Brian and Ravi described in previous articles the commodities run-up as we are using these crops demanded all around the world not only as food products, but for biodiesels. We are seeing record prices in the raw materials going into the products offered by these agricultural/fertilizer companies.
It’s an obvious conclusion that the companies able to manage a supply chain the most effectively will be ones able to add value to their company.
Looking into how agricultural companies add value to their organization, I came across Bunge, a business with operations primarily in S. America, being its largest exporter.
They are split into three main divisions – agribusiness, fertilizers, and food products. Being an completely integrated organization:
- it has mines where raw materials are shipped to plants where fertilizer is manufactured and in turn sold to farmers
- is involved in purchasing, processing, storing, and the selling of grains, oilseeds, and other finished food products, developing some ports to have faster access to their destinations, in addition to more capacity,
- and it uses a developed and experienced logistics network to be effective in delivering the finished goods to the final customers around the world.
With difficult conditions continuing from the early 2000’s until sometime in 2006, Bunge has proceeded to keep positioning itself for more efficiency and growth, seeking profitability through adding value or capturing value that is unleashed in various points along their food production chain.
The four objectives stated in their decade-long global strategy underscores this thesis, as they look for growth and focus on efficiency and customer service when refining their operating model. A great point was made in their overview of 2007 when they cited great conditions on all cylinders for their business, yet the many new, unexpected factors show exactly how dynamic the industry is and how quickly tides can turn in this industry.
Therefore, the risk management that Bunge repeatedly cites in their reports is reassuring.
Food production in the industries Bunge works in does not require much innovation.
Any company can get the most efficient machines and prices are rather efficient. Efficient in the sense that there is no longer information gaps and they are consistent since prices listed in futures market are generally used worldwide. Therefore, I find Bunge’s recent acquisition of Corn Products International last month fascinating. Let me explain.
Let’s first show very basically Bunge’s value chain as of now:
To give a quick background on Corn Products, they operate in one business segment, corn refining, in which they are the market leader. Their main divisions are sweetener products, making up for more than half their sales, which are spread throughout the world, with important sales and marketing bases in Africa and Southeast Asia and South Korea.
The synergies from elimination of duplicate costs and logistics are obvious and estimated to be $100-120 million annually. This acquisition is strategic for Bunge in many of their growth markets, such as Africa, which can be a supply gateway to Eastern Europe, which Bunge has been targeting for several years.
IT also supplies the joint ventures in Europe for biofuels, which has shown tremendous success in the past couple years. Most importantly, it helps to diversify Bunge’s product mix and enhances its value chain, as Corn Products has much more value-added products, as opposed to staples that make up most of Bunge’s products.
Looking into other well-positioned competitors, such as Archer Daniel Midlands and Cargill, with the latter being a private company, they seemed to have strong footholds in the Americas, but lack the reach into Asia although they do have some operations. Currently, Bunge is trading at similar multiples to ADM, yet I believe it has stronger growth potential and does not have that premium indicated in any of their ratios.
It was very little noticed that Bunge also happened to up their EPS estimates for the year from the $7.10-7.40 to $9.35-9.65 when it announced their acquisition. That day, Bunge lost 10% of their value during the day’s trading session.
Also note that Bunge had just increased EPS forecasts in April of this year and before that had estimated a guidance of $6.01-$6.30. It's interesting how Bunge has only dropped since the beginning of the year as they increase guidance.
This EPS represents a net income around 56% higher than 2007, a year in which Bunge had higher than 40% growth from the previous year.
The control of products from origination to the final destination ensures quality and consistency for the customer. For Bunge, this means increased margins at various stages of the supply chain because of the value being added.
Additionally, having control of these products provides Bunge with a better understanding of the supply and demand of these commodities, and with a logistics system being applied across the whole network, it will result in timely service and the ability to react to the dynamic market landscape that we are experiencing now and will continue to experience in the future.
References: www.bunge.com
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