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
Table of Contents
Sections
I
Macro View Grains and Oilseeds
II
Down on the Farm
III
Going up to the Elevator
2
I. Macro View of Global Grain & Oilseeds
5
Increased Dispersion of Global Grain & Soybean Trade
% of Global G&O Trade
Total Exports (1000 MT)
50%
500,000
45%
450,000
40%
400,000
35%
350,000
30%
300,000
25%
250,000
20%
200,000
15%
150,000
10%
100,000
5%
50,000
0%
0
Australia
Black Seas Region
Source: USDA-FAS, Rabobank 2017
Note: Accounts for Total Exports of Corn, Soybeans and Wheat.
Canada
EU
South America
U.S.
Total Global Trade
4
Despite Relatively Stable Harvested Acres—Production Continues to Increase
Productivity Growth—Harvested Acres +51%, Production +247%, Yield +130%
1,000 Metric Tons/Hectares
Metric Tons per Hectare
2,250,000
4.5
2,000,000
4.0
1,750,000
3.5
1,500,000
3.0
1,250,000
2.5
1,000,000
2.0
750,000
1.5
500,000
1.0
250,000
0.5
0
0.0
Production
Source: USDA-FAS, Rabobank 2017
Note: Accounts for Total Global Production of Corn, Soybeans and Wheat.
Area Harvested
Yield
5
Major Canadian Row Crop Plantings
Only canola shows consistent year-over-year increases
14,000,000
Hectares
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
Barley
Canola
Wheat, All
Wheat, Spring
Source: Stats Canada, Rabobank 2017
6
Minor Canadian Row Crop Plantings Mostly Show Increases
Hectares
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
Corn
Lentils
Oats
Peas, dry
Soybeans
Sunflower
Durum
Source: Stats Canada, Rabobank 2017
7
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
16
110
14
100
12
90
10
80
8
70
6
60
4
50
2
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
Global supply chain trends
Structural
•
Industrial
•
New significant sources of commodity supply
(Brazil, Black Sea Region)
Benefits to scale
– Input availability/price
Population and income-driven food demand
increase (protein-centric)
– Consolidating customers
•
Rich world health, wellness and nutrition concerns
– Globalization
•
Information and communication availability and
accessibility
•
– R&D reach
•
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
II. Down on the Farm
5
In Canada Number of Farms Shrinking, Land in Farms Relatively Steady
80,000,000
Hectares
Number of Farms
800,000
Average Farm Size = 315 ha
70,000,000
700,000
Average Farm Size = 80 ha
60,000,000
600,000
50,000,000
500,000
40,000,000
400,000
30,000,000
300,000
20,000,000
200,000
10,000,000
100,000
0
0
1921
1931
1941
1951
1956
1961
1966
1971
Land in Farms
1976
1981
1986
1991
1996
2001
2006
2011
# of Farms (Y2)
Source: Statistics Canada/USDA & Rabobank
11
U.S. Production Agriculture Continues to Consolidate
1,200
Million Acres
Million Farms
Average Farm Size = 195 Acres
6
1,150
5
1,100
4
1,050
3
Average Farm Size = 434 Acres
1,000
2
950
1
900
0
1945
1950
1954
1959
1964
1969
1974
# of Farms (Y2)
Source: Census of Agriculture/USDA & Rabobank
1978
1982
1987
1992
1997
2002
2007
2012
Land in Farms (Y1)
12
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
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016E
2017P
2018P
2019P
2020P
2021P
2022P
2023P
2024P
$0
Machinery
seed Chem Fert
Source: ISU, U of I, Rabobank, proprietary Partial Equilibrium Model, Oct 2016
Land
Labor
Value of Corn Per Acre- IA
Crop Value With Gov Payments
13
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
III. "Going up to the Elevator"
5
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
Scoular acquired
the Special Crops
division of
Legumex Walker
for CAD 175m
Bunge and SALIC
acquired 51% stake
in Canadian Wheat
Board for CAD 250m
ADM acquired Wild
Flavors for
USD 3.2bn (16.4x
EBITDA2)
GrainCorp and
Zen Noh formed a
50/50 JV to build
and operate grain
facilities in Canada
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
1.2bn2
Mitsubishi acquired
a 20% stake in Olam
and established a JV
in Japan
ADM sold its
chocolate business
to Cargill for USD
440m
ADM sold its cocoa
business to OLAM
for USD 1.3bn
COFCO acquired
100% of Noble
Agri for a total
investment of USD
2.2bn3
Bunge North
America acquired
the wheat milling
business of Grupo
Altex
ADM sells stake in
GrainCorp
Sale of Gruma’s
wheat mills to
Grupo Trimex for
USD 200m (13.5x
EBITDA1)
Wilmar acquired
Goodman Fielder
(USD 1.8bn EV, 7.7x
EBITDA)
Pengxin acquired
a controlling stake
in Fiagril in Brazil
Toyota Tsusho
acquired Nova Agri
ADM agreed to sell
50% stake in its
export terminal in
Barcarena to
Glencore
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
Consortium led by
Temasek acquired
over 75% of Olam
International
(USD 10.4bn EV;
11.5x EBITDA)
16
Recent M&A developments and deals in the ag-related sectors
17
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
Value-creation implications for players in grain & oilseed space
= size of bubble indicates P/E 2017F multiple
ROE (%)1
30.0%
Mixed
Average 5 year TSR: 64%
25.0%
IFF
Ingredion
Frutarom
Kerry
20.0%
Corbion
Tate & Lyle
Symrise
15.0%
Sensient
DSM
10.0%
Bunge
Scoular
ADM
Wilmar
AGT
Graincorp
R&D-centric
Average 5 year TSR: 203%
Acomo
5.0%
Andersons
Givaudan
Natural ingredients
Average 5 year TSR: 57%
Olam
SunOpta
(3.0)%
(1.0)%
1.0%
Glencore
3.0%
5.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
(5.0)%
(10.0)%
Scale-centric
Average 5 year TSR: 6%
(15.0)%
(20.0)%
Grain platforms
Net margin (%)1
Natural ingredients
Value-added processing
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)
Flavors and specialty ingredients
19
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
Contact Information
Stephen P. Nicholson
Rabo-AgriFinance
Vice President-RaboResearch Food & Agribusiness
Grain and Oilseed Analyst
12443 Olive Boulevard, Suite #50
St. Louis, MO 63141 U.S.A.
314-317-8278 (office)
314-452-2479 (cell)
[email protected]
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