Is Bunge Stretched Too Far?

A $12 billion company that has been around for nearly 200 years should represent the epitome of consistency, but BungeLimited has seen recent financial struggles that on the surface indicate more uncertainty than would be expected. Bunge has persevered through worse times, but investors should be at least a little concerned about the company moving forward.

An interesting history
Bunge has been in agribusiness for almost 200 years, and has held true to a similar business model over the entire time span. From ambitious beginnings as a trading company, growth to become a leading commodities dealer, major expansion into and throughout South America and then North America, followed by diversification into processing and food products, Bunge has demonstrated its growth-oriented culture. Over the past few decades, the company has made several major acquisitions, and in 2001 it went public.

Bunge's most recent attempts to continue its culture of growth came through entry into the Brazilian sugar and bioenergy business. Bunge is not alone in its hopes to cash in on the ethanol market, as BP has also made large investments in Brazilian sugar milling operations.

Growth and expansion, whether through new ventures or acquisitions, requires capital investment, and the biofuel business has been and continues to be a major strain on Bunge's financial resources. Their bioenergy segment is yet to be profitable, and no change to that trend is expected for 2013 Q4.

Too much to handle
Bunge's debt load in regards to its sugar and bioenergy segment is alarming, but a bigger indicator of the severity of the issue is that in addition to segment earnings being in the red, the segment is also reporting a negative EBIT. Bunge has not seen the returns on bioenergy that they had hoped for, and the performance of the segment is bringing down the rest of the company. In the past, Bunge's agribusiness and food product segments were able to compensate for the lagging performance in bioenergy, but the recent quarterly net loss of $137 million heightens fears that this is no longer the case.

Bunge spent 189 years conducting business almost exclusively in the commodities market, with the exception of a newer and financially successful food products business. The move in 2007 into the sugar milling and bioenergy business represented a move away from traditional sales and marketing of existing products toward a more intensive market in which it needs to partake in crop growing, processing, and sales.

The Brazilian sugar business has had to deal with unusually wet weather that has affected the cane crushing capacity as well as a declining ATR, which is a measure of the sugar available in the raw material minus the losses in the manufacturing process. The 2013 ATR is expected to drop below the record lows seen in 2012, which directly hurts bioenergy production efficiencies.

Bunge needs to decide if it is going to continue to funnel money into a business segment that it was not fully prepared to enter, or if it is going to cut its losses. Currently, nothing is off the table, as Bunge has indicated a willingness to sell its sugar-milling segment.

Looking forward
Bunge has been able to deal with the expenses of the bioenergy business, but the uncertainty in the sugar-derived ethanol market is becoming too much of a strain on the rest of the company. Over the long term, there is potential for huge growth in the sector, but the growth is contingent on too many factors to make up for the risks for a company like Bunge.

A massive company like BP can better afford the expenses, though growth in Brazilian bioenergy won't make the same impact on BP's bottom line that it would for Bunge. Bunge's possible interest in dropping out of the business may be seen by some as a warning sign for the industry, but BP could see this as an acquisition opportunity to expand further into this growth industry.

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