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There’s a New Agri-Giant Invading the U.S. Heartland

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For decades, four companies have dominated the agricultural market — grain barons controlling our daily bread and beef, and, increasingly, our vegan options, too. The quartet is made up of Archer-Daniels-Midland Co., Bunge Ltd., Cargill Inc., and Louis Dreyfus Co. — or  ABCD for short. 

It’s a neat acronym for a very profitable, if low-profile, industry. Glencore Plc, the London-listed natural resources giant, is now trying to break in with its own initial. From a business perspective, the timing is perfect; from a political perspective, it may be difficult.  

Glencore is the world’s largest commodity trader, handling lots of stuff like aluminum and crude oil. However, it has been a medium-sized player in agriculture, without a presence in the market that matters the most: the U.S. 

Now, it’s taken a major step to up its game in the world’s largest exporter of agricultural commodities. On Wednesday, Viterra — Glencore’s agricultural arm — announced it would pay $1.13 billion, excluding debt, to buy U.S.-based grain trader Gavilon, a unit of Japanese conglomerate Marubeni Corp. The price is less than half what Marubeni paid for Gavilon a decade ago. Viterra, a standalone company, said it will fund the acquisition from its own balance sheet and banking loans.  

Viterra should expect scrutiny about the deal in the U.S. farm belt. The deal will further consolidate an industry at a time farmers are worried about a lack of competition among the few grain traders they can sell their crops to. The White House has expressed concerns about concentration in agribusiness, although, so far, focusing on beef. With U.S. mid-term elections around the corner, Viterra and Glencore should expect politics to play a bigger role. 

Viterra is already the world’s largest wheat trader, thanks to its investments in major exporting regions including Canada, Australia, Argentina and the former Soviet Union. If Gavilon in the U.S. is added to that impressive portfolio, it will be the kind of concentration — and power — that governments worry about. Indeed, Beijing may be even more concerned about the deal than Washington. China, which is spending billions of dollars to build its own state-owned agricultural trading house, is unlikely to welcome further consolidation in an industry it relies on to feed more than one billion people.

Regulatory concerns aside, the deal is a steal. Glencore, founded by the late U.S. fugitive Marc Rich in the 1970s, built its agribusiness through acquisitions. In 2012, it beat out ADM and purchased Canadian grain trader Viterra Inc. for 6.1 billion Canadian Dollars ($4.8 billion). Today, Glencore controls just under 50% of the enlarged Viterra business, with 49% owned by two Canadian pension funds and a residual percentage controlled by the staff.

Deal-making is the DNA of Glencore’s agriculture business. It had approached rivals Bunge and Louis Dreyfus with talks of a merger but both said no. A next attempt at M&A was just a question of time — and Gavilon was the last grain operation of size up for grabs.

Marubeni was the obstacle. The Japanese trading house bought Gavilon from a group of private investors, including commodity hedge fund manager Dwight Anderson and billionaire George Soros, for an eye-watering $2.7 billion in 2012. Trouble soon followed. The Japanese business culture never meshed with the ways of Nebraska, where Gavilon is based. Disagreements between Tokyo and Omaha became legendary in the industry. Top executives left. Having bought at the peak of the cycle, Marubeni was forced to take multiple write-downs on its U.S. grain misadventure.

Viterra is likely to succeed where Tokyo failed in the American heartland. The business cultures are a match. And so are the geographical and commodity footprints: Gavilon is huge in the U.S., where Viterra isn’t.

With the industry enjoying an upcycle — Cargill and ADM have recently reported their highest ever annual profit — the deal should open the door for Viterra’s next big move: either an IPO or a partial sale to an institutional investor so Glencore and its Canadian partners can unlock value. Mideast sovereign wealth funds have shown themselves to be eager buyers of global grain trading operations, paying top money.

But first, Viterra-Glencore needs to demonstrate that it can make money under all market conditions. After adjusted earnings before interest and tax (Ebit) surged to nearly $1 billion in 2014, profitability fell significantly from 2017 to 2019, with Ebit dropping below $400 million. Viterra is now pumping money again, helped by volatile markets and strong Chinese demand. But if Glencore and the Canadians are to cash in, Viterra needs to continue doing so.

More From This Writer and Others at Bloomberg Opinion:

Greenflation Is Very Real and, Sorry, It’s Not Transitory: Javier Blas

BHP Picks the Worst Moment to Return to Mining Megadeals: David Fickling 

How Not to Tame Global Food Inflation: Clara Ferreira Marques

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of “The World for Sale: Money, Power, and the Traders Who Barter the Earth’s Resources.”

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