Cargill, the US agricultural group, is restructuring its financial services business and courting outside funds to address rating agency concerns that the unit’s rapid growth is distorting its financial performance.
The financial and risk-management arm already accounts for a third of earnings at Cargill, which has evolved over the past six years from a pure grain producer into higher-margin products such as speciality food ingredients and animal nutrition.
“We definitely had a tremendous result from the financial and risk-management platform,” said Bill Veazey, chief financial officer, pointing to gains by its distressed asset business.
He told the Financial Times that the privately held group was addressing the rating agency concerns by shifting financial assets into stand-alone entities supported by external investment. Fitch downgraded its outlook on the company to “negative” in April because of Cargill’s increased leverage.
The company has already secured $5bn in third-party funds for its Black River capital markets arm, and has started sourcing outside money for Cargill Value Investments, which specialises in distressed assets such as credit card portfolios and real estate.
“This is a food and agricultural company with a good financial services business,” he said. Cargill is in the midst of a mid-term strategic review, though Mr Veazey said it was satisfied with the restructuring introduced in 1999.
Cargill was likely to slow the pace of acquisitions because of high valuations.
“We think that [financial services companies] are making way too much money available at an unsustainably low risk premium to financial buyers,” said Mr Veazey. “Prices on most of the businesses we would look at are way too inflated.”
He conceded that overpaying for one company had led to a “disappointing” performance by its food ingredients and applications unit. Full-year earnings also dipped at its industrial business.
Sales rose 6 per cent to $75.2bn in the 12 months to May 31, and improved performances by origination and processing and agricultural services operations pushed up profits for the year from $1.53bn to $1.73bn, excluding special items.
Cargill has benefited from the continuing expansion of ethanol and biodiesel production, with prices for the grain alcohol rising because of its increasing use as a fuel additive in the US.
Warren Staley, the company’s chairman and chief executive has been instrumental in initiating the evolving debate over the competing claims on corn production for food, animal feed and ethanol. “We hope there is going to be more debate about what ethanol policy is,” said Mr Veazey.