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Archer Daniels Midland


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I do not have a thorough write-up so I am not posting this in the investment Idea section, but would like to hear anyone's opinion if they care to share.


I'm woefully low on time right now... Studying for the CFA at night and interning during the day.  My watch-list is uncomfortably small but 20% of my portfolio is in municipal bonds that mature very soon.


After reading IBISworld's industry analysis, and Value lines research report as well as a few articles I'm beginning to get interested in ADM.  Also my broker is a big proponent and Buffett recently said they are of interest to Berkshire.  Recently they missed earnings projections due to $380 million in what they call a one-time expense and the market hit the stock pretty hard.


As a manufacturer of agricultural products they seem to be at risk of commodity prices in the short-term, but are capable hedgers and most analysts think their pricing power is exceptional.  They invested more than $5 billion in growth capital expenditures and historically have returned fairly well on investments like this.  It currently trades near book value.


Does anyone see a competitive advantage for the company?  They sell unbranded products and the main barrier to entry seems to be reproduction costs and location.  I don't really fully understand their pricing power, but it seems their margins are healthier than others in the industry.  I see food costs going up from here and if I am able to wrap my head around how they will pass these costs on to their customers I'd probably pull the trigger on dips. 


I really like that the market they buy from is highly segmented, but prices of commodities are set by the market... do they have negotiating power?  Similarly their customer base often has healthy margins but is that because they can push ADM down on price or will that indicate they can stand to lose a little profit margin at the benefit of ADM?


Food for thought for anyone who would like to share their opinions.  I wish I had the time to look deeper into this!


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Interesting thoughts. I have been looking into Bunge myself. However, I feel that I do not have sufficient understanding of the business model.


The way I see it, key driver of profit is volume. In the case of Bunge, variations in commodity prices are partly offset by different units. The trading and souring department benefits from higher prices whilst the processing division suffers from lower spreads and vice versa.


Consider the following discussion from the Q&A session of the Bunge 2Q2011 earnings call:


Alberto Weisser (Bunge CEO)


Yes. Also, I think we have to remember that it is positive for us because we have been -- we got used a little bit to these high prices. But you have to remember that this is not always very good for high price -- it's not good for the end consumer. So if prices -- if there's more supply and prices come down, you pick up on the demand side. You might have a little bit less margin, but you have more volume. So we tend to be indifferent on commodity prices. If prices are lower, we tend to pick it up on higher volumes.


Kenneth Zaslow - BMO Capital Markets U.S.


Okay. No, but I guess I was trying to figure out, I think there was a -- one of your competitors would probably not benefit from the increased trade flow out of Eastern Europe. And it sounds like you guys would actually benefit from -- that's usually implied as a negative for the industry when Russia comes on because that means less soybean meal going to Europe, all that stuff. That's why I was just trying to figure out how it's playing out, but you guys seem positive on it.


Alberto Weisser


Very positive. We have become quite large in that part of the world and, normally, it contributes. And last year, we had 0 contribution. In fact, no contribution in some -- negative contribution from that. We are very happy that the supply is abundant and not perhaps as abundant as it can be, but it's very positive.


So as I see it, competitive advantage comes through the scale and efficiency of the distribution network. But, as I said, I´m far from comfortable with this conjecture.

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