Grain handling: a growth industry?

Domestic and international companies have invested billions of dollars in the western Canadian grain handling industry over the past three to four years.

It’s a capital outlay that will solidify Western Canada’s reputation as home to one of the most efficient and modern grain handling systems in the world.

However, according to some observers, the new investments also raise questions about whether the system is becoming overbuilt.

New entrants are spending aggressively to establish a position in the Canadian market, and industry observers suggest the current phase of capital investment could be followed by a period of consolidation.

Capital outlay will solidify Western Canada’s reputation as home to one of the most efficient and modern grain handling systems in the world. However, some observers question whether the system is becoming overbuilt. | File photo
Capital outlay will solidify Western Canada’s reputation as home to one of the most efficient and modern grain handling systems in the world. However, some observers question whether the system is becoming overbuilt. | File photo

The financial viability of new entrants — most notably those without assured port access — has yet to be determined.

“I believe it (Western Canada) is a very competitive environment, and I believe the open market has made it even more competitive,” said Darwin Sobkow, executive vice-president of agribusiness operations and processing at Richardson International.

“I don’t believe there’s anyone looking to exit so I think the others … (have determined) that the only way to get into the system is to build.”

An informal survey suggests that $3 billion has been either committed or invested in the western Canadian grain handling sector over the past three to four years, which coincides roughly with the elimination of single desk marketing.

Those investments include new elevators, expansions, upgrades and acquisitions.

The number does not include a major 2012 deal that saw Glencore PLC buy Viterra’s global assets for more than $6 billion.

  • G3 Canada, a joint venture between Bunge Canada and the Saudi Agriculture and Livestock Investment Co., which acquired a 50.1 percent ownership stake in former CWB assets for $250 million. As part of the CWB purchase, G3 Canada acquired the assets of two farmer owned terminals in Saskatchewan — Prairie West Terminal and Great Sandhills — as well as four new concrete elevators at Colonsay Sask., Pasqua, Sask., Ste. Adolphe, Man., and Bloom, Man., all of which were commissioned by CWB after its single desk marketing authority was ended in mid-2012.

G3 is also building a $60 million transfer terminal at Hamilton, Ont., and is planning a new $500 to $600 million export terminal in Vancouver. It also plans to add as many as 10 high-throughput concrete elevators in Alberta and Saskatchewan. Announcements are expected shortly, company officials said.

  • GrainsConnect Canada, a joint venture between Australia’s GrainCorp and Japanese agricultural co-operative Zen-Noh Grain, which announced plans last year to build four high-throughput elevators in Western Canada at a total cost of $120 million. Construction on the first of those facilities near Red Deer is slated to begin this year.
  • BroadGrain Commodities, a Canadian export company that recently announced plans to build a $25 million grain terminal and bean processing plant at CentrePort Canada, an export and logistics park in Winnipeg. BroadGrain, based in Toronto, also acquired Lakeside Global Grain in Dafoe, Sask., in 2011.
  • Ceres Global Ag, a Toronto-based company that is building a $90 million grain terminal and transportation hub at Northgate, Sask. Ceres also has owns short-line railways in southern Saskatchewan and grain handling facilities in the United States.
  • Hanfood Group Holding Corp., which announced plans last year to build a $20 million grain and oilseed collection facility at Nipawin, Sask., complete with a 134-car loop track.
  • Scoular, an American grain handling giant that recently bought Winnipeg-based Legumex Walker for $100 million. Scoular was initially named as a partner in the Ceres Global Ag facility at Northgate, but Ceres later announced it would proceed without Scoular.

Sobkow said established companies have been solidifying their competitive positions since the end of single desk selling.

The elimination of the CWB and Glencore’s purchase of Viterra kick-started a process that saw a number of western Canadian facilities change hands.

Shortly after the Glencore-Viterra deal was finalized, Richardson spent $800 million to buy 19 former Viterra facilities, including five primary elevators in Alberta, 10 in Saskatchewan, two in Manitoba and two in British Columbia.

Since then, it has announced additional investments valued at more than half a billion dollars, said Sobkow.

Those investments include a new concrete elevator construction project at Dauphin, Man., major upgrades to the company’s facilities at Estevan, Sask., a $120 million expansion of Richardson’s west coast export terminal in Vancouver, upgrades to export facilities in Thunder Bay and steel storage expansions at Richardson elevators.

“Even if you don’t include our 2013 acquisition of Viterra, we’ve invested between $500 and $600 million in the last four years,” said Sobkow.

Investments by other established Canadian line companies also tally in the hundreds of millions.

Viterra announced plans in 2014 to spend $100 million on improvements to its Pacific Terminal in Vancouver and $20 million on upgrades to its existing elevators in Saskatchewan.

It also bought the Lethbridge Inland Terminal and is building new high-throughput concrete elevators at Kindersley, Sask., Grimshaw, Alta., and Ste. Agathe, Man.

The estimated cost to build a modern concrete elevator is generally assumed to be $35 to $45 million.

Paterson Global Foods has also weighed in with plans to build new loop track facilities at Daysland, Alta., and Bowden, Alta.

Those projects come close on the heels of Paterson’s new facility at Gleichen, Alta., which opened in 2012.

Shane Paterson, corporate development officer, said the company would normally plan a new elevator every two to three years, but solid grain handling returns during the past few years have prompted it to increase its pace of reinvestment and network renewal.

Paterson said recent network investments by established Canadian grain companies will make it difficult for new entrants to maintain handling margins and extract significant profits from the industry.

Many of the investment announcements made by new entrants came at a time when the Canadian grain handling industry was enjoying record profit margins and sourcing record amounts of grain.

Those two factors likely influenced the investment decisions of newcomers, who will be competing against a handful of large, well-established companies.

“In my view, a lot of people would like to point to the end of (single desk selling) as sort of a fundamental change in the grain handling industry … that’s resulted in increased investment in Canadian agriculture,” Paterson said.

“I think that’s somewhat of a misconception. What I think we had was a confluence of supply and demand events.

“We had two of the largest crops in Canadian history (in 2014 and 2015) and that was coupled with market uncertainty in places like Russia, Ukraine and Syria. The result was that margins were at really historic highs for grain handlers and for agricultural producers, but that ride can’t last forever.”

Paterson said that a return to more typical handling margins could prompt new entrants to reassess their investment plans.

“I think there will be a difficult learning curve for some of the new entrants,” he said.

“It’s a difficult industry to get into and the barriers to entry are huge. You need to invest nearly a billion in hard assets to be a player of any consequence in the Canadian grain industry.”

G3 Canada fits that description.

It has been following an aggressive growth strategy based on modern facilities that will set a new standard for throughput efficiency.

Chief executive officer Karl Gerrand agreed that newcomers to the Canadian industry will face stiff competition, but he argued that G3’s position is unlike that of other new players.

The company is already well positioned to handle eastbound grain by virtue of its export facilities in Thunder Bay, Hamilton, and Quebec.

It also plans to solidify its position in the western Prairies by adding 10 new facilities in Saskatchewan and Alberta.

The result will be a modern origination network that consists of 18 prairie elevators, most of which have state-of-the-art loop track loading systems and high speed load-out capabilities.

“We’re looking for a nine to 10 time turn per year so at some of our new facilities, we’re looking to turn 300,000 tonnes up to perhaps 400,000 or 450,000 tonnes per year,” Gerrand said.

“I’ll be the first to admit that Richardson and Viterra and Cargill have a very strong position in the market but I think there’s room for another player.”

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