Reflecting on a stellar career

by World Grain Staff
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After 38 years with Cargill, Warren Staley, 65, retired as chief executive officer (CEO) and president in June and as chairman of the board in September. Staley joined Cargill in 1969 as a trainee and held merchandising, management and leadership positions in the United States (U.S.), Europe and South America.

He was elected president of Cargill in February 1998, CEO in June 1999 and chairman of the board in August 2000. He was elected to the Cargill board of directors in August 1995. During his tenure, Cargill’s earnings quadrupled. Staley led the company’s transformation to a customer-based solutions provider, instituted a new model of shared leadership and reshaped the organization in ways that generated new growth.

In fiscal 2007, Cargill reported earnings of $2.34 billion, a 36% increase from the previous year. It was the fifth consecutive year that the Minneapolis, Minnesota, U.S.-based company had posted record earnings. World Grain talked with Staley in September about his tenure with Cargill and the future of the privately held agribusiness giant in areas such as grain processing, oilseed processing, flour milling, feed milling and biofuels.

WG:
What internal initiative during your tenure gives you the most pride?

Staley:
The internal initiative that gave me the most satisfaction was implementing what Cargill called "Strategic Intent" or SI in brief. SI was conceived by a team of senior managers under Cargill’s preceding CEO, Ernie Micek, and its implementation coincided with the beginning of my tenure in June 1998. While it carried over some traditional aspects of Cargill’s culture, it also involved some major changes in our thinking and behavior. Perhaps the simplest way of explaining the changes is through the vision statement we developed at that time.

That statement declared our fundamental purpose as becoming the global leader in nourishing people. We had many discussions about what that meant, settling on the idea that it placed our focus on providing what is necessary for life, health and growth. We made that concept operational through the mission of providing distinctive value to our customers. By that we meant providing solutions to our customers that enabled them to be successful.

At the time we adopted SI, we were facing a world and a business environment that was undergoing profound change. Customers and competitors were consolidating, and new competitors with a tighter focus were emerging. It was clear to all of us that Cargill needed to change and adapt in some very fundamental ways in order to continue to grow profitably. In fact, we had to earn the right to grow.

Within SI there were a number of subordinate initiatives critical to its success, which we labeled our performance measures. The first was to engage our employees in the attitudinal and behavioral changes required to understand our customers’ needs, earn their trust and provide them with innovative solutions. The second was to focus on satisfying our customers, to look outward toward their needs rather than inward at our own capabilities. Third was to enrich the communities in which

Cargill people lived and worked. We set a goal of giving 2% of our global pretax earnings back to these communities, which we have now achieved. We felt that, if we accomplished these goals, our final performance measure — profitable growth — would follow. I think this effort proved to re-energize Cargill people beyond any of our expectations and was responsible for much of the financial success the company has enjoyed in recent years.

WG:
What external initiative (e.g., acquisition or joint venture) gives you the most pride?

Staley:
I think there were two external initiatives that were particularly satisfying. The first was our acquisition in 2001 of Ralston Purina’s international feed business, Agribrands. It greatly expanded our global presence in animal nutrition and provided us with a particularly important platform for growth in the important market in China that was emerging at that time. The second was our acquisition of Cerestar, the starches and polyols business based primarily in Europe. It remains our largest-ever acquisition, posed some interesting challenges in blending their culture and European presence with our own, but ended by giving us the critical mass needed to succeed in that highly technical and competitive industry.

WG:
What are the most important ways Cargill is different today than when you began your career with the company?

Staley:
There are at least three or four ways in which Cargill has changed dramatically over my 38 years with the company. One is the transformation from a commodities trading and processing company to a customer-focused, solutions-oriented business. It changed us from a transactions-based to a relationships-based business, from simply selling products and services to finding solutions that enable our customers to succeed.

A second major change occurred at the very heart of Cargill’s business, which is risk management. The company has moved from trading traditional agricultural commodities to a much broader range of physical and financial products, in the process developing new risk-management tools and skills.

Third would be Cargill’s change in size. When I joined the company in 1969, sales were $2 billion, earnings were $10 million, and there were 9,000 employees in 32 countries. Today, sales are $88 billion, earnings are $2.3 billion, and there are 158,000 employees in 66 countries.

The final difference I would note is the emergence of the Cargill brand. Cargill people always were conscious of the company’s reputation as its most valuable asset, but over the years we have invested more consciously in building the brand. That has involved re-positioning the company from one seen as a sharp and knowledgeable trader who played it close to the vest to one hopefully seen as sharing its knowledge and expertise to enable its customers to grow and succeed.

WG:
The processing of agricultural products is a much larger part of Cargill’s business today than was the case 30 years ago. To what degree have these investments met Cargill’s expectations, what is the company’s view of agricultural processing today, and what is the outlook?

Staley:
The growth of the food ingredients processing business has been one of the great success stories at Cargill over the past 30 years. Moreover, a fundamental commitment to our food and agricultural businesses has been the foundation for much of our strategic planning over the last 10 years. We believe that the food ingredients processing area remains one poised for continued growth. Cargill has maintained our basic processing capabilities and invested in more sophisticated processes and products to serve this growing and changing market, and we remain excited about its prospects.

I should add that we also remain very committed to the animal protein business. As people’s per capita incomes rise, their diets shift toward more animal products — meat, milk, cheese, eggs and the like. We expect this trend to continue and are well-positioned to serve this demand.

WG:
Exports historically have been an important part of Cargill’s business. What is the future of agricultural exports globally and from the United States?

Staley:
On a global basis, we expect there will be continued growth in the world’s "middle class." This will fuel increased demand for imported foods and feeds. At the same time, the biofuels industry creates new competition for some of those commodities. This is likely to exert strong pressure on the supply side to meet this rising, combined demand. Technology will play a critical role in meeting this challenge.

In terms of the effects on various origins, we think the United States will continue to be a significant exporter, but how significant will depend on supplies and the rate of growth of a domestic biofuels industry. At least for the next several years, North America is likely to be on a flat to mildly declining export trend. South America and countries of the former Soviet Union are likely to pick up the slack and see rising exports.

WG:
Cargill was "late" to flour milling and under your watch has become one of the world’s largest flour milling companies. What are your views of the opportunities for growth in flour milling from this point on, in North America and in other parts of the world?

Staley:
Actually, Cargill was early to the flour milling business, with a mill in Houston, Minnesota dating from 1880. But we exited from the industry early in the 20th century, returning to it in 1972 with the acquisition of Burrus. Today we process wheat in 12 countries, three-fourths of which is in standard flour mills and one-fourth through wet-milling. Grains are an important part of people’s diets. The increasing emphasis on whole grains and grain-based nutrition offers new opportunities. So, while flour milling is a challenging business, it also is one offering opportunities to partner and to provide new products in a changing marketplace.

WG:
A major factor in your growth in milling was the partnership with CHS. Has that been successful from your and the co-op’s point of view? Even though other grain companies have entered similar arrangements with co-ops, this was a first for Cargill, and might there be more?

Staley:
Partnerships must satisfy both parties and, ultimately, the customer to succeed. We certainly have been very happy with Horizon Milling, our joint venture with CHS. I recently spoke with John Johnson, the CEO of CHS, and he assured me that they and their members also are happy with the alliance. Many of their members are important wheat suppliers to Horizon Milling. I might add that we have a similar joint venture with Grain Corp

in Australia, which after a bit of a slow start is performing well.

WG:
I assume that Cargill arrays its various operations by measures like return on capital. How does flour milling rank, and what are the trends in returns from this business, and how does milling compare with other businesses like corn refining, oilseed crushing, etc.?

Staley:
We look at our various businesses through a variety of financial and non-financial measures, but we don’t share that analysis outside the company. I can tell you that flour milling has been a good, solid business for us. It is well run, which it has to be in this highly competitive industry, and we continue to watch for opportunities to grow and improve the business.

WG:
Flour milling is very much of an intermediate processing business, between the growers of wheat and the bakers of bread. In view of increasing integration in food industries like chickens and hogs, do you see the possibility of similar developments in flour milling or in other aspects of grain processing? Do you ever see Cargill considering entering into baking, for instance?

Staley:
We see both growers and bakers as customers to be served, not competitors to be taken on. Our focus is on differentiating ourselves as a supplier. In the case of the baking industry, we are working particularly hard with customers in the industry to build distinctive products and applications, particularly through blends and mixes. It is our goal to make ourselves a baker’s partner of choice through this differentiation and collaboration. Of course, "ever" is a long time, but we do not foresee an entry into baking in our future.

WG:
What parts of the world offer Cargill the greatest opportunities for future growth? You have had difficulties in India, and what do you think of the chances for major western investments in that country as well as in China?

Staley:
Cargill does not have a geographic investment strategy. We are organized around lines of business, supported by key functional capabilities (e.g., Treasury, Law, HR, etc.). So investment proposals come up from the businesses to senior management on where and why they wish to grow. That means that country X may look attractive to the oilseed business but not the meat business, which may prefer to invest in country Y. In recent years, Cargill has made significant investments in Brazil, Argentina, China, India, Russia, Ukraine, Ghana and Turkey, each of which has presented good growth opportunities to a particular business.

WG:
What operations do you see growing the fastest around the world? There was a time when it was said that you could stick a pin anywhere in the world and start a successful oilseed crushing business. Is there an operation about which something like that could be said now?

Staley:
Right now, the alternative fuels industry is the hot one. But certainly an important lesson from history is that such rapid growth seldom continues. As people rush in to seize an opportunity, industries build excess capacity that weighs down on them for a period of time. So, while we see many agriculturally-based businesses with good growth opportunities, we are leery of thinking that any good thing goes on forever.

WG:
How would you characterize the current ethanol boom? Is there any chance of this slowing down in light of the current political climate, which makes it almost impossible to imagine the American government imposing any sort of brakes?

Staley:
You certainly are correct that we are in the midst of a real ethanol boom in the United States; it is possible that the industry will hit the 2012 mandate of 7.5 billion gallons by the end of this year. And at both the state and the federal levels, there are serious proposals for upping mandates and expanding subsidies to the industry. Congress is debating additional energy legislation close on the heels of the 2005 energy act, with more incentives for biofuels. What I see as their political challenge is not so much "putting on the brakes" as easing up on the accelerator for supplies to catch up with the artificial demand policy has created.

This past year we have seen the rapid expansion in U.S. biofuels production capacity drive up food prices, with significant adverse consequences for poor people globally. Grain prices are up roughly 50 percent, and a significant poor-weather event anywhere in the world would force a rationing of supplies in which all three uses would be hurt.

All of this points toward a pause in this headlong rush to expand fuels production. If the world is to avoid making hard choices on how to allocate land and grains/oilseeds across food, feed and fuel uses, we need to let agricultural productivity catch up to this new demand pressure. The pace of expansion in biofuels needs to moderate in order for markets to find the appropriate balance among these uses. The alternative is a supply crisis that would be in no one’s best interests, including those political forces pushing so hard for ramping up mandates.

There also is a more fundamental question about energy security and the role of biofuels in America’s desire to lessen its dependence on troubled oilproducing nations. In this larger picture, biofuels is likely to come to play a minor role compared to more important steps, like increased conservation. As an example, raising the fuel efficiency of the U.S. vehicle fleet by five miles per gallon, which should be feasible with known technologies, would be the equivalent of 45 billion gallons of ethanol, while the distant goal of 35 billion gallons of ethanol from cellulosic sources faces major technological and economic hurdles. As energy policy develops, I expect that we will see more emphasis placed on conservation and on diversifying sources of supply for both fossil fuels and new technologies.

WG:
What would be the future of ethanol in an environment without all the special incentives, including doing away with the federal tax credit and the import tariffs?

Staley:
Clearly the ethanol industry would not have grown as fast as it has in the United States without the subsidies, protections and mandates that have been put in place. By the same token, ethanol has some attributes that make it an attractive fuel additive. It is a good octane enhancer, promoting a cleaner-burning fuel. It has grown to date largely as an oxygenate replacing lead and, more recently, MTBE in reformulated gasoline. This market is about 6 billion gallons and commands a premium over gasoline. This would be a natural market niche that ethanol could hope to serve in the absence of preferences.

At today’s high petroleum prices, ethanol from $2.50 corn could compete nicely on its own, not just for the premium additive market described above but also as a replacement for gasoline.

Removing the import tariff — currently 54 cents per gallon — obviously would expose U.S. corn-based ethanol to more intense competition from Brazilian sugar-based ethanol. Under this scenario, corn-based ethanol looks like a loser. But if import barriers were removed globally and ethanol could grow in an open market, the size of its market also would grow as blenders gained confidence in the reliability of its supply. Where all of this would settle out is unclear, but it could very easily be a positive for the industry long term. Generally, both industry and consumers would be more willing to increase dependence on an ethanol business built on a solid economic foundation rather than on uncertain political preferences that could fade away in different market circumstances.

WG:
While you have voiced doubts about the role of corn as the major feedstock for alternative fuel production, Cargill has been investing heavily in other industrial uses for corn, such as in biodegradable packaging. What advantages do such uses have over ethanol, and is there room for both?

Staley:
The plastics industry is built on fossil-based feedstocks, but many applications of plastics have higher-valued uses than fossil fuels. Some of these applications can be served by corn-based plastics, especially if the economics of disposal reflect growing environmental concerns. Corn-based plastics can compete on many functional characteristics and would have the environmental advantage of being biodegradable, allowing the product to decompose in a compost setting rather than having to be landfilled or recycled. So, while biodegradables are a slim market today, they could become an important environmentally sensitive answer in the future, especially with the rapid urbanization the world is experiencing. It is an interesting question whether this market will develop; at Cargill we hope so.

WG:
What are some of the challenges facing the biofuels industry worldwide?

Staley:
The challenges are economic, technical and political. Economically, biofuels must find markets that they can serve competitively, as mandates and protectionism cannot be long-term foundations for the industry. Technically, there are challenges in lowering processing costs and increasing feedstock supplies so that biofuels truly are a rational substitute for fossil fuels. And politically, we need to migrate from policies that distort or destroy markets to ones that harness market forces in allocating resources, sorting through feedstocks and properly siting and scaling biofuels production facilities. And hopefully there also will be convergence on standards for biofuels to facilitate efficient trade in both feedstocks and products.

More generally, there is the challenge of "food vs. feed vs. fuel." None of us in this industry want to force choices between food for the hungry, feed for growing livestock industries and fuels for cars and trucks. Right now, the policies underpinning the biofuels industry in most countries are not addressing this issue, but they are interfering with the global market’s ability to bring these harmoniously into line. Policy needs to migrate toward a "food and feed and fuel" outcome.

WG:
What countries/regions do you believe are poised to see the biggest growth in biofuels?

Staley:
The United States is poised to continue rapid growth in corn-based ethanol. Brazil has the capacity to continue expanding in sugar-based ethanol and, to a lesser degree, in oilseeds-based biodiesel. Other countries are looking at ethanol and biodiesel, but none offers the same potential as these two large players. Interestingly, China recently imposed a moratorium on construction of additional ethanol capacity in order to reserve its feedstocks for livestock production.

WG:
What are your thoughts on the food vs. fuel debate, particularly the impact diverting more grain and oilseeds for fuel production is having on food prices, not to mention commodity prices?

Staley:
At least in the United States we are coming to two inflection points that suggest it would be wise to pause in the headlong rush toward biofuels and to reconsider the best policy paths going forward. The first inflection point is in the product market: ethanol has largely filled the roughly 6 billion gallon gasoline additive market (where it commands a premium) and must now enter the gasoline replacement market (where its lower energy content likely will result in a discount). The other inflection point is on the supply side: ethanol is moving from a demand enhancer (increasing corn usage) to a demand diverter (taking cropland away from other uses and diverting corn from export and feed channels into the fuel channel).

It’s not a good strategy to overbuild biofuels capacity or to force expensive choices among alternative users, whether they be domestic feeders or export customers. Nor is it good for America’s reputation as a reliable supplier to work stocks down to bin bottoms and put the entire marketplace just one weather event away from a serious crisis situation. Prices and demand for food, feed and fuel uses are strong enough to encourage a supply response, and it would be prudent to let markets bring supply and demand back into balance, consolidating the gains that have occurred to date.

WG:
Do you agree or disagree with Peter Brabeck-Letmathe’s (chairman of Nestle) assertion that the world is in for a "significant and long-lasting" rise in food prices? Why?

Staley:
This is a very important question. For most of the 20th century, commodity prices declined in real terms as agricultural productivity grew twice as fast as industrial productivity. This has been very important in raising living standards and reducing the proportion of the world’s population suffering from chronic hunger. That success may have eroded incentives for additional productivity-enhancing research just as demand is shifting onto a higher growth path. We have largely exhausted the easy gains in output that come from shifting acres among crops and increasing purchased inputs, and it takes time for increased research expenditures to work through to pushing out the production frontier.

So, we think there is a good chance that food prices could increase steadily even with good weather and crops, and they could jump sharply with an adverse weather event. That is why we believe a pause in the policy push for more biofuels would be prudent.

WG:
With ethanol production and demand for corn expected to peak into 2008, how does a company like Cargill, with hog and feeding operations in the agricultural hotbeds of the U.S., plan for the backlash of food vs. fuel?

Staley:
In its simplest terms, we have a two-pronged approach. First, we have consistently said that government policies on biofuels should be based more on sound economics and marketplace fundamentals. As one looks toward 2008, this would place a premium on avoiding further mandate increases and developing policy options to protect traditional users in the event of a supply crisis, combined with a more measured approach to long-term growth in biofuels. On the second path, we continue to work with our customers to provide solutions that will help them cope with this ever-more intertwined food and energy market.

WG:
Despite the enhanced feed ban being implemented in Canada and talk of trade being normalized with Japan and Korea in coming months, is it safe to say the days of pre-BSE international trade will likely not be seen anytime soon?

Staley:
I think it is possible to restore trade levels to those we saw before the crisis broke, but the BSE crisis also has changed how this trade will need to be conducted. On the first point, demand for beef among Japanese and Korean consumers is robust. In fact, with current tight cattle supplies it will be a struggle to meet global demand for the next couple of years as full trade resumes. On the second, we applaud the tireless efforts of the USDA and the U.S. Trade Representative to restore normal trade and to build a foundation for that trade going forward on the specifications recommended by OIE, the international standards-setting body. This would restore trade in products of cattle from all ages but require that all Specified Risk Material be removed first.

WG:
How big of a role will China play in the future of food processing in the U.S., and which food industries have the most to gain?

Staley:
This is a great question. I wish the debate over China-U.S. trade relations could move beyond the skirmishes that are currently threatening to undermine this relationship and look at this bigger picture. There are many important ways in which the food and agricultural economies of these two countries are complementary. The United States has extensive land resources and high-quality food specialty capabilities. China has limited land and water resources and a need to shift toward more labor-intensive production of goods for mass audiences. With the right policies in place, the U.S. could greatly expand exports of land-intensive and high-quality goods to China, while Chinese agriculture could develop more labor-intensive production to serve its growing middle class and their shift toward a more animal-products-intensive diet.

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