CARGILL FORESEES NEW GRAIN ERA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00806R000100200011-6
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 3
• Document Creation Date: December 22, 2016
• Document Release Date: September 9, 2010
• Sequence Number: 11
• Publication Date: April 11, 1979
• Content Type: OPEN SOURCE

STAT
Sanitized Copy Approved for Release 2010/09/09: CIA-RDP90-00806R000100200011-6
11 APRIL 1979
argill foresees
Reprinted from the April 16, 1979,
issue of Business Week magazine,
.by special permission. m 1979,
McGraw-Hill Inc..
A deceptive calm blankets the
-world's grain markets. For four
years in a row, good weather has .
b'essed American farmers and
many of their counterparts else-
where with bumper crops, bring-
ling a leveling-off in the trading of
wheat, corn, soybeans and other
grains. 3.
Yet at its- headquarters just out
side Minneapolis, Cargill Inc., the
nation's largest privately owned
:company and the world's biggest
grain trader, is quietly but aggres-
-sively preparing for a brand-new
era. For Cargill, the next few years
may be every bit as turbulent as
`the period following the- 1972 Rus-
sian wheat deal that ,brought a
boom in worldwide grain trading;
a spectacular bulge in the profits of
.Cargill and other traders- and un
'welcome publicity for a business
that is still shrouded in secrecy.
Now, another round of explosive
growth In grain trading could be in
-the` offing, accompanied by sub-
stantial new risks that are forcing
-Cargill to plan for a boom.. that.
,might just- as easily turn ito,, a
painful bust-
1 hree . forces are at work that
promise not only great opportunity
but also uncertainty and turmoil
for Cargill: A projected swelling of
world demand for grains, a raft of
new competitors and. a threat of
more stringent government con
trots. Although Cargill executives
;refuse to divulge their plans for
dealing with such new develop-
meats, interviews with industry
executives, analysts and former
Cargill managers-supported; ;by
some of the company's-,recent
moves-reveal a unique approach-
:.avoidance strategy that Cargill is
;now taking toward its traditional
business.
rain era
Investment, protection
On one hand, the company is in-
,.vesting more heavily than ever in
grain-handling and transport facili-
ties at home and abroad. to position
R itself for the.. widely, predicted
surge in trading. At the same time,
however, -Cargill is protecting it-
Alself against the added risks in trad-
I by pursuing an equally vigor-
ous. program of diversifying away
* ~.
from it.
For fiscal 1979, ending June I,
fully half of the company's pro-
1 jected sales of $12.6 billion and
about 60 percent of,its predicted
$ I50 million in profits will come
)from. Cargill's rapidly growing
-non-trading activities. By contrast,
i in 1970, nearly 60 percent of the
company's revenues were generat-
ed by Cargill's grain-trading-oper-
ations. Even back then, Cargill had
already diversified into such fields
3 as corn milling, animal feeds,
chemicals, salt mining, soybean
processing and insurance.
Margins slashed - ,
While worldwide grain demand
has been growing at an annual rate
of 10 percent since. then, an. un-
precedented string of good crop
years has leveled off the growth in
trading and. cut grain traders' mar-
gins drastically:; Moreover, -there
are more than 1 billion bushels of
U.S. wheat and feed grains in stor-
age, a level that approaches the
record government-supported sur-
pluses of the.1960s
The -expected long-term grain
boom rests, partly on the law of
averages, which deems another
succession of splendid crop years
extremely unlikely. Yet, for myr-
iad economic and political reasons,
the world demand for grain is pre-
dicted to grow even faster in the,
years : ahead. The developing `'na-
tions are gaining buying clout. The.
Soviet Union and Eastern-bloc
countries are trying to put more-
meat if the diets of their popula-
tions.-boosting their-demand for
But the company has since used
its hefty. grain-trading profits to
expand those businesses and enter
new ones, including flour process-
ing, steel manufacturing,, poultry will,' make a. number' of big U.&
processing and coal. In November,' ! . grain purchases. this year. Noting
Cargill's desire for such diversifi- such trends, some agriculture.ex
cation was underscored=,by, the perts predict that grain-trading
'
company
s $75.million acquisition
of MBPXL Corp., the nation's No. 2"
meatpacker (after Iowa Beef Pro-
cessors Inc.) with annual revenues
of about $1 billion.;
Despite such diversification, Car-
gill's biggest growth opportunities
are still In the grain-trading. busi+
ness that it dominates with a 25.
.percent share of U.S..exports.
(Continental. Grain Co. of New
York is next with about, 20 per-
cent.), The volume of worldwide
trading today is .70 percent higher
than in 1970, but the larger part of
that. growth took place during the
first half of the decade, when Car
gill'&., profits grew?' sevenfold,. to
more than $200 million. ? ..
feed grains.
And China has become the wild
card In the global equation. Last.,
volumes- could rise 50 percent in
the-next five years.
Anticipating this surge, several,
newcomers have recently jumped;
into the business to join the tradi
tional. Big Four-Cargill, Continen?>
tal ? Grain,- Bunge- and. Louis Drey-
fus; Some of the, corporate
entrants, such as. Peavey Co. and
Pillsbury Co., are actually return-
ing - to a familiar field. They fled
the industry In. years past, seeking
more profitable investments else-
where. Still others. 'such as Philipp
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Bros., the huge metals-trading arm of Engelhard Min-
erals & Chemicals Corp., are new to the business alto-
gether, but view grain trading as a related area.
At the same time, big farm cooperatives, powerful
Japanese trading companies and others are now try-
ing to grab a greater stake in grain handling and trad-
ing.
Specter of restraint
But the most ominous threat to Its prosperity is the
one it can do the least about-government. While
rarely betraying a doubt publicly, industry executives
privately express fears that their free-trading days
may be numbered. The government has been re-
strained in regulating grain traders. Considering the
shady practices of some traders during the early 1970s
and the federal investigations that followed, "remark-
ably little regulation has resulted," admits,Cargill's
vice president of public affairs, William R. Pearce.
Another grain-trading boom could dramatically,
change that. The government and farmer groups have.,
ttaditionally been distrustful of the , secretive , grain
traders. That hostility increased after. the. revelations
of short-weighting, bribery and other shenanigans at.
Gulf Coast grain elevators in recent years. (Cargill and
Dreyfus were the only major traders untouched by the
scandals.)
The companies will probably come under' even,
greater fire if, as expected, grain prices rise as de-
mand outstrips supply. In periods of climbing prices,
the grain traders, acting as market-makers,. can- bens-.
fit tremendously by matching production in one coun-
try with deficits in another. If the companies' profits
soar, charges that the traders are "profiteering" prob-
ably will reach a crescendo. As one Bunge Corp. ex
Gecutive glumly observes: "I see no way to -keep the
government out of the market if we go through an-
other bout of exploding prices."
A number of legislative proposals are already before'
Congress that would put the government much deeper
into Cargill's business. The most drastic of these is a
bill introduced March 16 by Rep. Jim Weaver, D-Ore.,
which would establish a National Grain, Board mod-
eled after government units in Canada.and Australia.
The board would have the power to "barter, negotiate
or approve all export sales of American grain."
Grain market's OPEC
Because U.S. exports of wheat, corn, soybeans and-
other grains represent- half of the. world market ,a the
proposed board would be to grain what the Organiza-
tion of Petroleum Exporting Countries is to oil. Should
such a billpass, It would crimp the grain traders. in
their most profitable role-the market-making func-?
tion-and limit them to the much smaller -profits to, be.
made from grain handling and storing. R?a
The chances of the grain board bill passing this ses-
sion are slim, but other, similar proposals are gaining
favor. Some -farmer groups and -congressmen ' are
pushing for an International government-to-govern-r
ment arrangement for managing prices, .creating yet
another threat to Cargill's trading profits.
A more Imminent concern to the companyls the leg-
islative call for more extensive and faster reporting of
grain sales. Following the uproar over the Russian
wheat deal and the disruption it triggered in world
wheat markets, the federal government in 1973 began
requiring grain traders to report the terms of all large
domestic grain trades to the Agriculture: Department
But Cargill and other traders mostly sidestepped the
requirement by giving their foreign subsidiaries a
more active part In worldwide trading, Now, Con-
gress is debating a proposal that would extend the re-
porting requirement to the companies' foreign arms as
well. The industry fears that such a system could re-
duce its margins even further by giving grain sellers
and buyers more current information on prices and
supplies.
. Cargill executives also see another danger in such
rules. "They would just force foreign buyers who de-
sire privacy in trading to (use) foreign-based compan-
ies and diminish U.S. exports," argues Robbin S. John-
son. an assistant vice president at Cargill.
It is in this tumultuous milieu that Cargill is chart-
ing its strategic course. The company's executives are
characteristically tight-lipped about the plans being
hatched at headquarters-a palatial, 64-room replica
of a French chateau, sequestered in a sylvan, 250-acre
estate. Neither Chairman Whitney MacMillan, whose
great-grandfather Will Cargill founded the company
in 1865, nor President M.D. McVay would consent to
interviews with Business Week. A few other Cargill
executives did talk, but only sparingly. "Our strategy
is the only proprietary part of this business," one
stressed. "The lead time we build, keeping our com-
petitors in the dark, is a big edge."
Expansion underway f ,r
Nevertheless, it seems increasingly clear to close ob-
servers that Cargill is first hoping to maintain or even
increase its hegemony in grain trading. Cargill's 350
`
,'elevators, 500 barges, 5,000 rail cars and 14 ocean-
going vessels give the company a big lead over sec-
facilities. Now, according to industry executives, Car
lion to expand its grain-handling capacity by 50 per-
`x cent by 1984. One Dreyfus executive laments: "Cargill
drawing board'+or are under construction. Just a few
Great Lakes export elevator at Burns Harbor; Ind., to,'
tion recently began on another new elevator at Tole-
do, while large additions to existing facilities are also
-pegged for Duluth, Houston. Chicago and Norfolk, Va.-:
Meanwhile, the company Is revamping many of Its
115 country elevators-the first way station in the ex-
port pipeline, to which farmers bring their grain-to
increase that network's capacity to load rail cars. To-
gether, these Initiatives could boost Cargill's share of
U.S. grain exports to 35 percent, by some estimates.
Cargill is also strengthening its position In foreign.:
States. For instance, the company recently purchased
a chain of country elevators inr France, which is rapid-
ly, increasing its wheat exports. Argentina and Brazil
are two other countries whose growing grain produc-
tion and'export activity have prompted Cargill invest-
In Canada, where the government's Wheat
now controls all trading, Cargill bought 200 country'
elevators In 1974. And the company is now expanding
its Canadian grain terminal facilities. Cargill is gam-
bling that Canada's desire to capitalize on the new op-,
portunity in world grain trade will lead it to permit
the big private companies to share in the more profit-
able trading function. "We're counting on the Canadi=
an system moving more toward free markets," says:'
the company's world grain operations.
CONTIAt1'ED
But the success of Cargill's efforts to expand Its
grain business ultimately rests on the cantinuing sups-;
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riority of its far-flung trading operations handled by Yet, if any of the old-line traders can comtortabl~
an affiliated company called Tradax. An elite unit that weather the competitive onslaught, It is Cargill. Not
thrives-on intelligence gathering, secrecy and discre- only are its grain operations stronger, but It is also-
tion, Tradax peddles most of Cargill's exports. more diversified than its trading company peers. For
The unit, owned 70 percent by Cargill and 30 per- more than two decades, Cargill has made investmentss
cent by a consortium of Swiss banks, keeps a letter- outside grain, seeking a buffer against the capricious
box "headquarters" In tax-sheltered Panama. But the gyrations of its basic business. -
real headquarters of Tradax is a six-story building in Still, it was not until the mid-1970s .that. Cargill
Geneva that houses sophisticated telecommunications started making a series of big diversification moves.
equipment as well as its team of high-priced, cosmo- In all, the company has spent more than $1 billion oral
politan currency experts, grain traders and shipping non-grain operations since 1972, compared withllll
specialists. roughly $200 million during the previous decade. An
Consulted b_ YXIA the last grain boom bankrolled this campaign.
By all accounts, Cargill's trading mavens are quick- Even after the acquisition of MBPXL, Cargill still
,
witted and urbane graduates of the most prestigious Chants ks l l war chest of more than $5 cash,
into political thanks to those heady days in 0 In 1997373--?474. As
schools. Indeed, they are so plugged po private company, it is naturally much easier for Car
changes, crop developments and currency movements gill to hold on to that cash; the company pays out less
Bence A e said to meet with mein regularly to
- -pMk-t a traders' brains.
Tradax enables Cargill to react quickly to develop-
ments in sensitive grain markets, an invaluable asset
in a business where the volumes traded are large and
the margins thin. Nr? Leonard" Alderson, senior vice
president of Tradax, acknowledges that "Tradax gives
us a significant market advantage."
Others have tried to copy Cargill's success with
Tradax, but failed so far. In 1974, for instance, Conti-
nental opened a centralized Geneva office. But accord-
ing to trade sources, the company found that it could
muster neither the management talent nor the money
to support such an operation. It is now reportedly dis-,
mantling the operation. - 0' -
The trading style at Cargill is conservative, hedging
rather than, speculating, which given-the company,
fewer windfalls but also fewer big setbacks. Even for
Cargill, through, trading in the International markets
has been difficult for the past two years. "Margins
have been. very poor," says Alderson. Last year, in
fact, an estimated 70 percent of Cargill's earnings
came from non-grain operations.
Nonetheless, grain markets are not expected to re-
main weak much longer., "The important question
now is whether world supplies can possibly keep up
with demand," says Carroll G. Brunthaver, vice presi-
dent of Sparks Commodities Inc. and a former assis-
tant Agriculture secretary. -
Adversaries move in
When the market turns, those who stand to gain
most will be the traders close to U.S. grain sources,
which account for half of world shipments. Cargill, of
course, is first among these. But the recent evolution
of the world's grain market has attracted a wave of
foreign and domestic traders eager to carve out a
share of the business.
The big Japanese trading companies, for instance,
have been active in grain markets for years. But until.
recently, they were content to buy U.S. grains from
private traders, such as Cargill. Now,, Japanese com-
panies, such as Mitsui & Co. and Mitsubishi Corp., are
attempting to cut out the middlemen by purchasing
elevators and other grain-handling facilities In the
United States. For example, Mitsui jolted the Industry
last March when it outbid Pillsbury for the terminal
and country elevators of bankrupt Cook Industries-
Inc. -. .- .
Cargill also faces an army of new domestic adver-
saries. In addition to Philipp Bros., Pillsbury and Pea-
vey, the list of new and newly aggressive competitors
includes: Farmers Export Co., -a trading venture
founded In 1968 and backed by six farm cooperatives;
a joint venture by German-based Alfred C. Toepfer
shareholders, who are mostly members of the Cargill
and MacMillan families.
Like its trading, Cargill's diversification program'
has been conservative. In fact. the company's process-
ing, milling, poultry; beef and animal-feed operations
are seen almost as integration steps-investments "to
create markets for grain," according to Thomas C.
Veblin, an agribusiness consultant with SRI' Interna-
Price is the weapon
Where Cargill will invest to broaden Its stance fur-
ther is uncertain. Yet, it seems unlikely that the corn
pany will stray very far from the commodity-market
Ing, bulk-handling fields it knows. so well. As one-
former Cargill executive notes: "There are no market-
ing tricks over there. Everything Is a commodity. The
only weapon they know Is price."
Moreover; the emphasis on diversification during
the 1970s reflects the management transitioq taking
place at Cargill. Until a few years ago, the company
was dominated by officers from the trading side of the 1
business, while the "processing and feed people were
almost a lower caste," recalls one former executive.
Now that is changing.'The differences between the,
two camps are exemplified by the disparate back
grounds and experience of MacMillan and McVay.
Chairman MacMillan, 49, Is a trader. After graduat-
ing from Yale, he worked his way up as a vegetable-
oil merchant and later as a grain trader. McVay, on
the other hand, is the first executive from the process-
ing side of the business to reach the presidency. He is
a livestock- specialist, schooled at Kansas State Uni-
versity. McVay, 60, seems to embody the new wave of
mangement at Cargill. It Is more operations oriented
and technically trained; some of its members are
MBAs, and many were educated in the Midwest-con-
trasting sharply with the liberal arts graduates of Har-
vard and Yale picked in the 1950s and 1960s to be-
come Cargill's elite coterie of grain traders.
In the recent moves at Cargill, outsiders see the as-
cendancy of the technical camp generally and McVay
in particular. "McVay is the brains behind it all," says
gy argill alumnus. "He's the guy who is setting
one C
strate now. '
If'that ls,so, it probably reflects the subtle shift in
Cargill's long-term priorities away from grain trading
and in favor of food processing and other businesses
that the company has undertaken lately. The. shift Is
clearly a timely one. For, while Cargill is now beefing
up its trading operations, hoping to capitalize once
again on that superiority In the coming few years,
there seems to be a recognition vidthin the company
and two U.S. coops, and Tradigrain Inc., a company, that' Its next grain bonanza-if it materializes at all-
composed mostly of former Cook traders. = maybe Its last.
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