Thursday, November 7, 2019

Agribusiness giant CHS Inc. ($CHS) filed its Form 10-K for 2019 on Tuesday, and performance of its U.S. agriculture segment might best be described as wilted. It’s a good example of broad economic trends we all see in the headlines also showing up in the data. Let’s take a look.

First, the numbers. Total annual revenue fell by 2.4 percent, from $32.68 billion in 2018 to $31.9 billion this year. Net income did rise by 6.8 percent, but that was mostly due to a mix of good performance in non-agriculture operating units (CHS owns a few oil refineries that did well thanks to favorable pricing of Canadian crude); or special cost savings that might not appear again (the company had some favorable tax treatments that lowered the cost of goods sold, for example).

OK, that’s nice, but CHS is foremost an agriculture business. We started reading through the fine print thanks to our Interactive Disclosures page, and once we got past the oil refineries and tax treatments, we found items like this:

  • We continued to experience significant pressure on grain volume and margins due to slow movement of grain that has resulted from unresolved trade issues between the United States and its trading partners.
  • Poor weather conditions, including heavy snow during the spring and significant rainfall during the summer of 2019 negatively impacted our Ag segment operations. Severe flooding resulting from the heavy snow and rainfall contributed to railroad delays and prevented or delayed planting, which resulted in increased costs, reduced volumes and fewer planted acres.

Translation: bad weather at the start of this year’s growing season put CHS on the back foot, and the trade war has kept CHS in that position ever since.

Figure 1, below, tells the tale. North America sales fell by $1.58 billion, a decline of 5.3 percent. That decline in North America sales — and note the sentence under the chart, which explains that “North America” really just means the United States — was responsible for almost all CHS’s decline in total revenue.

How long will CHS’s difficult position last? Nobody knows. Don’t take our word for it. In the company’s Management Discussion & Analysis, CHS said this:

The agricultural industry continues to operate in a challenging environment characterized by lower margins, reduced liquidity and increased leverage that have resulted from reduced commodity prices. In addition, trade relations between the United States and foreign trade partners, particularly those that purchase large quantities of agricultural commodities, are strained, resulting in unpredictable impacts to commodity prices and volumes sold within the agricultural industry. We are unable to predict how long the current environment will last or how severe the effects will ultimately be.

Translation: CHS doesn’t know how long the trade war will last either. The company did say it’s trying to streamline operations and efficiency, with a few tricks like better internal controls and a new ERP system. Maybe those steps will help. Then again, Sales, General & Administrative expenses rose by 8.9 percent for 2019, so maybe not.

Either way, the key to CHS’s long-term future is an end to the trade war. U.S. and Chinese trade negotiators are supposedly edging toward resolution of the dispute, and may announce a preliminary deal in December.

That would be welcome news to CHS, which right now is stuck reaping the whirlwind.

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