At the same time as the federal government was unveiling its grain transportation policy in Ottawa, a couple dozen financiers, investors and corporate analysts were gathered in downtown Toronto talk about the grain industry.
The timing was coincidental, but it gave the people who finance much of the grain industry some new information as they talked about the future of the troubled industry.
And the consensus was that the government’s reform package contained little good news for the country’s grain handling companies.
“Everyone was pretty disappointed with the federal announcement,” said David Schroeder of Dominion Bond Rating Service, which organized the day-long seminar.
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The meeting attracted representatives from about 20 companies that provide financing for the major grain companies, including banks, insurance firms and pension funds.
Ottawa’s decision to bring in a railway revenue cap that will translate into a lower freight rate received generally positive reviews, since it will allow for more flexibility in transportation pricing.
But the money people were unhappy that the government didn’t act more forcefully to get the Canadian Wheat Board out of transportation and move to a fully commercial system.
“It’s felt the grain companies could benefit from the board being out of logistics,” said Schroeder.
Last week’s announcement provides that in each of the next two crop years, 25 percent of the board’s transportation program will be tendered out to grain companies, which will negotiate the details with the railways. That will increase to 50 percent in the third year. No decision has been made beyond then.
Schroeder said that as limited as that may be, and while the lack of details makes it difficult to know what will happen, the move to tendering should nevertheless provide much-needed competition.
“You should see increased competition at the country elevator level in terms of pricing or other competitive tools.”
Increased competition could speed the consolidation that corporate analysts have been saying for the last couple of years is needed in the grain industry.
Survival of the fittest
In its recent annual analysis of the state of the industry, DBRS said excess capacity has been built into the system in recent years as grain handlers have vied for market share by constructing high volume terminals.
A number of players will be unable to remain viable, said DBRS, with perhaps as few as three large grain companies surviving the inevitable shake-up.
“What got announced (May 10) will speed that up,” said Schroeder. However, he added that while the grain industry is struggling, there is no sense of impending disaster.
“There’s no Eaton’s in this group,” said Schroeder, referring to the venerable Canadian department store that went bankrupt last year.
“It was felt that before anything as drastic as that happens, there will be consolidation and mergers.”
During the past year, DBRS has lowered the credit ratings of Saskatchewan Wheat Pool, Agricore and United Grain Growers.
That can make it more difficult or expensive for companies to get financing, although Schroeder said it doesn’t appear to be creating any great problems.
“Most of the companies are relying on bank debt, so higher interest rates means they’re all facing higher interest costs,” he said. “But I haven’t heard of anyone having any significant difficulty getting financing.”
Here’s what DBRS said in its recently released report about the state of the four major grain handling companies. The firm does not track Pioneer Grain, which releases no public information on its finances.
- Agricore: The company’s financial situation deteriorated as it made heavy capital expenditures while cash flow was dropping sharply. Cash flow is unlikely to cover internal spending requirements until 2002. The company operates too many old, small elevators. Debt levels are high. Earnings will improve this year, but will remain low. The company’s strengths include good market share in Manitoba and Alberta, geographical diversification and strong terminal operations.
- Cargill Ltd.: The company is doing relatively well due to a strongly diversified business portfolio. Its American parent is a world leader in many key commodities, and helps provide economies of scale. The company takes a long-term view on investments and has a strong balance sheet, with reasonable debt, adequate cash flow and strong working capital. Challenges include low profitability in Asia and tight margins in processing divisions if commodity prices improve.
- Saskatchewan Wheat Pool: The pool has performed well below expectations and won’t recover soon. Loss of market share is a problem, although expansion into Alberta and Manitoba should help. Debt levels are excessive. Further consolidation is needed. Industry deregulation could help the pool, which boasts a strong, modern elevator network. The company’s strengths include a dominant market share and diversification outside of the grain handling business.
- United Grain Growers: Lower cash flow and higher spending have weakened the balance sheet. Market share could suffer as the company closes more elevators and faces increased competition. The company’s strengths include the fact it operates across the Prairies, it concentrates on its core businesses of grain handling and farm supplies, and the financial strength of minority share holder Archer Daniels Midland.
