Grain trade's new reality

by Teresa Acklin
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Continental's Fribourg outlines the impact of free trade, privatization and technology on international grain trade.

   The grain trade has entered an era of change that holds much promise for those companies that "think through the issues it presents" and are prepared to handle them, Paul Fribourg, president and chief operating officer of Continental Grain Co., New York, told U.S. grain industry executives attending the recent 100th annual meeting of the National Grain and Feed Association.

   "We are entering uncharted waters," Mr. Fribourg said. "There is great excitement in our industry at the recent return to profitability for most of the grain trade. Exports have bounced back. ... And we are once again enjoying a seller's market after more than 10 years during which the buyer was king."

   Mr. Fribourg said the world was just beginning to adjust to historic free trade agreements concluded in the past few years and to unexpectedly favorable reforms in U.S. agricultural policy.

   "Having enhanced ‘freedom to trade,' we are turning our attention to ‘freedom to produce' with the new (U.S.) farm bill," he said. "We are all entranced by a grand vision of farmers planting fence row to fence row, while grain traders scour the world to market our products to newly discovered private buyers."

    But the benefits of these new-found freedoms, at least in the short term, could prove elusive, he cautioned, requiring the grain trade to be patient and think matters through.

   "The North American Free Trade Agreement carried visions of great opportunity for our industry in Mexico," Mr. Fribourg said. "But before the ink was dry on NAFTA, we all woke up to a new reality. In place of the artificial trade barriers formerly imposed by the Mexican government, we found ourselves confronted by the very real trade barriers produced by economic collapse: depreciating currencies, private customers who could not pay, and a mass of cheap food products flowing back into the U.S. to compete with our own — not a very pleasant short-term picture."

    Mr. Fribourg also referred to the unexpectedly difficult transition of the republics of the former Soviet Union from state-controlled to market-oriented economies.

   "The fall of Communism and the totalitarian state had many of us drooling over the creation of 16 new countries and the opportunities to market and originate products in each of them," he said. "Unfortunately, the ‘freedom' newly brought to that part of the world has also produced chaos, causing major breakdowns in the food production and distribution systems."

Open Markets to Expand

    While the transition to free markets has been difficult, it also has proved to be deeply persistent, and not only in the former communist countries, Mr. Fribourg stated.

   "Organizations like the Canadian Wheat Board, the Australian Wheat Board, Russia's Export-khleb and China's Ceroilfoods — to name but a few — will increasingly be under pressure to conform to the new realities of the marketplace," he said. "Indeed, such changes can be seen much closer to home as well. (The U.S.) government has withdrawn from the storage business, is withdrawing from export subsidization and (has withdrawn) from production controls as well. If all goes well, we will have the best of all worlds — freedom for all of us to produce, store and market our products in the most efficient and effective manner." The ongoing media and information revolution will speed the already rapid pace of change in politics, in world commerce and in the grain trade, Mr. Fribourg said.

   "Governments can no longer isolate their people from political and economic developments," he said. "This, in turn, has facilitated a democratization in many parts of the world. Surely, one of the first demands of the world's newly informed and liberated masses will be to go from basic nutritional survival to a higher food standard of living."

    In order to meet these needs, Mr. Fribourg added, governments will need to continue privatizing commercial channels and turning over the basic elements of production and distribution to private industry.

   "Any hesitation on their part will be quickly overcome by budgetary pressures," he said. "The consumers of the world far outnumber its producers, and hereafter they will carry a much greater weight in the political balance."

    Lessened government involvement in economies will lead to fundamental change in the grain business itself, Mr. Fribourg said.

   "We are entering a ‘demass-ified' world in which the customer is in control, and our ability to serve his needs will necessitate key linkages throughout the food chain," he stated. "We will go from acting as volume handlers of generic commodities dealing with faceless buyers and government agencies to being the essential link transmitting the specific demands of real customers back to the producers, who will increasingly tailor-make their products."

    Grain facilities of the future will be designed more for greater flexibility and less for volume handling, Mr. Fribourg forecast.

   "(The United States') export capacity will be fully utilized, not so much from a growth in the volume of exports, but rather by the more demanding, painstaking process of loading so-called ‘grocery store' ships," he said. "One hold will be filled with high-oil-content (maize) for a poultry farmer, another with hard endosperm (maize) for an industrial user and yet a third with a specific variety of food beans for human consumption."

    The combined impact of new seed technology and the biotechnology revolution will engender a significant move toward more "specification farming" with regard to grain, Mr. Fribourg said. This will bring about a still-tighter linkage between producer and purchaser, he explained.

Strategic Alliances

    Greater interdependency will lead to linkages and increased vertical integration in the grain industry, according to Mr. Fribourg. In addition, he said, "we will need to rethink the way our industry is structured and the way our individual enterprises are organized. I predict an increasing number of strategic alliances, which can come in many forms.

   "In the more traditional sense, we have created joint ventures with cooperative groups who are strong in origination and have joined their forces with our export and marketing abilities. This has had the effect of linking, in a seamless manner, the farmer at the origin with the end customer at the destination. In addition, it uses the skills of both companies in the areas in which each is most expert. ... Soon, our industry will see exciting new forms of alliances between companies never before imagined."

   He referred to Continental Grain's recent decision to sell its barge line and contract with the buyer to move the company's grain as an example of focusing on one's core strengths.

   "Why not dream of the day when key grain consumers outsource their grain procurement, storage and handling operations?" Mr. Fribourg said. "Just as the barge line can handle our barge needs in a cheaper, more efficient way, so we are in a position to handle a food processor's grain needs more effectively than he can.

   Flour milling companies, poultry companies or (maize) chip manufacturers, for example, should not have to own and manage their own grain storage facilities. We can perform all the necessary functions, including financing, while they focus their management and investment dollars on processing and added-value marketing to their customers." Mr. Fribourg suggested that with gov

   "Why not dream of the day when key grain consumers outsource their grain procurement, storage and handling operations?" Mr. Fribourg said. "Just as the barge line can handle our barge needs in a cheaper, more efficient way, so we are in a position to handle a food processor's grain needs more effectively than he can.

   Flour milling companies, poultry companies or (maize) chip manufacturers, for example, should not have to own and manage their own grain storage facilities. We can perform all the necessary functions, including financing, while they focus their management and investment dollars on processing and added-value marketing to their customers."

    Mr. Fribourg suggested that with governments withdrawing from the responsibility of storing grain stocks, it would fall to the private sector to do so. And, because of difficulties in accessing capital from lending institutions wary of commodity lending, "it will behoove us all to come up with new ways to separate the risks of commodity financing from those of financing individual companies — i.e., the increasing securitization of our commodity assets," he said.

   Still another change that will evolve quickly in the coming years is in the financial structure of grain companies themselves, Mr. Fribourg continued.

   "Given the growing importance of strong balance sheets to support our businesses, we will increasingly be forced to turn to a variety of capital sources never contemplated before," he said. "One of those will be the public capital markets." But with the changes taking place in this direction, new demands will be made on grain companies to achieve consistent and attractive levels of profitability, he added.

   "Investors will compare our returns with those of excellent companies in completely different industries and demand similar performance," he said.

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