Ag Services the Story at ADM

Archer Daniels Midland (ADM - commentary - Cramer's Take) reported an upside surprise, with EPS of 80 cents besting the Street's average estimate of 70 cents and vs. 56 cents last year. Adjusting for special items -- most notably 6 cents of last in, first out (LIFO) charge this year vs. 2 cents last year -- the comparison was 85 cents vs. 51 cents.

The huge surprise was agricultural services, where operating income rose from $46 million last year to $366 million of the $913 million total segment operating profit. Through nine months, operating profit here is $910 million vs. $292 million last year. All of the quarter's increase was from merchandising and handling, as transportation was flat. The company's total sales were up 64%, 10% from volume and 54% from price in the quarter, which is probably a good reflection of the changes in ag services too.

Management described the volatility in the grain markets as unprecedented. Going forward, its expectation is for more unprecedented quarters and continued volatility. During the Q&A, analysts were somewhat skeptical of continuance near this level, citing a bad wheat crop in Europe last year, which required other grains to be imported for animal feed and grain export bans in the Ukraine and Argentina that have been lifted recently. Additionally, the wheat crop this year is expected to be much higher. I would also suspect that if genetically modified grain from the U.S. is ever allowed into Europe, the past year's kind of situation would be less profitably handled.

Oilseed processing earnings rose 28%, to $237 million, more than all of the gain coming from a $179 million crushing and origination result vs. $101 million last year. That was just strong demand for protein meal and vegetable oil.

Corn processing operating income was down 31%, to $172 million. Sweeteners and starches earnings fell 26%, to $98 million, and bioproducts (which includes ethanol) fell 38%, to $74 million. Increased corn cost and energy prices used in processing caused the declines. Sweetener and starch prices were up as were ethanol volumes.

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At the time of publication, Thomas had no positions in the stocks mentioned.