© The Financial Times Ltd 2016 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
October 23, 2012 5:34 pm
The worst drought in decades has decimated US corn and soyabean crops, forced ranchers to sell cattle and driven up food prices. It has also quickened efforts to build a global footprint among the world’s largest agricultural trading houses.
The US is set to export the least corn in 40 years, exposing the dangers of concentration in any one region for companies moving millions of tonnes of grain each year.
Archer Daniels Midland last week underscored the need to diversify when it revealed hopes to buy GrainCorp, a wheat, barley and canola exporter from Australia. Almost 90 per cent of its grain storage capacity is in North America.
ADM belongs to the group of global trading houses linking the world’s surplus food regions with fast-growing importers in Asia and the Middle East. New York-listed Bunge, Cargill of the US, Louis Dreyfus Commodities of France and Noble of Hong Kong are among a handful of big rivals.
The drought in the US, the smallest Russian wheat harvest in nine years, a de facto Ukrainian wheat export ban and a disappointing 2012 Brazilian soyabean crop have reorientated these companies towards what Cargill calls “atypical trade flows”. Brazil has lately been tapping neighbours for soyabeans. Pig farmers in the US, the world’s leading corn grower, have been forced to import corn from Brazil.
The changing map favours traders able to source supplies from a variety of origins. Australia is a top wheat exporter and in the southern hemisphere, harvesting when northern supplies run low.
As agricultural trading houses begin to report results from a quarter plagued by drought, performance may vary.
View the effects of the extreme drought faced in the US heartland in our interactive graphic.
More than half of Bunge’s long-lived assets are in Brazil, which in the past year exported a record 19m tonnes of corn. Company executives recently forecast a “strong finish” for its main trading segment. Third-quarter results are due on Thursday.
Privately-held Cargill, the world’s biggest agricultural trader, has already reported a 300 per cent rise in net profit in the quarter that ended August 31 but said the drought impact “has been mixed”.
Both Louis Dreyfus and Glencore, which have strong operations in the Black Sea region, were profiting strongly from the grain trade disruptions, according to people familiar with their operations.
In August, Christopher Mahoney, Glencore’s head of agriculture, described a “good” environment with “high prices, lots of volatility, a lot of dislocation, tightness, a lot of arbitrage opportunities”.
In ADM’s fiscal year to June 30, operating profit from merchandising and handling grains fell 39 per cent as low grain and oilseed stocks and high prices reduced US exports. Now the US corn crop is projected to be the smallest in six years. In July ADM said it was buying a port in Brazil.
“Because of different footprints, the companies have different relative strengths. The historical rule of thumb was that companies would rather have large volumes, not low volumes,” says Gary Blumenthal of World Perspectives, a consultancy.
ADM faces not only lower US export volumes but higher input costs for its business that processes corn into products from sweeteners to ethanol. In its home town of Decatur, Illinois, the company has been drilling wells in search of alternative water sources for its massive corn and soyabean processing facilities as drought empties a local lake.
The company’s footprint is partially extended by a majority stake in Hamburg-based trader Toepfer and a 16.4 per cent investment in Wilmar International, the world’s largest palm oil processor.
Commodity price volatility has added headaches for risk managers at trading houses who need to hedge fluctuations in commodity prices, freight costs and foreign exchange.
“The current environment has been volatile, complex and stressful for everyone who participates in our industry,” Alberto Weisser, Bunge chief executive, told investors last month.
Emery Koenig, Cargill chief risk officer, nonetheless embraced the new landscape: “It’s important to allow markets to work and fluctuate properly and not squelch price volatility, because therein lies the incentive for the innovation needed – better yielding crop varieties, better farming practices, better equipment – to help feed the world.”
Additional reporting by Javier Blas
Copyright The Financial Times Limited 2016. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.
Sign up for email briefings to stay up to date on topics you are interested in