St. Paul Pioneer Press | 4 June 2011
by Tom Webb
For rural farm co-ops, it's definitely a new era when East Coast hedge funds, Asian corporations and investors for billionaire George Soros come a-courting.
Across the Midwest, well-heeled outside investors are on the prowl to acquire the hard assets of U.S. agribusiness. They're motivated by a sense that the sun is rising on a sector that's historically been pretty sleepy but is being awakened by soaring grain prices and the world's growing appetite for food.
"There's a lot of new entrants that are very well capitalized," said Lynden Johnson of CHS Inc., the nation's largest farm cooperative, based in Inver Grove Heights. "If they want to invade a market and make a dent, they have the wherewithal to do it.
"There's always been competition," added Johnson, CHS' senior vice president of business solutions. "But it's escalated in the last 12 months, far beyond anything I've seen in the last 30 years."
Bill Oemichen, president of the Cooperative Network, sees outside investment in agriculture coming in another way.
"I've been to several conferences in the last six months and the advice being given out to large investors is, 'Buy Midwest farmland' - though I doubt many have ever put equipment into a field," he said.
Today, the old grain-handling firms with deep Minnesota roots like Cargill, CHS and Archer Daniels Midland are being crowded by a collection of new entrants. You can get a glimpse of this new world at the port of Duluth-Superior.
Since 2008, unfamiliar names, including some hedge funds, have been acquiring terminal grain elevators there: Whitebox Advisors, Riverland Ag, Gavilon Grain, the Ospraie Group, Ceres Global Commodities, Hansen-Mueller.
"There were changes of ownership in the past, it just didn't happen quite so quickly, then turn over again," said Ron Johnson, trade development director of the Port of Duluth-Superior.
Yet to veteran observers in agriculture, there's wariness, too. To some, it's reminiscent of the 1970s farm boom: the rising prices, the hunger to get in, the projections of global growth. Then came the 1980s when it all crashed, fueling a farm crisis that took a terrible toll.
"When New York investment money runs into agriculture, I almost have enough gray hair to say, watch out, there's going to be a crash," said Lee Egerstrom, an agricultural fellow at the policy group Minnesota 2020.
In a sector marked by booms and busts, there already have been some recent crashes. Ethanol soared in 2006, then collapsed. Grain prices rose to unimagined levels in 2007 and early 2008, only to plunge and scare away outside investors.
Ron Johnson, the Duluth port official, recalls that in 2008, "We started getting calls here, 'Do you know of any grain facilities for sale - not necessarily at the port, but even out in the country?' That fell apart pretty quick. But maybe that's coming back."
Today's boom is fueled both by short-term and long-term factors. In the past year, soybean prices have risen 48 percent. Corn prices are up 103 percent. Spring wheat prices, up 111 percent. That has brought momentum players into the market, analysts say.
Longer-term, there are powerful trends. By all projections, the planet will add billions of new mouths in coming decades, yet no more cropland. Consumers in developing nations like China and India will want to add meat and poultry to their diets, which will require more grain. And biofuels will compete for acres, too. So demand for food is expected to soar.
That bullish scenario already has boosted the big-name agribusiness players. In the past 12 months, shares of Plymouth-based fertilizer giant Mosaic are up 56 percent. Equipment-maker John Deere is up 52 percent. Grain merchant Bunge, up 50 percent. Railroad giant Union Pacific, up 45 percent.
But it's lifting a lot of smaller operations, too. That's doubly true for operations lucky enough to be well-situated - like those on a main rail line linked to an ocean-going port. For some, the feverish competition is raising eyebrows.
In the tiny Montana town of Chester, population 871, two different giants are scrambling to build separate large-scale loading facilities. Each will be capable of rapidly loading 110 railcars with grain en route to ports in the Pacific Northwest, and then to Asia.
"They've both broken ground, and work is in progress," said Lola Raska, executive vice president of the Montana Grain Growers Association. "From the growers' perspective, competition is a good thing. There's been a lot of consolidation in agriculture, as in all industries, so to see some expansion is good for producers."
One of those shuttle-loading facilities is being built by EGT Development. It's a joint venture between U.S. grain giant Bunge, Japanese food importer Itochu and Korean shipper STX Pan Ocean. Together, those partners also are building a massive grain-export facility in Longview, Wash., creating a new gateway between the Northern Plains grain belt and the booming economies of Asia.
The other is being built by a new entity, Gavilon Grain. Gavilon was formed in 2008 and is privately held, mostly by three hedge funds: Ospraie Special Opportunities Fund, General Atlantic and Soros Fund Management, the latter affiliated with billionaire investor and chairman George Soros.
Gavilon officials declined an interview request, but the Omaha, Neb.-based company is an interesting mix of new and old: At its core are assets of the old Peavey Co., a storied Minnesota name in the grain trade. Peavey was sold to ConAgra in 1982, which in 2008 shed its grain-handling assets.
Backed by Soros and hedge-fund money, Gavilon since has expanded even further, last fall buying Kansas City, Mo.-based DeBruce Cos. to create the third-largest grain-storage network in the country. (ADM remains the largest; Cargill is second.)
And Gavilon is hardly expanding alone. A cluster of foreign corporations are active, too, including Japan's Marabene and Mitsui as well as Canada-based Vitera (formed in 2007) and Ceres Global Ag Corp.
Last year, Ceres bought a group of grain elevators from Minneapolis-based hedge fund Whitebox Advisors. That transformed Ceres "from a passive investor in marketable securities to an operating company" that now offers public stockholders "an opportunity to invest in global agriculture," Ceres says.
All this action has traditional grain giants scrambling, too. They're making investments to upgrade infrastructure - and to fend off potential competitors.
"Today, the game is moving fast and furious on all fronts," Carl Casale, chief executive at CHS, recently wrote to his farmer-members. "If you're part of production agriculture, you're well aware of the massive change under way at every turn: expanding global distribution systems...and new players trying to grab a piece of ag supply-chain margins."
Industrywide, CHS's Johnson counts 60 or so major infrastructure projects under way across the United States. Most are located along well-trafficked routes: the east-west rail routes to the Pacific coast or the north-south river route to the Gulf.
Egerstrom, the ag policy specialist, is struck by the push into a low-margin business like grain handling - and what it says about future grain prices.
"This sounds like investment capital coming into commodities, not just as a trader but also as a player in the market," Egerstrom said. "There is some fast money bidding that this is a permanent condition, or a near-permanent condition. You might have slim margins, but you're going to have a heck of a lot more money when corn is at $7 a bushel than when it's $2."
Meanwhile, the boom is generating warnings.
State law prohibits corporate or foreign ownership of farmland. Co-op executive Oemichen isn't sure, but he strongly believes some investors are trying to evade those laws.
"I've been hearing that trusts of foreign buyers have been trying to buy up farmland in the Midwest ... and titling it in the name of individuals, so it's not being flagged." Under former Gov. Arne Carlson, Oemichen was assistant agriculture commissioner charged with enforcing those laws. He's already alerted current state officials of his suspicions.
And in the face of new entrants, the traditional agribusiness players are stressing their deep roots and long relationships.
"Co-ops have always been around, and I think we always will," CHS's Johnson said. In the 1970s, "A lot of people came into it, and a lot of people went out of it when it wasn't glamorous....My guess is that this will cycle, too, and we'll be left standing."
Meanwhile, tales of rural competition are drawing gasps.
"A co-op called me the other day," Johnson said. "One of these companies came to its door and said, 'We want to partner with you.' When that wasn't an option, they said, 'We want to buy you.' "
When that offer also was rejected, Johnson said, "The third option was, 'We're going to build right next to you.' "
His conclusion: "It feels like poker, that somebody's going to bluff here. But so far, everyone continues to build."
Tom Webb can be reached at 651-228-5428.
