A long-awaited shakeout in the prairie grain industry has begun, say grain industry officials, analysts and farm leaders.
They say the proposed merger of Agricore and United Grain Growers, to form Agricore United, is a sign of intense pressure that has been crushing the profit out of the prairie grain handling industry.
Some say mergers such as this could help the limping industry.
“It’s probably good for the industry and for Saskatchewan Wheat Pool as well, in that it takes out a competitor in an industry that has far too many competitors,” said David Schroeder, a grain industry analyst with Dominion Bond Rating Service.
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“We think the challenges of this merger are definitely outweighed by the potential benefits.”
Kerry Hawkins, president of Cargill Ltd., recently predicted that Canada’s grain companies would lose more than $100 million this fiscal year.
Officials and analysts say grain company competition has become brutally intense, with too many players chasing too little grain.
Canadian grain exports have shrunk slightly in the past few years, while foreign companies have moved into the industry.
Debt from overspending in the late 1990s is also weighing down the industry, Schroeder said.
“There are too many high throughput elevators and there were not enough closures (of wooden elevators) quick enough,” he said.
Mayo Schmidt, chief executive
officer of Saskatchewan Wheat Pool, said the merger is not a surprise.
“We’re in an industry that is challenged and we need to see consolidation so that the industry can get healthy again,” said Schmidt.
If the two companies want to realize the $50 million in savings they believe they can find, they will have to cut facilities and staff, he said.
Sask Pool has gone through its own disruptions in recent years, but is now poised to reap the benefits of its reorganization, he said.
“Consolidation means closures, closures mean opportunities for others,” said Schmidt.
Keystone Agricultural Producers president Don Dewar said he understood why the two companies decided to attempt a merger.
“We know there’s not a lot of money being made in the grain industry,” said Dewar. “People have been wondering who is going to be finally owning this industry and what it’s going to look like.”
He said he’d rather see two farmer-run companies merge than see a foreign company take control.
“Here’s a major player that’s going to be owned by Western Canadian farmers, if they choose to keep their shares,” said Dewar.
Neil Silver, Agricore’s chair of the board of directors, said farmers should not be alarmed that the new company will reduce competition in the grain handling system.
“The combination of two companies is still going to leave substantial choices for farmers and I don’t think it’s going to be easy pickings out there,” said Silver.
University of Manitoba agricultural economist Ed Tyrchniewicz said creating a large company might draw scrutiny from the federal competition bureau.
“In many ways, I think that’s where the real serious action is going to be, probably more so than the delegates meetings,” he said referring to an upcoming vote that requires two-thirds of Agricore delegate and shareholder approval.
Schroeder said there are still too many competitors in the Canadian grain-handling business, but it’s hard to see which other companies could merge. There aren’t many good fits.
But Hawkins said some of the smaller players won’t have much choice. The pressures are too great for all the companies to survive.
