Before news of the accounting issues broke and sent ADM shares tumbling 24 per cent on Monday, the biggest fall since 1929, according to the Center for Research in Security Prices, the company had been forecasting the Nutrition unit it has been expanding for much of the past decade would return to profit growth in 2024.

The recovery in the business segment that generated about 11 per cent of profit for ADM in 2022 would have helped cushion the blow from thinning margins in soybean crushing and ethanol, and from lower crop prices as global supplies of corn and soy rise, analysts said.

“It is now uncertain whether Nutrition operating profits will return to (year-over-year) growth in 2024,” said Arun Sundaram, senior equity analyst at CFRA Research.

“We expect the investigation and uncertain outlook to cast a shadow over ADM’s shares, as the Nutrition segment was once the fastest growing and most profitable segment,” he said.

CFRA cut its 12-month price target for ADM to $61 a share from $76 previously, one of several analysts that downgraded ADM share targets Monday.

Shares were up 1.6 per cent on Tuesday after sinking to a nearly three-year low the previous day.

ADM and its crop processing and trading rivals cashed in on historically wide soy crushing margins over the past two years due to strong demand for vegetable oil to make biofuel, and reduced soy product supplies from drought-hit Argentina. Those margins are now thinning due to expanded U.S. processing capacity and a projected crop rebound in Argentina.

Meanwhile, margins for producing ethanol biofuel, a cornerstone of ADM’s portfolio, have narrowed and a global grain glut has curbed crop exports from the United States, home to the bulk of ADM’s operations.

Rivals including Bunge BG.N have more of an export base in Argentina and Brazil.

Lowered outlook

ADM on Sunday put its CFO Vikram Luthar on administrative leave and postponed the upcoming release of fourth-quarter results and its annual 10-K filing with the U.S. Securities and Exchange Commission (SEC).

The investigation started in response to a voluntary document request by the SEC. ADM said it was cooperating with the regulator. An SEC spokesperson declined to comment about the voluntary document request and if the agency is investigating ADM.

The company also cut its adjusted earnings forecast to “above $6.90” per share for 2023 from an “excess of $7 a share” view earlier, and withdrew all of its forward-looking outlooks for Nutrition.

ADM has invested billions of dollars over the past decade in Nutrition, the smallest yet fastest growing of its three main business units, starting with its $3 billion acquisition of WILD Flavors in 2014. In that time, annual adjusted earnings per share swelled from $2 to $3 a share to a record $7.85 in 2022.

ADM executives frequently tout the segment as the future of the company, aiming to capitalize on healthier eating trends and rising consumer demand for natural ingredients and flavorings.

The unit also provided more earnings stability as company results were tied less directly to the highly cyclical commodities market.

It was unclear if two recent Nutrition unit acquisitions due to close early this year would be impacted. ADM announced the purchase of Revela Foods, a Wisconsin-based developer and manufacturer of dairy flavor ingredients, and UK-based flavor and ingredient firm FDL late last year. Analysts also struggled to gauge future returns for the Nutrition segment.

“If we can’t rely on the financial statements, it’s hard to judge the return that they are getting for all these acquisitions if there is going to be a massive restate of profits that affects multiple years,” said Seth Goldstein, strategist with Morningstar.

–Additional reporting for Reuters by David Gaffen and Tom Polansek.

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“It’s that time of year,” said Jamie Wilton of R.J. O’Brien in Winnipeg, on the seasonal declines in canola, adding that a lack of demand was contributing to the softness.

While domestic crush margins remain wide, canola is still overpriced for exporters, according to Wilton. He pointed out Canadian canola was trading at US$90 per tonne over European rapeseed and US$80 per tonne over soybeans from the United States.

From a chart standpoint, after the move below $760 per tonne in the November contract, Wilton placed the next level of support at a retracement level around $725 per tonne.

The release of Statistics Canada’s next production report could provide some nearby direction. However, Wilton expected the report was unlikely to sway the market too far one way or the other, as it will be based off satellite images and computer models, with survey-based data not out until December.

— Phil Franz-Warkentin is an associate editor/analyst with MarketsFarm in Winnipeg.

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“We’re still at the mercy of trying to determine what size of crop we have,” said MarketsFarm Pro analyst Mike Jubinville, noting trade guesses range anywhere from 16.5 million to 19 million tonnes.

He was leaning toward the lower end of that range, at around 17.5 million tonnes, which would be well below Agriculture and Agri-Food Canada’s current estimate of 18.8 million and would leave the country with relatively tight exportable supplies.

He expected domestic crushers would continue to pay up for canola, given the historically wide crush margins, with most of the necessary demand-rationing coming from the export side of the market.

“We have this element of demand-rationing… which limits the downside, but immediate harvest pressure will create volatile activity over the next few weeks,” Jubinville said.

Gains in outside vegetable oil markets were supportive, he added, limiting the downside risk for canola through the harvest season.

From a chart standpoint, Jubinville said the convergence of the 50- and 200-day moving averages around the $760 per tonne level in the November canola contract was providing support, although that level could be tested during the harvest.

On the other side, November canola settled just below the psychological $800/tonne level on Wednesday.

Beyond the Canadian harvest, the market will also be keeping an eye on U.S. soybean production and then on South American crop potential.

— Phil Franz-Warkentin is an associate editor/analyst with MarketsFarm in Winnipeg.

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“It’s hard to have a real solid opinion of whether we’ll go up or go down, because you could easily make a case either way,” said analyst Mike Jubinville, of MarketsFarm.

“Is there room to go (lower)? absolutely,” Jubinville said, adding “are we oversold and due for a bounce? Absolutely.”

Canola has lost about 45 per cent from its highs of the past year, with similar losses seen in Chicago soyoil, said Jubinville. However, he noted European rapeseed is down by 61 per cent from its own highs. While canola is usually the leader in the relationship with European rapeseed, the past six months has been the other way around and Jubinville thought the weakness in rapeseed could leave canola open to more downside as well.

Looking at the weekly chart, Jubinville expected the July canola contract that settled at $649.50 per tonne on Wednesday could easily drop into the $500 per tonne area. On the other side, a correction to the 20- or 50-day moving averages would see prices move back above $700 but would still leave the market in a long-term downtrend.

Crush margins are off their highs of the past year but remain attractive from the processor’s perspective, which should remain supportive, although Jubinville said there was increasing competition from other oilseeds in the export market.

With expectations for large crops already being priced into the markets, “if we fall short in any way, then we have room for a bounce,” said Jubinville.

— Phil Franz-Warkentin is an associate editor/analyst with MarketsFarm in Winnipeg.

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Jerry Klassen from Resilient Commodity Analysis in Winnipeg said canola prices have mostly followed the lead of the Chicago soy complex, while rains fell on Brazil as its soybean harvest began.

“It looks like things are progressing very well in Brazil and it pressured the canola complex,” Klassen said, adding that along with rains in Argentina, Brazil’s new soybean crop is also pressuring soymeal prices.

“The meal values have been trading at some very lofty levels, driving the crush margin structure for beans, but also contributing to the strength in canola. But soymeal has faded now, as well as soyoil. The products have deteriorated over the past week and they have contributed to the overall weakness in canola.”

The May canola contract closed Wednesday at $818.60 per tonne, a decline of $13.10 from one week earlier. The price of the May contract hasn’t fallen below $800/tonne since Jan. 26 and hasn’t been higher than $840/tonne since Jan. 19.

Klassen added there is usually an uptick in canola selling before March due to road restrictions being implemented on trucks during the month.

Despite taking cues from the Chicago soy complex, canola did not fall to the same depths as soybeans during the week, where the May soybean contract lost 2.6 per cent of its value to US$14.9425 per bushel even after gaining in price on Wednesday.

“South American soybeans are trading at such a sharp discount (compared to U.S. soybeans). That’s why we’ve seen the beans drop off a little bit more than the canola,” Klassen said.

With Minneapolis spring wheat prices falling precipitously over the past week, it may be an indication that farmers on the Canadian Prairies will choose to grow canola over spring wheat in the next few months, according to Klassen. This may result in an increase in canola acres, putting pressure on the oilseed.

“You see canola kind of soften in the first half of March. That’s a very strong seasonal tendency. When you get into the last half of March and (farmers) start to focus on seeding…you usually start to see the markets strengthen,” Klassen said.

— Adam Peleshaty reports for MarketsFarm from Stonewall, Man.

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From a chart standpoint, March canola is stuck in a sideways range between $800 and $900, with little to suggest a break one way or the other for the time being.

“I don’t think there’s a hard consensus about where we go next… I don’t have a solid opinion up or down right now,” MarketsFarm Pro analyst Mike Jubinville said.

He noted the U.S. Department of Agriculture is set to release several key reports on Jan. 12, which could provide some nearby direction to grains and oilseeds.

“From a demand perspective we look ‘OK’ on canola,” said Jubinville, but he added larger macroeconomic issues may weigh on the commodity.

“There’s a macro wet blanket sitting on top of us,” he said, pointing to recessionary concerns, worries about inflation and rising interest rates, the ongoing conflict in Ukraine, as well as COVID-19 issues in China and potential implications for demand.

However, wide canola crush margins suggest domestic demand from processors should remain strong, while Jubinville expected to see a solid export program despite increased competition from Australia this year.

— Phil Franz-Warkentin reports for MarketsFarm from Winnipeg.

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Limited and choppy trading in nearby soybean contracts had pulled down canola for most of the week, according to Winnipeg-based independent trader Jerry Klassen.

“When the March got up to $868-$870 (per tonne)… there was still some farmer selling at the higher levels,” he said. “Everyone who wanted to sell at that level has likely done so at this time and secondly, (farmers) are not going to make any sales until mid-January.”

On Tuesday and Wednesday, however, canola prices made a comeback, with the March contract rising by $11.50 per tonne in that span.

“We’re seeing some strength in the (soyoil) futures here. It’s largely setting the direction for the canola,” he said. “Canola is garnering some of that strength, spillover support into the domestic crush margins.”

Klassen added that commercial stocks are at 1.2 million tonnes, which he considers to be “snug.” Add in limited farmer selling and an inverse in the ICE Futures market and he believes canola is striking a bullish tone.

“You’ve got the bean oil and the bean meal improving the crush margin structure and it’s giving us a steady tone,” he said. “We’re kind of winding down for the holiday season, but we could see the funds start to come in here on the buy side because the market has held above the 20-day average over the last two days.”

He expects a softer tone until New Year’s Day.

“You have outside influences. It looks like there are beautiful (soybean growing) conditions in Brazil. Argentina’s on the dry side, but they still have time,” Klassen said. “The commercial demand kind of goes to sleep over the holiday season, until the second week of January.”

— Adam Peleshaty reports for MarketsFarm from Stonewall, Man.

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Since nearly hitting the $900 per tonne mark on Nov. 15, the January canola contract declined for eight straight sessions before going as low as $803.50/tonne on Nov. 28. The price then recovered, but not as high as $850/tonne.

While Chicago soyoil dropped three U.S. cents per pound in the span of a half-hour on Nov. 30, hindering canola’s upward movement, soyoil later recouped most of its losses in the session.

“Canola is slowly starting to recover some of its value against the oil and meal values,” Ken Ball of Winnipeg-based PI Financial said. “The crush spreads have been astoundingly wide… and they’ve been ridiculously (fueled) by speculative trade.”

The January canola crush margin on Tuesday was $312.27 above the futures, according to ICE — a $64.33 increase from one month ago and a $34.31 jump from the previous week.

Ball added that canola did not go below $800/tonne because of support from strong soyoil prices, which then triggered canola’s rise to $850/tonne.

“That will be the range for now, but there’s room for (the price) to swing quite significantly because of the extremity of the moves in the crush margins,” he said.

“It’s quite possible over time those crush margins will come back towards normal levels. We expect crush margins are going to stay high.”

However, this will create a dilemma for the export market.

“If we’re going to export canola, it can’t trade relative to those oil and meal values or Canadian canola will get too expensive in world markets. Once Australian canola flushes through the system over the next few months, canola margins should start to tighten up again to more normal levels,” Ball said, adding that many end-users of canola are both crushers and exporters.

“They would certainly much rather crush the canola than export it. There would be a tendency to downplay exports and work on crush. But we only have so much crush capacity, we still have to rely on exports.”

Further affecting canola prices going forward, according to Ball, will be whether Chicago soyoil prices continue to trade at higher levels compared to other vegetable oils.

This week, the U.S. Environmental Protection Agency (EPA) is set to announce its biofuel blending mandate for 2023, which may affect vegetable oil markets.

“There is a lot of chatter and talk about the blends for ethanol and biodiesel,” Ball said. “Soyoil stocks are looking a little bit tighter this year and that’s because of increased biofuel usage. So there’s some pressure on them to start slowing that down a little bit.”

— Adam Peleshaty reports for MarketsFarm from Stonewall, Man.

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Rising prices prior to the weekend later gave away to selling pressure after the weekend due to a correction in vegetable oil prices, according to broker Ken Ball of PI Financial in Winnipeg. But despite falling as much as $30 per tonne, canola still showed relative strength.

“The product side fell off about $40. That again is canola showing…it’s undervalued and it shouldn’t go down as easily as when the markets go down,” Ball said. “(Canola) should see some upside potential as long as vegetable oil prices stay reasonably steady.”

When the January canola contract surged past $900 on Friday, it was the first time the contract reached that mark since July 29. That day was also the last time the price settled above that level. Despite a recent inability to move above $900 and stay there, Ball believes that time will eventually come.

“I think the odds are still high that canola can get through and percolate higher,” he said. “It may not have any sharp upward action, but it should be able to percolate higher as long as vegetable oil can stay firm.”

Meanwhile, crush margins continue to hit record levels. Canola positions up to May 2023 are seeing margins surpass $200, according to ICE. The November/December stood at $271.58. While they are at a very high level, Ball does not think crush margins will stay this high for long.

“These are very, very extreme levels,” he said. “I don’t think we can see crush margins stay there because what high crush margins mean is that canola is relatively attractive to an end user buyer, both a crusher and a buyer for export. At those relatively cheap levels (for canola), we’re going to have too much demand.

“I don’t think canola can stay this relatively cheap because we don’t have the supply to meet the kind of demand that might be generated,” Ball added.

He also expects canola to undergo a turnaround very soon.

“We’re not necessarily expecting a huge upside in canola, but certainly the bias is firmer overall for the next little while,” he said. “Assuming vegetable oil prices are going to peak and fall back at some point, but so far they’re staying firm.”

— Adam Peleshaty reports for MarketsFarm from Stonewall, Man.

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“The crush margins are unsustainably high,” said Ken Ball of PI Financial in Winnipeg, pointing to margins that currently work out to over $200 per tonne above the nearby futures.

“Canola should be performing sturdier than the soy market, although whether that means (prices) will go up or not is hard to say,” Ball said. He expected crush margins would work down into a $150-$200 per tonne range over the next few months.

Easing crush margins would be achieved by higher canola prices, but could also occur if canola held steady while the product values declined.

“There’s no reason to expect a big upside in canola,” said Ball, noting prices are still historically high. “It wouldn’t be a shock to see $900 (per tonne) canola if (soybean) oil can stay where it is.”

That said, a lack of dramatic shortages of oilseeds anywhere in the world may limit the upside.

Outside influences, such as the ongoing war in Ukraine, could also influence futures markets, according to Ball.

— Phil Franz-Warkentin reports for MarketsFarm from Winnipeg.

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