Sophisticated Farmers Cut Out Trading Giants in Profit Hunt

Source: By Shruti Singh, Jeff Wilson, and Mario Parker,Bloomberg • Posted: Friday, June 16, 2017

It wasn’t that long ago that U.S. farmers like Brian Marshall had few choices about where and when to sell their crops, which meant taking whatever price was offered at the local grain elevator during harvest season.

The Archer Daniels Midland Co. corn processing plant in Peoria, Illinois. Photographer: Daniel Acker/Bloomberg

Today, the Missouri grower stores his own corn and soybeans, sells them whenever he wants and arranges deliveries directly to processors or exporters. That could spell trouble for global agricultural companies including Archer-Daniels-Midland Co., Bunge Ltd., Cargill Inc. and Louis Dreyfus Co. that  generate billions of dollars providing those kinds of services to farmers.

“People are doing a lot more things in house,” said Marshall, 40, a third-generation farmer who works with his father on more than 4,000 acres near Kansas City. “You cut out a middleman or two.”

American growers are taking advantage of technologies that weren’t around two decades ago to squeeze more profit from crops, especially after record harvests left global surpluses and plunging agricultural income. Up-to-the-second price and weather data accessible by smartphone make it easier to sell every bushel, while email and social networks give farmers more information to make decisions. They’ve also expanded storage capacity by 20 percent since 2003, government data show, reducing their reliance upon local elevators.

At the same time, buyers like ethanol maker Green Plains Inc. are bypassing the big merchants to make direct purchases from farmers. With grain and oilseed crops valued at about $108 billion last year, the stakes are high for companies that have made their living for generations with vast networks of trucks, grain elevators and barges.

“Major grain companies built a business model to buy grain as cheaply as possible at harvest and store it until prices improved,” said Steve Nicholson, vice president of food and agriculture research at Rabo AgriFinance in St. Louis. “That plan to merchandise big volumes of grain covered up a lot of sins. The big grain companies just don’t control the volume like they used to.”

On the Marshall farm in Missouri, gone are the days when Brian’s grandfather was forced to take freshly harvested corn straight from the field to an elevator four miles away. There’s also no need for his mother’s once daily ritual of calling eight or 10 elevators to unearth the best prices. Now, the family can store crops for months, get prices from thousands of miles away and use their own trucks to haul crops as far as necessary to make the best profit.

Better Seller

Marshall stopped paying big grain handlers to store, dry and haul crops for his family farm over the last several years, but he’s also starting to ween his business off their marketing services. Last year, he asked a global grain trader to sell 15 percent of his soybean crop before it was planted. It went for around $8.50 a bushel in March 2016. After the harvest in October, Marshall stored some of his soybeans and recently sold them for $10.14.

While there’s still market risk no matter who holds the crop, Marshall says during the past year he did just as well as or better than the professionals without having to pay them a commission.

The big guys have noticed. White Plains, New York-based Bunge saw its agribusiness revenue shrink over the past three fiscal years as prices fell, and during that time said it won’t meet a 2017 per-share earnings target that the company set for itself. Chief Executive Officer Soren Schroder has said the industry has too many players and growers are getting more sophisticated. That means more competition on every farm, which is pushing the need for more consolidation in the industry, he said.

Last month, Bunge became a takeover target from commodity giant Glencore Plc. While Schroder “has made the right moves” to boost Bunge’s returns, “the glut of grain supplies in the global markets and the persistent problem of slow farmer selling have frustrated its plans year after year,” Robert Moskow, a New York-based analyst for Credit Suisse Group AG, said in a report on June 7.

Spokesmen for Bunge and Minneapolis-based Cargill didn’t respond to multiple voicemails and emails seeking comment, while spokeswomen for Rotterdam-based Louis Dreyfus and Chicago-based ADM declined to comment via email.

Even smaller middlemen are feeling the pinch.

“To the extent that the farmer relied on us to handle his harvest bushels, he has much more capacity to do it himself, so the role of what you touch in the harvest time has decreased,” said Randy Ritchie, director of international grain marketing at Omaha, Nebraska-based Gavilon Group LLC, a unit of Japan’s Marubeni Corp. “You look at a state like North Dakota. They can store their entire crop: wheat, corn and soybeans.”

Bypassing Middleman

Some longtime customers are bypassing Arizona Grain Inc. in Casa Grande, Arizona, according to Eric Wilkey, the grain handler’s president. For example, a farm that had supplied crops to Arizona Grain for 15 years built its own mill and began selling cow feed directly to dairies, Wilkey said. In another instance, a local flour mill ditched purchases from Arizona Grain to buy directly from a farmer who had been a customer for two decades, he said.

“Our storage, capital, price discovery and management was no longer needed,” Wilkey said. “There are new forces coming into play.”

Wilkey estimates taking out a middleman can save 20 cents on a bushel of wheat that fetches about $4.57 in Chicago, which is less than half the price of five years ago (wheat futures traded at about $4.41 Thursday).

Farmers are becoming more comfortable selling outside of traditional channels, said Brennan Turner, president and CEO of FarmLead, an online grain marketplace backed by crop chemical maker Monsanto Co.

Traders and cooperatives “have way too much overhead and aren’t emptying bins fast enough to turn a profit,” said Iowa corn and soybean farmer Terry Jones, 56. He and his brother manage 4 million bushels of storage capacity and 25 grain trucks. “We can move faster.”

Saving Money

Grain users are taking note. Omaha-based Green Plains, one of the biggest U.S. ethanol makers, buys about 60 percent of its corn directly from farmers, compared with 20 percent five years ago, and it is trying to increase that share to rely less on grain merchants. The company processes 1.6 million bushels a day.

Depending on the location of the farmer and the company’s 17 ethanol plants, Green Plains can save itself 3 cents to 8 cents a bushel with its direct purchases, CEO Todd Becker said. The company has expanded its storage capacity by almost fivefold to as much as 50 days of demand.

“The farmer has a lot of storage and we have a lot of storage,” Becker said. “We just skip over the traditional way that grain used to move through the market. We’re now tearing that whole thing down.”