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Foreign grain traders invade North American turf

by
grain traders
grain traders

(Reuters) - For decades, the world's leading grain traders like Cargill and Bunge enjoyed an unparalleled advantage: their smaller North American competitors lacked the flexibility and diversity of a global operation, and their foreign rivals lacked access to the biggest and most stable exporters in the world.

That's about to change.

Large U.S. and Canadian grain companies that have come up for sale are offering Asian and European traders like Glencore (GLEN.L) and Noble Group (NOBG.SI) a rare chance to secure a foothold in the market.

They are jumping on the opportunities in hopes of expanding operations and profits in the low margin, high volume business of grain handling, creating unprecedented new competition for traditional players on their home turf and the largest wave of consolidation in the industry since Cargill bought rival Continental Grain in the late 1990s.

The urgency to operate in the United States or Canada, countries that account for more than a third of the world's corn and wheat exports, has grown because of increasing global demand for crops. Other producers like Argentina and Russia have frustrated grain traders in recent years by curbing exports and bringing in disappointing harvests.

"If you really want to have an origin for corn, wheat and soybeans, the U.S. is the place," said Harold Reed, chief operating officer of The Andersons (ANDE.O), an Ohio-based grain and ethanol company.

International traders, well aware of demand pressures, "see the U.S. and Canada as the one sound anchor that just doesn't ever go away," Reed said. "The government is reliable, the export program is reliable, the weather is usually reliable."

Glencore, the world's No. 1 commodities trader, saw a large value in Canada, striking a C$6.1 billion ($6.2 billion) deal last week to buy the country's largest grain handler, Viterra. Gavilon, a major U.S. agriculture and energy trader, is up for sale.

To be sure, Glencore had additional incentives to pursue Viterra. The end of Canada's nearly seven-decade wheat marketing monopoly has enhanced its appeal for global traders, and Viterra owns valuable assets in Australia.

Companies including Mitsui & Co (8031.T), Marubeni Corp (8002.T) and Hong Kong-based Noble are jostling to buy Gavilon, valued at around $5 billion, according to sources.

SYSTEMIC CHANGE

While the move to open Canada's wheat and barley markets to competition is a strong incentive to enter the sector, senior executives said it is the dramatic inversion of the global market that is spurring the race for assets and access.

A boom in Asia's population and increased use of corn to make biofuels has tightened global grain supplies, making demand the primary driver of agricultural markets instead of supply fluctuations. That makes it even more critical for companies to be able to secure enough crops from reliable suppliers.

"You've got a demand-driven dynamic rather than a supply-driven dynamic and people need origination, raw material to meet consumptive demand," said Curt Vossen, president of Richardson International Ltd.

Vossen's company will acquire 23 percent of Viterra's grain-handling assets as well as certain processing assets in North America for C$900 million as part of Glencore's deal.

Companies also are on the hunt for acquisitions to improve efficiencies at a time when industry leaders have been hurt by volatile global markets.

ADM made the first broad workforce reduction in the company's history this year and saw a sharp drop in last quarter's earnings. Cargill also has cut jobs and said the quarter ended November 30 was its worst since 2001.

"People are looking to integrate to gain more economies of scale and value for shareholders," said Doug Hart, president of Hart and Associates, a Toronto-based consultant to agricultural companies and government bodies. "The more market share you have in an area, the more ability you have to control your margins and pricing."

TARGETS

Takeover targets include privately held French firm Louis Dreyfus, a major industry player, and family companies Paterson GlobalFoods and Parrish & Heimbecker, which have medium-sized agricultural networks in Canada, said Alberta agriculture analyst Ron Frost.

Dreyfus has considered mergers with companies including Glencore and Singaporean rival Olam. Paterson and P&H have not yet expressed an interest in selling. Farmers, meanwhile, hold some valuable cards in the dozen independent, share-owned grain terminals that dot the Canadian Prairies, amounting to 2.6 million metric tonnes (2.9 tons) of annual volume.

It would not be surprising to see industry leaders attempt to consolidate further with smaller acquisitions, analysts said.

The Canadian Wheat Board, defrocked of its marketing monopoly for 2012/13, could also conceivably bid for some handling assets, using government borrowing guarantees for the next five years, Frost said.

Even small outlets, like family-owned agri-chemical company Morris Grain in Minnesota, have received takeover offers, although manager DeWayne Greiner said the owners were not interested in selling.

"There are companies that want to buy," he said.

CARPE DIEM

Companies need to seize opportunities to buy companies like Gavilon when they can because agriculture is already a consolidated industry, said Paul Bertels, vice president for production and utilization for the National Corn Growers Association in the United States.

"You can probably count without using all the fingers on your second hand the number of companies that size," he said.

Dominant agribusiness giants Archer Daniels Midland (ADM.N), Bunge (BG.N), Cargill CARG.UL and Louis Dreyfus -- known as the "ABCD" traders -- are still vying to grow, even though they probably cannot compete for Gavilon due to competition concerns. The companies declined to comment for this article.

ADM was interested in Viterra but said last week it did not submit a final bid because the acquisition would not meet its "return objectives."

It remains to be seen whether the latest wave of consolidation ultimately results in more or less competition. At a minimum, farmers may find themselves dealing with some unfamiliar new enterprises, although that seems unlikely to unnerve them.

"Whether they deal with Viterra or Glencore, it's not a big difference," said Reed of The Andersons.

The Andersons, which bought an Iowa ethanol plant last month, is not for sale, but is looking out for new acquisitions, Reed said.

Glencore is already planning to expand in North America through acquisitions in the United States and through organic growth in Canada, said Chris Mahoney, the company's director of agricultural products, at a news conference about the Viterra deal. "It would have been difficult for us to grow organically, silo by silo, in North America," he said. He declined to comment on potential interest in Gavilon. "If one wanted to take a significant step, it probably would have to be through acquisition."

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