Agriculture's Consolidation Remains a Constant

Size: px

Start display at page:

Download "Agriculture's Consolidation Remains a Constant"

Bryan Stone
6 years ago
Views:

1 Agriculture's Consolidation Remains a Constant Risks and Opportunities Ahead as Agriculture Evolves Prepared by Stephen P. Nicholson Vice President RaboReasearch Food & Agribusiness Grain and Oilseed Analyst April 2017

2 Table of Contents Sections I II III Macro View Grains and Oilseeds Down on the Farm Going up to the Elevator 2

3 I. Macro View of Global Grain & Oilseeds 5

4 Increased Dispersion of Global Grain & Soybean Trade 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% % of Global G&O Trade Total Exports (1000 MT) 500, , , , , , , , ,000 50,000 0 Australia Black Seas Region Canada EU South America U.S. Total Global Trade Source: USDA-FAS, Rabobank 2017 Note: Accounts for Total Exports of Corn, Soybeans and Wheat. 4

5 Despite Relatively Stable Harvested Acres Production Continues to Increase Productivity Growth Harvested Acres +51%, Production +247%, Yield +130% 2,250,000 1,000 Metric Tons/Hectares Metric Tons per Hectare 4.5 2,000, ,750, ,500, ,250, ,000, , , , Source: USDA-FAS, Rabobank 2017 Note: Accounts for Total Global Production of Corn, Soybeans and Wheat. Production Area Harvested Yield 5

6 Major Canadian Row Crop Plantings Only canola shows consistent year-over-year increases 14,000,000 13,000,000 12,000,000 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 Hectares Barley Canola Wheat, All Wheat, Spring Source: Stats Canada, Rabobank

7 Minor Canadian Row Crop Plantings Mostly Show Increases 3,500,000 Hectares 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 0 Corn Lentils Oats Peas, dry Soybeans Sunflower Durum Source: Stats Canada, Rabobank

8 U.S. Planted Acres Growth in Oilseeds & Minor Crops In minor crops growth has been in dry edible beans, peas, lentils. 120 Million Acres Million Acres Total Feed Grains Total Food Grains Total Oilseeds Cotton (Y2) Minor Crops (Y2)** Source: USDA/NASS, Rabobank 2017 *Prospective Plantings, March 2017 **minor crops include tobacco, dry edible beans, peas, Austrian winter peas, lentils, proso millet, sugarbeet, sugarcane, potatoes, sweet potatoes 8

9 Global supply chain trends Structural New significant sources of commodity supply (Brazil, Black Sea Region) Population and income-driven food demand increase (protein-centric) Rich world health, wellness and nutrition concerns Information and communication availability and accessibility Industrial Benefits to scale Input availability/price Consolidating customers R&D reach Globalization Availability of finance/liquidity Emerging leaders from Asia and South America Implications Heightened competition, selective pricing power Significant organic investments: Hard assets R&D Vertical and horizontal integration (M&A) Constrained ROIC leads to search for value-add 9

10 II. Down on the Farm 5

11 In Canada Number of Farms Shrinking, Land in Farms Relatively Steady 80,000,000 Hectares Number of Farms 800,000 70,000,000 Average Farm Size = 315 ha 700,000 Average Farm Size = 80 ha 60,000, ,000 50,000, ,000 40,000, ,000 30,000, ,000 20,000, ,000 10,000, , Land in Farms # of Farms (Y2) Source: Statistics Canada/USDA & Rabobank 11

12 U.S. Production Agriculture Continues to Consolidate 1,200 Million Acres Average Farm Size = 195 Acres Million Farms 6 1, , ,050 3 Average Farm Size = 434 Acres 1, # of Farms (Y2) Land in Farms (Y1) 0 Source: Census of Agriculture/USDA & Rabobank 12

13 E 2017P 2018P 2019P 2020P 2021P 2022P 2023P 2024P Baseline Case for U.S. Farming Margins Not Until 2019 Crop Year is There Potential for Positive Margins $1,200 Dollars per Acre $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Machinery seed Chem Fert Land Labor Value of Corn Per Acre- IA Crop Value With Gov Payments Source: ISU, U of I, Rabobank, proprietary Partial Equilibrium Model, Oct

14 Changes are Happening Down on the Farm Current Situation Results Implications Low commodity prices Softening land values Input costs remain relatively high Financial stress Lose of liquidity, equity and decreases in working capital Increasing use of debt capital Farmers leaving the farm Larger farms Less farm services providers required Continued depopulation of rural areas Strategies More diverse farm operations/business Become low cost producer Pooling input purchases Investment in technology Acting more like a grain merchandiser Getting closer to end user 3 14

15 III. "Going up to the Elevator" 5

Competition for grains intensifying due to changing landscape

emerged as key players in the sector Increased use of

sharing Traditional G&O majors focused on extending their

players are increasingly targets or using M&A strategy

Viterra through Glencore GrainCorp and Zen Noh formed a 50/50 JV

chocolate business to Cargill for USD 440m ADM sold its cocoa

3bn Bunge North America acquired the wheat milling business of

Brazil Scoular acquired the Special Crops division of Legumex

SALIC acquired 51% stake in Canadian Wheat Board for CAD 250m ADM

Glencore ADM acquired Wild Flavors for USD 3.2bn (16.

CPPIB for USD 2.5bn (~$10b EV, 12.5x Norm.

JV in Japan COFCO acquired 100% of Noble Agri for a total

2bn 3 ADM sells stake in GrainCorp Wilmar acquired Goodman

16 Competition for grains intensifying due to changing landscape Alternative capital providers (SWFs, SOEs, pension funds) have emerged as key players in the sector Increased use of partnerships and minority investments for participation and risk sharing Traditional G&O majors focused on extending their value-added capabilities to improve profitability Regional grain players are increasingly targets or using M&A strategy defensively Richardson acquired the oat milling business from Viterra through Glencore GrainCorp and Zen Noh formed a 50/50 JV to build and operate grain facilities in Canada ADM sold its chocolate business to Cargill for USD 440m ADM sold its cocoa business to OLAM for USD 1.3bn Bunge North America acquired the wheat milling business of Grupo Altex Sale of Gruma s wheat mills to Grupo Trimex for USD 200m (13.5x EBITDA 1 ) Pengxin acquired a controlling stake in Fiagril in Brazil Scoular acquired the Special Crops division of Legumex Walker for CAD 175m Toyota Tsusho acquired Nova Agri Bunge and SALIC acquired 51% stake in Canadian Wheat Board for CAD 250m ADM agreed to sell 50% stake in its export terminal in Barcarena to Glencore ADM acquired Wild Flavors for USD 3.2bn (16.4x EBITDA 2 ) Glencore divested a 40% stake in Glencore Agri to CPPIB for USD 2.5bn (~$10b EV, 12.5x Norm. EBITDA) COFCO acquired a majority stake in Nidera at an est. equity value of USD 1.2bn 2 Mitsubishi acquired a 20% stake in Olam and established a JV in Japan COFCO acquired 100% of Noble Agri for a total investment of USD 2.2bn 3 ADM sells stake in GrainCorp Wilmar acquired Goodman Fielder (USD 1.8bn EV, 7.7x EBITDA) Consortium led by Temasek acquired over 75% of Olam International (USD 10.4bn EV; 11.5x EBITDA) Note 1. Rabobank estimate Note 2. Market estimates Note 3. Initial investment of $1.5 billion for 51% and subsequent investment of $750 million for the remaining 49% Sources: Bloomberg, Capital IQ, company information, Reuters, Rabobank analysis 16

17 Recent M&A developments and deals in the ag-related sectors 17

18 Grain and Oilseed Sector Continues to Evolve Drivers Increase Return-on-Investment (ROI) Monetarize owner s investment Take advantage of new supply chains Consolidation in both down-stream and up-stream customers Spread costs across a larger footprint Increasing competition on all fronts, e.g. processors, exporters, etc. Strategies Outright acquisition Strengthen current strong performing core businesses Develop closed supply chains upstream and downstream Vertical integration, e.g. processing Enter partnerships and joint venture agreements Upgrade current facilities Be opportunistic and take advantage of niche markets Strategic review of business(es) 18

19 Value-creation implications for players in grain & oilseed space = size of bubble indicates P/E 2017F multiple ROE (%) % 25.0% 20.0% Symrise 15.0% DSM Sensient Bunge 10.0% Scoular R&D-centric ADM Wilmar Acomo Average 5 year TSR: 203% 5.0% AGT Natural ingredients Graincorp Andersons SunOpta Olam Average 5 year TSR: 57% - (3.0)% (1.0)% 1.0% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% Glencore (5.0)% Mixed Average 5 year TSR: 64% Ingredion Kerry Frutarom Tate & Lyle Corbion IFF Givaudan (10.0)% (15.0)% Scale-centric Average 5 year TSR: 6% (20.0)% Net margin (%) 1 Grain platforms Natural ingredients Value-added processing Flavors and specialty ingredients Source: Capital IQ as of March 27, 2017 Note 1: Based on latest available financial period 5 Note 2: ROE and net margin based on company input; the size of the bubble reflects the average of US-based grains platforms (The Andersons and ADM) 19

20 Agriculture will continue to Consolidate & Evolve Current Situation Implications Low commodity prices/volatility Lower merchandising margins Increasing export competition Less export volume Too much capacity Expand/Invest outside of home footprint Acreage growth is limited Traditional input business has limited growth Market fragmentation Complexity of business increased Demand increased flexibility Consolidation in production agriculture Less producers to serve Less farm service providers will be required More sophisticated operations/specialized roles in the farm business, e.g. merchandiser Increased direct marketing Less need for grain merchandisers/handlers More competition for grain, e.g. processor, livestock producers, exporters, etc. Consolidation of food companies (CPGs) Fewer traditional end user customers/buyers More price sensitive 20

21 Contact Information Stephen P. Nicholson Rabo-AgriFinance Vice President-RaboResearch Food & Agribusiness Grain and Oilseed Analyst Olive Boulevard, Suite #50 St. Louis, MO U.S.A (office) (cell) 21

22 Banking & Securities Disclosure This document has been prepared exclusively for your benefit and does not carry any right of publication or disclosure other than to Coöperatieve Rabobank U.A. ( Rabobank ), registered in Amsterdam. Neither this document nor any of its contents may be distributed, reproduced or used for any other purpose without the prior written consent of Rabobank. The information in this document reflects prevailing market conditions and our judgement as of this date, all of which may be subject to change. This document is based on public information. The information and opinions contained in this document have been compiled or derived from sources believed to be reliable, without independent verification. The information and opinions contained in this document are indicative and for discussion purposes only. No rights may be derived from any potential offers, transactions, commercial ideas et cetera contained in this document. This document does not constitute an offer or invitation. This document shall not form the basis of or cannot be relied upon in connection with any contract or commitment whatsoever. The information in this document is not intended and may not be understood as an advice (including without limitation an advice within the meaning of article 1:1 and article 4:23 of the Dutch Financial Supervision Act). This document is governed by Dutch law. The competent court in Amsterdam, The Netherlands has exclusive jurisdiction to settle any dispute which may arise out of or in connection with this document and/or any discussions or negotiations based on it. This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of Food & Agribusiness Research and Advisory All Rights Reserved. 22

Strategic shifts in the global animal nutrition industry

Strategic shifts in the global animal nutrition industry Our long term view Karen Heuvelmans RaboResearch Food & Agribusiness 27 September 2017 The four drivers of change 2 What are the key sector trends