Omaha-based Gavilon still faces an oversupply of grain from record 2016 harvest
May 30, 2017
By Russell Hubbard World-Herald staff writer, May 28, 2017 Updated May 29, 2017
The grain-trading business that is central to Nebraska’s economy is still facing an oversupply from last year’s abundant harvest, but financial results are looking better in some sectors for the companies that store, transport and market the Midwest’s cornucopia of foodstuffs and cattle feed.
Omaha-based trading giant Gavilon had an improved fiscal 2016 profit, partly on cost cuts. Cross-town rival Scoular Co. reports its fiscal year about to end as “very good.”
It is still a mixed bag, though, with enormous amounts of grain still left over from the record 2016 harvest, inventories that affect the Nebraska-based traders, as well as out-of-state merchants with substantial operations in the state, such as The Andersons, Archer Daniels Midland and Cargill.
The sector is a major employer and economic engine, handling the purchase, storage, transport and sale of the 1.8 billion bushels of corn and 310 million bushels of soybeans the state has produced in recent years, with about $2.5 billion worth exported overseas.
It is a business that depends in a large part on the ability to buy corn, wheat and soybeans at one price and sell it at another. Grain traders typically employ fleets of grain elevators, railcars, trading desks and so forth to get the grain from farmers and to end users such as sweetener plants, flour mills and export terminals.
» At Scoular, an employee-owned merchant formed in 1892, “we had a very good year” in the one about to end for financial reporting purposes, said Bob Ludington, the company’s chief of North American grains and oilseeds. He said the volume of grain handling was up, with strong demand from farmers who wanted to store grain in the company’s fleet of elevators, the product of last year’s record corn harvest.
“Our fee business had a nice year,” said Ludington, referring to the company’s storing of grain for farmers pending its eventual sale. “Volume was up, but margins were down.”
Scoular employs about 1,200 people, operates about 100 grain facilities and has about $5 billion in annual revenue.
» Gavilon, the Omaha grain trader owned by Japanese conglomerate Marubeni Corp., had an improved fiscal 2017 profit for the 12 months ended in March, but only after cost reductions.
Gavilon, purchased from private investors for $5 billion in 2012, had fiscal 2016 net profit of about $100 million, Marubeni said this month on a webcast for shareholders and analysts from Japan. Gavilon struggled to find profitable grain trades, however, Marubeni said.
“At Gavilon, while weakness in ag trading weighed down profit by around 2.5 billion yen ($22 million), for the full fiscal year, profits grew sharply on the back of cost and operational efficiency improvements at existing assets in its core North American grain business,” Marubeni Chief Executive Fumiya Kokubu said on the webcast. “We anticipate an earnings recovery at Gavilon’s ag trading.”
Gavilon, which grew out of the commodities trading operation at ConAgra Foods some years ago, engineered only modest job cuts last year at the Omaha headquarters, where it still employs about 350 people, part of the 1,900 on the worldwide payroll. The company operates about 300 offices and ag facilities, mostly in North America. Besides grain trading, the company earns from storage and dealing in fertilizer and livestock feed and ingredients.
Chief Executive Lew Batchelder, formerly a top man at rival ADM who took over after the departure of his Gavilon predecessor last year, said in an interview the struggles the company had before he arrived were common throughout the industry; Tokyo management chastised the company in shareholder reports in 2015 and 2016 for poor performance.
“It is a cyclical business,” Batchelder said of grain trading. “Cargill, ADM and Bunge had losses or decreases in the same period, and all are great companies.”
Batchelder said grain traders don’t much care what the price of grain is; they can make money as long as there is a spread between where and when they buy it and where and when they sell it.
“We only care to the extent the farmer is profitable,” said Batchelder, a veteran of 40-plus years in the commodities business.
And that, too, has been a mixed bag lately. Corn-price volatility is at a 15-year low, said Bill Lapp, a commodities analyst at Omaha’s Advanced Economic Solutions. And while that is no bonus for farmers, he said the lack of price swings also means grain traders are earning principally from storage fees, with farmers preferring to pay for the warehousing as opposed to selling at current prices.
Corn, for example, was selling for about $3.70 a bushel late last week, way off the 2011 and 2012 record highs of near $8 a bushel. The preference to store and pay for the privilege of doing so in the hopes of a better price down the road has sent corn inventories up 10 percent from about a year ago, to 8.6 billion bushels on March 31, according to the U.S. Department of Agriculture; soybean stocks are up 13 percent and wheat 21 percent.
All that has kept prices low and stagnant — bad for traders looking to make a profit from buying low and selling higher. Like almost all commodities of interest to investors, grain has what traders call a volatility index — a measure of how much variance there is in the returns earned from investing in the commodity. The higher the volatility, the better for traders.
But volatility has been low. The volatility index for corn maintained by the Chicago Board of Trade was at 21 late last week, less than half the five-year high of 52 achieved in 2012. The soybean volatility index was at 16, down from 48 in 2012; soybeans late last week were selling for about $9.43 a bushel, down 17 percent from more than $11.50 a bushel a year ago.
“Lack of volatility is typically an indication of a lack of profit opportunities for trading firms,” Lapp said. “Beyond that, I am as surprised as anyone to hear about a brighter profit outlook for grain traders.”
Part of the equation is the enormous productivity of farmers around the world — irrigation advances, equipment efficiency and high-yield seeds all contribute to meeting the world’s demand for food and cattle feed. But it also conspires against the producers, who in the classic supply-demand scenario earn less per unit the more units they produce.
U.S. farmers last year, for example, produced 15 billion bushels of corn, 11 percent higher than a year earlier. (Nebraska is one of the top corn producers every year — often in the top 3.) Soybeans — Nebraska is a leader there, too — came in at 4.3 billion bushels, 10 percent higher.
That is part of the reason the price of commodities has fallen sharply in the past few years, said Russ Kaplan, an investment adviser at Lincoln-based Frank, Fox & Hoagstrom Financial Group.
“This is basically because of equipment and the expansion of fertilization in underdeveloped countries,” Kaplan said. “I believe that the price of commodities will rise in the future. Like with the price of oil, farmers will learn to cut back production in order to increase prices.”
The supply glut is affecting all of the grain traders. Chicago-based ag colossus ADM, with locations throughout Nebraska, failed to meet first-quarter earnings expectations. Revenue has fallen for four straight years, net income for three.
“We believe that the medium-term risks remain weighted to the downside, especially in the grain marketing unit, which appears to be facing structural headwinds,” analysts at wealth adviser JPMorgan wrote in an investor note this month.
The company still earned $1.3 billion last year, although the CEO said in a conference call with investors this month results were boosted by $50 million in cost cuts in the preceding 12 months.
Another grain trader with major Nebraska operations is Ohio-based The Andersons, with six Nebraska locations. The Andersons reported a narrower first-quarter loss this month, but the grain group still had a loss of $5.1 million, with the company telling shareholders that “post-harvest farmer selling has been slow.”
Minnesota ag giant Cargill is also a main Nebraska grain operator, with more than a dozen locations. The company said in March quarterly earnings rose by half, helped by “steady grain export volumes” and strong demand from China for soybean meal.
Demand from a superheated Chinese economy was a main reason behind what economists call the commodity “supercycle” that ran from 2000 to 2014 or so, said John Campbell, an investment banker at Omaha’s Ocean Park Advisers. High prices for almost all minerals, food, feed, fiber and energy lined the pockets of producers and processors as the world’s most populous nation grew into the world’s second-largest economy.
“The past couple of years have been a transition from the commodity supercycle triggered by oil prices and China to more normal values, with a possible overcorrection,” Campbell said.
So now, the abundance produced last year to satisfy that earlier level of demand is still being sold off.
John Miller, ag products vice president for BNSF, the nation’s largest railroad by ton-miles, said in an interview that volumes on the company’s network to Pacific Northwest export terminals are strong, full of trains laden with corn and soybeans being sent overseas to feed livestock in Asia.
“Asian demand for protein continues to grow,” Miller said.
Grain shipments at Texas-based BNSF are up 12 percent so far this year, while those at Omaha-based Union Pacific, the second-largest railroad, have vaulted 18 percent; both operate west of the Mississippi River and serve Nebraska shippers.
The business of grain trading was one of the foundations upon which Omaha was built — a river, barge and rail town in the middle of the world’s most productive farmland.
In 1904 the Omaha Grain Exchange was founded at 19th and Harney, a handsome building still in existence but much changed from the outside. A central market where traders bought Nebraska and Iowa grain and who in turn moved it on to flour mills and other end users, it was moving almost 70 million bushels a year by the 1920s, when it was the fourth-largest grain market in the world based on volumes handled.
While the grain exchange is long closed, the farm produce, the transportation and storage, and the intellectual ability that connects farmer and end user are still right here, said Batchelder, the Gavilon CEO, who says people sometimes forget that lining all that up in a fashion that is economical for the consumer and profitable for all of the participants is an enormous undertaking.
“We should never forget that the minds behind all of that are still right here in Omaha,” Batchelder said.
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