By Shruti Singh, Maria Kolesnikova and Jack Kaskey - May 30, 2012
Bloomberg
Marubeni Corp. (8002)’s proposed $3.6 billion acquisition of U.S. grain merchandiser Gavilon Group LLC underscores the growing interest in agricultural traders as rising food demand puts pressure on global supplies.
The Marubeni deal, announced yesterday, will boost the Japanese company’s access to the U.S., the biggest corn grower and exporter. Marubeni prevailed after rival traders including Glencore International Plc (GLEN), Bunge Ltd. (BG), Mitsui & Co. and Mitsubishi Corp. also expressed an interest in Omaha, Nebraska- based Gavilon. Shareholders of Canadian grain-handler Viterra Inc. (VT) voted yesterday to accept a C$6.1 billion ($6 billion) takeover by Glencore, the world’s largest publicly traded commodities supplier.
“It’s a trend that’s been developing over the last five years that’s been accelerating,” Farha Aslam, a New York-based agricultural analyst for investment bank Stephens Inc., said in an interview. “The desire is to broaden the supply, broaden the reach and increase the depth across the globe.”
The agricultural-trading industry is being redrawn by the rising demand for food and animal-feed in developing countries including China, which went from being a net exporter of corn to a net importer two years ago. Corn futures have more than tripled in the decade through 2011 while inventories of the grain measured as percentage of consumption fell to a 38 year- low last year. Glencore said in March that global grain and oilseed demand will increase as much as 3.5 percent a year.
Supply Disruptions
At the same time, unforeseen disruptions to supplies have tripped up some trading companies. A drought has hurt South America’s soybean crop this year, helping soybean futures in Chicago to advance 13 percent. The last two U.S. grain harvests have disappointed initial government forecasts.
The long-term trend of population growth and rising prosperity in developing countries is continuing despite short- term economic concerns, said Kelly Wiesbrock, a San Francisco- based managing director at Harvest Capital Strategies, which has $1.2 billion under management. Geographic expansion helps suppliers meet demand in China when the harvest falls short in Brazil or Argentina, he said.
“If you have a base in North America, South America and the Ukraine from which to originate product, you have a lot of options,” Harold Reed, chief operating officer of Maumee, Ohio- based grain processor Andersons Inc. said in a telephone interview. “Everyone is broadening their base.”
Louis-Dreyfus Merger?
There may be further acquisitions in the trading industry. Margarita Louis-Dreyfus, the chairman of Louis Dreyfus Holding BV, was cited by Les Echos on May 15 as saying that the trader is being prepared for a possible initial public offering. She also isn’t ruling out a merger, the newspaper reported. The Amsterdam-based company said May 1 it agreed to acquire Sugar Land, Texas-based Imperial Sugar Co. for $77.6 million to expand into refining and distribution of the sweetener.
A takeover of Australia’s GrainCorp Ltd. (GNC), which operates seven of the eight ports that ship grain in bulk from the country’s east coast, is “inevitable,” Tim Mitchell, an analyst at Citigroup Inc., said in a March 12 note. GrainCorp climbed 1.7 percent to A$9.43, compared with the 0.5 percent decline in the local benchmark index.
Closely held Gavilon drew interest from Singapore-based Wilmar International Ltd. (WIL), the world’s largest palm-oil processor, as well as Bunge of the U.S., Switzerland’s Glencore, and Japan’s Mitsui and Mitsubishi, people familiar with the matter said in March and April.
Food Prices
Cargill Inc., the agricultural supplier that’s the largest closely held U.S. company according to Forbes, was interested in buying Viterra, the Wall Street Journal said March 11. Cargill Vice Chairman Paul Conway said in a March 22 interview that a “new player” in the U.S. agricultural industry was likely to purchase Gavilon as traders connect surpluses in the Western Hemisphere with demand in Asia.
Global food prices more than doubled in the past 10 years, according to an index of 55 food items tracked by the United Nations’ Food & Agriculture Organization. The measure reached a record 237.9 points in February 2011 and was at 213.9 in April. The global food-import bill is expected to fall only slightly from the record set in 2011 amid “strong demand” even as world grain production rises to a record 2.37 billion metric tons in 2012, according to the FAO.
“When you look at the bigger-picture, secular story that says we have to double our food production in the next 40 years, that’s a big deal,” Wiesbrock said. “The biggest glaring issue is China.”
‘Safer Return’
The world’s most populous country became a net corn importer in 2010 for the first time in 14 years. It will continue that streak for the fourth straight year in the marketing year that begins on Oct. 1, the U.S. Department of Agriculture forecast on May 10.
World stockpiles of seven oilseeds are forecast to slump 25 percent to a three-year low by the end of the 2011-12 crop year on the combination of rising demand and falling production of soybeans, according to German research company Oil World.
“In the period of uncertainties, like the one we are in today, agriculture is one of the sectors that offers opportunities, which are a bit more predictable than other investments,” Abdolreza Abbassian, a senior economist at the FAO, said in a telephone interview. “For a long-term investment it’s going to be a safer return.”
Still, while grain demand is continuing to expand, prices have fallen back in the past year, and that may be a contributing factor to recent acquisitions because it lowered companies’ valuations, Wiesbrock said.
Price Volatility
“Some of the froth is out of the market,” Wiesbrock said. “If you’ve been waiting and waiting, now you are saying, this is a good time.”
Corn imports by China may advance 35 percent as a rapid increase in meat demand boosts consumption of grains to feed chickens and pigs, the UN said May 3. Corn consumption jumped 53 percent in the past decade while demand grew 41 percent for poultry and 27 percent for pork, according to the U.S. Department of Agriculture.
Corn prices averaged $6.785 a bushel in Chicago trading in 2011. It has declined 13 percent this year to $5.625 a bushel at the close yesterday and may average $6.05 a bushel in 2012, according to the median of four analysts’ estimates compiled by Bloomberg. Wheat prices in Chicago averaged $7.235 a bushel last year after more than doubling in the past decade. They may average $6.29 a bushel in 2012 and $6.90 a bushel in 2013, according to estimates.
Price Volatility
Given such price volatility, buying assets such as grain elevators and ports that connect farmers with consumers provides a more consistent return on investment, Jason Zandberg, a Vancouver-based analyst for PI Financial Corp., said in an interview.
“You are seeing consolidation of the supply chain of global commodities,” said Greg Pearlman, managing director and sector head of the food, consumer and retail group in Chicago for BMO Capital Markets. “Scale matters. Local market access matters. Part of it is physical assets and market access in both of these deals.”
