The Grain Industry Restructures

Commentary, Agriculture, Sylvain Charlebois

In an unexpectedly daring bid, SaskPool recently offered 1.35 of its shares for each of Agricore’s common shares. Although the takeover bid was labelled as “hostile,” – in other words, not sought or welcomed by Agricore – it does indicate that the grain industry is turning away from ideology and towards a focus on efficient marketing. Even if the deal falls through, SaskPool should be commended for its boldness in uncertain times.

This manoeuvre – with the country’s second biggest grain company trying to buy its chief rival – has left many pondering what SaskPool’s real intentions are. Many say that the deal is unlikely to happen. Including Agricore’s debt and stock options, the total value of the takeover offer approaches $900 million. If it’s successful, the new company would be a Canadian giant, with $4.3 billion in annual revenues and major operations in all three Prairie provinces.

SaskPool is struggling with its new identity and with the understanding that, to keep its modern vision of markets intact, it must sacrifice some of the damaged relationships it had in the past. As many farmers worry about the future of the grain industry, financial analysts are waiting for Agricore’s response to this hostile bid. To compound the anxiety, since the competition bureau intends to study the proposed takeover, there also is uncertainty about the response from Archer Daniels Midland (ADM), Agricore’s largest shareholder, with 23.4 per cent of limited voting shares. Nonetheless, if one considers the big picture, SaskPool may be on to something.

First, such acquisitions are increasingly seen as an important way to drive future growth, now that internally focused cost-cutting has run its course. But for both Agricore and SaskPool, this is not the case. Costs are still an issue for both companies. They are both relatively young organizations, working to improve internal efficiency. Agricore, which was formed in 2001 through the merger of United Grain Growers and Agricore Cooperative Ltd., reported a profit of just over $12.5 million last year. Similarly, SaskPool produced revenues of nearly $1.4 billion and a profit of barely $2 million. This newly formed conglomerate could deliver a significant level of economic cost synergies and increased profits.

Second, with the end of the Canadian Wheat Board’s monopoly quickly approaching, the industry needs to restructure. Consolidation provides marketing efficiency via economies of scale in remuneration, mutual reporting and alignment of marketing strategy. The industry is gradually preparing for the post-CWB era, and it seems as though SaskPool is willing to lead the way. Consolidation is one factor in what is generally agreed to be a more stable pricing scheme in the long term. If the economies of scale promised in consolidation actually play out, then consolidation will also result in a more stable grain industry that is able to capitalize on new technology, to the benefit of its customer base.

Change can be traumatic, but it can also be advantageous, if it accomplishes intended goals. We should perceive the SaskPool offer as a stage in the evolution of the grain industry that is long overdue. One can still wonder, however, whether this deal really represents a profitable opportunity or if there is an adequate fit between these companies. That remains to be seen. While they share analogous core competencies, SaskPool was technically bankrupted three years ago and is still experiencing what you could call “a corporate identity crisis.”

In addition, since both organizations are currently aiming at similar markets, the merger may not necessarily lead to desirable marketing synergies. Jobs may be lost through the consequent restructuring. To safeguard jobs and infrastructure, the surest strategy is to focus on new globally targeted markets and become an influential player on a worldwide scale.

In the end, some farmers who invested in the old Pool may feel cheated, and rightly so. They lost millions in a company that is now planning to spend almost $900 million on a competitor, and SaskPool needs to keep that in mind throughout the process. In retrospect, though, this daring strategy indicates that “the Pool of old” is no more, and that growth and change are necessary.

The grain industry is poised for consolidation. Additional mergers are expected because of increased exposure to competition that will force older organizations to innovate or risk becoming irrelevant to producers and consumers. We live in a world of consolidation, and the grain industry is no exception. Shareholders and customers want the benefits of compatible resources, and the drive to reduce or eliminate facilities, excess human resources, and duplicative technology all factor into the consolidation trend.

A merger between SaskPool and Agricore will lead to some cutbacks and redeployment of resources based on shifts in supply and demand. Even so, more jobs could be created if the marketing focus is there. Investors and farmers alike must now look at managing the future with confidence.