One of the world’s largest agricultural trading companies, Archer Daniels Midland Co. (NYSE: ADM), doubled its net profit in the second quarter and beat analysts’ expectations, partly because of the U.S.–China trade war.
ADM is among many S&P 500 companies that have weathered growing trade tensions to report strong results in the second quarter of 2018.
The Chicago-based company, a dominant player in the global grain trading and processing market, is among the companies that have strongly opposed President Donald Trump’s tariffs.
“The short crops in South America, as well as increased purchases from that region by China in anticipation of tariffs, offered motivation for other buyers to come to the United States,” ADM Chief Financial Officer Ray Young said during the call. “The result was significantly higher volumes and margins for corn, wheat and soybean exports.”
“I sort of think this tariff is good for you,” Morgan Stanley analyst Vincent Andrews told ADM’s executives during the earnings call. According to Andrews, the volatility from Chinese soybean tariffs and supply disruptions in South America have worked in ADM’s favor.
In early July, China implemented a 25 percent import tax on several commodities from the United States including soybeans, in reaction to tariffs imposed by the Trump administration on Chinese goods.
As a result, soybean prices have plummeted, hurting U.S. farmers. Since the beginning of trade disputes in early April, soybean prices in Chicago have fallen 16 percent, Andrews wrote in a report. However, he thinks the prices will recover as China is still dependent on U.S. soybeans in the medium term.
“Chicago prices fell as Chinese consumers shifted purchases to South America in advance of the import tariff increase,” he said. “But Brazil and Argentina are unable to supply all of China’s needs, especially after both a drought that led to a 40 percent year-on-year fall in Argentine production and freight issues in Brazil.”
Cargill’s Profit Doubled
ADM’s biggest rival, Cargill Inc., also has benefited from trade tensions.Effects of Tariffs on S&P 500
In recent quarters, tariffs have become a more frequent topic of discussion by company executives on earnings calls. Given the implications of tariffs for profits, companies in the S&P 500 feel the urge to comment on the ongoing trade war.As of July 25, “43 of the 70 companies (61 percent) that have discussed tariffs on their earnings calls saw little to no impact on their earnings in the second quarter or anticipated little to no effect in future quarters from tariffs,” stated a FactSet report.
Out of 70 companies, only 19 said the tariffs had at least a “modest” negative impact on company’s earnings or would have a potential negative impact in future quarters, wrote the same report.
Companies in the industrial sector commented on tariffs more than those of other sectors. Honeywell International Inc. and 3M Co. were among companies that noted limited exposure to rising tariffs.
“Based on the tariffs enacted to-date and our mitigation actions across the portfolio, we anticipate a minimal impact to our overall business results in 2018,” Greg Lewis, CFO of Honeywell, said on a July 20 earnings call.
Nick Gangestad, CFO of 3M, said on a July 24 conference call that the steel and aluminum tariffs have “a fairly immaterial impact on us.”
“We estimate that to be approximately $10 million, or a penny of share, on an annualized basis,” said Gangestad.
Meanwhile, companies including Union Pacific Corp., Stanley Black & Decker Inc., and United Technologies Corp. raised concerns because of tariffs.
“As we look ahead at the second half of 2018, our agricultural products group will continue to face challenges in the export grain market from high global supplies, foreign tariffs, and a low protein wheat crop,” Elizabeth Whited, chief marketing officer of Union Pacific, said during an earnings call on July 19.
If the tariff retaliation escalates, some companies may have to revise their guidance for future earnings. Don Allan, CFO of Stanley Black & Decker, said on July 20 that an additional $200 billion in tariffs on Chinese goods create uncertainty for his company’s future earnings.
“We have not included the impact of these tariffs in our guidance, due to the uncertainty around implementation, timing, and the product categories that will ultimately be included,” he said.