That proclamation, made by Gert-Jan van den Akker, president of Cargill’s agricultural supply chain division, at the FT Commodities Global Summit in London this spring, was a stunning admission that the world’s agribusiness giants no longer have a decided edge over grain producers when it comes to grain merchandising. At that same event, Gary McGuigan, president of global trade at Archer Daniels Midland Co., Cargill’s longtime rival, echoed van den Akker’s sentiments, saying that the traditional ways of buying crops at one origin and dropping it off at a port were becoming outmoded.
“I just don’t see how that sort of thing will survive,” McGuigan said.
When the men overseeing trade at two of the world’s largest agribusiness companies say such a dramatic shift is taking place in grain trading, it’s certainly worth noting. Add to that the comments from Bunge CEO Soren Schroder, who last year said a “structural shift” was occurring in global agricultural commodities markets and consolidation in the industry was inevitable, it’s clear to see where the situation is headed. In fact, it’s been rumored for months that Bunge might be the biggest domino to fall in this trend toward consolidation, as it is being targeted for a takeover by ADM or Glencore.
It’s no secret that the world’s top agricultural companies have been dealing with financial pressures the last several years. For many years, grain merchandisers at these companies thrived, particularly when markets were the most volatile, so some have assumed the recent financial challenges are related to an oversupplied grain market that has lacked volatility, causing prices to drop and stay low for about four years now. To a certain degree that’s true, but it also appears the industry is undergoing a more structural change, one that means long-term relief may not come for the world’s largest grain traders even when supplies start to dwindle and volatility returns to the market.
In years past, what separated these grain traders from producers and consumers was the inside knowledge that they possessed. But up-to-the-minute data on commodity prices, weather, crop yields and trade flows are now available through technology advances and also affordable for those who want it.
Rather than taking their grain directly to the local elevator as they harvest it, farmers in places like the United States, Brazil and Ukraine are now building larger storage on their properties — for example, since 2003 U.S. farmers have expanded storage capacity by 20%, according to the USDA — which allows them to hold it until prices rise and/or sell it directly to the end user, essentially cutting out the middle man.
During a recent Wheat Quality Council meeting in Kansas City, panelists discussed how an increasing number of wheat growers are bypassing commercial elevators and essentially becoming ingredient suppliers to flour mills by producing wheat to specification for millers. Andrew Hoelscher, a third-generation farmer from Ellsworth, Kansas, U.S., and founder of Farm Strategy Consultants, which advises production agriculture operations across the hard red winter wheat belt, told Milling & Baking News, sister publication of World Grain, that more growers are starting to work directly with mills to supply wheat with desired protein levels.
With the volume of grain they’re storing and handling diminishing, the world’s commercial grain traders currently find themselves in the unenviable position of being caught in the middle of the age-old business strategy of eliminating the middleman. But the good news is these increasingly diversified companies rose to the top by being nimble and creative, and they are more likely than not to find new sources of revenue to counteract their declines in grain sales.