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Thin Margins Get Crop Giants Working Together as M&A Falters

Isis Almeida

(Bloomberg) -- For years the agriculture industry has been expecting a wave of consolidation that just hasn’t come. To battle razor-thin margins, the world’s top crop traders have come up with a new strategy: working together.

Rivals Archer-Daniels-Midland Co. and Cargill Inc. now have a soybean joint venture in Egypt and recently swapped grain elevators in the U.S. Midwest. The two firms, along with Bunge Ltd., Louis Dreyfus Co., Glencore Plc and China’s Cofco International Ltd. are also teaming up in a blockchain technology project that will streamline shipping transactions and reduce costs.

“The name of the game in traditional ag services and oilseeds is consolidation,” Ismael Roig, ADM’s president for Europe, Middle East and Africa, said Wednesday at the Global Grain conference in Geneva. “Consolidation is easier said than done, and there aren’t many large companies with which you can do a large consolidation, so what we’ve been working on is a lot of joint ventures and alliances.”

The buzz about consolidation has waned since President Donald Trump’s trade wars hurt companies’ ability to forecast trends and therefore properly value assets. At the same time, Glencore’s agriculture unit, which had previously approached Bunge, has gone quiet amid a Department of Justice investigation into the parent company. Chris Mahoney, the chief executive officer that laid out Glencore’s agriculture ambitions, also retired.

Agricultural commodity merchants have struggled to make money as years of bumper crops curbed the volatility traders need to thrive. At the same time, competition has increased as more companies have entered the market. That spurred speculation the industry would consolidate in megamergers.

“One of the ways to do it is to try to consolidate through joint ventures, sharing best practices, so you are getting these minor areas where companies are working together,” said Jonathan Kingsman, author of ‘Out of the Shadows: The New Merchants of Grain,’ a newly launched book about agricultural commodity traders. “This will continue because the megamergers can’t happen at the moment.”

ADM plans to focus on digesting recent acquisitions after buying the animal nutrition unit of France’s InVivo for about $1.8 billion, a deal that was completed earlier this year, Roig said. Juan Luciano, who leads the Chicago-based firm, said earlier this year that ADM’s five-year plan was low risk and excludes deals above $100 million or $200 million.

“With the level of acquisitions that we had, I don’t think you see ADM being a very aggressive investor in the next few years,” Roig said, adding that the firm was focused on better utilizing its grain and oilseeds assets, driving efficiencies and growing organically.

The agriculture industry is just now starting to follow the path of energy markets, where companies have established partnerships and joint ventures to help spread risk and reduce costs. Roig cited a study of more than 300 oil projects, of which 70% were joint ventures.

While the mega mergers haven’t happened, there are still medium and small deals taking place. Crop trader Andersons Inc. this year completed a $300 million acquisition of Lansing Trade Group. Louis Dreyfus recently sold all its inland elevators in Canada to Parrish & Heimbecker.

“These discussions are happening a lot, but it’s more about swapping than outright consolidation or big trades,” Pat Bowe, chief executive officer of Andersons, said in an interview in Chicago last week. “The blockbusters? On that front it’s kind of quiet, but I think swaps and individual asset trades will continue.”

(Updates with comment in sixth paragraph.)

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