Glencore's convincing grain grab

With the acquisition of Viterra, commodity giant Glencore looks to have realised the first of two major deals for the year and secured a key element of its agricultural and soft commodity strategy.

Glencore appears to have realised the first and smaller of its two major ambitions for this year with the overnight announcement of an agreed $C6.1 billion bid for Canada’s dominant grain marketing and distribution company, Viterra.

Viterra, which is also a major player in the Australian grain trading sector after its $A1.6 billion 2009 acquisition of ABB Grain, conducted what was effectively an auction of itself after being approached by Glencore several weeks ago, and Glencore emerged the victor.

The deal, a minor distraction from the far larger $US90 billion merger Glencore is pursuing with Xstrata, is a key element to Glencore’s plans to grow its agricultural commodity trading business, which at present has relatively modest revenues of about $US17 billion.

The acquisition will give Glencore a major position in the deregulating Canadian grains market – the market will be opened to competition in August, ending a 70-year-old monopoly held by the Canadian Wheat Board – as well as the platform in Australia, the world’s third-largest exporter of grain, that Viterra established through the ABB takeover. Glencore also has a pre-existing position as a trader in this market.

While the bid is being made by Glencore, it has agreed to on-sell some Viterra assets to another big Canadian agri-business, Agrium, and a privately-held company, Richardson International. Agrium, which took over AWB in 2010, will buy Viterra’s retail network and fertiliser operations for $C1.8 billion and Richardson will acquire 23 per cent of its grain-handling assets for $C800 million.

The sales account for about 40 per cent of Glencore’s purchase price. The sales to Agrium are of assets that don’t fit with Glencore’s commodity sourcing, trading and marketing strategies, while the deal with Richardson might be designed to assuage any regulatory and/or political concerns about its acquisition of a company that handles about 45 per cent of Canada’s grain trade.

Glencore’s Ivan Glasenberg has made no secret of his desire to grow the agricultural commodities segment of his business, nor of his desire to gain a North American foothold. While he now has that foothold, Glencore still hankers after a US presence and, with the private equity-owned and US-based Gavilon also on the market for a similar price-tag, Glencore might be tempted to seize one of the few remaining large-scale opportunities to bulk up in the sector.

The corporate end of the agricultural commodities sector has been heavily consolidated in recent years and is now dominated by Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus.

The next rung down were companies like Viterra and Agrium which wanted to join in the consolidation and gain scale and the diversification of exposure to production bases and markets that is essential to reducing risk in a sector characterised by volatile prices and which is extremely vulnerable to weather.

Underlying that scramble to consolidate was a long term view that after the hard commodity producers benefitted from the first big wave of industrialisation in China and India the next generation of beneficiaries would be the soft commodity producers as rising living standards in the big developing economies flow through to higher-value food consumption

It is a similar conviction that has informed BHP Billiton’s push into potash, given that shift in consumption will also require greater agricultural productivity from reducing acreage of arable land in developing countries.

The recent emergence of Asian commodity traders as buyers of soft commodity producers is another manifestation of the consensus around the long term outlook for the sector, which has major and potentially very positive implications for Australian farmers, particularly if the sector can improve its own productivity.

For Glencore, neither the acquisition of Viterra nor the merger with Xstrata was practically feasible until last year’s decision to float and the transparency that brought to a previously opaque and secretive organisation, as well as the market valuation and enhanced access to capital.

It still needs to convince an Xstrata shareholder base which is sceptical about the terms of the proposed merger if it is to pull of the transforming deal and get the merger past the regulatory obstacles but Glasenberg has demonstrated that Glencore isn’t going to put its other ambitions on hold in the meantime.