When news of the proposed merger between Cargill and Continental first hit, grain producers everywhere were shocked. After all, it isn't every day that the number-one and number-two grain exporters combine into a single, powerful global force.
In reality, however, there is nothing shocking about it. Takeovers, mergers and joint ventures are occurring in all phases of agriculture.
For example, Stauffer, ICI Americas, Velsicol, Sandoz and Ciba-Geigy all were once common names that every producer knew. Now they exist as a single entity called Syngenta.
Agriliance? It's a joint venture representing names — or former names — such as Wilfarm, Cenex, Land O'Lakes, Terra, Countrymark and Farmland.
Even family farms have followed the pattern. From seven million in the 1930s, the number of farms has dropped to just more than two million. And along with that drop in farm numbers comes the fact that each year a smaller number of top-tier farms produces a higher percentage of the nation's grain and livestock.
It's just business. Big does seem to beget bigger in America.
Still, the Cargill/Continental deal raised eyebrows from the secretary of agriculture's office to the smallest rural coffee shop. In a report analyzing the effect the combined companies might have, Marvin Hayenga and Robert Wisner, Iowa State University economists, raised some important issues concerning both the merger and the industry as a whole:
Only four firms (pre-merger) accounted for 81% of U.S. corn exports: Cargill, Continental, ADM and Zen Noh. The same four firms accounted for 65% of soybean exports. According to former Agriculture Secretary Dan Glickman, a combined Cargill/Continental company would handle 42% of corn exports and 31% of soybean exports.
On the upper Illinois River, ADM owns 49% of the available grain storage space. With the merger, Cargill's share would jump from 21 to 31%. The result: 80% of storage space on this critical section of the Illinois would be held by just two companies.
Market share also matters overseas. Cargill/Continental would account for 25% of Argentina's corn and soybean exports.
The bigger-is-better trend in the grain-handling business extends far beyond the Cargill example. An examination of storage capacity for the 10 largest U.S. grain companies — conducted by Milling and Baking News — shows some startling changes between 1981 and 1999. ADM, ConAgra, Farmland and Cenex Harvest States were not on the list in 1981. All are now major players and have chalked up startling growth, along with grain traders such as Cargill, Continental, Bunge and The Andersons. So why the tremendous growth by just a few companies?
Reasons for consolidation
Hayenga and Wisner point out several reasons for consolidation, including the desire to handle more volume, international market expansion, developments in information technologies and the appearance of biotechnology and its resulting products.
Another factor, they say, is the cyclical nature of exports. During periods of low export volume, trading companies have to absorb idle time. During times of soaring export volumes, they have to have enough equipment to get the job done. And the swings are tremendous. For example, feed grain exports hit a peak of 70 million metric tons in 1979-80, then fell to nearly half that — 36 million tons — just a few years later. Another huge swing happened in the 1990s with annual exports ranging from 70 million tons down to 40 million tons.
There are many other technical reasons for consolidation, of course, but in its essence, consolidation is largely driven by a single factor.
“That would be money,” says Steve Sonka, director of the National Soybean Research Laboratory at the University of Illinois. “You have to realize that even private companies are active in equity markets where profitability is only one standard by which they are judged; the other is growth.
“And during periods of low margins and low profitability, one way to grow is through acquisitions. You grow the volume and occasionally remove costs from the system when you merge horizontally.”
The goal, of course, is that when higher profitability returns, more volume leads to even larger profits. That's when bigger really is better. The concern, though, is unfair market power, where a farmer's ability to sell his crop is limited because there is no real competition among buyers.
“We all get concerned when we perceive fewer options,” Sonka says. “But the real question is, How big does a market have to be? And how many options do you need? So far, I don't think any careful studies have documented problems solely due to firms merging. Like Cargill and Continental — that was looked at very carefully. I also think it's important not to ask for the impossible. It's like saying, What would the world look like if it didn't look like it did? There are many ways to see any event.”
Adding service and value
Oddly enough, in many ways grain markets are offering more options than they ever have. Hayenga and Wisner say Cargill intends to dedicate some facilities to specialized products and to pursue the marketing of value-added specialty crops. It isn't alone.
“The biggest change arrived with the Internet and free movement of information,” Sonka says. “When you go to meetings now there's lots of talk about how to move small lots of grain around the world — like using containers. In the old days, bulk was it. So value and quality matter and we are seeing it in the grain industry. Smaller firms may not be able to compete on low cost, but they can add service or an attribute that boosts value.”
An example of the changing face of the grain industry is Clarkson Grain Company of Cerro Gordo, IL. Ten years ago it saw opportunities in niche markets and started filling them. White corn, food-grade soybeans, non-genetically modified grains — they exported them all, providing new markets for farmers from Pennsylvania to Nebraska, and from Minnesota to Missouri.
As a grain marketer, Jim Traub, Clarkson's vice president of the specialty grains program, is well-versed in the industry's troubles. However, he prefers to point out opportunities. And he says that right now the most dynamic aspect of food production in the United States is the rapid growth in the production of organic and natural foods. There is, he says, an alternative to bulk grain production.
“We are moving away from the commodity mind-set,” he says, “and focusing on the idea of food production. Where's the growth? It's in the organic and natural foods business, which is growing 20 to 30% per year and has been for a decade.”
Traub says the Achilles' heel of organic food production always has been the need for a crop rotation that at some point includes wheat or oats or sorghum.
“So far, I don't think any careful studies have documented problems solely due to firms merging. Like Cargill and Continental — that was looked at very carefully. I also think it's important not to ask for the impossible. It's like saying, What would the world look like if it didn't look like it did? There are many ways to see any event.”
Steve Sonka director of the National Soybean Research Laboratory University of Illinois
“But with the new USDA requirements, coupled with the rising demand for organic meat, milk and eggs, we are now buying more of the entire rotation,” Traub says. “In the past, that rotation crop really pulled the per-acre net back because it didn't go for organic prices. But with the need for organic feed grains, the market is now supporting $3.10 corn, $3.50 to $4.00 wheat, and $10.00 to $10.50 soybeans. There's now a fully supported rotational system.”
Best of all, he says, is that there is opportunity for anyone with CRP ground. When it comes out, it will qualify for organic production.
“The opportunity for producers is that there is now some security to it,” Traub says.
Clearly, the grain industry is changing. Consolidation is real. There are fewer and larger buyers of grain. But there also will be new opportunities, new companies and new markets that emerge. It's like wondering what the world would look like if it didn't look like it did.