CHS 2Q income drops; ag business earnings off 89 percent

CHS Inc. reported net income of $82.3 million on sales of $5.2 billion for the second quarter ending Feb. 28, 2009, compared to the year-ago $168 million and $6.9 billion, respectively. Six-month net income was $219.5 million on sales of $12.9 billion, versus the year-ago $468.9 million and $13.4 billion.

CHS said the drop in revenues reflected lower values for many of its grain, refined fuels, and crop nutrients products. Also, CHS noted that during first quarter 2009, it recorded a $70.7 million impairment in its processing segment on the value of its ownership in VeraSun Energy Corp., an ethanol producer that filed for bankruptcy and has been liquidated. During fiscal 2008, CHS recorded a gain of $91.7 million on the company’s sale of stock in CF Industries Holdings Inc.

During the first six months of fiscal 2009, the ag business unit, which consists of crop nutrients, grain marketing, and country retail operations, reported lower earnings due to reduced global grain demand and lower crop nutrient values. Six-month ag business earnings before income taxes dropped to $32.7 million on sales of $8.4 billion from the year-ago $324.7 million and $8.1 billion. Second-quarter earnings were $13 million on sales of $3.4 billion, down from $120 million and $4.3 billion, respectively.

During the second quarter, earnings from the wholesale crop nutrients business decreased $44.3 million. The market prices for crop nutrients fell significantly during the first half of fiscal 2009, and due to a wet fall season, CHS had a higher quantity of inventories on hand at the end of the first quarter than is typical. Fertilizer margins realized were significantly reduced compared to the same period in the previous fiscal year. In order to reflect whole crop nutrient inventories at net-realizable value, CHS made a lower-of-cost-or-market adjustment in this business of $56.8 million in November 2008, of which $18.1 million was remaining at the end of the second quarter.

Second-quarter wholesale crop nutrient revenues were $325.8 million, down from the year-ago $397.9 million. Of the decrease of $72.1 million, $66.7 million was attributable to decreased volumes and $5.4 million was due to decreased average fertilizer selling prices. Volumes decreased 17 percent, mainly due to higher fertilizer prices and a fall season that experienced excess moisture.

The average sales price of all fertilizers sold reflected a decrease of $6/st from year-ago levels. Second-quarter whole crop nutrients cost of goods sold was $350.6 million versus the year-ago $378.4 million.

Six-month wholesale crop nutrient revenues were $959.3 million, up from the year-ago $931.3 million. Of the revenue increase of $28 million, $311.1 million was due to increased average fertilizer selling prices, partially offset by $283.1 million in reduced volumes. The average sales price of all fertilizer sold reflected an increase of $171/st over the year-ago period. Volumes decreased 30 percent. Cost of goods was $1 billion for the recent six months, versus the year-ago $888.6 million.

As of Feb. 28, 2009, crop nutrient inventories stood at $380.4 million versus the year-ago $400 million. As of that date, CHS said fertilizer commodity prices affecting its wholesale crop nutrient and country operations retail businesses generally had decreases between 21-66 percent, depending on the specific products, compared to prices on Aug. 31, 2008.

CHS said its energy segment benefited from improved refining margins and increased propane demand driven by cold winter weather. Earnings from the processing segment declined due in part to lower consumer demand for food and ingredients, which impacted CHS joint venture food manufacturing and flour milling operations. CHS said the weak economy also contributed to lower earnings for the company’s insurance, risk management, and financial services businesses.