AgDM newsletter article, March 1999

Cargill's acquisition of Continental Grain's grain merchandising business

By Marvin Hayenga, Emeritus Professor and Robert Wisner, Professor of Economics, 515.294.6310, rwwisner@iastate.edu

The largest grain exporter’s acquisition of the second largest exporter has raised some concerns regarding potential loss of competition.  However, it may also make these firms with excess capacity more efficient and effective in competing for a larger U.S. share of the world market. This article provides some analysis and raises some issues which may prove useful in the dialog as the pros and cons of this acquisition are debated.

The basic concern is that Cargill bought Continental to remove a significant competitor, particularly in the export market, and expand merchandising margins.

Why did Continental Grain sell?

Industry speculation is that Continental excelled in very large volume bulk export trading but had not diversified enough into value-added processing to compete effectively in a market environment where export volumes have been sharply reduced in recent years. To attempt to effectively compete by restructuring their operations at this late date would require too much capital and too much risk. Continental's storage capacity declined significantly over the last 10 years while Cargill, ADM, and Peavey expanded. Their capital could be more productively employed in their other agricultural and financial businesses.

Why did Cargill buy Continental?

Cargill expects this acquisition to contribute to its ability to compete effectively in a rapidly changing market environment. The acquisition will contribute to more effective knowledge acquisition and transfer from an expanded global presence.  In addition it will have a broader base of grain origination facilities in the countries where grain is produced.

The grain merchandising system is a high fixed cost system. Cargill hopes to compete more effectively and keep a large share of the Continental volume, capturing economies of scale by increasing volume without equivalent changes in the costs of managing their system. Further, Cargill expects that it will be more able to reduce costs, not just by having fewer people, but by dedicating some facilities to specialized products and getting more efficiencies in operations (shorter barge turnaround times, longer runs in elevator handling, etc.).

Cargill's new joint venture with Monsanto, to arrange production and to market value-added specialty grains and oilseeds for the feed and processing industries, will require greater capacity to handle segregated grain flows throughout the domestic and export marketing system. Continental has had a significant presence in the identity-preserved grain market with half its international feed customers converted to high oil corn.  Cargill expects to better serve the producer by enhancing productivity and passing some of those cost savings on in the form of better prices to their suppliers and customers. They also plan to offer to farmers more services such as price risk management, production advice, and financing.

The efficiencies that Cargill plans to achieve from the acquisition will have to be estimated in tangible terms for consideration by the Department of Justice. In addition, some of the less tangible benefits identified by Cargill could influence the firm's effectiveness in competing in the domestic and world market arenas.

A broader coverage of the major world suppliers and customers in the world grain and oilseed trade may offer improved market intelligence.  This is a key to effective trading in a very risky environment.  In addition it would give them more effective and timely sourcing to serve a broader array of discriminating customers.

Concerns regarding the acquisition

The basic concern expressed by some farmers, politicians, and industry participants is that Cargill bought Continental to remove a significant competitor (particularly in the export market) and expand merchandising margins. The ability to "control" more facilities and larger volumes of grain and soybeans might adversely influence competition and the transparency and effectiveness of the price discovery process in the grain marketing system.

Other issues which might arise are similar to those being raised in the current Microsoft case, such as:

Antitrust review and procedures

A major combination of two leading competitors in the U.S. and world grain merchandising industry certainly will prompt market power concerns by policy makers, the Secretary of Agriculture, and others; which will involve data submission to the relevant antitrust agencies.  The U.S. Department of Justice and similar agencies in other parts of the world where both companies extensively do business will do the review and subsequent challenge or approval.

Summary and Overview

This quick analysis of the readily available data pertinent to an evaluation of the Cargill acquisition of Continental Grain's grain merchandising business in the U.S. market offers the following insights:

Will potential efficiency gains and improved ability to serve the changing demands of farmers and customers make Cargill and the U.S. grain merchandising industry more effective competitors in the rapidly changing world market? Or will the further consolidation of the industry into fewer hands in important export and river terminal markets reduce competitiveness significantly in this very important marketing system? Some economists have argued that there are many competing uses and markets for grain in the U.S. and overseas to keep markets sufficiently arbitraged.

The dynamic changes in the world seed and grain production and marketing system which have been occurring and appear on the horizon (related to biotechnology) are likely to transform the system from a "commodity" orientation to a “specialty” (value-added trait) product system over the next decade or two. Is this acquisition likely to play a useful role in positioning this company and the U.S. industry as a more efficient and effective competitor for U.S. farmers' grain, and for customers in the U.S. and world markets? Or does it have some associated shortcomings for industry competitiveness in the short run which need to be remedied before the acquisition is approved by our Department of Justice? Hopefully the data and analysis provided here will contribute to an informed dialog and debate.

 

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