Some of the world’s biggest traders of agricultural commodities are seeking new alliances and joint ventures as they battle tough market conditions brought on by the end of a decade-long boom for the industry.
In interviews with the Financial Times senior executives at Cargill and Louis Dreyfus Company said they were looking to join forces with both big producers and consumers after struggling to increase profits in recent years.
Bumper harvests, overflowing stocks and violent price swings have cut into earnings for the handful of companies that dominate global flows of crops and staple foods.
At the same time customers in fast-growing markets such as China and Asia are consolidating and using their size to buy directly from producers in the Americas and other regions.
“There has been some misunderstanding about what we are trying to do,” says Gonzalo Ramirez Martiarena, chief executive of Louis Dreyfus Company, on moves to ringfence and seek out partnerships for its dairy, metals, fertiliser and orange juice units.
“It’s not about selling businesses. We see growth coming from strategic alliances and joint ventures. We can’t grow organically alone.”
Mr Ramirez adds that LDC’s fertiliser business could partner with a potash producer to help it bear price risk while tie-ups with distributors could improve the reach of its orange juice business, which has been affected by changing consumer tastes.
Controlled by Russian billionaire Margarita Louis-Dreyfus, pre-tax profits at LDC fell 15 per cent to $151m, in the first six months of 2016.
Cargill, which has traditionally focused on moving crops from areas of surplus to areas of demand, faces a new competitive landscape where big customers are increasingly sourcing their own supplies, according to Gert-Jan van den Akker, the head of the company’s powerful agricultural supply chain unit.
Cargill, one of the world’s largest private companies, could counter that threat by forming alliances with big customers in emerging markets or making acquisitions.
“Large Asian consumers need a secure source of supply — we can be that partner,” says Mr van den Akker during an interview at the division’s headquarters in Geneva.
Mr van den Akker says the tough market conditions may also spur consolidation.
“Results for the industry overall have not been good. Overcapacity has made it difficult to operate and produce returns,” he adds.
LDC and Cargill are among the handful of companies that dominate agricultural trading along with Archer Daniels Midland, Bunge and Glencore. They had enjoyed a decade of bumper growth at the start of the century due to the shifting diets of the rising middle class in developing markets.
Crop failures had boosted prices further between 2008 and 2012, sparking fears of food shortages in the poorest countries. But investments, technological advances and increased productivity made during this period has led to surpluses.
The global agricultural industry has also been shaken by the emergence of new players such Cofco, China’s state-owned grains trader.
Its international trading arm Cofco Agri recently took a significant step towards becoming one of the world’s leading agricultural houses with a deal to secure full ownership of Nidera, the Dutch grain dealer.
Matt Jansen, the head of Cofco Agri, told the Financial Times Commodities Global Summit in April that the company was looking to invest more in supply-side assets, especially in North America, where it lacks a presence.
The company is seen as an attractive partner for many producers because it provides a gateway to China, a market that is sometimes difficult for foreign companies to access.
In the absence of a big crop failure, Mr Ramirez said he expected grain and oilseed prices to remain depressed as ample supplies offset rising demand. That view was echoed by Mr van den Akker.
“Demand is very good and better than most people think,” Mr van den Akker says. “But on the supply side we are in a very comfortable position. There is too much of everything.”
After a violent rally in May and June, grain slumped over the summer, with prices touching their lowest level in more than a decade. These erratic moves crimped trading opportunities and caused several trading companies to issue profit warnings.
Mr Ramirez says the wild moves were partly the result of an “irrational wave of speculative money” hitting the derivatives market where investors can buy and sell contracts linked to agricultural commodities. Investors have bought into commodity indices in anticipation of a recovery in oil and metal prices, but many also allocate of portion of the money to agriculture.
“It’s like a tsunami, you can’t see it coming,” he says.
“At the beginning of the rally the farmers start selling, but the market goes up further and consumers are scared to buy and farmers stop selling. That means we don’t have a role as a merchant.”
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