World Grain - September 2012 - 6

from the editor-in-chief

Globalization, integration drives new growth

t the turn of the 20th century, from 1889 to 1908, the largest ﬂour milling company in the United States was owned by a group of English investors. The company, Pillsbury-Washburn Flour Mills, Ltd., was created through a combination of once independent companies bearing names still prominent today. The English investors had been attracted by tales of great proﬁtability, but they were sorely disappointed by the results, as reﬂected in few or no dividends. That business was dismantled after less than two decades of operation. But it stands in milling history as a development well worth recalling at a time more than a century later when the internationalization of businesses engaged in food processing is proceeding at a heady pace. Events of this year alone would most certainly have amazed those earlier investors who reached across continents in order to build markets beyond their own countries. It may be argued that the internationalization of food has speeded up this year in a way that never occurred before. Several driving forces appear to be at work. One is the desire of companies that once limited their business to commodity trading to be active participants along the entire supply chains. Rather than being satisﬁed with premier positions as originators and suppliers of basic ingredients, not just in food, but also in industries like mining, these companies have aggressively pursued acquisitions of companies that extend their

operations nearer to consumers than ever before. At the same time, the outlays required by this level of investing, spanning oceans and reaching into territories where foreign ownership is new, has prompted extraordinary capital raising. Hardly anything symbolizes the dimension of these changes more vividly than the few moves toward public ownership of once private, secretive ﬁrms. This reaching out by commodity trading ﬁrms, which has brought new management to places like the prairie provinces of Canada and, yes, the U.S. ﬂour milling industry, has naturally spurred companies that long have had an international reach in milling to expand their interests. Focusing on what has been called “fully integrated assets” has seen these companies step up investing in places like South America, Eastern Europe and China. Emphasis on achieving signiﬁcant cost reductions via growth explains many moves. Even the development of highervalue products has been cited as a step to lower costs. It is obvious that moving closer to consumers is meant to boost margins. Acquisition of a grain origination business with a line of country elevators is now equated with enhancing supply chain efﬁciencies. Even as companies pursue opportunities in every corner of the world, competition is emerging from unexpected places, like sovereign wealth funds operated by nations as a way of centralizing investment decisions

as well as by an international organization like the World Bank. Having made a decision within the past year to shift its focus to improving food production, especially in developing nations, the bank, through its investment arm, International Finance Corporation (IFC), has elected to make equity investments in global trading houses, beginning with a stake in a food-related enterprise. An IFC ofﬁcial said, “In order to reach the poorest parts of the world’s population, you need to work with the intermediaries.” The latter are, of course, the trading houses. Given this new source of funding, traders have expanded their ambitions primarily by making their own investments “in companies which integrate the supply chain.” Note has been made of the manner in which World Bank support gives many of the smaller houses added credibility in seeking to extend their business. Not all that long ago, investing in international trading companies was viewed as a way of being upfront in investing in commodities like wheat and other grains. While nothing that has happened has changed that singular attraction, it is important to realize that internationalization and supply chain integration have suddenly become the most powerful forces affecting how many processing industries are evolving.. Morton I. Sosland Editor-in-chief

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World Grain - September 2012

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