Soybeans trip up top traders, prompt rare offer to U.S. farmers

CHICAGO - Two of the world's biggest agricultural trading houses bungled crop sales they made on behalf of U.S. farmers this year because of what one described as "unique" price moves for soybeans, prompting both to take rare steps to keep disgruntled customers.

Every year, hundreds of U.S. farmers trust major grain traders, including privately held Cargill Inc and Bunge Ltd, to sell parts of their harvests on their behalf for a fee. They hope the global reach and expertise of these companies will secure the best price and profits.

But this spring, a 37 percent surge in U.S. soybean futures caught many traders and veteranagriculture economists off guard. Large supplies were expected to keep prices low, but flooding in Argentina sparked heavy buying instead.

Cargill and Bunge separately sold most of the soybeans they were trading on behalf of farmers at about $9 a bushel, well below the rally's peak near $12 in June, five farmers who used the services told Reuters.

This month, Cargill reported that the surge hurt quarterly earnings because its traders in May had made wrong-way bets that prices would fall. Bunge, too, reported weaker quarterly results for oilseed trading, while Wilmar International Ltd posted its first-ever quarterly loss because of untimely purchases of soybeans.

"We're all trying to figure out exactly what went on," University of Illinois agricultural economist Scott Irwin said about the market's moves.

Cargill Chief Financial Officer Marcel Smits and Bunge Chief Executive Officer Soren Schroder said in separate interviews that their trading programs have worked well for farmers over the long run. They said they did not have details about the programs' results so far in 2016.

It is not clear exactly how many farmers take part in the programs or how much money they feel was left on the table.

The large grain companies rarely reveal how and where they make money inside their trading businesses. Last year, about half of Bunge's earnings came from a large division of the company that includes soybean trading. Cargill does not detail how much of its profits come from trading.

MISSING PEAK PRICES

This year's trades on soybeans have raised questions among some farmers about the value of using the grain companies to trade.

"This year I can say honestly is the worst job they have done regarding soybeans," said Brad Orr, an Illinois farmer who has used Cargill's trading service for about 7 years.

"The bean market rallied $3, and they didn't capture any of it."

Orr said he had 30,000 bushels of soybeans in the company's crop program. That means Cargill's trades may have cost him up to about $90,000.

Making poor trading decisions hits bottom line profits for the big traders because they regularly buy and sell grain to keep their businesses running. When they affect farmers' incomes, it threatens the close relationship between the companies and the customers who ultimately provide the crops that they move around the world.

In June, Bunge wrote to farmers offering a one-off chance to re-do soybean sales, according to a letter sent to customers and seen by Reuters. It said the company had faced "unique soybean price action" and thanked participants for their trust.

A company spokeswoman did not respond to requests for comment.

"They know they missed the boat," said Tennessee farmer Lyn Stacey, who used Bunge's service. "They've given us an option to increase our bottom line."

That same month, Cargill's corn merchandising manager, Randy Christy, told clients the company had "missed the market" trading soybeans, in a web cast seen by Reuters. He said in a subsequent web cast that Cargill was exploring options strategies to increase the value of its positions.

Cargill spokeswoman Antonella Bellman told Reuters that a team of experts trade on behalf of farmers in its ProPricing program. The company's "first priority is to deliver the best overall level of performance and risk management on behalf of our ProPricing customers," she said.

"The results of our current ProPricing contracts, just like any other ProPricing contract, are addressed directly with participating customers," she said.

Missteps are rare for Cargill's program, which has outperformed on one-year soybean contracts for seven of the past eight years through to 2015. Graphic: http://tmsnrt.rs/2bBAX2T And the company has taken tough action in the past when trading goes awry.

After a wrong-way trade threw up a $100 million loss at Cargill's North American energy arm in 2014, the company exited a number of markets and made management changes.

Historically, advisers on trading have struggled to consistently beat agricultural markets, according to a University of Illinois analysis of trading recommendations from 1995 to 2004. The review included dozens of firms, though not programs run by the major grain handlers.

Brett Wong, a senior research analyst for Piper Jaffray who tracks Bunge, said farmers often want to delay sales for what they consider the optimum price, while grain handlers aim to sell consistently for smaller margins.

"What the farmer needs is not, in my view, the same as what Bunge and Cargill and Louis Dreyfus are doing," Wong said. "The farmer needs the third-party guy who is working specifically on the farmer's behalf."

Stacey, the farmer from Tennessee, said he accepted Bunge's offer to sell soybeans for a higher price this summer.

Ohio farmer Nathan Fortkamp, another participant, declined. He said he was reluctant to allow Bunge to trade his crops again in 2017 as part of the deal.

"I think I'll be doing it all myself," he said. "That way I don't have anyone to blame but me."