Ahandful of companies still dominate the global grain trade. Chances are, you re still selling to them too, either directly through a local elevator they own, or indirectly through the maze of marketing agreements that local buyers negotiate with them.
But scratch that surface and you ll find a sector that s undergoing an enormous transformation and the jury is still out as to how it s all going to shake out.
The business model of the global grain trade had been about as straightforward as you could get.
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For over 200 years, it was all about buying grain in areas where farmers had produced a surplus and where the grain price was low as a result and then shipping that grain to countries where grain is scarce, and prices sky-high because of it.
To make that model work, the key was information (or market intelligence as it s called in the industry.) What was the crop like on the Russian steppes? How were things shaping up on the U. S. plains? Was there drought in Australia? Frost in Canada?
For as long as they can remember, the big companies owned that information, and it made them billions. In effect, the only ones who really knew how much your grain was worth were the companies, and they weren t saying.
But now, says Brian Hayward, the former CEO of the Canadian grain company Agricore United, that information asymmetry is disappearing from the market. An explosion in information technology has all but eliminated this strategic advantage from the arsenal of the major grain companies.
What these companies were basically doing was leveraging proprietary knowledge, Hayward says. If the Russians had a drought, for example, the only ones who knew were the Russians and the people in some of these companies and maybe not even all of them.
Now, says Hayward, if you want to know if it s raining in Russia, you go onto Google and type raining or radar map and Russia.
A new model
Faced with the virtual disintegration of their long-standing way of doing business, the global grain companies quickly divided into two camps. There were those that understood they needed to find a new role beyond simply trading grain, and those that failed to redefine themselves in light of a new business reality.
The smart companies understood that some of these things were happening and made moves, says Hayward. The ones that didn t are gone. Continental is the perfect example.
So what are the successful strategies? In simple terms, these companies are using their size and wealth to build and buy pipeline assets that take control of grain at the farm gate and don t give it up until they reach the store shelf, earning a buck at every step.
In a way, it isn t exactly new. Hayward recalls a colleague from Canada Packers telling him the company tried to break even on meat. Where it made its money was on hides, tallow and byproducts.
Today, it s much more sophisticated. The grain company owns the elevator, it owns the ethanol plant, it owns the distribution system for distillers grains and it owns a chunk of the meat processor. And not just in Canada. They do it on the world stage, developing an endless list of value-added products along the way, from de-icers for airplanes to specialty industrial oils.
To a significant degree, companies such as Archer Daniels Midland and ConAgra have fundamentally changed their business model. They aren t grain traders. They re grain processors.
Canada up for grabs?
Now, the grain world is watching Canada and Australia, the two big grain-producing regions that were never totally immersed in the grain company strategy, largely because of their marketing boards. Love or hate their single-desk systems, they undeniably slowed the growth of the grain giants here. The multinational footprint was never quite so large, and smaller regional players continued to operate successfully within highly regulated environments.
But while the global grain giants were evolving, so were these markets. Canada has deregulated its grain handling and transportation systems, kicking off a wave of consolidation that eventually swallowed all the Prairie co-operatives. Australia meanwhile began trying to privatize its marketing boards, until a kickback scandal discredited the single-desk system and ultimately led to an open market.
That s created an opening to build companies with a foot in both countries, says Belinda Moore, a top agriculture analyst at investment bank RBS Morgan s Australian operation. Moore points to the recent buyout of the former Australian Barley Board by the Canadian grain company Viterra and the proposed takeover of the former Australian Wheat Board by Canadian fertilizer producer Agrium as just two examples.
Australian agricultural assets are highly strategic for the big international agricultural companies that are wanting to expand in the Asia Pacific region the high-growth region, Moore said in an email exchange with Country Guide. Canada and Australia have different crop cycles. So this is a good diversification move. It is also about being able to have secure supply. The different crop cycles allow the company to better manage its working capital requirements.
The company that s clearly gone the furthest down the road to building another multinational grain company is Viterra, the Regina-based grain handler that rose from the ashes of the former Saskatchewan Wheat Pool s ill-considered global expansion strategy of the 1990s. Led by CEO Mayo Schmidt, the company bought out the other former producer cooperatives which had amalgamated under Hayward s Agricore United banner.
During a recent conference call to announce Viterra s quarterly results, Schmidt made it clear to reporters and investment analysts that the company has no intention of standing still now. In everything from investment decisions to infrastructure investments like a global IT platform, the company is preparing for the future, he said.
You won t find Viterra taking a passive role in things that are important to us, Schmidt told the conference call.
Hayward says the strategy of the company has become clear in recent months, especially as they ve made investments in value-added processing and signalled there will be more to come. Today the company already has interests in canola processing, oat and speciality grain milling, malt processing and pasta manufacturing. What s less clear is how exactly it will play out.
They ve chosen to aggressively expand with acquisitions, hostile and otherwise, Hayward says. That can be risky, though there can be greater rewards. The jury is still out though on this agressive strategy, versus a more Cargillian approach if that s a word where you build a company more slowly over decades like Cargill did.
There s also the question of just how successful the Viterra management team can be at raising money in the future. To date they ve been able to go to capital markets rather than taking out loans, to fund their expansion plans. With a slowing economy and lacklustre stock performance in recent months, Hayward says that could become a tough sell.
If you re putting your money into equity, you re expecting a risk premium and investors haven t been getting that, Hayward says.
The other major player that might ponder an expansion is Richardson International, born in Kingston, Ont., and now a major player across the country, with key port facilities in Ontario and Quebec and operations throughout the West.
Now based in Winnipeg, the Richardson family has become a major canola crusher with their purchase of Canbra Foods and construction of a major new crushing plant in the Yorkton area. They were also participants in the Viterra takeover bid for Agricore United, but were ultimately outbid. Hayward says the company is well run and has a track record of success, but the private ownership model limits their financing options for any expansion bids they may be contemplating. In essence, because they re privately held they can t do a stock swap without converting to a publicly traded company.
Major expansions say a theoretical buyout of the Australian grain handler Graincorp would be difficult without such tools, Hayward says. I m not sure what Graincorp would go for, but it would be a big cheque for the family to write.
Buy the railroad
Hovering over any discussion of the global grain trade is another question, says a University of Saskatchewan agriculture economist with a long-time interest in the grain business. Murray Fulton has been observing and writing about the grain trade for most of his career, and he says there s growing evidence that nontraditional companies are showing new interest in agriculture.
I think there s a growing realization within some of these companies that they want to hedge some of the risk of things like global warming and population growth by investing in agriculture, says Fulton.
It s the sheer scale of the companies making these investments that s a game-changer, Fulton says, citing the recent takeover bid by Australian mining giant BHP Billiton for the Potash Corporation of Saskatchewan. With a total market capitalization of more than $180 billion, BHP Billiton dwarfs the companies that seem like big fish in a Canadian context. CP Rail has a total market cap of around $10 billion, for example, and Viterra sits at around $3.3 billion.
Whether such companies will think agriculture is too far out of their core strengths may depend on the size of the potential profits they see. But it is clear that such companies can impose solutions that simply aren t available to current players. These are gigantic companies, Fulton says. They can do things very differently. For example, if they have a problem with rail service, one of the possible solutions they could entertain because of their size, is simply buying that railway.
Meanwhile, Canadian fertilizer producer Agrium has bid for the former Australian Wheat Board. Agrium is a well-managed and focused company that has a model, Hayward says. They want to be in the manufacturing and distribution of fertilizer, which means retailing.
Hayward says Agrium CEO Mike Wilson has responded cautiously to enquiries about the ultimate fate of AWB s grain business, but Hayward expects if the deal goes through, Agrium will subsequently sell it. What you d be seeing is they really don t want to contaminate their business model, which is the manufacture and retail of farm supplies, he says.
Canaustralia?
Another grain trade insider says he thinks we ve seen the major moves already. Greg Arason is the former CEO of Manitoba Pool Elevators and twice headed up the Canadian Wheat Board. He says the major shifts have already been made and the last obvious move on the drawing board is to consolidate the Canadian and Australian grain industries.
They re producing the same crops, for the same markets, Arason says. It would give the companies flexibility in supply at certain times of year and protect them from production issues in one of the countries.
Hayward seconds that opinion and goes one step further, predicting that there won t be any takeover of the grain business by outside interests. I really do think it s going to be the usual suspects, he says.
Hayward also says he s expecting a period of less activity in coming years as the global economy works through the hangover from the financial crisis and recession.
That may be so, but there are a lot of non-agriculture businesses out there sitting on a lot of cash, and they re starting to look for places to invest it, says Fulton. That could mean big changes for an industry that s been under the radar for a long time.
I m expecting ongoing change, Fulton says. That s as far as my crystal ball goes, but it s going to be very interesting to watch this over the next five or 10 years. CG
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They ve chosen toaggressively expandwith acquisitions, hostileand otherwise, Hayward says. That can be risky.
