Global Policy Forum

By David Kesmodel, Lauren Etter, Aaron O. Patrick

At a time when parts of the world are facing food riots, Big Agriculture is dealing with a different sort of challenge: huge profits.

On Tuesday, grain-processing giant Archer-Daniels-Midland Co. said its fiscal third-quarter profits jumped 42%, including a sevenfold increase in net income in its unit that stores, transports and trades grains such as wheat and corn, as well as soybeans. Monsanto Co., maker of seeds and herbicides, Deere & Co., which builds tractors, combines and sprayers, and fertilizer maker Mosaic Co. all reported similar windfalls in their latest quarters. The robust profits are emerging against the backdrop of a food crisis some experts say is the worst in three decades. The secretary-general of the United Nations, Ban Ki-moon, on Tuesday called for the creation of a high-level global task force to deal with the cascading impact of high grain prices and oil prices. He said that countries must do more to avert "social unrest on an unprecedented scale" and should contribute money to make up for the $755 million shortfall in funding for the World Food Program, which feeds the world's hungry.

President Bush told reporters on Tuesday that he's "deeply concerned about people who don't have food abroad," and all three presidential contenders have recently cited high food and energy prices as causes for concern. Arizona Sen. John McCain, the presumptive Republican candidate, has said he favors scrapping the 51-cent per gallon ethanol tax credit and a 54-cent per gallon tariff imposed on most imported ethanol, ideas abhorred by farmers and many politicians. The crisis stems from a combination of heightened demand for food from fast-growing developing countries like China and India, low grain stockpiles caused by bad weather, rising fuel prices and the increasing amount of land used to grow crops for ethanol and other biofuels rather than food.

Food companies say they're not to blame for the soaring prices and are committed to working toward a solution. They say bigger profits can be used to develop new technologies that will ultimately help farmers improve productivity. Monsanto says it's designing improved genetically modified seeds that can squeeze even more yield from each acre of planted grain, while ADM says it's investing in tools that can mitigate supply disruptions. "Maybe the question should be not, 'Are you making money?' but, 'What are you doing with the money that you make?'" says Victoria Podesta, vice president of corporate communications at ADM.

Some observers think financial speculation has helped push up prices as wealthy investors in the past year have flooded the agriculture commodity markets in search of better returns. Total index-fund investment in corn, soybeans, wheat, cattle and hogs has increased to more than $47 billion, up from about $10 billion in 2006, according to AgResource Co., a Chicago-based agriculture research firm. The Commodity Futures Trading Commission last week held a hearing in Washington to examine the role index funds and other speculators are playing in driving up grain prices.

The Food Chain

Not all food-related companies are benefiting. Companies that work most directly with farmers are gaining the most from higher food and grain prices, while companies further along in the food chain, like meat producers Tyson Foods Inc. and Pilgrim's Pride Corp., are smarting because they've had trouble passing along the increases to consumers. Tyson, Springdale, Ark., on Monday posted a $5 million loss for its latest quarter, hurt by higher prices for grains to feed its chickens. Earlier this month, Pilgrim's Pride, Pittsburg, Texas, said it plans to cut weekly chicken processing by 5% to counteract higher grain costs. "Anybody who is early in the chain is going to benefit," says Ann Gilpin, an analyst with Morningstar. "I don't think this is going to last forever, but there are some significant tailwinds to cause this to persist for a couple of years."

Flush with more revenue than they have enjoyed in years, and eager to take advantage of the highest grain prices they've seen in years, farmers are paying more money for seeds, fertilizer and farm gear. That has translated into huge revenue jumps and handsome profit increases for the companies that sell these products. Growing global demand for food has been a boon to companies that buy, process and transport grains. Monsanto saw its profit in the latest quarter more than double. Rivals DuPont Co. and Syngenta AG recently raised their profit estimates. Deere posted a 55% rise in earnings in its latest quarter. Mosaic's third-quarter net income jumped about 12-fold. ADM's major rivals are notching big profit gains, too. Closely held Cargill Inc.'s profits jumped 86% to $1 billion in the latest quarter. Bunge Ltd.'s earnings rose about 20-fold to $289 million. Bunge sells fertilizer in addition to processing and storing grains.

Ms. Gilpin, the Morningstar analyst, said some companies are enjoying steep profit margins on certain food ingredients in this "brave new world of commodity prices" in part because of perceived shortages globally for basic foodstuffs like soybean oil. In a telephone conversation with Bunge officials in February, Ms. Gilpin says she was told that "food companies are so panicked about supply," Bunge can charge what it wants for soybean oil.A Bunge spokesman says "the amount Bunge pays farmers for crops and the amount we charge when selling products to customers are related to prevailing market prices, which are set daily in futures and other markets." He says these prices have gone up "as the world has entered a period of tighter supply and demand."

Food vs. Fuel

Archer-Daniels-Midland's grain merchandising and handling business was its star performer in the quarter ended March 31. Operating profit rose to $366 million from $46 million a year earlier. ADM's bread-and-butter business is procuring grain from farmers and then selling it up the food chain, either by processing it into one of myriad products such as high-fructose corn syrup and ethanol, or packing it on barges and ships to be sent overseas.

Patricia Woertz, the company's CEO, said she empathizes with consumers who are paying more for food, but she directed the blame at gasoline prices that force up food transportation costs, rather than the use of crops for biofuels, saying that the food-versus-fuel debate is "misguided." On a conference call with analysts, Ms. Woertz responded to suggestions that U.S. policies encouraging the production of ethanol should be reconsidered. "Retreat from biofuels is wrong, it's foolish," she said. ADM is one of the nation's largest ethanol producers. ADM's stock fell 3.9% Tuesday to $45.58 in 4 p.m. composite trading on the New York Stock Exchange, suggesting that investors may be worried that ethanol subsidies are under fire. "Most investors we speak to feel uneasy about allocating their capital to a business model that relies on government subsidies, however small," Credit Suisse analyst Robert Moskow said in a note to investors.

Cargill's chairman and CEO, Greg Page, said earlier this month that "the dimensions of change in global agriculture are striking" and that the Minneapolis company is doing "an exceptional job measuring and assessing price risk." He said world grain stocks are at their lowest level in 35 years.Rising food-ingredient costs have hurt some U.S. packaged-food companies. Kraft Foods Inc.'s profit dropped by 6% in the fourth-quarter of last year thanks to high dairy costs that hurt its cheese business. (Kraft reports its first-quarter 2008 earnings Wednesday). Other food companies have fared better by cutting costs, hedging their commodity purchases, passing along price increases to consumers and boosting marketing. General Mills Inc. recently raised its 2008 profit forecast and in March, the Minneapolis-based cereal maker reported fiscal third-quarter profit rose by 60% from the previous year's quarter.

Passing On the Costs Consumer-products giant Unilever has been particularly hard hit by increases in the price of vegetable oils, such as palm oil, which it uses in margarine and soap. It is passing the costs on to consumers. "We have moved decisively to increase prices across many categories and markets," Unilever Chief Financial Officer Jim Lawrence said on an earnings call with analysts in February. In Europe, Nestlé SA and Groupe Danone SA, two of the world's largest food manufacturers, have passed on higher prices to consumers with apparently little or no impact on profits. Nestlé increased its average wholesale price for all its products 5.3%.

Like many European companies, Nestlé doesn't release first-quarter profits. But sales rose 6% to 25.7 billion Swiss francs ($24.84 billion) in the quarter from the year-earlier period. Stripping out the effect of currency changes, acquisitions and divestments, sales were up 9.8% -- a big jump for such a large company. "This performance is unprecedented," Nestlé's head of investor relations, Roddy Child-Villiers, said on a conference call with analysts April 21. Nestlé says it will increase profit margins this year, a sign that it has been able to pass on higher costs to consumers. Nestlé's products begin at relatively cheap levels, with an average price per product around $2. Many consumers may not have noticed they are getting more expensive. Price rises reduced the amount of milk, yogurt and other fresh dairy products sold by Danone in the first quarter, but the company says revenue still grew. The Paris-based company says it produces one-fifth of the world's fresh dairy products. Higher feed costs have made it more expensive to keep cows, driving up wholesale milk prices.

In the U.S., consumers are being whipsawed by the weak economy as they grapple with higher fuel and food costs. With food inflation running at about 5% in the U.S., the highest level since 1990, some lawmakers are considering action. Sen. Charles Schumer (D., N.Y.) has scheduled a hearing in Congress on Thursday to examine how high food prices are affecting U.S. families and explore possible solutions. Some states are growing concerned that ethanol production is pushing up food prices. Missouri lawmakers are weighing whether to roll back a law that encourages ethanol production, while Texas Gov. Rick Perry has asked for a partial waiver of a federal mandate that requires the nation's oil companies to blend 15 billion gallons of corn-based biofuels into the nation's gasoline supply by 2015. That's up from around nine billion gallons today. Mr. Perry's proposal is being cheered by Tyson and Pilgrim's Pride.