Cargill looks to the future with an eye on costs

Over the past year, Cargill has been particularly busy buying new businesses and exiting old ones. Big bets have been made on fish feed and chocolate, while noncore businesses including steel and pork have been shed.

At the same time, Cargill has been grappling with stagnant earnings and slower global economic growth, while its big grain business has been buffeted by low commodity prices.

It all adds up to this: The agribusiness giant will be increasingly cost-conscious as it moves forward, while continuing a high level of acquisitions and divestitures, analysts say.

"They are really taking a good look at their portfolio of businesses and trying to raise their return on capital for shareholders," John Rogers, a credit analyst for Moody's, said in an interview.

And with the "sustained decline in commodity prices likely to continue in [fiscal year] 2016, we expect further cost reductions will be needed to offset a more challenging operating environment," Rogers wrote in a January report.

Indeed, Cargill is in the midst of reorganizing its major business units, a move aimed at increasing efficiency and reducing costs.

Minnetonka-based Cargill, the largest privately held U.S. company, is well diversified, its business spanning 70 countries and including everything from road salt to corn syrup and beef packing.

Still, Cargill's recent financial results have been trending downward. For the first half of its 2016 fiscal year ending Nov. 30, the company's adjusted operating earnings fell 7 percent over a year ago to $1.19 billion.

For its 2015 fiscal year, earnings rose 2 percent to $1.9 billion, but were well short of the $2.4 billion recorded in 2013. The company had $120 billion in revenue, down from $135 billion a year earlier.

"The stagnation of earnings generation over the last few years is an important credit concern," according to a November report by Fitch, which gave Cargill a "high credit quality" rating on a $602 million bond issue.

While Cargill is owned largely by descendants of its founding Cargill and MacMillan families, the company issues some publicly traded debt.

Part of the problem facing Cargill is simply that world economic growth is slowing, weakening demand for all sorts of products. "Lower growth is a fact of life going forward," said Moody's Rogers.

In the grain business, persistently low prices — the result of big harvests — have been a problem.

"From an industrywide perspective, there has been a bit of a downturn, and it's driven by a global excess supply of grains," said Chris Johnson, a debt analyst with Standard & Poor's Rating Services.

Right now, a lot of grain is idling in inventory, and prices are trading in a relatively narrow band.

"When you have low and stable commodity prices — that's a negative in terms of margins and overall profitability," Rogers said.

Rogers and other analysts say a key part of Cargill's long-term strategy is investing in businesses that are less directly susceptible to commodity swings. "Chocolate is a great example," he said.

Cargill, already one of the world's largest chocolate producers, got bigger last year when it completed a $440 million acquisition of ADM's chocolate business.

The deal particularly boosted Cargill's North American operations, giving it three new chocolate factories here along with three in Europe.

Chocolate complements Cargill's cocoa business, also one of the world's largest. Cocoa, the main ingredient for chocolate, is a commodity, subject to price volatility. Chocolate is a higher-margin, less-volatile business with good long-term growth prospects as world chocolate demand is growing.

Another global business with a bright future is feed production for the burgeoning aquaculture market. Cargill made one of its largest acquisitions ever last year by shelling out $1.5 billion for EWOS, a Norway-based fish feed producer.

The only bigger deal was Cargill's $2.2 billion acquisition in 2011 of Dutch animal feed company Provimi. With its heavy investment in animal feed, Cargill is clearly making a long-term bet that meat consumption will continue growing as incomes rise in developing countries.

Cargill itself is a global force in meat production, though it sold its U.S. pork business to Brazilian meat giant JBS for $1.45 billion.

Unlike in beef and poultry, Cargill hasn't been a global pork player, and the company was not one of the top two pork producers in this country. Plus, Cargill got a sweet price for its pork business from JBS, analysts said.

Also last year, Cargill sold its interest in North Star BlueScope Steel for $720 million, exiting steel production. Plus, it unwound its Black River Asset Management subsidiary — which managed over $7 billion — primarily by spinning it out into three independent firms.

"Some of the financial assets they own they are scaling down over time," Rogers said. "I think they will largely divest them or have a minority position in them."

That could mean CarVal Investors, Cargill's other large money management arm, might follow Black River out the door. CarVal, which has $10 billion under management, specializes in distressed debt and real estate.

So could Cargill be streamlining itself in preparation for an initial public offering, something it has long resisted?

"No," Cargill spokeswoman Lori Johnson said flatly. The sprawling company is always buying and selling businesses, she said, particularly noting its spinoff of its fertilizer operations into a public-traded company, Mosaic.

The action is part of tightening the bottom line. So are Cargill's efforts to keep a lid on costs.

"Another important cog in Cargill's strategy to seek profitable growth is to increase its operational efficiency, especially as earnings have drifted lower over the past years," according to the November Fitch report.

The report noted Cargill's restructuring of its back office functions over the past couple of years, which resulted in the creation of six global business service centers, Many finance, human relations and other administrative jobs were centralized in these offices. The reshuffling produced some layoffs, though no number has been disclosed.

More recently, Cargill has begun reducing the number of subdivisions within its five major business divisions.

For instance, in late February Cargill announced internally that it would consolidate the six divisions of its U.S. grain business into four, and the six divisions of its Canadian grain operation into four.

"The idea is you can get more efficiency," said Cargill's Johnson. "Will there be changes in jobs? Probably. Certainly there will be changes in job responsibilities. Is there a net plus or minus [of employment] — we are not there yet."

She said the company has no target for overall head count reductions.

Mike Hughlett • 612-673-7003