East of Minnetonka

Is Cargill suffering more from poor leadership than it is from the failure of its trading instincts?

 

Yes, there is a place called Minnetonka; in Minnesota, predictably enough. It sounds like the sort of place that John Steinbeck would, perhaps even should, have written about; perhaps he did, because in East of Eden, which is I think his greatest book, he documents the profiteering that can come from war.  Caleb tries to buy his father’s affection with the proceeds of beans he grew during World War I, but to no avail: it was all pre-Beatles and no one had told him yet that you couldn’t buy love. Cargill, my subject for today, also made a lot of money during the same war and it was accused of war profiteering at the time too.

Don’t worry if you haven’t heard of Cargill, after 147 years of existence it is still a privately held company and it plays its cards pretty close to its chest. It does have to tell us something of its doings though and you can judge the scale of its vast economic empire from its recent announcement that its profits have slipped to a 10-year low: it only made $1.17Bn during the 12 months to the end of May 2012, some 56% down on the record profit in 2011 – the fourth-quarter just $73M, 82% down on the same period last year.

Cargill is primarily in the food business and, with revenues last year of $133.9Bn, actually up 12% on previous year, you can easily guess it operates on many levels and on a global scale. It is the largest privately held company in the United States and if it were a public company it would rank, as of 2011, number 13 in the Fortune 500. Cargill has over 140,000 employees, in 66 countries; it controls 22% of the US domestic meat market; it is the biggest exporter of beef from Argentina; the largest poultry producer in Thailand; and all of MacDonald’s eggs in the US pass through Cargill’s hands.

Trading is in Cargill’s DNA and surprisingly it is claiming that this is were it has faltered of late, after a century of trading through the country’s most difficult times, when it has mostly tended to do rather well even if its approach has been a little controversial. In addition to the WWI intrigue, it was suspended from the Chicago Board of Trade in 1938, after the failure of the corn crop in 1937, because it wouldn’t release grain onto the market; it was accused of trying to corner the market in corn.

I guess trading is all about trying to corner the market in something and if there is any company out there who can do this sort of thing with food it is Cargill, so what has gone wrong of late? Chief Executive, Greg Page, acknowledged that this is something they should be good at but claimed that this year’s markets were “driven as much by the economic and political environment, as by the fundamentals.”  Well, that’s a bit rich when you consider Cargill’s history – how can such an enormous part of the economy be just driven by supply and demand and not by the “economic and political environment”? Its CFO says “markets were much tougher to read than in previous years”, with asset classes “pretty much correlated.”

I cannot begin to guess at what complications come with a private company that still has 90% of its shares controlled by the 80 or so descendents of William Wallace Cargill, the founder of this remarkable business. It has a non-family CEO, which is a good sign, but how much interference there is from this close shareholder group, all keen to get their share of the 20% of trailing profits that are distributed annually, would be interesting to know. I guess that next year they will only have $234M to share between them, so tough times ahead it seems.

I’m inclined to think this is more of a leadership issue than anything else.  How the CEO can imply that this isn’t a highly politicised and political business is beyond me. Financial success from the control of food resources on this scale is obviously far more than just about fundamentals. Yes, the world has changed, but Cargill has been pretty adept at changing with it so far, in fact, its ability to adapt has probably been one of it principal competitive advantages to date. Cargill just needs the right leadership to negotiate today’s political and economic landscape – ignoring it is just a hopelessly wrong-headed conceit.

Mark

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