Fitch: Robust Liquidity and Improving Earnings for U.S. Agribusiness Sector in 2010

Fitch Ratings says U.S. agribusiness companies' stable ratings during the recent period of weak and unpredictable earnings have been supported by strong liquidity, along with well-diversified product lines and geographic footprints. Ample liquidity and diversification are expected to support the ratings throughout 2010 as earnings improve. Moderate earnings volatility occurs periodically and is factored into ratings; however, circumstances such as the collapse of fertilizer pricing, lack of profitability in ethanol for part of the year and losses in financial-related businesses led to earnings pressure during 2009.

To put the situation in context, a period of historically high earnings preceded the global demand slowdown. While Fitch had anticipated a recession-driven earnings slowdown in 2009, the extent of the lower earnings generation in certain sub-segments of the industry was worse than expectations. The ratings factor in earnings improvement in 2010; however ratings, particularly for Bunge Limited (Bunge), which has the weakest and most volatile credit metrics in the sector, are at risk until the earnings recovery gains sustainable traction.

"As a whole, the outlook for the agribusiness sector next year should be stable, driven by a rebound from recent earnings weakness. In the near term, agribusiness companies are expected to benefit from their ability to store, transport and process the large U.S. crops from this year's harvest," said Judi Rossetti, Director at Fitch. "U.S. harvests are approaching completion, but there is still uncertainty regarding the estimates because the harvest period has been delayed, increasing the likelihood of potential crop damage."

Last week the U.S. Department of Agriculture (USDA) slightly lowered corn production on lower yields, but raised soybean production on an increase in yield. The price ranges for both corn and soybeans were raised. South America is currently planting large crops, to be harvested in the spring of 2010. However, it is too early to tell what events may transpire that could impact the South American crops or spring 2010 North American crop plantings. There always remains a risk for the agribusiness industry that severe weather problems could shrink supplies and lead to price spikes.

Crop Outlooks - Large Crops Anticipated, Lending Support For Earnings Improvement:

The USDA expects farm prices for wheat, corn and soybeans to remain above their long-term averages. However, they are likely to be lower than the highly elevated prices in 2007/08 and 2008/09 when prices were driven by strong demand, rising oil prices, speculation, and adverse weather conditions. Large North American crops this year have brought prices down closer to their long-term averages, although they are still elevated in comparison to historical stocks/use ratios. As of November 2009, the USDA's range for wheat prices for the 2009/2010 crop year was $4.65-$5.05/bushel, corn was $3.25-$3.85 and soybeans were $8.20-$10.20. Excessive precipitation has led to a very late harvest period and put upward pressure on crop prices. The National Agricultural Statistics Board (NASS) has reported that the harvest, particularly for corn, is substantially behind the five-year average. Unharvested crops have high moisture levels and either need to be dried in the field or mechanically dried. However, a period of mild weather has allowed farmers to get back in the fields, which could alleviate fears of potential crop deterioration.

Last week the USDA forecast U.S. corn production at 12.9 billion bushels, 7% above last year and only fractionally below the 2007 record of 13 billion bushels. The corn crop is forecast to be the second largest on record. The yield of 162.9 bushels per acre has come down from last month's estimate, and further yield degradation may occur. Nonetheless, tremendous yield improvements have occurred in recent years, allowing ample supplies for food, feed and fuel. Ethanol is expected to use 4.2 billion bushels of corn, or approximately one-third of the U.S. crop in 2009/10. Last year, ethanol production used 3.7 billion bushels, or 31% of the crop. Although the percentage of the corn crop used for ethanol continues to grow, the year-over-year growth has slowed. Feed and residual continues to be the predominant use of the corn crop at 5.4 billion bushels in 2009/10, or 42% of the crop. Soybean production, at 3.3 billion bushels, is forecast to be record high, up 12% from last year. Despite the large crop and approximate doubling of soybean ending stocks, the stocks-to-use ratio remains low, supporting continued high prices. U.S. wheat production is forecast at 2.2 billion bushels, down 11% from the prior year. U.S. wheat stocks are forecast at 885 million bushels, a 10-year high. With ample stocks, wheat prices have returned much closer to their long-term averages than they had been during the past two crop years. However, based on historical stocks-to-use ratios, wheat prices should still trend lower.

High fertilizer prices and reduced credit curtailed demand and led to a steep drop in fertilizer earnings at Bunge and Cargill, Inc.'s consolidated results of The Mosaic Company (Mosaic). In comparison, Archer Daniels Midland (ADM) has limited exposure to fertilizer. Fertilizer prices plummeted when demand dried up. Although farmers can cut back on fertilizer application for a year or possibly two, this is not a sustainable strategy because soil nutrients will become depleted. While fertilizer demand should revive and ultimately return to normal levels, the timing is uncertain. A short-lived improvement in international fertilizer prices during Bunge's third quarter fizzled and failed to pull the fertilizer segment out of a slump. In South America, soybean plantings have been favored this fall over more fertilizer-intensive corn and cotton due to lower input costs. This has contributed to the delayed recovery of the Brazilian fertilizer market. Bunge's fertilizer business should improve in 2010 as it replenishes inventories at market cost. However, for at least the next quarter, possibly longer, it will still have depressed results from high-cost inventory coupled with a weak pricing environment. South American plantings are proceeding well. The USDA currently projects Brazilian soybean production at 63 million metric tons (mmt) in 2009/10, up over 10% from 57mmt in 2008/09. Argentina's soybean crop is expected to be up more than 65% to 53 mmt from the severely drought reduced crop of 32 mmt the previous year. Brazil and Argentina together are expected to produce nearly half of global soybean production and contribute to the restoration of global soybean stocks.

Industry Outlook - Demand Pick-Up Anticipated, But Risks Remain:

While agribusiness faced some severe reductions in profitability in recent quarters, longer-term positive fundamentals remain due to population growth and improving diets in developing countries. Brazil has significant support from its government to drive long-term growth in strategic sectors such as agribusiness. However, short-term volatility will occur, and is factored into ratings. While the argument still exists that diversification tempers results, the extent of losses in fertilizer, ethanol and financial sub-segments dragged down overall earnings for major agribusiness processors in 2009. Excluding Corn Products, credit metrics have weakened considerably as very strong earnings periods have rolled off the latest 12 months financial results. Continued earnings weakness will put pressure on the ratings, particularly for Bunge, whose leverage has risen significantly to give the company credit metrics that are currently not investment grade. Fitch will monitor the progress of earnings improvement in the near term.

In soybean processing, the USDA expects global protein meal use (domestic plus exports) to rebound to positive territory versus a decline for the last crop year. Near-term soybean crush margins should be strong as U.S. exports continue to benefit from the drought-reduced soybean crop in Argentina this year. Margins are expected to remain solid at least until the robust expected South American crops are harvested in spring 2010, which will give the U.S. greater export competition and larger global stocks. There was tight soybean availability until the North American crop harvest began. The large soybean crops should provide sufficient product availability, barring unforeseen crop shortfalls. China continues to be the largest global importer of soybeans and is expected to import 40.5 million mmt in the crop year 2009/10, or approximately half of global soybean imports.

On the corn processing side, Mexican demand and ethanol blending should lead to a fairly balanced supply/demand situation for corn processing. Increased high fructose corn syrup (HFCS) volumes to Mexico, driven by high sugar prices, have been positive for the industry. Ample corn supplies are expected to meet all corn processing needs in 2010. Also, normalization of the relationship between corn and co-products in 2010 should be positive because it had led to high net corn costs in 2009. However, degradation in starch yields with the delayed harvest could raise corn costs. There is still weakness in the industrial starch area and demand may be slow to return. The major corn processors are currently in the midst of negotiating sweetener contracts for 2010. Companies are hesitant to lock in pricing for 2010 until the North American harvest is further along, because corn prices could continue to rise.

In early November, ADM reported that ethanol spot margins turned positive for the quarter ended Sept. 30, and remain positive. Even with ethanol prices close to unleaded gasoline prices, the $0.45 per gallon blender credit encourages discretionary blending above mandated levels. Ethanol margins have strengthened along with oil prices; however, oil prices seem to be trading more on higher inflation expectations than on fundamentals. If viewed on a fundamental basis alone, Fitch believes oil prices should be lower than the $75 to $80 per barrel level, which would be negative for ethanol margins and discretionary blending. ADM recently began production at its ethanol plant in Columbus, Nebraska, and its Cedar Rapids facility is nearing completion with an estimated start-up date in 2010. Together the two facilities will bring 550 million gallons of capacity on line. The Energy Independence and Security Act of 2007 (Energy Act) mandates conventional biofuels production to rise 14% to 12 billion gallons in 2010, from 10.5 billion gallons in 2009. In 2008, nine billion gallons of ethanol were produced in the U.S., more than triple the 2.8 billion gallons produced only five years earlier in 2003. According to the Renewable Fuels Association, the ethanol industry currently has 11.9 billion gallons of capacity at operating refineries. Another 1.4 billion gallons are under construction or expansion, for a total of 13.3 billion gallons. This is approaching 10% of gasoline consumption and is not far from the 15 billion gallons mandated for conventional biofuels by the Energy Act by 2015. However, it is greater than the 12 billion gallons mandated in 2010, so there may be near-term overcapacity. There is also more than 1 billion gallons of ethanol capacity that is idle, but if it is re-started it could also contribute to overcapacity. The ethanol industry is awaiting comment by Dec. 1, 2009 on its application seeking a waiver for ethanol-gasoline blends of up to 15% (E15). Blends above 10% would be positive for the ethanol supply/demand balance and help alleviate concerns about potential overcapacity.

Transportation, storage and trading businesses should benefit from the large U.S. crops being harvested. However, these businesses thrive on volatility and crop dislocations, so if volatility is lower in 2010, there may not be as many opportunities to capture value and enhance earnings. Due to high moisture levels in the crops being harvested, the agribusiness companies' drying operations should benefit. There are very large wheat supplies with steady demand. However, with a lack of crop dislocations, significant profit opportunities may be limited. Cocoa is underperforming due to record raw material prices and weaker demand, which has hurt margins.

Credit Outlook - Adequate Liquidity, but High Capital Expenditures Particularly Coupled With Weak Earnings Are a Concern:

The maintenance of significant liquidity is an important rating factor for agribusiness companies because adverse weather conditions, periodic disease outbreaks and changes in government agricultural policies can have unforeseen negative effects on earnings and cash flow. Total availability on committed credit facilities was approximately $12 billion for the major agribusiness companies as of each of their latest quarter ends. Little to no commercial paper (CP) was outstanding, although CP is likely to increase as the North American harvest comes in, particularly if commodity prices move higher. Cash and marketable securities also enhance liquidity. Available cash excluding marketable securities from the same time period was more than $5 billion for the sector, excluding Cargill's consolidated cash at Mosaic and Bunge's cash at its Fosfertil subsidiary. Readily Marketable Inventories (RMI), which are highly liquid and generally hedged, provide an important source of liquidity. In addition to evaluating traditional credit measures, Fitch's analysis of agribusiness companies takes into consideration leverage ratios that exclude debt used to finance RMI. Working capital fluctuates with commodity prices levels, with heavy working capital usage when prices rise, and decreases when prices fall.

Cargill's liquidity is enhanced by its ability to monetize its 64% investment in The Mosaic Company, which is currently valued at approximately $14 billion. While Cargill may increase or decrease this investment, it has not indicated a plan to do so. As a private company Cargill does not have access to equity capital except via its investment in Mosaic. Last month Mosaic announced a special dividend totaling approximately $580 million, payable in December 2009. While Mosaic's earnings declined substantially from the year-ago level, Cargill's financial businesses, which suffered during the credit crisis, returned to profitability in its August 2009 quarter. Bunge enhanced its liquidity with $760 million of net proceeds received from its 12 million share equity issuance in August 2009. A portion of the proceeds were used to reduce short-term debt; however, a portion may also be used for acquisitions. ADM's $1.75 billion equity units are an effective source of equity at a future date. The units, which were issued in 2008, will be assigned 50% equity credit beginning June 1, 2010. The equity units contain a forward purchase contract for the holder to purchase ADM stock no later than June 1, 2011.

Agribusiness companies are undergoing a period of expansion, where they have extensive opportunities to grow their businesses through capital expenditures, acquisitions and joint ventures. Most of the agribusiness companies have greatly increased capital expenditures over the past several years. ADM's capital expenditures reached $1.9 billion in fiscal 2009. It spent nearly $5 billion during fiscal 2007 through 2009 as it worked toward completion of seven major projects. During fiscal 2008 and 2009, ADM spent approximately all of its funds from operations (FFO) on capital expenditures. Bunge's capital expenditures have also accelerated, totaling $2 billion in 2006 through 2008. Bunge's capital expenditure guidance for 2009 is $950 million to $1.05 billion. With so many opportunities for expansion, share repurchases have been a relatively low priority for the sector, and are expected to remain a low priority.

Recent acquisitions and joint ventures (JVs) in agribusiness have been in key growth areas such as sugar-based ethanol processing in Brazil and expansion of processing in Eastern Europe. A similar acquisition/JV strategy, primarily focused on South America, is likely to continue in 2010. In September 2009, Cargill announced an agreement to sell its Brazilian poultry and pork processing business to Marfrig for approximately $700 million in cash plus the assumption of nearly $200 million of debt. While Bunge's potential acquisition of Corn Products fell apart in 2008 along with the stock market decline, the rationale still makes sense and talks may heat up in the future. Their product portfolios and geographic diversification remain highly complementary.

Upcoming long-term debt maturities for the U.S. agribusiness sector are very light in 2010 and 2011. The companies have plenty of flexibility as to when they would want to tap the debt markets to refinance maturities further out. Bunge has a couple of near-term credit facility expirations, including a $600 million facility expiring in January 2010 and a $645 million 364-day facility expiring in June 2010.

The following is a list of Fitch-rated issuers and their current Issuer Default Ratings (IDRs):

-- Archer Daniels Midland Company ('A'; Outlook Stable);
-- Bunge Limited ('BBB'; Outlook Stable);
-- Cargill, Incorporated ('A'; Outlook Stable);
-- Corn Products International, Inc. ('BBB'; Outlook Stable).

Additional information is available at 'www.fitchratings.com'.

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