CHS Q3 pummeled by tough ag economy

Underlying business performance stable, but one-time events caused quarterly loss.

CHS Inc., the nation's leading farmer-owned cooperative and a global energy, grain and food company, reported this week a net loss of $45.2 million for the third quarter of its 2017 fiscal year, compared to net income of $190.3 million for the same period one year ago. Consolidated revenues for the third quarter were $8.6 billion, compared to $7.8 billion for the third quarter of 2016, representing a 10% increase.

"Despite the economic challenges in agriculture and energy, several of our underlying businesses are having a solid year," CHS president and chief executive officer Jay Debertin said. "Unfortunately, we've experienced three negative one-time events this fiscal year that have resulted in charges leading to a loss in the third quarter and a significant earnings decline for the year to date. In response to these events, we are implementing measures to better identify risk management gaps in some of our processes and, when necessary, enhance our ability to effectively manage our risks."

Pretax income for the nine-month period ended May 31, 2017, was $40.0 million, compared to $407.9 million for the nine-month period ended May 31, 2016. The company said the decrease is primarily the result of charges related to a Brazilian trading partner entering into bankruptcy proceedings, loan loss reserve charges -- a significant portion of which relates to a single large producer borrower -- and asset impairment charges.

Revenues for the nine-month period ended May 31, 2017, were $24.0 billion, compared to $22.2 billion for the nine-month period ended May 31, 2016, an increase of 8%.

"Throughout the world, agriculture and energy markets remain unpredictable, and our owners and customers depend on us, so it's our job to be prepared to succeed in any economic environment," Debertin said. "That's why we're committed to improving our risk management practices across our businesses. Additionally, we are refocusing on the areas we know best and in parts of the world where we need to be to serve the U.S. farmer. We will do this based on the core values and tenets CHS has built on for more than 85 years: trust, partnership and opportunity."

The CHS Energy segment experienced a loss before income taxes of $9.3 million for the 2017 third quarter, compared to income before taxes of $109.4 million for the same period in fiscal 2016. Results were primarily due to significantly reduced refining margins and a $32.7 million charge incurred due to a cancelled capital project, the company said. The propane, transportation and lubricants businesses experienced decreases in earnings compared to the same period a year ago.

The CHS Ag segment, which includes domestic and global grain marketing and crop nutrient businesses, renewable fuels, local retail operations and processing and food ingredients, generated a loss before income taxes of $221.2 million for the 2017 third quarter, compared to income before taxes of $24.2 million for the 2016 third quarter.

“Grain marketing earnings decreased primarily due to a $230 million charge driven by a trading partner in Brazil entering bankruptcy proceedings under Brazilian law,” the company explained.

The wholesale crop nutrients and renewable fuels businesses experienced decreases due to lower margins. Earnings for the processing and food ingredients business decreased primarily due to impairment charges taken on certain assets during the third quarter. Country Operations earnings increased due primarily to increased volumes.

The Nitrogen Production segment generated income of $8.7 million during the 2017 third quarter, compared to $25.0 million during the same period last year. The decrease is primarily due to lower production margins, CHS said.

The company's Foods segment -- previously reported as a component of Corporate & Other -- generated pretax earnings of $7.0 million during the third quarter of fiscal 2017, compared to $17.0 million in the same year-ago period. The decreases were primarily due to reduced margins at Ventura Foods LLC, the investment that makes up the Foods segment.

The Corporate & Other segment generated pretax income of $5.6 million during the 2017 third quarter, compared to $18.9 million during the same period in the previous year. Earnings in this category are primarily derived from the company's equity investment in the Ardent Mills LLC wheat milling joint venture and Business Solutions operations.

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