The largest players in the global agriculture trading industry are likely to be cut out of a growing share of world crop trade following the recent move by China’s trading arm COFCO to acquire majority stakes in Nidera and Noble Group Ltd’s agriculture businesses.
By beefing up COFCO’s agricultural product origination capabilities, the Chinese government will be able to cut other third-party traders out of the lucrative purchasing and logistics portion of the supply chain. And given that China is one of the world’s largest importers of nearly all grains, oilseeds and edible oils this development could emerge as a major threat to the core businesses of the traditional ‘Big 4’ giants of agri trading - Archer Daniels Midland Co, Bunge Ltd and Cargill, and Louis Dreyfus Commodities, which are collectively known as the ABCDs.
Long Time Coming
As China emerged as the dominant trader, consumer and importer of agricultural staples over the past decade, expectations have risen among the trading community that the country would take steps to establish more direct origination and handling capabilities in the grain and oilseed markets.
China’s chief agricultural trading arm COFCO has increased its scope and capabilities over the past few years in order to accommodate the steep increases in imported volumes of a slew of agricultural products.
But it has been something of a surprise that it took until this year for China to make its first official moves to acquire or partner with major trading houses that specialize in the food and feed arenas.
Now that it has conducted back-to-back deals to acquire a majority stake in Netherlands-based Nidera and the agricultural unit of Singapore-based Noble, however, trader focus is starting to shift to how this new set-up will impact the global agri-trading industry going forward.
With Nidera’s well-established trading acumen in Europe and South America, and Noble’s extensive port and logistics infrastructure throughout the Americas, Asia, the Middle East and Africa, COFCO has made its intentions clear that it will look to source its crop and food products via a diverse global network.
And given the scale of China’s food and feed requirements, taking such a broad approach to agri-product sourcing is not surprising as it lessens dependence on any one supplier country or region.
However, China’s resulting improved diversity in the agriculture import field could prove to be bad news for those firms who have lately been heavily reliant on China for steady demand in grains and oilseeds.
And given that each of the ABCD firms have benefited strongly from China’s aggressive demand requirements over the past decade, each looks set to suffer diminished trading revenues going forward as China steers more of its purchase orders through its own businesses.
Not only that, but any downturn in trading activity with China will also reduce each firm’s market intelligence on a major global player, and thereby inflict an intellectual penalty that could prove to be more severe than any downturn in trading receipts.
Reduced Dependence on the US
While the U.S. will remain the world’s top producer and exporter of corn and a leading supplier of soybeans, wheat and other products, China’s new trading set-up could mean it depends less on North American suppliers for those commodities going forward.
Both Nidera and Noble have developed extensive handling and origination capabilities across South America in recent years, where vast tonnages of corn, soybeans and other crops are grown every year.
What’s more, Chinese authorities have taken steps in recent years to approve certain seed traits grown in that region that should foster increased domestic demand South American crops over the coming years.
Combined, this should set the stage for a steady increase in the flow of oilseeds and grains from throughout South America towards China and neighboring countries over the coming years.
And while this does not necessarily mean any downturn in shipments out of North America - as demand is expected to continue rising in all regions for the foreseeable future - China’s increased orientation towards South America does highlight the importance for the major agri-exporters to develop and expand markets in other regions going forward.
While all the ABCDs have a global footprint in terms of both origination operations and consumer markets, some appear to be better placed than others to adopt to any ‘post-China’ landscape.
At first glance, Cargill may appear to be in the strongest position to offset any reduced demand from China due that company’s enormous scale throughout the world.
But in actuality, Louis Dreyfus may have the broader footprint in terms of operational exposure, as Cargill’s heavy emphasis on grains and meat production leave it potentially more vulnerable to any downturn in Chinese protein demand than Dreyfus, which is also a major player in the citrus arena.
Bunge also looks likely to get hurt by any aggressive switch in Chinese purchasing patterns due to that firm’s dominance in the soybean arena, and the fact that China is the world’s largest importer and consumer of that oilseed.
And ADM may prove to be impacted worst of all, as despite efforts last year to broaden its geographic footprint via a failed bid to acquire Australia’s GrainCorp, the company remains a mainly American concern, with an especially-heavy presence in the United States.
What’s more, of all the ABCDs ADM has the strongest ties to the corn market, and its share price has shown a clear tendency to ebb and flow in close correlation with U.S. corn export and price patterns - climbing during periods of high corn demand and faltering somewhat during spells of reduced corn consumption and shipments.
Despite efforts towards self-sufficiency in grain production, China was a major corn importer in recent years and was instrumental in corn’s blistering price rise in 2012 as it ratcheted up imports right in the midst of the U.S. drought.
But now that China has hooked up with two firms with close ties to crop growers predominantly outside the U.S., it is likely that any further Chinese corn purchases will be at least steered through other firms, if not from other locations altogether.
This could leave ADM, alongside the rest of the ABCD giants, under pressure to compete with one another for the crop demand outside of China over the coming years, which would mark a stark contrast to the recent period when they all enjoyed a share of China’s impressive agricultural demand. (Reuters)