Merging two grain giants

by Teresa Acklin
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Cargill, Continental agreement will create a stronger market for U.S. grain, executives say.

   The proposed acquisition by Cargill, Inc. of the worldwide commodity marketing business of Continental Grain Co. will create a stronger market for U.S. grain, according to executives of the two companies.

   The agreement, which was announced Nov. 9, includes Continental's grain storage, transportation, export and trading operations in North America, Europe, Latin America and Asia. If approved, the acquisition would make Cargill, which is based in Minneapolis, Minnesota, U.S., the largest grain company in North America, with nearly 15.5 million tonnes of licensed storage capacity in 318 facilities (see box on page 34). Currently, Archer Daniels Midland Co., Decatur, Illinois, U.S., is the No. 1 ranking grain company in North America, with about 14.4 million tonnes of licensed storage capacity in 618 facilities.

   Together, Cargill and Continental control about 20% of U.S. crop exports.

   Under terms of the agreement, Continental Grain, which is based in New York City, will retain its domestic and international poultry, pork, cattle, aquaculture, flour milling, animal feed and nutrition businesses as well as its liquefied petroleum gas trading and financial services businesses. The company is changing its name to ContiGroup Companies, Inc.

   “This is a bold strategic move for Continental that will enable the company to concentrate our financial and managerial resources on significant opportunities worldwide in our fast-growing, higher added-value agri-industries, financial services and private investment operations,” said Paul J. Fribourg, chairman and chief executive of Continental. “At the same time, it will ensure the future for the grain business that is our historic core. We have the highest respect for Cargill and believe it will provide the right home for our grain business. We also know Cargill is well positioned to serve the needs of our customers and suppliers in today's competitive, fast-changing global markets.”

   Ernest S. Micek, Cargill chairman and chief executive officer, said combining the two companies' grain operations would “extend farmers' reach into new markets and improve service to a world of increasingly demanding customers — and that's what it's all about in today's global marketplace.”

   He added, “Continental's worldwide grain handling and export facilities will help us move farmers' crops to our processing plants and to our customers more reliably and efficiently. It also strengthens our ability to serve the growing market for specialty grains and other products that require special handling, shipping or processing capabilities.”

   Cargill has 80,600 employees in more than 1,000 locations in 65 countries, with business activities in 130 more. Mr. Micek said that fundamental changes in the global food and agriculture system are driving changes in companies like Cargill and Continental.

   “Population growth, rising incomes, urbanization and new technologies are transforming the global food system — making it larger, more open and more demanding,” he said. “To serve that changing market, we are taking many steps that help us better link farmers with consumers around the world.”

   In a letter to the investment community, Mr. Fribourg, too, noted “fundamental changes” in the grain industry.

   “The evolution of seed genetic engineering, combined with the integration of grain origination, trading and grain processing — are two irreversible trends,” he said. “While we spent considerable time these past few years trying to find the right links with companies in these areas, we came to the conclusion over the summer that it ultimately made more sense for us to exit this business and focus our energies on building our other core businesses.”

      ANTITRUST QUESTIONS RAISED.

   The proposed acquisition has raised antitrust questions from several U.S. farm state legislators and farm organizations, who are concerned about diminished competition in the industry. Federal regulatory authorities are reviewing the acquisition proposal.

   U.S. Secretary of Agriculture Dan Glickman said that while there should be no knee-jerk reaction against consolidation in the agriculture industry, such as the Cargill-Continental agreement, there should be some thoughtful reflection “about agriculture's future, about the value of competition and about the fate of individual economic opportunity as we go further and further down this path that no one seems quite sure where it leads.”

   A trend toward fewer and larger operations throughout agriculture makes it difficult to ensure that farm families will fully share in the sector's prospective prosperity, Secretary Glickman said. “It's important that agriculture become more productive, more efficient and more globally competitive,” he said. “But it's also important that these changes do not come at the expense of family farmers and ranchers who also deserve a fair shake in the marketplace.”

   Linda Thrane, a spokesperson for Cargill, said the company would cooperate fully with regulatory authorities and hoped to have the transaction completed by the first quarter of next year. “We take their (the legislators' and farm groups') concerns seriously and are happy to sit down with them any time and any place to answer their questions,” she said.

   She added, “I think they'll find the two systems will create a stronger system with a longer, more sophisticated pipeline for export customers and more capacity to serve increasingly demanding domestic customers.”

   Teri McCaslin, senior vice-president for Continental Grain, also said the transaction would not be anti-competitive. “The grain markets in the United States are large and diverse. Only a fraction of the grain sold in the United States is purchased by Cargill and Continental. We believe that the transaction review by U.S. antitrust regulators will show no adverse impact on American grain producers resulting from the transaction. We believe that the combination of Continental Grain and Cargill will actually strengthen and improve markets for American grain in the United States and globally.”

   Even after the acquisition, Cargill will hardly have a dominant role in grain origination or grain storage, according to Peter A. Kooi, president of the Cargill's newly-created World Trading Group, and Frank L. Sims, president of the North American Grain Division. According to Mr. Sims, the combined origination of Cargill and Continental equates to 10% to 12% of the grain and oilseeds grown in the United States. The companies' combined grain storage capacity of 15.5 million tonnes equates to less than 5% of total grain storage capacity in the United States, he said.

   In grain exports, Cargill has a 20% share, while Continental's share has been estimated at about 15%.

   While Cargill's annual export totals may exceed Continental's, it has been Cargill's ability to use its grain infrastructure to supply large internal grain needs, especially in years of depressed exports, that has been central to why it wants to stay in the grain business while Continental does not, Mr. Kooi said.

   “People's businesses have moved in different patterns,” he said. “It isn't just Cargill and Continental. Bunge is going through changes. ADM is making large investments in South America and has gone into the cocoa business. People are lining up for the future.”

   Cargill, Inc.

   
Headquarters: Minneapolis, Minnesota, U.S.

   Total licensed grain storage capacity: 10.9 million tonnes

   No. of grain storage facilities: 236.

   Country elevators: 195.

   U.S. port facilities: (13) West Sacramento, California; Tampa, Florida; Portage, Indiana; Port Allen and

   Reserve, Louisiana; Duluth, Minnesota; Albany, New York; (2) Portland, Oregon; Houston, Texas;

   Chesapeake and Norfolk, Virginia; and Seattle, Washington.

   Continental Grain

   Headquarters: New York City, New York, U.S.

   Total licensed grain storage capacity: 4.6 million tonnes

   No. of grain storage facilities: 82

   Country elevators: 26.

   U.S. port facilities: (6) Stockton, California; Chicago, Illinois; Westwego, Louisiana; Beaumont, Texas; Tacoma, Washington; and Milwaukee, Wisconsin.

   As measured by terminal, sub-terminal, river and port elevator grain storage capacity, Cargill, Inc. and Continental Grain Co. were the second- and fifth-largest grain companies, respectively, in North America, according to the “1999 Grain and Milling Annual” published by Sosland Publishing Co.

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