Grain Handlers Expand Hunt for Cheaper Crop Bins as Prices Slump

November 30, 2015 05:00 AM
midwest grain elevator

For almost three years, Curt Vossen tried to buy grain elevators and processors in the U.S. for Richardson International Ltd. The chief executive officer of Canada’s biggest agricultural company said there just weren’t many assets for sale, and the few that were fetched hefty premiums.

There are signs that’s changing, Vossen said. With crops like corn to soybeans headed for their longest price slump since at least the 1990s, shrinking profit margins may make owners of North American grain assets more inclined to sell. While premiums remain near a 10-year high, they have declined, and the pace of deals for agricultural operations has accelerated, with the most transactions this year since at least 2000, data compiled by Bloomberg show.

“We’ve moved into more of a supply-driven market once again,” said Vossen, who last acquired major crop-handling assets in 2013 with an C$800 million ($598 million) deal that included 19 grain elevators from Canada’s Viterra Inc.“What we may see is a more fluid market in terms of mergers and acquisitions than what we’ve seen in the past.”

Closely held Richardson is “actively” looking in the U.S., while American companies such as Bunge Ltd. are trying to expand in Canada. Assets in North America, which exports more grain than any other region in the world, also are drawing interest from overseas because global demand for food is expected to keep rising for decades.

Buying Spree

Optimism about prospects for agricultural assets led metals and energy trader Glencore Plc to acquire Viterra for $6.11 billion in December 2012. At the time, U.S. grain processor Archer-Daniels-Midland Co. passed on the deal because it concluded returns didn’t justify the cost. A few months later, Japan’s Marubeni Corp. purchased Gavilon LLC in the U.S. for $4.6 billion.

Since then, global surpluses have sent commodity prices plunging to a nine-year low. Now, Glencore wants to sell a stake in its agricultural operations to reduce debt run up during its buying spree, and the billionaire who controls Louis Dreyfus Commodities BV may offer part of the trading house to raise cash.

“Valuations got frothy, and expectations by sellers are coming down, which should facilitate M&A events,” said Farha Aslam, a New York-based analyst for Stephens Inc. “We expect the pace to pick up.”

More Deals

So far this year, 177 transactions involving agricultural assets have been reported globally, up from 149 in 2014 and more than any year since Bloomberg began tracking the data. Based on five deals for which the information was available, the median price either paid or proposed by buyers was about 18 times the target’s earnings before interest, taxes, depreciation and amortization, down from a 10-year high of 20 times last year, the data show. In the nine years before 2014, the so-called valuation multiple averaged less than 12 times.

Slumping commodity prices may erode the value of assets used to store, process and transport them. Global grain inventories will be the highest ever in 2016, after production surged in recent years and demand slowed, according to the U.S. Department of Agriculture. After three straight years of price declines, wheat and soybeans are having their longest slide since 1999, while the drop for corn -- the U.S. biggest crop-- is the worst since 1977.

Increased investment in grain silos on and off farms has left more capacity than the combined production of U.S. corn, wheat, soybeans, sorghum, oats, barley and rice farmers in the 2015-2016 crop year.

Margin Squeeze

As prices drop, the profit margin to crush soybeans into oil and meal in the U.S. has tumbled 47 percent in the past year, while the margin for processing corn into ethanol in Illinois has plunged 55 percent, data compiled by Bloomberg show.

Income potential from storing grain also has slipped, partly because the market offers less incentive to hold onto it and storage capacity is overbuilt, said Hal Reed, chief operating officer of Maumee, Ohio-based Andersons Inc., which markets, processes and stores crops.

“Asset values are declining,” and more assets may become available, Reed said. “We will continue to look for those opportunities as they come to the market.”

Acquiring assets may still be difficult, especially from family-owned businesses or those that see long-term value, said Don Meltzer, head of mergers and acquisitions in North America for Rabobank.

Next year may be a turning point for deals, said Dan Kowalski, director of industry research for Greenwood Village, Colorado-based CoBank, which provides loans and other services to U.S. agribusinesses.

“If we see multiple years of stress on the farmers, you will see that trickle into the grain handling side,” Kowalski said. “If the stress on farmers starts to creep into the middle part of the supply chain, there will be a little shake-out.”

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Spell Check

Chappell, NE
12/1/2015 02:22 PM

  Slumping commodity values erode the value of EVERYTHING. How long will it be this time before the next world wide economic meltdown? The definition of madness is continuing to do the same stupid thing over and over again expecting a different outcome next time. Cheat the farmer now, pay for it later. It's very simple really.


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