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Two years ago China’s state-owned grains trader announced a $10bn war chest for foreign mergers and acquisitions. It has now shown the will to act.
China National Cereals, Oil and Foodstuffs Corp last week charged into South American markets with a deal to buy a controlling stake in Nidera, a 94-year-old trading house.
The company known as Cofco is now in talks with Hong Kong-based Noble Group, one of Asia’s leading commodities traders, to establish a joint venture in sugar, soyabeans and wheat.
The deals will put China’s top grains importer directly in competition with global agricultural trading houses such as Archer Daniels Midland, Bunge, Cargill, Louis Dreyfus Commodities – long known as the “ABCD” companies – and commodities powerhouse Glencore Xstrata.
“This is a big deal. It transforms them into a major player, and gives them a diversified footprint that they don’t have now,” says Philippe de Lapérouse, managing director at consultancy HighQuest Partners and a former Bunge executive.
Cofco has the budget to assemble a formidable international presence. But with 106,000 employees and a long history as a state monopoly, it is more likely to buy for China than arbitrage between markets. Cofco’s revenues rose 13 per cent last year to $31.7bn, but profits fell 20 per cent to $585m. By contrast, Cargill earned $2.31bn, on revenues of $136.7bn.
The move to build a global supply chain is in line with a shift in priorities for China. Rising incomes and richer diets have collided with a shortage of arable land and clean water, leaving the world’s second-largest economy to abandon its traditional reluctance to look abroad for feed grains. “We will encourage agriculture to go global and actively use foreign resources,” the Ministry of Finance said in its annual budget released on Wednesday.
China is already the world’s top importer of soyabeans, snapping up the lion’s share of that harvest from the US, Brazil and Argentina. Demand from Chinese dairy farms has driven up North American alfalfa hay prices. Rice from Thailand, barley from Australia and cocoa from west Africa all find their way to China.
This year’s annual rural policy document specifically called for more corn imports. “The trade volume thus far is still small relative to the overall corn market, but it’s growing and the potential is very large,” says Joseph Glauber, chief economist at the US Department of Agriculture. The US is the world’s top corn exporter.
Recent agribusiness deals have invoked Asian demand as a rationale. Glencore’s $6.1bn purchase of Toronto-listed Viterra gave it access to wheat exports from Canada and Australia. Marubeni of Japan last year closed on Gavilon of the US for $2.7bn, excluding debt – a move that gave it access to grains infrastructure in the US and positioned it for a rise in Chinese demand. A similar strategy motivated ADM to bid for GrainCorp of Australia in a $3bn deal rejected by Canberra on national interest grounds.
Cofco’s five-year plan calls for investments of $10bn in overseas mergers and acquisitions by 2015. Other goals include raising its processing capacity to 77m tonnes a year by 2015, from 50mtpa in 2012. Some of that oilseed crushing or corn grinding capacity is in joint ventures with the international trading groups with which it will now compete.
Sugar is a second area of focus, after grains, given Cofco’s roster of processed food brands. In 2011 it bought Tully Sugar, an export sugar mill operator in Australia. But Cofco’s war chest is unlikely to be spent solely on bulk commodities. It also counts Great Wall wines, Mengniu Dairy products and a number of packaged food brands among its products; and is on the lookout for more.
A deal with Noble would strengthen Cofco’s hand in sugar and grant a beachhead in the US grain market. China Investment Corp, the sovereign wealth fund, is already Noble’s biggest outside shareholder. “Noble Group has a very deep background in China and enjoys a close relationship with the government,” says Ma Wenfeng of Beijing Orient Agribusiness Consultant Co.
Nidera – an acronym formed from Netherlands, India, Germany (Deutschland), England, Russia and Argentina, the countries where it started trading in the 1920s – has been in need of working capital, bankers and agricultural investors say. Cofco invested almost $1.3bn for a 51 per cent stake.
Frank Ning, the US-educated chairman of Cofco, deemed the transaction “in line with Cofco’s strategy to become a global player in the agricultural industry”.
“With Cofco’s Nidera move and with Noble, you’re almost creating another credible competitor to the ABCDs now,” says one banker who advises agribusiness companies.
Chinese bureaucrats have an uneasy relationship with international grain traders, with some harbouring fears they wield too much pricing power. China’s ministry of commerce required that Marubeni and Gavilon keep soya sales channels to China firewalled as a condition of approving that deal. Companies including ADM and Dreyfus have seen corn shipments turned away at Chinese ports in recent months over concerns they contained unapproved genetically modified seeds.
Not everyone is cheering Cofco’s transformation into China’s international agricultural trading arm.
Private feed producers such as New Hope Group, China’s largest private agricultural business, have lobbied for many years to open China’s corn imports but still have limited access to imported grain.
“There must be an enterprise to take the lead when it comes to China’s overseas agricultural business. Right now, Cofco is doing it, but I hope more private enterprises in China will be able to participate as well,” adds analyst Ma Wenfeng.