January 9, 2013 4:55 pm

Cargill in drive to improve its assets

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Soybeans Brazil©Bloomberg

Cargill is tilting its investment towards improving its own assets and away from takeovers, even as a wave of consolidation sweeps the grain trading sector.

The agribusiness, one of the world’s largest private companies by revenue, said it is weighting capital spending towards internal projects a year after almost half its capital investment went to acquisitions.

Cargill’s approach stands in contrast to its rivals, who have pursued regional grain exporters in a bid to extend their geographic reach.

Archer Daniels Midland is seeking to purchase Australian wheat exporter GrainCorp for A$2.8bn ($2.9bn). Last year Marubeni of Japan spent $5.3bn to purchase Gavilon of the US and Glencore bought Toronto-listed Viterra for $6.1bn.

Cargill’s statement came as it announced earnings of $409m for its second quarter, ended November 30, 2012, over four times the amount it earned in the same quarter of 2011. But the it was less than half the profit booked in first quarter, when a succession of droughts in Brazil and the US triggered a global scramble for grain supplies.

In the fiscal year ending May 2012 Cargill invested more than $4bn, about half of which was accounted for by the $2bn purchase of animal nutrition company Provimi – its largest acquisition ever.

Historically, acquisitions have averaged about a third of investment, but Cargill said that that would change this fiscal year.

“Following two fiscal years in which capital spending was tilted toward acquisitions, the company’s current capital investments are weighted toward new, expanded and modernised facilities that support the growth objectives of customers and the company,” the company said.

Among them are a grain terminal recently opened in Canada’s Alberta province and the expansion of a sweetener plant in China.

“We have a record $2.4bn of large projects under construction in 13 countries,” said Greg Page, chief executive. “As these facilities come on line, they strengthen Cargill’s supply chain, risk management and innovation capabilities.”

Cargill cautioned that the shift did not signal an end to acquisitions, saying that the company continues to assess opportunities.

Cargill is among the so-called “ABCD” of leading global agricultural traders. Others are New York-listed ADM and Bunge and Louis Dreyfus Commodities of France.

In Cargill’s latest quarter, prices for corn, soyabeans and wheat – the most widely traded agricultural commodities – declined as traders eyed an increasingly promising crops from South America.

US-based Cargill said that its origination and processing division, which buys, ships, processes and sells grain and oilseeds in dozens of countries, contributed most to the company’s quarterly results. A year before the group was beset by problems including losses from trading cotton and sugar. “Strong global trading” in “more fundamentally driven markets” helped results, the company said.

Profit margins for crushing oilseeds into vegetable oil and meals also improved from a year ago. Amid industry overcapacity, Cargill shut a crush plant in the US state of Iowa last year.

Mr Page said: “The steps we’ve taken over the past months to focus attention on what our customers value most, change how we work, instil more cost discipline and invest in growth are paying off in the current year.”

Results lagged behind the first quarter, when Cargill earned $975m amid extremely volatile grain markets. “There was some disruption in supply chains, and our ability to source supply from multiple origins became critical to customers,” Cargill said. Second-quarter revenue rose 6 per cent to $35.2bn.

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