ADM loss underlines Black Sea grain basis risk

Archer Daniels Midland (ADM) CFO Ray G. Young revealed the company’s Ag Services division suffered an extraordinary impairment based on the firm’s basis risk exposure to the Black Sea grains market.

Young explained the company had suffered a $20m loss because of the company’s physical and paper exposure failing to correlate when asked during an analyst call Tuessday.

The firm “had a very good quarter in global trade, but [ADM] kind of had a one-off item here in the sense that we had some hedges on some Black Sea sales on both corn and wheat,” Young said.

The company hedged its exposure “off some North American exchanges and there was kind of like a lack of correlation between the hedge and the underlying movement.”

Tuesday’s third quarter earnings report revealed profits at ADM’s Agricultural Services division fell to $87m, down from $195m.

Grains markets on the Black Sea have suffered from a lack of correlation with global futures contracts, with US-centric contracts widely perceived as failing to capture local supply and demand complexities of the Russian and Ukrainian export markets.

AgriCensus’ FOB Russia 12.5% wheat assessment moved up 0.5% over the month to close October at $192/mt. At the same time, CME’s SRW December contract – one of the most popular US-centric proxies used to hedge global grain risk exposure – slipped 5.9% to $4.185/bu ($153.77/mt).

Similarly, in the corn market AgriCensus’ FOB Ukraine assessment moved up 1.6% over the course of October to close the month at $159.50/mt. The Chicago corn December contract, meanwhile, fell 2.5% over the same period to close the month at $3.4575 c/bu ($136.12/mt).