And then there was one

by Emily Wilson
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Founded as an international grain merchant, built as a company that focused on managing the many risks it faced in global commodity trading, Louis Dreyfus Corp. has newly emerged as a major provider of "risk management" services to leading industrial companies in the United States and around the world.

This focus on risk management makes Dreyfus unique among the globe-circling enterprises that had their origins in grain trading. Many of the companies that once were grain trade leaders have elected to focus primarily on grain processing and other industries, often making grain trading and risk management not the primary emphasis of their activities. Still other companies, influenced both by the potential adversities of trading in commodities and the negative opinions of bankers about commodity trading, have either left the grain trading business or have dramatically changed their style of operation.

These changes leave Dreyfus as not just the only member of this "fraternity" of grain traders that considers risk management to be its primary business, but has also taken the skills it has learned in managing its own business risks to develop an innovative platform of risk management for a broad range of industries. The latter include those that only recently have learned to appreciate the advantages of well-executed risk management techniques.

A broadening portfolio of commodities expertise has made the risk management descriptor increasingly meaningful at Dreyfus. "Fifteen years ago we really were a grain company," said Bruce N. Ritter, executive vice-president. "Today we see ourselves as a risk management firm. We have diversified into coffee, sugar, rice, cotton, meats, citrus and energy. The latter includes petroleum refining and distribution, natural gas and electricity. We also are a significant developer of band width capacity in Europe, where we are laying cable."

Mr. Ritter added, "We believe we can bring value to any market in the world that has risk. We think the direction of the marketplace will favor companies that can serve a broad array of markets and geographies."

In view of the rapid marketplace changes, a belief that Dreyfus possesses considerable expertise in risk management should not be confused in any way with complacency, Mr. Ritter said. To the contrary, he believes wariness of risk bordering on paranoia is crucial for any company hoping to survive, much less thrive, in the current environment.

"We have to go to bed every night scared, thinking of what can go wrong with our business," he said. "These have been horrible years for the commodity industry because of over capacity, increased efficiency and a lack of understanding of the full basket of risk. The world in the last eight years has lost its price floors, ceilings and benchmarks. What killed people over the last three years was price risk and contract risk."

Mr. Ritter said Dreyfus maintains central management of overall global risk. "The key to survival is maintaining integrated control of risk while devolving authority," he explained. "That is the crucial balancing act."

Volatile prices do not represent the only risk companies face, he said. "It is a broadening basket of risk that must be addressed if we are to serve an important role in the marketplace. Industrial companies today face price risk, sovereign risk, client risk and quality and logistics risk. It is the recognition of and competency in handling these that explains why we've survived and why we think we can prosper and bring value to clients. We want to empower those companies founded in a strong industrial base."

Helping companies understand what may be done to manage risk remains an ongoing challenge that receives constant attention from the Dreyfus staff, Mr. Ritter said. The company conducts seminars on risk management worldwide and also pursues business through normal channels such as customer contacts and the media.

"What really excites us is the Internet and the horizons that will open for us," he said.

One hurdle that rarely stands in the way is making managers understand that they face these risks, Mr. Ritter said. "Ten years ago they did not comprehend, but companies now do understand they face this amazing bundle of risks," he said. "They are looking for creative solutions. The company that doesn't understand its risk will not survive."

A NAME TO WATCH. Louis Dreyfus is one of the oldest and most distinguished names in the international grain business. Established in 1851, the company has been owned and managed by members of the Louis-Dreyfus family ever since. The parent company, Louis Dreyfus & Cie., is headquartered in Paris, but William Louis-Dreyfus, the chairman, is a U.S. citizen and maintains residences in the United States and Paris.

Always a name to watch in the grain industry, Dreyfus moved into the limelight earlier this year when it acquired three U.S. elevators from ContiGroup Companies, Inc. Included in the transaction were a 3.5-million-bu (about 95,000 tonnes, based on wheat/soybeans) export elevator in Beaumont, Texas, and river elevators at Lockport, Illinois, and Caruthersville, Missouri.

Also in January, Dreyfus revealed it had entered into an agreement to lease the Houston (Texas) Public Elevator, a 6.2-million-bu (168,000-tonne) export facility located on the north side of the Houston Ship Channel.

In March, Dreyfus acquired the Seattle, Washington, export elevator of Cargill, Inc. Like the ContiGroup elevators, the Seattle facility was targeted for divestiture as part of a Justice Department agreement allowing Cargill to acquire the grain assets of Continental Grain Co. The Seattle facility has 4.5 million bus (122,000 tonnes) of storage capacity.

Serving export grain customers on an equal footing with other exporters requires access to physical export terminals, Mr. Ritter explained. He said the acquired capacity was a "necessary tool to compete with a concentrated export industry."

Gary Lubben, senior vice-president, expanded on the importance to Dreyfus of operating export facilities. "You can't serve international milling customers without the ability to separate and differentiate quality. We have overseas buyers asking for data on farinograph and alveograph results, gluten strength, and a host of other quality requirements that can vary dramatically from miller to miller. Every milling customer has his own way of looking for wheat with optimal quality. For so many years 11% protein and 40 d.h.v. (dark, hard, vitreous) was the standard specification for wheat exported from the United States. Governments imposed those specifications on their domestic users. Now, except for feed wheat, those days of standardized and mediocre specifications have largely ended.

"Latin American buyers are as sophisticated as U.S. flour millers. It's the same all over the world, whether it's Nigeria, Colombia, Peru, Egypt or the Far East."

The demise of the large central buying agencies in importing countries has made such service — historically not part of the grain industry culture — an absolute necessity, Mr. Ritter said. "It used to be the large grain companies would line up a couple times a year, making sure we were at the receptions for Ceroilfoods or Exportkhleb, hoping to host the key dinner," he said. "It's only a small exaggeration to say that was the extent of industry customer service. Today we have 100 names on our customer list in China."

While noting that the acquisition of export capacity reflected competitive realities, Mr. Ritter said timing was opportunity driven. "This business is about timing," he said. "It always has been cyclical and always will. We are driven by opportunity, and this was the right time."

If the acquisition of the export capacity was an important step for Dreyfus, the move should not be perceived within the industry as a directional change for the company, Mr. Ritter stressed. The Dreyfus staffing base has not changed significantly, beyond the personnel actually at the acquired facilities.

"This was not as significant a change as might appear," he said. "We didn't hire marketers to handle the business. We did not hire more traders. We have customers around the world, and the new assets let us serve them better and to find new customers."

Even if it does not represent a transformation, the Dreyfus elevator acquisitions earlier this year can hardly be shrugged off as insignificant. With Beaumont and Houston, Dreyfus is now the only company with two export grain elevators in Texas. And Dreyfus has always been a company that has tended to move in large steps. The recent expansion of the company's export capacity came several years after a decision to dismantle its domestic grain business with the sale to Archer Daniels Midland Co. of 46 grain elevators in the United States. The sale included all of Dreyfus' elevators except its export facilities at Portland, Oregon, and Pascagoula, Mississippi, and a barge loading facility on the Snake river in Washington state. Offices in Kansas City and other interior points were closed.

Prior to that sale, Dreyfus had been a major force in the domestic grain business with grain storage capacity of 77 million bus (20 million tonnes).

"It was a very difficult time in the industry with very poor margins," Mr. Ritter said. "Our assets had been acquired and built over a lengthy period of time, and as they were structured they had no strategic cohesiveness. In grains, we were more optimistic about opportunities elsewhere, particularly in Latin America. We focused on developing our risk management and customer base."

The company also focused resources on its rapidly growing energy business.

Mr. Ritter said the company looks back on its decision to exit the domestic grain business with "absolutely no regrets." He said, "We think the assets we have developed now do have strategic cohesiveness and allow us to add value to the chain with domestic partners and export customers."

GOING FORWARD. Looking ahead, Dreyfus has no plans to integrate vertically in the United States, and the recent acquisitions of export grain terminals should not be perceived as an omen that expansion within the U.S. will soon be forthcoming. Instead, Dreyfus has established a series of partnerships with regional companies that "know their market well," Mr. Ritter added. While these relationships help ensure Dreyfus maintains a flow of grain to its export facilities, they also help the partners "compete better," he said.

Mr. Ritter described the relationships with domestic grain companies as "formal" but without signed contracts. "The environment changes quickly, but our agreements allow an ongoing relationship that also spurs innovation," he said.

"We believe we can serve the domestic industry in the United States and can differentiate ourselves from our competition. Our potential client list will turn to us for our ability to manage price risk over a long period of time. They will not come to us to supply particular specifications or delivery schedules."

Dreyfus also has attracted attention recently by initiating a major expansion of its grain storage capacity in Canada, a project progressing quickly, Mr. Ritter said. By later this year, the company will have constructed six new 20,000- to 40,000-tonne steel grain elevators in the prairie provinces. The network will include another two facilities by early 2001, Mr. Ritter said.

The grain industry in Canada remains saddled by overcapacity, much of which is inefficient and at considerable competitive risk, Mr. Ritter said. He predicted further concentration in the years ahead.

Change at Dreyfus has not occurred only in the markets it serves. Mr. Ritter said that rapid changes in technology have been "disruptive to the status quo," but he said the opportunities offered by the embrace of technology have not been lost upon the company. The most prominent manifestation of technology at the company is a global information database, which he said is nearly unparalleled in its depth.

"Personnel worldwide have access to the data," he said. "The world of e-commerce is here to stay. Whether it is our internal systems or our ability to project on an extranet basis our services to customers, we are able to move any portion of our database to our staff and/or our customers."

Central to executing its growth strategy is the hiring of a qualified team of motivated and focused merchandisers, an area of mounting concern to Mr. Ritter in an era where any industry pales in the minds of young people compared to "high tech."

"We're in the interview process right now," Mr. Ritter said. "We are not competing with the other companies in our industry as much as with the financial market and the dot-coms and e-commerce businesses. The difficulty in recruiting is an important issue for us. It is through our people that we have differentiated ourselves."

Regarding another technology-related issue — grain biotechnology — Mr. Ritter said his personal view is that these scientific advances hold great promise and do not alter current market realities.

"GMOs offer a tremendous resource for the world," he said. "Anything that increases agricultural productivity does more for the environment than just about anything else. The message must be communicated that this is not Frankenfood.

"Having said this, from the standpoint of our business, if the customer wants GMO-free corn or soybeans, then we will provide it. There will be a two-tier market worldwide for some time. The biggest concerns today are in Europe."

While his still youthful appearance and energetic manner are at odds with the image of a grain industry veteran who has "seen it all," the 49-year-old Mr. Ritter ranks in experience among the more senior executives of the grain industry. He joined Dreyfus in 1973 after graduating from Oregon State University and remained with the company until 1988. After a brief stint as an independent trader, he was recruited to establish a grain business in the J. Aron Division of Goldman, Sachs & Co.

Mr. Ritter returned to Dreyfus in 1991 two years before the J. Aron unit was dissolved, a victim of the difficult grain industry environment. His decision to leave Dreyfus in 1988 reflected the tough state of the grain industry at the time and a need Mr. Ritter said he felt for professional growth.

"When I left Dreyfus, I needed a change," he said. "The business was difficult, and it was time to learn something new. And I learned a tremendous amount working for myself and for Goldman. But I always looked at Dreyfus with fondness and admiration. When they offered me the chance to run the business, I jumped at it. There are good people here. There always were."

CHANGING INDUSTRY. If stagnation characterized elements of the grain industry in the late 1980s, Mr. Ritter said it is difficult to overstate the changes in the industry in the 1990s. The shift was precipitated by the privatization among importing nations and the near simultaneous removal of acreage controls in the United States.

In response to privatization and growth in customers, the number of Dreyfus employees in overseas offices has expanded rapidly. For instance, the company has a staff of 25 in Vornezh in the Black Earth region of Russia. "Our presence in Russia or China seven or eight years ago was two people and 15 years ago was an American with a travel visa making a trip every month," Mr. Ritter said.

Mr. Ritter brimmed with enthusiasm as he described prospects for Dreyfus in its remote locations. "Young Russians today are as motivated and bright as any one within the company," he said. "This will help us compete long term. It's true in China and true in South America."

Opening offices in the various countries has not been executed in a cookie-cutter fashion, Mr. Ritter said. For instance in Russia, the company is involved in a number of farming projects. "We're doing this not because the company believes that the direct returns will prove lucrative but because the company believes it will benefit long term by helping prime a highly motivated private agricultural sector and because of relationships it is establishing in the process," Mr. Ritter said.

The various offices currently are managed by expatriates, "but the idea in the long run is to create a Russian firm in Russia and so on."

The move toward establishing a significant presence in several countries mirrors the widespread recognition in the United States that its world grain export market share is not and will never be unshakably secure.

"The United States has now fully accepted the fact of competition, which has taken a long time," Mr. Ritter said. "Now understood is the fact that it is difficult to keep agricultural prices at significant premiums above production costs for lengthy periods of time. In South America, if soybeans are above $6 a bu for a sustained period of time, they have demonstrated they will expand production 5% to 10% per year. And even today, this rate of growth can and would continue for many years into the future."

Asked whether grain merchandisers in the year 2000 are having as much "fun" as during the fabled era of the 1970s when he first entered the grain business, Mr. Ritter paused. "When I was new in the grain business in the 70s, it was an exciting time because things were changing so fast," he said. "This was great for a novice because those who had been in the business for 10 years did not have a leg up on us.

"It's the same excitement today. The status quo doesn't make it any more. What the business will be like three years from now is impossible to guess. Things are moving twice as fast, and we are working twice as hard. It's a very exciting time."

Mr. Lubben added, "It's a different excitement from the explosive inflation-driven changes of the 1970s."

Mr. Ritter agreed. "In the 1970s you had the legends of the grain business. It is more disciplined today. There is no room for cowboys any more."

L. Joshua Sosland is the executive editor of Milling & Baking News, sister publication to World Grain.