Glencore's Move on Bunge Shows Value of US Agribiz

Anglo-Swiss firm Glencore (LSE:GLEN) confirmed Tuesday (May 23) that it has expressed an interest in acquiring US grain trader Bunge (NYSE:BG).
The company said in a statement that its non-consolidated joint agriculture venture, Glencore Agriculture, made the “informal approach” to Bunge, but emphasized that “there is no certainty that a transaction will occur.” Bunge responded by saying that it is “not engaged in business combination discussions” with Glencore or Glencore Agriculture. 
Bunge’s share price rose 1.03 percent on Wednesday (May 24), while Glencore’s increased by a moderate 0.01 percent.

Whether a deal is made remains to be seen, but many market watchers see Glencore’s move as unsurprising. The company has been involved in international grain trading since 2012, when it took over Viterra. And while it sold half of its agriculture business to two Canadian investment funds in 2016, CEO Ivan Glasenberg has said he wants to use that structure to continue expanding the company’s focus on agriculture.
A deal with Bunge is appealing because it would allow Glencore to gain a presence in the US grain market. Bunge also sells products like phosphate and nitrogen in Argentina, and operates a fertilizer terminal in Brazil — both are also areas where Glencore currently does not have a stake.
Glencore’s approach to Bunge comes at a time of low crop prices, and as MarketWatch notes, that environment has pushed many companies in the space toward mergers. The news outlet quotes Bunge CEO Soren Schroder as saying, “[i]t is very clear that there are too many, too many trying to do the same thing with a small margin.”
One major deal that is expected to proceed is Potash Corporation of Saskatchewan’s (TSX:POT,NYSE:POT) merger with Agrium (TSX:AGU,NYSE:AGU). PotashCorp president and CEO Jochen Tilk gave a timeline for the merger during a discussion of the company’s 2016 year-end financial report in January. “The regulatory review and integration processes are advancing, and we expect the transaction will close mid-2017,” he said.

The move also comes at a time of low potash prices and concerns about oversupply. Currently spot potash prices are at about $230 per ton, though there is reportedly some regional divergence, with North America experiencing better pricing than other areas.
Concerns about oversupply appear to be valid considering the number of projects expected to come online over the next few years. BHP Billiton (NYSE:BHP,ASX:BHP,LSE:BLT) is building the Jansen potash mine in Saskatchewan. It has been in development for over a decade and is expected to begin production by 2023. Gensource Potash (TSX:GSP) and Essel’s joint venture company, Vanguard potash, could also bring a mine online in Saskatchewan by 2019. 
Across the globe, private firm EuroChem said in May that it plans to produce 1.1 million tonnes of potash in 2018 from its two new Russian mines, and will steadily ramp up production to 8.3 million tonnes annually by 2025. That said, company CEO Andrey Ilyin was quoted by The Globe and Mail as saying that the firm’s mines are “not going to create a massive problem” of oversupply. 
Furthermore, many major potash miners, including PotashCorp, expect a positive outlook for potash in 2017. Research and Markets has predicted a stable five-year outlook for the commodity despite noting concerns about falling crop prices and oversupply. The firm notes that agriculture remains a key source of food, provides fiber for the textile industry and biofuel for a growing global population.
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Securities Disclosure: I, Melissa Shaw, hold no direct investment interest in any company mentioned in this article.