20.Food traders share global ambitions By Javier Blas in London and Kevin Brown in Singapore

Food traders share global ambitions

By Javier Blas in London and Kevin Brown in Singapore

September 24 2010 TFT

Agricultural commodities traders used to be content to intermediate between farmers and merchants, a business of large flows but razor thin margins. Today, they aim to reach from the farm to the fork, moving into more lucrative processing.

The merger talks between Louis Dreyfus, a Paris-based, family-owned agricultural trading house founded in 1851, and its much younger rival Singapore-based Olam point to this transformation of the raw materials industry.

Both want to re-invent themselves, building processing facilities and farming their own arable land. For that, they need much more long-term capital, which can be financed mostly through short-term credit facilities.

“Both companies are in a transformative phase,” says an industry executive, who is not involved in the merger talks, but deals with both trading houses. “They want to move away from the high flow, low margin trading business and invest into new assets. They need money, so they need to explore new ways,” he adds.

The shift comes as emerging markets – particularly Asia and the Middle East – demand more food and, crucially, a varied diet, richer in meat and dairy, and away from traditional staples such as rice and vegetables.

Meanwhile, consumption in developed countries is growing more slowly, in line with population and general economic activity. The Hong Kong Monetary Authority found in a recent study that a 10 per cent increase in household spending triggered an 11.5 per cent jump in meat spending in China, but only a 1.1 per cent increase in the US.

As such, agriculture and the big food trading houses have been drawing increased attention from policymakers following the price spikes and supply uncertainties of the 2007-08 global food crisis, the first in more than 30 years.

Food security, long a topic merely for agriculture ministers, is hotly debated among leaders of the Group of Eight industrialised countries. The attention has increased recently, as the cost of crops from cotton to wheat spiked, triggering on Friday an emergency meeting of the United Nations’ Food and Agriculture Organisation.

Amid such profound changes, the company that would result from a merger of Louis Dreyfus andOlam would dominate in several areas, particularly cotton – where it would be by far the largest trader and could face regulatory problems because of its size – rice, coffee, sugar and orange juice. It would be big in wheat and corn, and enjoy a top five position in oilseeds.

Geographically, Louis Dreyfus is strongest in Latin America and Europe, while Olam’s strengths are in Africa and Asia. The combined group would have a significant presence in the key agricultural commodity origination regions of Latin America and Africa and in Asia, which is developing as the significant area of demand growth.

“This would be a pure play agricultural commodity group that would have an unparalleled opportunity to emerge as a leading global player in the industry,” says a person with knowledge of the talks.

A merger would give the combined group substantial businesses in 25 agricultural commodities,with upstream production in 11 when Louis Dreyfus’s citrus and sugar cane operations are added toOlam’s businesses in plantations, timber, dairy farming, rice, rubber and nuts. Bankers believe a combined group could be worth as much as $18bn, making Louis Dreyfus-Olam the third-largest agricultural trader, after Cargill and Archer Daniels Midland.

The deal would be the largest in the agricultural commodities trading business since Cargill’s acquisition of the main business of Continental Grain Company in 1998 and the fire sale of Andre &Cie, the Swiss-based trader that collapsed in 2001.

Copyright The Financial Times Limited 2010.