September 18, 2013 6:03 pm

Bunge, Cargill, Dreyfus and ADM face new challenges

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Harvested soybeans are loaded onto a truck at a farm in Frutal City in the state of Minas Gerais, Brazil, on Wednesday, March 10, 2004. Cargill Inc., the largest U.S. agriculture company, said the growth of Brazil's soybean industry will slow because clogged ports and roads are hampering delivery of crops©Bloomberg

The people in charge of feeding the world are changing. Last week Cargill named the ninth chief executive in its 148-year history, a move that followed new CEO appointments at rivals Bunge and Louis Dreyfus Commodities in June.

The leadership changes come as the “ABCD” companies that dominate global agricultural flows – Bunge, Cargill and Dreyfus plus Archer Daniels Midland – face a new set of challenges.

The world's appetite

The world's appetite
Global agricultural trade flows

The quartet are vital to the world food trade, using hard-to-duplicate networks of silos, ports, ships and farmer relationships to buy in surplus and sell to customers ranging from food groups such as Nestlé to Egypt’s state wheat buying board.

They are not the only companies in the sector – Glencore Xstrata, the world’s biggest commodities trader, has expanded in agriculture – but they are the biggest.

The world’s food import bill will total $1.09tn this year, the UN Food and Agriculture Organisation estimates. ABCD revenue was collectively $348.7bn in their most recently reported 12-month periods. The sum includes businesses other than grain trading.

Trade is “increasingly playing an important role in helping countries to cover their needs”, says Abdolreza Abbassian, senior FAO grains economist.

Mayhem reigned in agriculture markets between 2010-12. Corn and soyabean prices surged to records last year as drought withered the US and Brazilian crops. In 2010, wheat prices spiked after Moscow imposed a cereals export ban in a panic over a heatwave in Russian growing regions.

The volatility favoured the trading arms at the companies. Cargill reported record profit in the year that included the export ban. But as a group, the ABCD delivered erratic results, with profit at ADM, Bunge and Cargill all falling sharply in 2012.

Now, a different scenario awaits Cargill’s David MacLennan and the new chief executives. The world is this year expected to produce record corn, wheat and soyabean crops. The prospect will damp the price swings that traders thrive on, but may still reap a net benefit to the companies.

“At the end of the day, lower grain volumes are not as good for overall performance for these companies as more grain volumes,” says Chris Johnson, credit analyst at Standard & Poor’s, which last week raised its outlook on Cargill’s debt rating from negative to stable, citing rising profit.

Grain prices add to farmers’ clout

Argentina’s farmers are hoarding soyabeans . Months after harvest, sales have been slow in the world’s top exporter of the meal and vegetable oil crushed from the oilseed.

Negotiations between farmers and merchants have long been a feature of agricultural markets. But high grain prices have strengthened growers’ bargaining power, squeezing trading house margins.

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This is because the ABCD companies sunk billions into processing facilities in recent years. These assets became costly, underused millstones when grain fell short. Now, the prospect of higher grain stocks will put them to the test.

“In varying degrees, all four of them have tried to become something more than trading companies,” says Bob Kohlmeyer, president emeritus at consultant World Perspectives and a former Cargill executive.

Mr MacLennan, who is set to become CEO at privately owned Cargill on December 1 after being promoted from president and chief operating officer, says the majority of the company’s investments are now taking place outside the US. These include processing businesses such as a $40m plant to turn chickens into McNuggets for McDonald’s in Russia.

“We use the phraseology ‘diverse, balanced and resilient’,” Mr MacLennan says. “The fact is, there may be struggles in one part of the world or one industry. But in other parts of the world, other geographies and industries, we’re doing quite well.”

Soon after Soren Schroder stepped in as chief at Bunge at the beginning of June he said returns “must improve” and announced a $200m cut in capital expenditure to $1bn.

Bunge this year idled a Kansas soyabean processing plant as US stocks of the oilseed dwindled too low to keep running. But Mr Schroder sees the possibility of big surpluses and lower prices, which he says will be “good for global consumption and customers”.

ADM, which is poised to spend A$3bn ($2.8bn) to purchase Australia’s GrainCorp, meanwhile continues to be led by seven-year chief executive Patricia Woertz.

ADM owns an asset-heavy empire of biofuel refineries and mills, with $23.4bn in gross property, plant and equipment on its balance sheet. It is also the most concentrated of the four in the US, where drought decimated the 2012 corn crop. The assets have dragged on earnings, with ethanol plants losing money until recently.

“We have all these assets that we’ve talked about for the year that are not being utilised,” Craig Huss, chief risk officer, told analysts last month. Now, “we will be filling those assets”.

Ciro Echesortu was head trader and operating chief at privately owned Dreyfus before becoming chief executive at the end of June. Dreyfus is in the middle of a transformation, tapping the public capital markets for the first time in its more than 160-year history, to finance acquisitions and investments.

Louis Dreyfus’ executives call the company “asset-medium”, with fixed assets of $3.4bn.

“They have much more of a trading focus,” says Philippe de Lapérouse, managing director at consultancy HighQuest Partners. However, the company plans to invest $5bn over five years “to master the entire distribution chain, from the farmer to refining as well as connection with final consumers”, its annual report says.

Despite all the changes, the companies are not abandoning trading. World trade in grains and oilseeds rose 48 per cent to 453m tonnes in the past decade and will expand further in the next 10 years, according to the US Department of Agriculture.

“Trading is still a very important competency at these companies, but it’s become a bolt-on activity to the processing operations,” adds Gary Taylor, former president of Cargill Cotton, who now heads an investment group.

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