Glencore continues looking for opportunities to expand ag business

by Holly Demaree
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Glencore 
 
BAAR, SWITZERLAND — Glencore Plc. continues to focus on its Agricultural Products segment, particularly in terms of looking toward building infrastructure in the United States with acquisitions or joint ventures.

Glencore_IvanGlasberg_CEO
Ivan Glasneberg, chief executive officer and executive director of Glencore Plc.

“We've always said in the ag business, we set up the structure with our partners, the Canadian Pension funds, whereby we have this 50-50 arrangement with them in Glencore Agriculture,” said Ivan Glasneberg, chief executive officer and executive director of Glencore Plc. “Now our deal was to grow Glencore Agriculture and have this partner in the same way as we set up a vehicle where we would not be doing all the funding to grow in the mining sector at the time where we had the public owning 60%, Glencore, 40%. We could leverage that vehicle. And if equity was required, we didn't have to put it up all ourselves. So, we're just doing the same in the ag sector, where this vehicle setup is performing nicely. And we have said we want to grow. We would likely grow in the United States plus other areas. And we will continue looking for opportunities. And as I said, if opportunities arise, and we think they're making economic sense and they give the right IRRs, then we'll continue looking into our growth in that sector.”

For the past year Glencore has continued to look for growth opportunities for its ag segment. 

On May 23, Glencore made a takeover approach for U.S. grain trader Bunge Ltd. In reaction to the bid, Bunge released a statement affirming that it was “not engaged in business combination discussions with Glencore Agriculture Limited or Glencore plc.” The company added that it was “committed to continuing to execute its global agri-foods strategy and pursuing opportunities for driving growth and value creation.”

Nothing materialized after that but Robert Moskow, a research analyst with Credit Suisse, issued a report on May 24 suggesting such a business combination “makes sense for agribusiness industry.”

“I think it's more just that growth,” Glasneberg said during a call with analysts on Aug. 10. “We have a very good ag business. We're very strong in certain countries in the world. We're not well set in the United States. As you know, in the United States we don't have much infrastructure to be able to be active in the agricultural business. It is an infrastructure gain. You have to own infrastructure, so therefore you can source from the farmer and then get it to through the system to get it on board vessels.

During the past several years, Glencore had sold assets, including 50% of its agricultural segment to reduce its debt by millions of dollars.

Overall, Glencore’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the first half of 2017 was $6.7 billion, up 68% from $4.02 billion in the first half of 2016.

For the first half of 2017, adjusted EBITDA for the Agriculture Products segment was $331 million, a jump of 81% compared to $183 million in the same period of last year. Glencore did note that in December 2016, the sale of 50% of the Agricultural products business segment completed. Post close, it was determined that Glencore Agri met the definition of a joint arrangement, to be classified as a joint venture under IFRS 11 and be accounted for using the equity method in Glencore's financial statements in accordance with IAS 28.

green wheat field
Glencore is one of the world’s two biggest wheat traders, handling 18% of the world’s seaborne trade, and is one of the top three in Russia, Canada, Australia and the E.U. 
 
Revenue for Agriculture Products in the first half of 2017 was $12.674 billion, an increase of 12% from $11.290 billion in the same period of last year. 

The first half of 2017 reflected the impact of a record Australian crop, which was beneficial for both Glencore’s local origination business and the Viterra handling operations. This more than compensated for Viterra Canada, which was satisfactory, but below expectation as low prices, farmer retention and some crop quality issues pressurized margins.

According to Glencore, prices have declined over the medium term, with the S&P GSCI index reducing by 40% from 2011 to 2015 and broadly flat since then, putting sustained pressure onto the industry overall.

In the first half of 2017, commodity prices remained at low levels, particularly grains, and markets were subdued until late in the period when wheat rallied due to a U.S. spring weather concern. Glencore noted, against this overall backdrop, grain, oilseeds, cotton and freight marketing performed well, with sugar more challenging.

Soft seed crush and biodiesel margins in the E.U. continued to be under pressure, while the wheat milling business in Brazil performed in line with company expectations, despite challenges posed by the currency devaluation, Glencore said. The decline in sugar and Brazilian ethanol prices negatively impacted sugar milling result. However, this was partially offset by hedging and improved farm and factory production yields.

The company’s global processing volumes of 6.5 million tonnes were in line with first half of 2016. Farming decreased following the sale of Glencore’s Russian assets toward the end of 2016. Crushing volumes were consistent period on period, with increases across the European and CIS portfolio partly offset by reduced production at Timbues (Argentina), due to timing of maintenance.

Glencore is one of the world’s two biggest wheat traders, handling 18% of the world’s seaborne trade, and is one of the top three in Russia, Canada, Australia and the E.U. The group is vying for a position among the world’s biggest “ABCD” commodity traders – Archer Daniels Midland Co., Bunge, Cargill Inc., and Louis Dreyfus Commodities BV.

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