Even with a global grain and processing business that is changing at a dizzying pace, Archer Daniels Midland Co. (ADM) has identified trends with staying power that merit significant capital investment, said Juan Luciano, ADM’s chairman and chief executive officer (CEO).
Over the past two years, Chicago, Illinois, U.S.-based ADM has made major investments in its global ingredients business, highlighted by the 2014 purchase of Zug, Switzerland-based Wild Flavors GmbH for $3.1 billion. Still, the company has made other moves toward strengthening its global position in grain storage, transportation, marketing and processing.
High probability trends such as the expanding global middle class and high probability constants like major areas that are deficit and surplus producers of grains and oilseeds underpin ADM’s confidence in its future, Luciano said.
“For the first time, a global middle class is emerging, which is significant,” Luciano explained. “Before it was here and there, but now it’s even in the emerging markets. That number is supposed to double in the next 15 years. So, I think we are like 2 billion people in the middle class, a figure that will grow to about 5 billion people by 2030.”
What’s key for a company like ADM isn’t just the sheer growth, but the multiplier effect on certain grains, Luciano said.
“If you look back to 1990, population since then grew 35%, and if you look at consumption, wheat and rice that are associated with what people eat, grew about 37%,” he said. “Then when we look at pork, it grew 70%. And when we look at chicken, and soybean meal, they grew 180%. In the next 15 years, we need to double, so that number alone is going to be 100%. Think about what these numbers could be.”
Understanding the fundamentals of this change for ADM is fairly simple, Luciano said. ADM supplies grains and oilseeds, soybean meal, corn meal, vegetable oils, wheat flour and feed ingredients, the core of the company’s grain and processing businesses. The stakes for ADM in these commodities are high. Of the company’s $67.7 billion in revenues in 2015, soybeans and soybean meal alone accounted for 29% and corn represented another 11%. In the company’s processing business, the company owns or operates 280 plants around the world. By processed volume, oilseeds account for a little more than half of ADM’s processing business, corn for about a third and wheat for just over 10%. Luciano takes a holistic perspective of this sprawling global presence.
“I have this simplistic view of what we do in grain — we equalize humidity in the world,” he said. “Because what happens is that humidity is unevenly distributed. So water is unevenly distributed. For example, China has 22% of the world population, 6% of the fresh water. They will always be an importer. So you always are going to be shifting humidity from the U.S., from Brazil and Argentina, from Eastern Europe into North Africa, the Middle East and China. And that’s nothing that geo-politics or the dollar can change. Eventually you still have humidity in one place and you still have the mouths in another place. And you need to match that, and that’s what we do in grain, and very efficiently.
“Again, it’s just a simplistic way to view, but it makes you comfortable that the future will be there. We invest for the next 50 years, so we cannot invest in things that will disappear tomorrow. And everybody says, ‘Oh my goodness, there are changes, changes, how do you deal with change?’ And I keep on saying there is always something that you can count that is not going to change, or is stable. And you need to base your decisions on that. Demographics are very stable. And transporting humidity is very stable. We invest in those facts as we invest in ports, we invest in elevators and we invest in basic processing. And that’s heavy capital.”
A native of Argentina, Luciano joined ADM in April 2011. Before then, he spent his entire career at Dow Chemical Co., beginning in 1985. At Dow, Luciano held positions in Argentina, Brazil and the United States. He was a corporate executive vice-president when he retired to join ADM as chief operating officer. He was promoted to ADM president in 2014, CEO in January 2015 and chairman of the board of directors in January 2016.
In a presentation in December 2014, just before he took the reins as CEO, Luciano declared ADM’s strategic intent to “set the competitive standard by industry,” including grain, basic processing and ingredients.
Asked how the company has progressed toward this objective, Luciano offered a deeper explanation of the principle and examples of how pursuit of the goal is playing out in the company’s global grain business. A risk in large corporations, Luciano said, is the tendency for one major business to mask the inefficiencies of another.
“We have three major businesses — the grain business, the processing and the ingredient business, give or take, with transportation in the middle,” he said. “What I don’t like in a corporation is when there is a piece that subsidizes another piece. That’s a big risk for investors and shareholders — that the managers can decide that their favorite pet project will be subsidized. There’s no defense for the shareholder on that.
“So I always feel very strongly that each of these businesses, although I make sure that there are strong synergies for us, needs to stand on its own feet. So, I want my grain business to be the best grain business out there. And to be competing with people that are only in grain. And, I want my processing business to do the same and I want my ingredient business to do the same.”
To maximize value ADM derives from its grain unit, the company has looked to gaps in its business. Already strong in grain origination, Luciano spoke earlier this year about opportunities in “destination marketing,” noting at the time only about 15% of the company’s grain volume reaches the final customer, say in Brazil or Egypt. This final step represents an opportunity to widen margins, and ADM has crafted a plan to increase the percentage to 30% or even 40%.
In December, the company acquired a 50% stake in Cairo-based Medsofts Group, a joint venture that includes a local grain distribution operation serving customers in Egypt, an inland logistics network linking port operations to customers throughout Egypt and an international commodity merchandising operation that handles more than 1.5 million tonnes of grain, oilseeds and soft commodities annually.
“When we sell to Egypt, we don’t export it FOB (free on board) anymore,” he said. “Now we sell landed in Egypt, so it’s C&F. (includes transportation to Egypt).We take it from the vessel from there, and we break it into smaller pieces and we take it to the final customer.
“That’s one example. In Morocco we bought a wet corn mill, which is a little different, a producer of high-fructose corn syrup. But that helps also, because now that we have a position in Morocco, we’re leveraging that to do a little more destination marketing.”
While acquisitions have been ADM’s chosen path toward expanded destination marketing in Morocco and Egypt, different approaches have been pursued elsewhere, Luciano said.
“For example, if you think about the world in destination marketing, in Central America and in Mexico we’re growing it ourselves,” he said. “So we’re building the offices, we’re adding the people, we are leveraging the existing position we have. In Egypt we didn’t have that, so we bought 50% of Medsofts, and we have excellent partners doing that with us. In Europe, for example, we opened an office in Italy that we didn’t have, and we’re leveraging that. In Southeast Asia, Indonesia, we also grew significantly last year, but we did it ourselves. It’s a combination.
“You put together a strategy, and you always get to this fork in the road when you’re going to implement, which is, do you buy or do you make? Sometimes it’s better to buy and sometimes it’s better to make it. When we find great companies that want to work with us, and they are very honorable companies like Medsofts in Egypt, we’re more than happy to go into partnerships. When we don’t find those things, it takes a little bit longer, but we are patient. We have the long-term view. We’ve been around for 114 years. We want to be a great company for the next 114 years. So, sometimes we can do things faster but would rather do things well. So, if it takes a little bit longer, it takes a little bit longer.”
Like all international grain companies, ADM walks a tightrope between recognizing the role agricultural biotechnology will play in helping feed a growing global population and the pockets of resistance that have emerged to genetically modified organisms.
“Our position is normally to support the introduction of technology that actually helps to feed the world,” Luciano said. “The challenges are enormous, even with the technology we have, so going backward in technology, I think, is almost physically impossible unless we all become vegetarians tomorrow. I don’t think it will happen. So, we are supportive of GMO, and we work with all the seed companies to make sure that there is an orderly commercialization of all these things. We need to match the approvals in the different geographies with the desire of the countries to export. It’s not an easy task. But we also respect the fact that there are certain parts of the population that don’t want GMO.”
In the non-GMO arena, ADM also has been active with contract growing to meet the needs of specific customers, Luciano said. It represents what he called a very small percentage of the company’s business. The company dipped its toe a bit deeper in the non-GMO market earlier this year with the acquisition of a controlling stake in Harvest Innovations, which specializes in non-bioengineered, minimally processed, expeller-pressed soy proteins, oils and gluten-free ingredients. Harvest Innovations is based in Indianola, Iowa, and has a second processing facility in Deshler, Ohio.
When he first joined the company, Luciano visited many of the company’s facilities around the world to familiarize himself with the business. Looking at the time at ADM’s positioning in the global grain market, Luciano saw and has addressed major geographic imbalances.
“A big gap the team identified five years ago when I came to ADM was that we were spectacular in North America, but we were not the same power in the rest of the world,” he said.
Since then the company has made grain storage and handling investments along the Amazon, Paraguay and Danube rivers as well as the Black Sea, while continuing to leverage investments in the United States along the Mississippi and Ohio rivers.
Similarly, the company has expanded its corn processing business internationally with a corn complex in China. In November 2015, the company purchased assets from Eaststarch, the company’s 50-50 joint venture with Tate & Lyle PLC. With the acquisition, ADM owns corn wet mills in Bulgaria and Turkey and owns 50% of a corn wet mill in Hungary.
“All of a sudden, in a few years we came from being just a North American player to being a global player,” he said. “We’re making non-GMO lecithin in Germany and in India. We continue to grow. It’s exciting stuff. We’ve invested a lot over the last two years. And, in 2015, maybe what I’m most proud of, we did all these investments and we still returned $2.7 billion dollars to shareholders.”
Also during this period, ADM divested a number of businesses, including its cocoa/chocolate operations and South American fertilizer, lactic acid and Brazilian sugarcane ethanol businesses.
Another objective Luciano said ADM will pursue under his tenure is reduced earnings volatility. The company’s net income in 2015 (year ended Dec. 31) of $1.85 billion was down from $2.25 billion in 2014 but up sharply from $1.34 billion in 2013 and $1.38 billion in 2012.
Increasing the proportion of the business insulated from market volatility, with acquisitions like the Wild Flavors business, will help, Luciano said. Still, volatility will never disappear entirely.
“I still realize we are in the commodity business that is influenced by the weather,” he said. “There are things we’re doing in the grain business, such as extending it through destination marketing or expanding geographic exposure, that help. So the entire strategy of the three businesses is to improve returns while reducing earnings volatility. Yes, we understand that we are in a volatile industry. It isn’t a problem. Our company does volatility very well.”