Soy Hedging Hits Commodity Giant Louis Dreyfus’ Profit

(Reuters) – Louis Dreyfus Company, one of the world’s largest agricultural commodity traders, said adjustments to its hedging policy for soybeans contributed to a steep fall in first-half profits, but would benefit its full-year results.

Louis Dreyfus said group net profit, including discontinued operations, had fallen to $100 million from $160 million. Excluding divested assets, notably its profitable metal trading business, net income dropped to $67 million from $134 million.

The lower earnings come at a sensitive time for the 167-year-old firm, which has just undergone a management shakeup and whose controlling shareholder, Margarita Louis-Dreyfus, needs to find $2 billion to support debt-laden Brazilian sugar unit Biosev (BSEV3.SA) and buy out family minorities.

However, echoing comments made by Chief Executive Ian McIntosh after his appointment two weeks ago, the company said it was expecting a decent year.

“The lower net income reflects a temporarily negative mark-to-market recognized by the group as of June 30, attributable to our hedging strategy of locking in soy crush margins,” Louis Dreyfus said in a statement.

“This will ensure a high return from our crushing activities for the whole of 2018.”

The adjustment to its soy margin strategy, which had a negative $65 million impact in the first half, would ensure positive crushing margins in the second half of the year and into 2019, Louis Dreyfus said.

The recent acquisition of a processing factory in northern China would also boost its oilseed activity at a time when trade tensions between the United States and China were fuelling volatility in the soybean sector, it said.

A rise in financing costs to $142 million from $94 million, partly due to higher interest rates, also weighed on first-half profits, the company said.

First-half sales stable at $18.8 billion as a 6.3 percent drop in volumes linked to its asset divestments was offset by higher prices.

Louis Dreyfus’ results statement also provided clues to how Margarita Louis-Dreyfus may finance a bailout of Biosev and the buyout of a minority stake in the group’s holding firm worth over $800 million.

The report showed that the operating firm had loaned $1 billion to its holding company, mostly related to Biosev, with that loan due to mature in 2023.

A $411 million dividend was also awarded to shareholders on the basis of 2016 and 2017 results.