The Hunger Games Report #1: Cargill, Toepfer and Bunge Step Up their Play

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Financial reports for 2011 have shown, as expected, an exceptional year for cereal traders in Romania, and have consolidated the podium with three of the top global companies.

It is well known by now that if you look up the words “cereal trade” in an encyclopedia, the first explanation it will return will be “Cargill Inc.” No wonder, then, that America’s largest private company has had its eyes on Romanian agriculture since 1996, only 6 years after the fall of communism, when it opened its Bucharest branch. Romania was going through a difficult and slow transition from collective land ownership and exploitation to private ownership and voluntary association. Romania had been a major exporter of agricultural products during the ‘70s and ‘80s (although productivity was low by western standards), and it was just a matter of time before it went back on that road.

Cargill has acquired its first cereal silo in 2000, its second one in 2001, and…35 more in 2004 (only 17 are operated today), plus two others in the meantime, reaching a storage capacity in excess of 450,000 metric tons of cereals (17.75 million bushels of corn). Its most important investment was made in 2008, through a joint venture with Romanian logistics provider Transport Trade Services, in a 50,000 metric ton silo at the Black Sea side, in Constanta Harbor. In fact, all of the other silos that Cargill has bought are placed conveniently next to the Danube River, giving it direct access to this cheap and effective means of transportation: goods can be delivered through Serbia, Hungary, Slovakia, Austria and Germany, right to (or from) the heart of Europe, or down to the Black Sea and the Mediterranean area. Though, two silos, situated in a county where Glencore (LSE: GLEN) dominated cereal business, were sold last year to French malt producer Soufflet Group, bringing the storage capacity down 11% to nearly 400,000 tons (15.75 million bushels in corn).

The trading giant has also invested in oil production, by acquiring a cooking oil factory in 2005 and turning its “Grandmother’s Oil” brand into a national best-seller, with $95 million in revenue last year. But that’s not all: Cargill has separate divisions for input distribution, starch production, animal fodder and sweeteners. Cereal trade, though, accounts for the bulk of its revenue, making it one of the most efficient companies in Romania, with $867.55 million in revenue in 2011, made with roughly 200 employees.

It is only natural that the second largest cereal trader in Romania is Alfred Toepfer (owned by Archer Daniels Midland (NYSE: ADM)), which held the first ranking in the list of traders in Romania until 2008, when it had to step aside for the traditional “rival,” Cargill. Toepfer already owns a storage capacity of 110,000 metric tons (4.33 million bushels of corn) and has announced an investment plan that includes the refurbishing of old silos, the building of 12 completely new ones, also along the Danube River, and a brand new export terminal at the seaside. The most recent investment has increased the storage capacity of a silo built by German standards in 1940, from 16,000 to 35,000 tons.

The company’s most notable recent breakthrough was taking part and winning a delivery lot in an auction organized by the State of Egypt for 240,000 metric tons of wheat (8.8 million bushels) in august 2011. Romanian wheat delivered by Alfred Toepfer amounted to only 60,000 tons, but it was a breakthrough nonetheless, since Russia had a sort of monopoly in wheat deliveries to Egypt, a country that imports around 10 million tons (367 million bushels) per year.

For the moment, Toepfer doesn’t seem interested in any other activities connected to cereal trade, probably because the consumption market for cooking oil cannot possibly grow faster than the available quantity of cereal for export, therefore allowing it to grow sustainably within its core business.

Last, but not least, on the podium is Bunge (NYSE: BG), through its trading division, though the company initially entered the Romanian market by acquiring sunflower oil factories, in 2002. It now produces six different brands, for all the market segments, in an integrated factory in Buzau County. Following an investment of $30 million, the factory is now capable of supplying cooking oil to both the Romanian and Bulgarian markets. By volume, Bunge is the market leader, with close to 40% in 2011.

Recently, Bunge and Portuguese producer Prio Foods have set up a joint company (55% owned by Bunge) that operates another cooking oil factory, as well as a biodiesel plant.

As concerning cereal trade, Bunge is taking advantage of its two connected business lines and exports whatever quantity of cereals it does not need in the oil factories, through its 60,000 ton functional silo. The company also owns another 56,000 ton storage facility that is undergoing major refurbishment and, as we speak, is in the process of taking over another silo of 20,000 tons in the western part of Romania, where it was inactive before. After a steady growth in the export business during 2008-2010, the revenue dropped by 17% in 2011 to $412.36 million, although part of the decline was due to the reorientation of the goods toward the production lines.

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Romania has returned to the top 10 global corn producers last year, while the national average productivity has still to increase through intensive techniques and high quality inputs. Estimates show that the 17 million available hectares of agricultural land should provide enough food to support the consumption of 80 million people, while there are roughly 20 million inhabitants in Romania.

Revenue numbers might be relevant, but profit/loss results should not be held as a reflection of the efficiency of the companies’ export operation from Romania, as most of them can send profits through their mother companies or branches in countries with lower taxes. Profits are taxed by 16% in Romania, while sending out dividends to the mother company cuts another 16%, therefore making it unattractive to make profits here if you are a global company.

The clue that the cereal trade has been profitable all along comes from the results of Agricover, the only Romanian company in the top seven, which posted profits for all the past four years.

Although 2011 has seen an overall increase in the value of exported cereal and all the major players have moved to increase their coverage and storage facilities, 2012 has brought extreme drought that has already halved the wheat and rapeseed harvest and will most likely affect the corn production just as much. It remains to be seen if and who will manage to make up in value what they will lose in volume, but the long term rule still seems to be "double digit growth year to year."

Stay tuned for the Hunger Games Report #2, featuring Monsanto, Pioneer and Syngenta!

OvidiuNeacsu has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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