COFCO’s Acquisitions Highlight Its Strategic Role In China

The author is Fitch Ratings Inc.

COFCO Corporation’s (COFCO) planned acquisitions of controlling stakes in leading global agricultural products traders, Nidera and Noble Agri Limited (NAL), demonstrate its role as the Chinese government’s key policy tool for ensuring food security for the country.

The acquisitions also underline COFCO’s very strong operational and strategic linkages with the state.

COFCO said on 2 April 2014 that, together with other minority investors, it plans to acquire 51% of NAL for an initial payment of US$1.5 billion.

COFCO plans to establish a joint venture with Noble Group Ltd., the largest commodity trader in Asia by sales. NAL conducts all Noble’s global agriculture commodities businesses and competes with global major grain traders.

This follows COFCO’s announcement in February 2014 of plans to acquire 51% of Nidera, a Dutch grains trader, for US$1.289 billion.

Fitch believes COFCO’s moves fit the Chinese government’s strategy to secure supplies of agricultural products from sustainable and diversified sources.

China plans to continue to be self-sufficient in meeting at least 95% of rice and wheat demand, but it is increasingly dependent on imports due to the soaring demand for other grains, especially soybean and corn.

For example, corn imports are expected to double to 5 million tonnes in 2014, and reach 20 million tonnes by 2022. The higher demand is driven by rising consumer incomes and a shortage of arable land and clean water.

Currently, COFCO and other Chinese importers buy most of their grain from global agricultural traders, but a recent wave of consolidation in the global agricultural business has left buyers with fewer alternatives and less control over logistics and prices.

In 2013, Marubeni Corp. bought U.S. grain merchant Gavilon, and in 2012, Glencore bought Canadian grain company Viterra.

Meanwhile, Archer Daniels Midland (ADM) in 2013 attempted to take over GrainCorp of Australia. The proposed NAL acquisition can be seen as a strategic move by COFCO, given NAL was unprofitable in 2013.

However, NAL owns logistics and processing assets worldwide and operates production, sourcing, processing, storage and marketing for grains and oilseeds as well as soft commodities, including cotton and sugar.

The Nidera acquisition provides COFCO direct access to procure grain/oilseed in South America and central Europe.

NAL and Nidera’s global supply-chain systems and origination capabilities complement COFCO’s domestic logistics, processing, and distribution network.

After rationalizing the operations, COFCO will be a powerful global agricultural trader and able to procure directly around the world, and compete more effectively against ADM, Bunge Limited, Cargill Inc., and Louis Dreyfus Corp., a group of companies widely known as "ABCD", which dominate global grain flows.

(The article has been edited for clarity)