Tough times for big grain traders

Tough times for big grain traders

Intense competition means record crops generate little profit for middlemen

Booming production and strong demand has helped the world’s biggest oil traders record bumper profits in recent years.

Yet similar market conditions have not been as kind to big grain traders, who have seen profits decline and margins squeezed. The question is why?

One answer is slow farmer selling in key producing regions like Argentina and Brazil, which forces traders to compete aggressively with each other for the crops needed to satisfy their export commitments.

That at least, is the view of Soren Schroder, the chief executive of Bunge — the B in the so-called “ABCD” of companies that dominate international agricultural trading, along with Archer Daniels Midland, Cargill and Louis Dreyfus Company.

“Commodity prices dropped during harvest, farmers held back selling and used all means to store their crops, in silo bags, at co-operatives” Mr Schroder explained last week after the company reported a sharp drop in second-quarter profits.

“Brazilian exporters and crushers therefore fell behind on procurement and had to compete aggressively for bean origination to fulfil commitments,” he continued.

The result, according to Mr Schroder, was that grain traders and processors made little or no profit from a record South American crop.

“The size of the mismatch between farmer pricing and industry commitments is unprecedented and challenges the traditional wisdom of farmer marketing patterns”, he concluded.

For margins in both soyabean crushing (the process used to make vegetable oil and protein meal) and grain trading to return to historic norms, Mr Schroder says it will require the industry to be more responsive and manage capacity actively.

It will have to work more closely with farmers, who now have a wealth of information at their fingertips, and offer them new financing and risk management tools as well as logistics, so they can lock in a larger share of crop before harvest. All of which is easier said then done.

The industry will also have to think about consolidation, says Mr Schroder. But how that consolidation plays out is the subject of much debate within the industry at the moment and there are no clear answers from the leading players.

Glencore’s agricultural arm — a joint venture with two Canadian pension funds — has already nailed its colours to the mast. It approached Bunge over a possible business combination in May but was rebuffed. It is likely to come again but for the moment is playing its cards close to its chest.

Mr Schroder prefers a regional partnership approach, something he says is a fairly straightforward way to achieve rationalisation and better utilisation of assets. Indeed, Bunge has struck several such deals in recent years.

Meanwhile, ADM has the financial firepower to strike large deals, according to its chief executive Juan Luciano, but is wary about the benefits of consolidation which is often confused with dealmaking and land grabs.

“If I look at transactions in the past, most of them have been the consequence of someone trying to grow more than consolidating a position,” he told the Financial Times last week after reporting second-quarter results.

“Some of the transactions we may see in the future may be the same — a strong player taking over a strong player for geographic growth rather than consolidation,” he added. es un sitio web oficial del Gobierno Argentino