July 18, 2012

 

France's farm cooperatives to build effective infrastructure

In order to avoid being marginalised as niche players while global commodity giants broaden their footprint on international grain markets, France's long-standing farm cooperatives will need to scale up further and build effective infrastructure.

 

Through a series of multi-billion-dollar acquisitions this year, international operators have been extending their reach in the handling of wheat and other staple crops to capitalise on rising demand for food. Fundamental change is unlikely to happen overnight in top western European producer France, traders and analysts say, as closely held companies control its grain flows from farms to ports and are well used to competing on the world market.

 

However, French firms will have to sharpen their competitiveness as new players such as diversified commodities company Glencore join the ranks of the so-called ABCD majors - Archer Daniels Midland, Bunge, Cargill and (Louis) Dreyfus - that dominate grain flows.

 

"In the future, what will be really crucial for the cooperatives will be to defend their current role as an indispensable intermediary," Yves Pelle, associate with consultancy PricewaterhouseCoopers in France, said. "Otherwise we could see these links in the grain sector breaking up, with farmers going directly to the likes of Cargill or Dreyfus to sell their crop."

 

France's cooperatives and private firms have used their close ties with farmers and well established logistical networks to develop massive export flows. Their success in winning overseas sales owes much to France's historical ties with former colonies on the African continent and to the cachet France has as a supplier of consistent grain volume and quality, aided by a temperate climate.

 

InVivo, France's largest farm cooperative group and top grain exporter, expects to have shipped seven million to eight million tonnes in the 2011-12 season that ended on June 30. Fellow cooperative players Axereal and Lecureur and family-owned Soufflet also export millions of tonnes, and together the French firms claim the bulk of France's grain exports. Yet if global traders become more aggressive in the markets typically supplied by France's grain groups, they could expose the weakness of French firms as single-origin exporters.

 

Record French grain exports in 2010-11, when Russia stopped exporting for the most of the season after a severe drought, deflected attention away from the long-term growth of cheaper Black Sea supply and lagging investments in France.

 

"France is a major grain-producing country and will remain one," Pelle said. "But to be honest, on grain markets the French origin does not offer extra quality." Some exporters have raised concerns that French wheat lacks a unique selling point.

 

"French wheat doesn't have a strong image. German wheat is like a BMW car, while French wheat is a Renault," the head of French grain exporters union Synacomex said.

 

"If tomorrow Algeria's (state grain agency) OAIC changes its terms ... we could lose a vital outlet for our wheat," Jean-Michel Aspar told a grain conference earlier this year.

 

Talk last month that the state buyer in Egypt, the world's top wheat importer, would apply tougher rules on grain moisture unnerved some French traders, who saw a further handicap after losing ground in recent years to sellers of Black Sea grain in Egypt's keenly contested tenders. Concerns in France include the fact its grain quality has become relatively average compared with other origins, that wheat yields have hit a ceiling since the 1990s and that it has few deep-water ports for loading big cargoes to importers such as Egypt. Current weather troubles in the Black Sea region may give France another short-term export window like that of two years ago, but the longer-term outlook is less promising.

 

Analyst Strategie Grains projects EU wheat exports in five years' time as flat to slightly higher. This could mean France and the EU miss out on what Bunge sees as an extra 140 million tonnes of wheat, corn and soy that will trade on global markets in the next 10 years. The French grain sector has reacted with a plan to raise silo capacity by five million tonnes, or 10%, as soon as possible and raise wheat output by 20% over 20 years.

 

Axereal has led the way by expanding capacity in the past year at the Mediterranean ports of Sete and Fos to channel its members' grain from inland eastern France. This may come too late to prevent some slippage in exports, with projects in France slowed by policy and public opinion, including strict regulations on planning permits and misgivings about genetically modified crops. On a company level, French firms have already adapted by consolidating locally to get the funds and expertise to cope with costly risk management in trading, giving rise to big groups such as InVivo and Axereal. They are also sourcing some grain from other countries, notably in central Europe, to reinforce their export muscle. International competition is set to push this trend further.

 

"If the cooperatives want to reach out internationally, they will need to get bigger," Yves Pelle said.

 

The listing of units, such as French sugar and ethanol group Tereos has done in Brazil, is one way for cooperatives to get extra capital to grow, he added. Ultimately, given their core commitment to marketing home-grown grain, French firms may have to limit their export ambitions versus global traders who play off multiple origins. This could mean turning more to domestic channels such as animal feed or non-trading foreign activities. In one example, Soufflet produces malt, a beer ingredient made from barley, in Eastern Europe.

 

"Soufflet is more in an industrial phase than a trading one," Philippe Chalmin, an economist at Paris Dauphine university and a commodities specialist, said. "It is well established in Russia and Ukraine but doesn't necessarily export from there."

 

Pressure on the French grain cooperatives may come gradually, giving them time to adapt. Analysts say global trading houses may not want a price war in Europe and the Mediterranean while they get a return on high acquisition costs and will focus more on channelling grain to booming Asian markets. French firms' grip on the local market also gives them time. Multinationals such as Bunge or Toepfer International are longstanding exporters of French grain but to a lesser extent than domestic players, and global traders Cargill and Marubeni have struggled to develop sourcing in France. Takeover bids, as seen in North America, would be a long shot, because they would take a revolution in the mind set of cooperatives and family firms such as century-old Soufflet.