After years of ditching assets and chipping away at debt, Canada’s two largest grain handling companies are talking expansion, a drastic change in philosophy that has been met with cautious optimism by those who follow the industry.
Financial analysts say it is the logical tack for Saskatchewan Wheat Pool and Agricore United to be taking after a long process of righting their respective ships.
“The balance sheets have been cleaned up, the infrastructures have been built out and most of the old country elevators that were going to be closed have been closed,” said Anil Passi, senior vice-president with Dominion Bond Rating Service.
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“Now investors want to know ‘what’s your next step.’ “
Passi said the grain companies have both done an admirable job of paring themselves down to lean, mean grain handling machines. Unfortunately there is little growth in that sector of the agricultural economy. Shareholders view it as a steady but uninspiring investment.
“It’s not going to be enough to be able to pop your earnings something extravagantly, where your share price starts going up by leaps and bounds,” said Passi.
But with years of hard work and sacrifice, both companies have gotten themselves to a point where grain handling revenues can be used to finance new ventures rather than paying down debt.
“They can actually think of doing something different,” said Passi.
And that is exactly what is happening.
During their latest quarterly reports Sask Pool and AU gave strong signals that they are poised to make a dramatic change in strategic direction.
“This could involve an expansion of our livestock division, or developing initiatives that involve some level of processing grains and oilseeds beyond their raw state, including investments in or with alternative energy businesses,” said Agricore United chief executive officer Brian Hayward.
Sask Pool’s CEO was less forthcoming about how a major exchange of debt for equity in recent years will help pave the way for future growth at the pool.
“We don’t have anything that we can announce today … but you’ll see us continue on the track of looking for stand-alone opportunities or joint ventures and partnerships to expand the opportunities for our shareholders,” said Mayo Schmidt.
Those words elicit mixed emotions from Grain Services Union general secretary Hugh Wagner, who has experience with the pool’s past expansion strategies.
“They invested whole-hog in the terminal elevator concept on borrowed capital,” he said.
That Project Horizon campaign, combined with some ill-fated global expansion initiatives, left the company in such financial ruin it was forced to rid itself of many of its assets, including employees.
Between 1999 and today, Sask Pool has shed 55 percent of its workforce, falling to 900 employees from a high-water mark of 2,000.
Wagner agreed with Passi that diversification is a good idea but the pool has been down that road before only to end up selling off its publishing, livestock and flour milling assets.
“I hope whatever they do, they do it successfully and execute it better than their last efforts,” he said.
DBRS insists the pool is in desperate need of diversification given that grain handling contributes two-thirds of the company’s earnings and agri-product sales accounts for another quarter.
That is quite a turnaround in attitude for a rating company that in the late 1990s chastised the pool for diversifying into areas outside of its core expertise including pork production and value-added processing.
But Passi said it is different this time around because the pool’s shareholders will ensure the new diversification initiatives are subject to more scrutiny and that they will not be financed by debt, which is what got the company in trouble in the 1990s.
Although never as guilty of overextending itself as the pool, AU has also been wrestling with a sizable debt problem ever since the 2001 merger of Agricore Co-operative Ltd. and United Grain Growers.
But with the return to more normal handling volumes in the 2005-06 crop year, the company has some capital with which to play.
Hayward said AU is now looking for ventures outside the grain handling business because of its limited growth potential and its susceptibility to extreme weather conditions.
“What we’re looking for are opportunities that are probably a bit more stable than what our traditional core business has been.”
DBRS said Agricore is in the best position in the West to take advantage of the trend toward livestock, given its large position in the feed business.
And Passi thinks both companies are on the right track with their expansion plans.
“Well-managed, prudent growth I don’t think is harmful,” he said.
