It’s been an eventful two years since CWB took its first steps into Western Canada’s newly deregulated grain market.
And the next two years are shaping up to be every bit as interesting.
Between now and July 31, 2016, CWB will take another important step toward privatization.
By law, the former wheat board must devise a plan to privatize its assets and complete its transformation into a fully competitive, commercial grain handling entity.
The plan must be submitted to Canada’s agriculture minister and executed — pending government approval — by July 31, 2017.
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Information surrounding CWB privatization has been limited.
Saskatoon-based Farmers of North America is the only organization to announce publicly that it is interested in acquiring a controlling stake in CWB.
However, as FNA officials work to get their investment capital in place, the inevitable question arises: Who else is out there? What other potential suitors are kicking the tires at CWB? And does a grassroots, farmer-controlled investment group have a realistic chance of garnering the CWB’s attention?
In the past, CWB executives, including chief executive officer Ian White, have indicated that they would like to submit a privatization plan well in advance of the July 2016 deadline.
They have also indicated that they would prefer a business model that includes some element of farmer ownership.
To some observers, this suggests that CWB decision makers might favour a partnership with an organization that is farmer-owned, farmer-directed and pays dividends to producers.
But is that necessarily the case?
Jay O’Neil, a global grain industry analyst at Kansas State University, doesn’t think so.
O’Neil, who has served as a consultant to international grain companies seeking a larger footprint in North America’s grain industry, said CWB will be less concerned by ideology and more about synergies that allow it to compete as a fully commercial grain handling entity.
“I would imagine that they want to use the strengths that they have in Western Canada and the relationships that they have built to establish themselves a valid free-standing business entity,” O’Neil said.
That’s not to suggest it would reject partnerships or mergers with larger companies, he added.
“There is a great deal of consolidation going on right now, and all of the small- or medium-sized companies are being bought up or merged to create bigger, more efficient operations,” he said.
“Would CWB , as a private entity, be an attractive takeover candidate? I would have to say yes, it probably would be,” he said.
O’Neil said any company that wants a piece of CWB’s action will need deep pockets, a desire to expand grain origination operations in Western Canada and a bank of assets and resources that complement CWB’s current business.
When it comes to farmer ownership, CWB has already taken steps.
Under its current equity offering, CWB is offering farmers $5 worth of equity in a privatized CWB for each tonne of grain that they market through the company.
CWB officials have not divulged how much equity they expect to be transferred to farmers through the equity offering.
However, if total CWB handlings in the 2013-14 and 2014-15 crops years fall in the range of 20 to 30 million tonnes, which some industry observers say is reasonable, then farmer equity in a privatized CWB could be assumed to fall in the range of $100 to $150 million.
That could increase if additional farmer equity is offered in the 2015-16 crop year.
CWB officials have made good on their commitment to develop their own western Canadian grain handling network.
The company has amassed an impressive collection of grain handling assets over the past year or more, including Mission Terminal at Thunder Bay, Prairie West Terminal at Plenty, Sask., Great Sandhills Terminal at Leader, Sask., and four new elevators under construction at Colonsay Sask., Bloom, Man., Glenlea, Man., and Pasqua, Sask.
CWB also owns two new ships, a fleet of 1,700 hopper cars and a downtown Winnipeg office building.
Together, those assets were valued at $34 million as of July 31, 2012.
Since then, the value of CWB’s assets and all other aspects of its financial position have been a tightly guarded secret.
Stewart Wells, a former CWB director and current board member with the National Farmers Union, said efforts to acquire information about CWB revenues, spending, grain handling volumes and debt financing arrangements have been unsuccessful.
With so many recent CWB acquisitions, some observers are beginning to question where the CWB is getting the money to finance its grain handling network.
The funds may be from a contingency fund worth more than $125 million. Ownership of those funds is still at the centre of an ongoing class action legal battle between farmers and the federal government.
Regardless of how the dispute plays out, it seems clear that contingency fund money is the base upon which CWB intends to build much of its western Canadian grain handling empire.
There are other potential sources of investment capital as well.
In June 2012, just before the western Canadian grain market was deregulated, federal agriculture minster Gerry Ritz announced that Ottawa would contribute $349 million of taxpayers’ money to CWB’s coffers to cover extraordinary transition costs.
At the time, White said the funds would pay for expenses such as employee severances, pension liabilities and other unspecified costs.
By some estimates, $177 million of the $349 million fund was accounted for publicly in the CWB’s 2011-12 financial statements.
The fate of the remaining money, approximately $172 million, is unknown.
That aside, there are strong indications that CWB’s current buying spree is not over yet.
CWB chief strategy officer Dayna Spiring recently said the company will continue to look at additional investment opportunities, including new construction projects and acquisitions of existing facilities.
High on CWB’s shopping list is guaranteed port access on the West Coast.
Regardless of how much investment capital the CWB currently has at its disposal, there is little doubt that access to a stable pool of additional investment capital would greatly enhance its chances of remaining commercially viable.
Some sources in the grain industry have suggested investment capital is near the top of a list that Ottawa and the CWB will use to identify a potential investment partner.
Brian Hayward, a former Canadian grain industry executive, thinks that is not necessarily the case.
“I think it’s arguable whether they need somebody with capital or whether they intend to do something like what the Australian Wheat Board did, which is go to capital markets themselves and become a separate company (that is) publicly traded,” Hayward said.
“There are other ways that they could slay that dragon.”
Hayward, who served as CEO of Agricore United when it was one of Canada’s largest agribusiness companies, said a decision by CWB to acquire capital through a corporate merger or partnership would likely mean forfeiting some degree of control over the company’s operations.
The decision to do that can be a huge hurdle to overcome, said Hayward, who helped oversee the merger of United Grain Growers and Agricore in 2001.
Leadership in some organizations might forego opportunities for growth if it affords them greater control over their assets and operations.
Either way, it is safe to assume that CWB leaders are concerned primarily with strengthening their position in the Canadian market, competing with existing grain handling companies and providing growers with another viable grain marketing option.
“If I were in their shoes, and somebody hucked me a ball and said, ‘do this, privatize the CWB,’ I would probably be looking for somebody that has characteristics that were complementary to my own … a one plus one equals three sort of situation,” Hayward said.
“Its base in Western Canada … its relationships with farmers, its knowledge of Canadian markets, where crops are grown, things to do with weather and risks, dealing with railways, dealing with port authorities, that sort of thing. However, what they don’t have is probably a large international network and a strong presence in other countries where there’s growth that’s likely to occur in the future.”
O’Neil agreed, saying grain origination and control over logistics are critically important considerations to any company that’s looking to become bigger.
In recent years, a number of global grain companies have attempted to expand their export programs without first securing adequate control over grain origination and logistics functions.
“That’s what a number of global agribusinesses have found as they expanded on the export side is that they didn’t have sufficient control of train logistics and they didn’t have sufficient control of grain origination to fully meet their needs,” O’Neil said.
“Origination is the key to the global grain business. You can’t have a good international operation without good origination.”
Who’s in the game?
Archer Daniels Midland (ADM)
Publicly traded company based in Decatur, Illinois with global operations on six continents
2012 revenues of US$89 billion
Launched failed $2.7 billion takeover bid for GrainCorp, Australia
www.adm.com
Farmers of North America (FNA)
Membership-based buyers group with headquarters in Saskatoon
Founder of Genesis Grain and Fertilizer
Attempting to raise up to C$380 million in farmer capital
www.fna.ca
Bunge
Global agribusiness company based in White Plains, New York with operations in 40 countries worldwide
Canadian operations focused on oilseed crushing
Net sales of $61 billion in 2013
www.bunge.com
Co-operator bulk handling (CBH Group)
Farmer-owned co-operative based in Western Australia
2013 revenues AUS$2.7 billion
AUS handlings of 16 million tonnes (2013-14)
www.cbh.com.au
CHS Inc
Formerly Cenex Harvest States
The American-based farmer co-operative owns 16 farm retail centres in Western Canada
2012 revenues of $40.6 billion, assets valued at $9.4 billion
www.chsinc.com
Louis Dreyfus
Based in France with global operations in 90 countries
2010 revenues of US$46 billion
Sixth largest grain handler in Canada, owns 10 elevators and one crush plant in Western Canada
www.louisdreyfus.com
Olam Intenational
Based in Singapore, operates in 65 countries
Has 24 locations across the U.S.
2013 revenues of $20 billion
www.olamonline.com
Marubeni Corporation
Publicly traded company based in Japan
2013 revenues exceeded US$9 billion
Recent U.S. joint venture with ADM
www.marubeni.com
Cargill
Diverse global footprint, employs 142,000 worldwide
Already established in Canada
2013 revenues of US$136 billion
Acquired grain assets of AWB, former Australian Wheat Board
www.cargill.com
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