Japan trading firms bet big on food, eye Asia
Reuters | 20 Aug, 2008
TOKYO: Japan's big trading houses, which have enjoyed bumper years from betting on iron ore and metals, are getting into the food market, aiming to tap voracious demand in China and emerging economies.
Mitsui & Co and Marubeni Corp are snapping up cropland abroad and buying more grain direct from farmers in the United States, as they seek to expand sales across Asia, where demand for meat and animal feed has sent global grain prices soaring.
But some analysts worry the move could trigger potentially bruising rivalry with grain majors Cargill, Archer Daniels Midland Co and Bunge Ltd -- firms that are currently more partners with Japanese trading firms than competitors.
"Expanding into the global grain and food market means muscling in on their turf," said Nobuyuki Chino, president of Unipac Grain Ltd.
"Agriculture is a risky, low-margin business. On top of that, a price war and a plunge in margins are possible if you lock horns with the majors."
The dollar's recent rally has dented the grain market, with food prices dropping 37 percent from their peaks in February.
Cargill posted a 68 percent increase in quarterly profit on Tuesday, to above $1 billion, buoyed by strong grain processing and fertilizer results, but warned of more agricultural commodity market volatility.
Marubeni, Japan's fifth-biggest trading company, told investors this month it aimed to nearly double its volume of global grain trading to 20 million tonnes within three years -- equivalent to around two thirds of annual grain imports in Japan, one of the world's biggest grain importers.
That would put it on par with Bunge and ADM, although it would still be short of Cargill's 32 million tonnes.
"By increasing volume, you can cut freight costs, giving you a greater competitive edge on the global grain market," Daisuke Okada, Marubeni's executive officer, told Reuters.
Marubeni this month bought grain storage facilities in the United States through its Columbia Grain unit so it can increase purchases from farmers It also plans to spend up to $650 million over two years to strengthen global grain sales and build grain elevators in exporting countries.
Second-ranked Mitsui last year spent $90 million on 100,000 hectares of farmland in Brazil, in an investment with U.S. farm cooperative CHS Inc and a Brazilian grain trader
"We have amply hedged our bets through alliances with skilful traders and an experienced farm company," Mitsui President Shoei Utsuda said, when asked about the risk of being exposed to price volatility and drought.
Itochu Corp has teamed up with COFCO, a Chinese food wholesaler, to help procure food from around the world while Mitsubishi Corp, Japan's biggest trading firm, last year made U.S. grain dealer FGDS a subsidiary.
Breaking into China's vast grain and food markets -- where the grain majors are relatively weak compared to their dominant positions in Europe and the United States -- is key to Japanese trading firms' strategy as they look to boost volumes and grow overseas.
Some analysts say Japanese traders can make significant inroads into the rapidly growing market, given their strong sales networks with major Japanese food makers.
"I believe they can fight on an equal footing with giants like Cargill in Asia, if they make the most of their ties with affiliated food processing makers and retailers," said Hideaki Kurihara, an analyst at Mitsubishi UFJ Securities.
Japan's leading trading houses have big food wholesalers, food manufacturers and convenience store chains under their umbrellas. They also handle farm equipment and agricultural chemicals and are involved in businesses including irrigation, power generation and financing.
Anticipating demand for top-grade wheat, Marubeni has already formed a joint venture to operate a flour mill and taken a stake in bakery chain Christine Group in Shanghai.
But, while Asia and China are the main focus, Marubeni, at least, is looking further afield.
"We are looking beyond Asia. We expect demand to soon start to rise in countries like India, Turkey, Kuwait and other Mideast countries," said Marubeni's Okada.
ADM and Bunge declined to comment. Cargill did not respond to requests for comment.
Analysts said the Japanese companies' push into the food sector is unlikely to have a big impact on their stock prices for now as investors focus on ballooning profit from their stakes in iron ore, coal copper mines and oil fields -- which can account for up to 70 percent of their profit.
The stocks, heavily owned by foreign investors, have more than doubled over the past four years amid a global commodities boom.
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