Chinese trader COFCO Corp's move to grab control of two overseas grains operations in the space of a week threatens to limit the benefits Japan's Marubeni Corp hoped to reap in the world's largest food market.
The Japanese trader's purchase of U.S. grain merchant Gavilon last year made it China's top grains supplier. The advantage of that firepower could be curbed as China develops its own global agriculture trading house.
COFCO, which agreed to buy a majority stake in Dutch grains trader Nidera on Feb. 28, is in talks to buy into Noble Group's agribusiness arm, people familiar with the matter said.
If the deals are completed, they will give state-backed COFCO more leverage on pricing and strength in logistics and market intelligence.
"The key to competitiveness in grains trading is the utilization of shipping, and if COFCO can get the ships that Noble has it will make them more competitive and better able to understand prices," said an executive in the grains department of a Japanese trading house.
Rising incomes have led to growing demand for protein in China, which is determined to strengthen its overseas procurement network as well as find new sources of food, as well as soybean meal and corn to feed livestock.
Chinese soybean imports are expected to rise more than 15 percent to 69 million tonnes in 2013/14, according to the U.S. Department of Agriculture, with shipments of corn likely to nearly double to 5 million tonnes.
In a bid to capitalise on such demand, Marubeni spent $3.6 billion to buy Gavilon in a bid to link the U.S. firm's vast storage network with its own export capabilities in Asia. The two together now sell 15-16 million tonnes of soybeans to China, according to a source with knowledge of the matter.
But the completion of the Gavilon purchase took more than a year as Chinese regulators scrutinized the deal before approving it on condition the firms maintain separate, independent trading units when selling soybeans to China, limiting pricing power.
"I can't say this is a really, really bad deal, but it will take them some time to get their money back," said a Japanese trading house analyst who requested anonymity.
Akio Shibata, president of the Natural Resource Research Institute, said Marubeni's foray into China had met unexpected hurdles, including regulatory and a weakening in grain prices between the time the deal closed and they took on the business.
"It looks like it will take Marubeni longer and require more effort than first envisioned to obtain the full benefits from the addition of Gavilon," he said.
A Marubeni spokesman said the company was aware of the COFCO developments but was not in a position to comment on them.
DIVERSIFIED SUPPLIES
The conditions attached to the Gavilon buy, along with curbs on foreign investment in domestic crushing activities, are part of Beijing's strategy to curb the dominance of a single company.
"Big buyers, not just COFCO, want multiple supply sources because having a single supply source creates insecurity," said an official in the grains division at a Tokyo-based trading house.
"While COFCO will continue making purchases from others, it will also get supplies from its own production areas, and that will have an impact (on the market)."
A deal with Noble would also pit COFCO against Marubeni in South America, where Noble has soybean crushing facilities and China is already a major buyer.
Marubeni bought nearly a quarter of Brazil's soybeans in 2013, and is looking to sell Brazilian corn to China.
If it wraps up the Nidera and Noble deals, COFCO will likely gain more leverage in corn as well. China's corn imports are seen nearly doubling to five million tonnes in 2013/14 from 2.7 million tonnes a year ago, according to the U.S. Department of Agriculture.
"COFCO has buying power domestically, so for grains majors, including Marubeni, trade would fall if they could buy from themselves," the executive at the Japanese trading house said.
"But Noble doesn't have any grain supply depots in production regions, they're just a trader, so it's not too frightening."
Marubeni sells soybeans mostly to small- and mid-sized traders in China, but does not currently sell direct to COFCO.
The two firms did, however, sign an agreement in 2010 for Marubeni to import Chinese milling wheat into Japan from COFCO.
MORE DEALS MAY COME
When asked about its M&A intentions, COFCO previously said that a key strategy was to increase supply sources worldwide to boost food security and focus on firms with a network to help export finished and processed food products.
Developing its own trading house should help China get a firmer grip on food supply and the flow of farm commodities.
Beijing sees it as vital to gain a bigger say in pricing commodities. China is the top consumer of everything from soybeans to copper yet price benchmarks are dominated by the West.
COFCO could be on the lookout for more acquisitions. A Japanese trading house official said once COFCO establishes a sales outlet, it could be looking to boost its production assets.
"So you add the selling power, then go for the production area, so (with a Noble deal) it will be very interesting how COFCO decides to move next."
