Key Points

  • ADM lowered its full-year earnings per share guidance on Tuesday, and executives said on the Q3 conference call that the company is on track to achieve its goal of cutting costs by $200 million to $300 million this year, while awaiting clarity on U.S. biofuel policy and a U.S.-China trade agreement.
  • CFO Monish Patolawala noted that the "evolving global trade landscape" and delays in U.S. biofuel policy have dampened demand for the company's agribusiness and oilseed operations, a key segment that includes oils from crushed soybeans and rapeseed. The segment's operating profit fell 21% year-over-year to $379 million in the quarter.
  • CEO Juan Luciano said on the call: "The two events that will drive commodity prices will be clarity on the U.S.-China trade agreement and regulatory clarity on biofuel policy. Until then, the market will remain in a tight 'hand-to-mouth' balance for some time."

In-Depth Analysis

Just days before ADM's earnings release, U.S. President Donald Trump and Chinese President Xi Jinping announced a trade and economic agreement that includes provisions to open China's market to U.S. soybeans and other agricultural products. However, company executives remain cautious about the specific implementation details of the agreement.

This guidance cut marks ADM's third of the year, reflecting ongoing earnings pressure in the grain industry after years of low crop prices and weak buyer demand. According to The Wall Street Journal, the company and its industry peers are facing this challenge.

Seth Goldstein, senior equity analyst at Morningstar Research, said Tuesday that the guidance cut was mainly due to lower soybean crushing margins, which may be related to ADM's more concentrated North American footprint compared with peers. Goldstein wrote in an email: "In the near term, ADM is slightly impacted by shifts in global grain trade flows, as China is buying more soybeans from South America rather than the U.S. But I expect the long-term impact to be limited as trade flows adjust. Total global soybean demand won't change; it's just that U.S. exports will take some time to adapt to China's shift toward South American purchases."

Goldstein believes that ultimately more U.S. soybeans will flow to other markets such as Europe, Southeast Asia, and the Middle East. Meanwhile, although China has already imported large volumes of crops from Brazil earlier this year, the new agreement may make China more willing to buy U.S. soybeans early next year. "In any case, as trade flows shift, I expect soybean demand to normalize by 2026."

The company on Tuesday lowered its full-year earnings per share guidance to a range of $3.25 to $3.50, from approximately $4.00 previously.

Luciano said in the earnings release: "In the third quarter, we made solid progress in areas within our control, successfully navigating a highly dynamic global environment. We advanced portfolio optimization initiatives, achieved cost savings through targeted streamlining, operated plants efficiently, and generated strong cash flow."

On the call, he expressed cautious optimism about the trade agreement between Trump and China, noting that details still need to be confirmed. While "on the surface" the agreement is favorable to ADM and the grain industry as a whole, Luciano said he has not yet seen a joint document containing specific terms.

Luciano said: "Whether the 12 million tons of soybeans are completed within the calendar year or the marketing year, of course, makes a huge difference. Additionally, it needs to be clarified whether the quantity counted is sold or shipped... and at what price the transactions will occur." He also mentioned that farmers have been slow to book sales due to uncertainty.

Patolawala reiterated that the timing for finalizing biofuel policy remains unclear, although some analysts expect the policy to be finalized in the first quarter of next year. Patolawala said: "For now, given that we still lack clarity, our current expectation for the first quarter is essentially flat compared with the fourth quarter."

In a Morningstar report on the company published in August, Goldstein wrote that the new U.S. Renewable Fuel Standard (which requires refiners to blend more ethanol into transportation fuel) should boost demand for the company's soybean oil, as soybean oil is a key feedstock for renewable fuels.