milling results by $7 million.

This segment’s operating profit fell $231 million from a profit of $469 million last year. Lower global margins due to increased Argentine soymeal exports and considerably reduced US meal exports caused the global soybean crush and origination results to fall. Lower softseed crush volumes and weaker Brazilian commercialization impacted the segment’s results.

The Corn Processing segment’s operating profit rose from $127 million to $129 million. An improved cost environment, driven by strong capacity utilization, led to good sweetener and starch results. Bioproducts’ results fell from $42 million to a loss of $12 million because of challenging conditions in the global lysine market.

Archer Daniels Midland’s peers in the industry include McCormick & Company (MKC), Flowers Foods (FLO), and WhiteWave Foods (WWAV). They saw operating margins of 12.5%, 6.0%, and 8.9%, respectively, in their last reported quarters. The Vanguard S&P Mid-Cap 400 Value ETF (IVOV) invests 0.70% of its portfolio in Flowers Foods. The Consumer Staples Select Sector SPDR Fund (XLP) invests 1.3% in Archer Daniels Midland.