ABCD ambition
China’s COFCO makes painful cuts in drive to lead global food trade
China’s COFCO International is in the throes of a staffing upheaval as the group pursues its professed ambition of sitting at the top table of global agricultural traders.
But doubts persist among some in the industry over whether the trading firm will really challenge the existing four dominant players in grains, oilseeds and sugar. In the end, they suspect, it may prioritize securing strategic food supplies for China over commercial aims in an era of rising trade tensions.
State-owned conglomerate China National Cereals, Oils and Foodstuffs Corp (COFCO) began building its foreign commodities operations in 2014 and formally launched the COFCO International Ltd (CIL) trading division in April 2017. Its assets include port facilities in Brazil and Romania, sugar mills in Brazil and grain silos across the globe.
Last month, Yu Xubo, president of Beijing-based parent company COFCO Group, laid out a bold expansion.
“We aim to become the largest international food trader by 2020, not only in the assets we own and the revenues we make, but also in the quality of our assets, business operation and return on investment,” he once said.
COFCO Group, which has interests that include hotels, real estate and some of China’s leading food and drink brands including Great Wall wine, reported revenue of 344.79 billion yuan ($53 billion) in the first nine months of 2017.
Reflecting progress toward its targets, by the middle of last year, the group was already the second-largest grain exporter from Argentina, one of the world’s top food producers.
Painful integration
China is securing its global supply lines, moving into mining ventures in Africa, expanding its ocean shipping fleet and buying ports around the world. This effort is accelerating under the China-proposed Belt and Road initiative which involves huge infrastructure projects connecting China to Europe and beyond.
But COFCO International – in which Singapore, London-based Standard Chartered and the World Bank’s commercial arm also hold stakes – spent most of last year integrating past purchases rather than expanding.
This process has been painful at a difficult time for all traders. Four years of global bumper grain and oilseed harvests have squeezed profits at the established players: Archer Daniels Midland Co, Bunge, Cargill Inc and Louis Dreyfus Co, known as the “ABCDs” due to their initials.
“It has been a challenging period,” said one source with knowledge of COFCO International’s strategy. But the source said the worst was over, with the trader poised to try to take market share from rivals. “The big ambition is still there – to be the new C of the ABCDs.”
COFCO International has been trying to integrate two purchases, together worth more than $3 billion, that it agreed three years ago – from Rotterdam-based grain trader Nidera and the agribusiness of Singaporelisted Noble Group.
This has meant heavy job losses. A company official said last month that over 2,500 jobs had been shed in its Brazilian sugar operations alone, although this was separate from the integration process.
COFCO Group has also sent a team of managers from Beijing to take pivotal roles in operations across the globe, including in Canada, Brazil and Europe, company memos seen by Reuters showed.
A spokesman for Geneva-based COFCO International said that around 50 members of its staff are former COFCO Group employees, although he noted this was out of a total workforce that exceeds 13,000. The spokesman declined to comment further on human resource issues.
Chief executive Johnny Chi, who held top positions at COFCO Group in China, has overseen the departure of several top staff at Nidera, from which the trader inherited big losses. These included a $150 million financial hole in its Latin American operations and $200 million in unauthorized trading losses on its biofuels desk.
Company memos show Chi has been followed by Frank Feng, appointed CEO for South America, and Lucas Shi, who has taken the same role at a regional level in the “Southern Cone” countries including Argentina. Another recruit from Beijing is Dong Guo, who has become chief research officer.
Sources said Nidera teams have been shrunk or removed in Europe and North America. This followed a management reshuffle in Brazil after the accounting irregularities.
The firm has also hired high-profile figures from the industry, with Pierre Lorinet, former CFO at trade house Trafigura, and Serge Schoen, an exLouis Dreyfus chief executive, both joining its board.
Cultural questions
Whether the firm has achieved a turnaround yet is unclear. No profit and loss accounts are available for COFCO International, in which the Beijing parent holds 48 percent and the sovereign wealth fund China Investment Corp 12 percent.
COFCO International announced in November an agreement to sell its crop seeds business to Switzerlandbased Syngenta AG – which has been bought by ChemChina – but did not disclose price terms.
“The seeds sale has boosted the balance sheet,” another source said. “2017 [was] an effective year and COFCO International is back on track and can start thinking again about growing.”
COFCO has said it will pursue partnerships to expand overseas after signing a supply deal with US cooperative Promark last year.
One former COFCO International manager who left in the past year said the firm had been struggling over how to cut costs and ensure future revenues after shedding people who had been making it money. Other problems lay in overcoming cultural differences across its global operations.
“It’s a big machine. It doesn’t think like a business. It thinks like a government,” the former manager said, declining to be named.
The spokesman for CIL said that differences in corporate culture are pretty normal in the context of a merger of companies.
“CIL is currently deploying a new common corporate culture across all CIL locations, which were developed by various CIL management [personnel] in 2017,” he added.
Feeding China
Chi has played down suggestions that the firm is torn between competing objectives, unsure whether to pursue its own commercial aims or the strategic interests of its home country. In November, he told the Financial Times it did not want to be “just a procurement platform for COFCO Corporation or China.” But some remain skeptical. “What COFCO International should strive for is to be the most efficient procurement office for China – the feeding of China’s population is of the utmost strategic importance,” said Jean-Francois Lambert, founding partner of Lambert Commodities consultancy. “This is in fact their prime objective.”
With such powerful Chinese shareholders, the firm has the financial clout to become an ABCD “if they want to,” said Jay O’Neil, senior agricultural economist at Kansas State University.
The views of COFCO International’s shareholders remain unclear. COFCO Group did not respond to requests for comment while China Investment Corp declined to comment, as did Standard Chartered and China-based private equity firm HOPU Investments.
Singapore state investor Temasek said it did not direct the business of its portfolio companies, while the World Bank’s commercial arm IFC said its investment aimed to drive world food supply efficiency.
If COFCO International sticks to its commercial ambitions, it cannot achieve this through internal growth and will have to return to the acquisitions market, O’Neil said.
“I do not see them as taking a significant percentage of market shares away from others until and unless they buy into one of the ABCDs. If they do that, then they will be an ABCD.”