Editor's Note

Having your product show up at the buyers door only to be rejected because of high fungus levels is not conducive to a successful sale. For a company that is already suffering from a decline in revenue the outlook for the future worsened.


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BG - Bunge Limited - Company Profile

Bunge is an agricultural business and food company. They sell food, commodities and fertilizer on a global basis to more than 40 countries. Last week they reported earnings on February 11th and they were not good. Earnings came in at $1.49 compared to estimates for $1.56. Revenue of $11.1 billion missed estimates for $11.6 billion and that was well below the year ago quarter at $13.2 billion.

The company guided lower saying the strong dollar was weighing on revenues and declining economic conditions in countries like Brazil are limiting the available funds to import food. Pricing power is falling as commodity prices continue to decline worldwide.

Adding to Bunge's problems was a cargo of French wheat that was rejected by Egypt because of what they claimed was excessive levels of the ergot fungus. The generally accepted level for fungus is 0.05% and apparently, Egypt decided the content was higher than the standard. Since it is impossible to halt the naturally occurring fungus entirely, it exists in every load. Egypt made the unusual statement that they would have "zero-tolerance" for fungus in the future. If Egypt can get away with that qualification then other countries could try to change their rules as well. Bunge is suing Egypt and the cargo of wheat is still parked off the Egyptian port of Damietta. Egypt subsidizes bread for its population of 88 million.

Reportedly Bunge is trying to resell the wheat but it may be difficult since the rejection has tainted the cargo. The decision by Egypt for zero-tolerance has pressured the prices for wheat to $179 per ton and a five-year low. This hurts future sales by Bunge to any other country.

To recap, Bunge missed on earnings and revenue, guided lower for 2016 and has seen future commodity sales threatened by the Egyptian move and the falling prices of their various commodities.

Shares fell sharply after earnings from $58 to $46. An instant rebound appeared to $53 but that is now fading as the bad news sinks in and the outlook for Bunge's earnings dims even further. I believe that we could see the stock price return to those lows from last week, if not lower. Shares had already been declining since last June.

With a BG trade at $49.75

Short BG shares, stop loss $51.25

Optional:

Buy April $47.50 put, currently $1.55, stop loss $51.85