Archer Daniels Midland

Archer-Daniels-Midland reported strong second-quarter earnings results as favorable grain merchandising conditions resulted in companywide operating profits roughly tripling year-over-year.

Why it matters: ADM shares were up 2% on Aug. 4 as the market reacted to the strong results and management raising its full-year guidance above FactSet consensus estimates. Our forecast already assumed higher earnings per share versus management's first-quarter guidance. Due to energy price volatility and disrupted global shipping as a result of the Middle East conflict, we saw favorable grain merchandising conditions in 2026 and forecast ADM will generate above midcycle profits. Our forecast is now in line with management's updated outlook.

The bottom line: We maintain our $65 fair value estimate for no-moat Archer-Daniels-Midland. We slightly raised our 2026 agriculture services and oilseeds forecast. Separately, we raised our capital expenditures forecast on higher growth investment. These changes largely offset one another. We expect grain merchandising conditions will eventually normalize, driven by reduced volatility in energy prices and shipping. This, in turn, will create fewer crop price dislocations, leading to lower profits after 2026. At current prices, we view shares as overvalued, with the stock trading more than 20% above our fair value estimate and in 2-star territory. As such, we recommend that investors wait for a pullback in shares and for the stock to offer a margin of safety before considering an entry point.

We maintain our $65 fair value estimate for ADM following the company's second-quarter earnings. We assume roughly a 7% weighted average cost of capital.

In the agriculture services and oilseeds business, which generates the majority of profits, continued increases in crop yields and new land brought under agricultural production, particularly in South America, are likely to lead to an increase in crops transported around the globe. This bodes well for the agriculture services business; however, better global pricing information for farmers and stronger, more consistent crop yields should also reduce crop price volatility over time, which will limit the trading desk’s arbitrage opportunities. The agriculture services business is all about capacity utilization, and weather can cause fluctuations in operating rates year to year, as seen with the 2019 flooding that led to the lowest US crop plantings in over a decade.

In 2026, we anticipate an above midcycle grain merchandising environment for ADM, as we expect trade disruptions from the war in the Middle East will create favorable conditions. Our current base case is for ADM's profits to be higher than our midcycle outlook but below the highs in 2022 when the Russia-Ukraine conflict began. We expect this business will generate operating margins in the mid-4% range. Longer-term, as soy crush margins improve and crop prices slightly rise, we expect margins to fall to our midcycle forecast of 4%.

We expect the carbohydrate solutions business to see stable profits in 2026 as weak demand in sweeteners and starches is offset by growth in the ethanol business, named Vantage Corn Processors. Over the long term, we expect profit growth from continued product development. In the nutrition business, profits returned to growth in 2025 following a large decline in 2023 due to weak demand and a restatement of revenue and profits. Over the past two years, nutrition business profits have fallen nearly 50% versus the 2022 restated financials. In 2026, we expect growth to continue.

ADM's ethanol business, Vantage Corn Processors, has been a potential divestiture candidate as management focuses on the nutrition business. While it could be sold or spun off in the future, we include it in our explicit forecast until a deal is announced.

In a downside scenario, we assume Russia's proposed grain exchange materially impacts agriculture services and oilseeds profits from lower volumes. In this scenario, we also assume lower carbohydrate solutions and nutrition profits as these products see declining demand and specialty ingredients such as flavors become more commoditized over time. In this scenario, our fair value estimate would fall to $30.

In an upside scenario, we assume ADM benefits from higher long-term volumes and continued trade disruptions. In this scenario, we assume global protein demand grows and requires more grain merchandising. In this scenario, we also assume higher carbohydrate solutions and nutrition profits, as these products see rising demand and ADM benefits from specialty ingredients over time. In this scenario, our fair value estimate would rise to $100.

We assign a no-moat rating to Archer-Daniels-Midland. In its largest business, agriculture services and oilseeds, ADM is one of four dominant players; the company holds a solid position in global agribusiness and oilseeds processing. The company owns a massive network of processing plants, storage facilities, mills, port operations, transportation, and crushing facilities that would be difficult to replicate from scratch. That said, the capital intensity of Archer-Daniels-Midland's operations and the generally razor-thin margins in the business have historically made it difficult for the company to generate returns on invested capital above our estimated cost of capital throughout a cycle.

Profits in the agriculture services business are highly dependent on the spread ADM can generate from buying crops from farmers and selling them to customers. Here, ADM can benefit from higher crop prices, which, all else equal, encourage farmers to sell, and crop price volatility, allowing ADM to generate profits above a typical transportation fee-like spread. These dynamics can work in ADM’s favor when crop prices rise and during volatile times, such as a drought in a major agriculture-producing region or crop export uncertainty due to geopolitical events, such as war. However, when crop prices are lower and there is less volatility, these dynamics can turn against ADM as farmers are more reluctant to sell, reducing ADM’s opportunities to generate an extra profit spread. While profits are generally small, ADM can also support its profit potential by ensuring its transportation network runs near full capacity, which is also reliant on farmers’ willingness to sell. While ADM and its global grain merchandising peers used to have an informational advantage over farmers and customers, the easy accessibility of real-time crop price data and the increased buildout of grain storage by farmers have largely reduced ADM’s advantage.

Additionally, we view ADM’s oilseed processing business as generally earning its cost of capital through a cycle. This business buys oilseed crops, which are commodities such as soybeans, and processes them into commodities such as soy meal and soy oil. This business’ profits are highly dependent on the soy crush spread, the price difference between soy meal and oil versus soybeans. This can be volatile, but over a number of years is unlikely to remain at a level that allows ADM to generate an excess return on invested capital. Accordingly, when we analyze ADM’s grain merchandising and oilseeds business, we are not confident the firm will earn an excess return on invested capital throughout a cycle.

The carbohydrate solutions and nutrition segments are made up of largely commodity products. Each business has some specialty ingredients, such as specialty starches and enzymes in carbohydrate solutions or flavors and probiotics in nutrition. These specialty ingredients deliver higher margins, likely due to intangible assets and switching costs. Intangible assets are related to proprietary formulations stemming from research and development spending for the development of new specialty products. Customer switching costs come from consumer packaged goods companies’ unwillingness to jeopardize the brand equity of their products by changing specialized ingredients that are critical to the consumer experience. However, the majority of products in the carbohydrate solutions and nutrition businesses are commodities where the company does not benefit from pricing power or any particular moat source. As such, we do not have a high degree of confidence that these businesses will be able to generate an excess return on invested capital over the next decade. All in all, ADM can generate economic profits during the favorable part of an economic cycle in the agriculture services and oilseeds business and has some specialty ingredients that command pricing power. However, we are not confident that the business is likely to generate excess returns on invested capital throughout a cycle over the next decade.

With a global network of processing, storage, and transportation assets, ADM has scale advantages over regional competitors. Its trading operations are often able to generate arbitrage opportunities from extensive market knowledge produced by the global origination and logistics network.

ADM's investments in building a global nutrition business will create value for shareholders as the company continues to expand its product portfolio.

As a major processor of soybeans—a key component in animal feeds—ADM should benefit as emerging economies consume more meat.

Grain merchandisers, including ADM, will continue to face structural headwinds as farmers and grain buyers have better access to price information. This will limit trading profits over the long term.

Profitability is subject to operating rates in each segment, which can be negatively affected by a number of factors outside ADM's control.

As a commodity trader, ADM is essentially a price taker competing in a market where similar products are available from rivals.