Brazil soybean crop
An ever-growing Brazilian soybean crop is depressing prices in the nation.

NEW YORK — An ever-growing Brazilian soybean crop is depressing prices in the nation, resulting in low farmer selling and leading to a weak start to the year for grain processors such as Archer Daniels Midland Co. and Bunge, said analysts with Credit Suisse during a conference call on April 7.

But it’s not significant enough for analysts to lower their expectations for the two companies that are major players in agriculture. While the analysts lowered Bunge’s first-quarter results below consensus to 78c per share, they maintained the company’s fiscal year 2017 earnings per share at $6. ADM’s first-quarter estimate was maintained at 64c, but the 2017 estimate was lowered to $2.95.

Robert Moskow, Credit Suisse
Robert Moskow, analyst with Credit Suisse

“That includes a big outsized benefit in Wilmar, but weaker results in the rest of the business,” said Robert Moskow, who covers food and agribusiness processors for Credit Suisse, during the conference call.

Ahead of the earnings announcements, ADM and Bunge shares rallied April 18, suggesting a hopeful turn in investor sentiment.

Brazilian equivalent soybean prices are down 21% off summer highs, so farmers aren’t selling, he said. Prices are down because the Brazilian crop keeps getting revised higher and is now estimated at 108 million tonnes, an increase of 11.5 million tonnes from last year, according to the U.S. Department of Agriculture.

North America's impact

What’s happening in North America also impacts South America, Mr. Moskow said. The U.S.D.A.’s March 31 planting intentions for corn and soy were higher than expected, as was inventory. Soybean planting intentions of 89.5 million acres are up 7% year-over-year.

That combination is pressuring soy prices, he said, and that has led to an increase in the volume of North American soybean exports. The U.S.D.A. estimates that number at 2.025 billion bus.

“There’s a 5% increase this year, and we’re extending the time period of exports,” Mr. Moskow said. “That’s supposed to be a good thing for North American-focused exporters like ADM. But margins for exporters have contracted.”

Chart: North American soy exports are higher
The U.S.D.A. forecasts 2.025 billion bushels for 2017, up 5% year-over-year.

Soybean crush margins are ticking up a little bit vs. fourth quarter and a year ago, but are still down from the five-year average. Processors are holding back on production hoping to get the margins higher, he said.

Pressure from Argentina

Crush margins mainly are being pressured by Argentina, which dumped a large amount of soybean meal on the market, he said.

“Despite global protein expansion, that has not translated into attractive soybean meal prices yet,” Mr. Moskow said.

There were several factors that stopped analysts from lowering estimates further for ADM and Bunge. For one, Brazilian farmers will have to sell eventually, Mr. Moskow said. This may happen by the end of the second quarter, but it may need some decline in the Brazilian real or a jump in prices to motivate farmers.

Victor Saragiotto, a Credit Suisse analyst based in Brazil, said Brazilian farmers do not have enough storage to hold onto a significant portion of their crops. But farmers are reluctant to sell at current prices, and only 62% of soybean production has been sold, he said.

In addition, ADM will see a big boost in the quarter from its investment in Wilmar. Mr. Moskow estimated that impact will be $60 million higher than expected. In 2016, ADM increased its strategic ownership stake in Wilmar to 23%. Based in Singapore, Wilmar has assets in soy crushing, edible oil refining and packaging, palm plantations, palm refineries, biodiesel production, specialty fats and oleochemical fatty acids throughout Asia.

Crush margins should get better eventually, too, Mr. Moskow said. Feed wheat formulations have worked their way through and are no longer viewed as a factor.

Corn processing is still strong, and analysts are not concerned about 2018 high-fructose corn syrup (HFCS) pricing. Analysts did not change their forecast for strong margins in corn processing for ADM or Ingredion.

Corn ethanol
Ethanol prices in Brazil have come down due to the large volume of U.S. imports.

Ethanol margins are better than last year, but are still down from the long-term averages, Mr. Moskow said. U.S. exports, which are tracking at almost 1.5 billion gallons, are driving the strong margins by tightening domestic supply and improving pricing, he said.

Higher ethanol exports could have a negative impact for Bunge, he said. Ethanol prices in Brazil have come down due to the large volume of U.S. imports.

“We’ve reduced our estimate on Bunge’s Brazil sugar and bioenergy,” he said.

The next 30 days will be crucial for corn production in Brazil, Mr. Saragiotto said. If it rains, corn production could be even higher than the estimated 89 million tonnes. That compares to a challenging 2016 and a yield reduction of 25%.

“The corn market remains very liquid," Mr. Saragiotto said. "Prices are starting to cause concern among producers and the government."

The government has said it will act to sustain prices, if necessary.