Bankrupt Brazil partner sinks CHS earnings for quarter

Struggling with continued weak farm prices and stung by the bankruptcy of a Brazilian trading partner, Inver Grove Heights-based CHS announced a large drop in earnings for the third quarter.

The global energy, grains and foods company on Friday reported a net loss of $45.2 million for the three-month period ended May 31, compared with net income of $190.3 million for the same period a year ago.

Consolidated revenue for the quarter was up by 10 percent to $8.6 billion, compared to $7.8 billion for the third quarter of 2016.

"Our underlying businesses are still stable, and we are focused on operational excellence," said CHS President and CEO Jay Debertin, who took charge in May after former CEO Carl Casale departed, in an interview. "But we do have three one-time events that are part of our quarterly results."

The biggest problem is that CHS is a large creditor of Seara Ind e Com de Produtos Agropecuários Ltda, a Brazilian commodities trader that filed for bankruptcy protection in April. Debertin said the Brazilian firm originates much of the grain that CHS exports around the world, and has been a reliable business partner for the past decade.

CHS extended credit and other funds worth about $230 million to the company, which is now at risk because of the bankruptcy proceedings, Debertin said.

The cooperative also reported loan loss reserve charges that relate mainly to a single large Midwestern producer, and asset impairment charges.

"In response to these events, we are implementing measures to better identify risk management gaps in some of our processes," Debertin said in a statement.

Debertin and Tim Skidmore, the cooperative's chief financial officer, have been traveling the country to inform the co-op's owners and employees of the financial problems and other matters. They held town halls in June near CHS facilities in Indiana, Montana, North Dakota and Washington. Another six meetings are scheduled in August in other states, including two in Minnesota.

Debertin said those attending the meetings so far have been engaged and concerned.

"Frankly the meetings are challenging because these are big numbers and they are negative numbers, but they can also be encouraging because members also see a transparency and candor about them, and we can also show that the underlying business of CHS is good," Debertin said.

The co-op, formed from the merger of Cenex and Harvest States Cooperatives, is best known for its grain and petroleum-based businesses. Its energy segment lost $9.3 million for the quarter compared with income of $109.4 for the same period in 2016. Results were due primarily to significantly reduced refining margins and a $32.7 million charge incurred because of a canceled capital project, the company said.

The CHS agricultural segment generated a loss of $221.2 for the quarter compared with income of $24.2 million for the same period a year ago. The grain marketing earnings decreased mainly because of the Brazilian bankruptcy. Wholesale crop nutrients and renewable fuels businesses and the company's nitrogen production segment also experienced decreases due to lower margins.

Debertin said the company is accustomed to cycles in both its agricultural and energy businesses, and that lower but stable earnings are to be expected in challenging times.

In its past two fiscal years, CHS reported that net income dropped 28 percent in 2015 and 46 percent in 2016, sliding from $1.1 billion in 2014 to $781 million a year later and then to $424 million. The declines were attributed in large part to lower values for the energy and grain products that it handles.

Tom Meersman • 612-673-7388