ADM Stock Slips After Falling U.S. Crop Prices Eat Into Profit (how increased supply and inelastic demand can hurt farmers)

By Patrick Thomas of The WSJ.

"Archer Daniels Midland stock slipped Tuesday, after higher global grain supplies and lower U.S. crop prices sapped the agricultural company’s profit.

ADM reported adjusted per-share earnings of $1.03, on $22.2 billion of revenue, for the April-June quarter. Both undershot Wall Street forecasts.

Executives at the Illinois-based grain trader and oilseed processor said it is dealing with challenging market conditions from larger South American harvests and an expected bumper American crop. That marks a sharp reversal from recent years, when higher prices fueled soaring profits for it and other agriculture companies.

“Strong supplies out of South America have led to a rebalancing of the supply and demand environment,” said Ismael Roig, ADM’s interim chief financial officer, on a call with analysts.

At the business unit that includes ADM's agriculture-trading operations, quarterly operating profit fell 56% to $459 million. Corn prices are down more than 20% over the past 12 months, while soybeans and wheat are down more than 25%.

ADM said Tuesday that increased grain supplies from Brazil and Argentina shifted exports from the U.S. to South America. The trader is also facing higher logistics costs in Brazil, it said.

Chicago-based ADM is one of the biggest companies in the food-supply chain. It buys crops and sells them globally to countries and food companies, while running processing plants that turn crops into vegetable oil, fuel and other products. Margins for biodiesel made from soybean oil were also lower for the quarter, ADM said."

This article basically says that supply shifted to the right. This led to a big price drop because demand for farm products is often inelastic (which usually means a fairly steep demand line). Price falls alot more than quantity rises, revenue falls. Demand for food can be inelastic because we can only eat so much. Even if food were free, most of might eat a little bit more but not much.

In the graph below, which comes from Economics Help.org, we can see that price falls much more than quantity rises. See What causes price fluctuations in agricultural markets? which discusses, among other things, inelastic demand.

Before supply increases in the graph below, total revenue for farmers would have been 700 = 350*20. But afterwards, revenue is just 440 = 200*22. This might be the situation that ADM is in right now.