As the world trade in farm commodities faces a shake-up, one of the groups widely expected to play a leading role – China’s COFCO – will probably have to sit out the industry consolidation after all.

Sources with knowledge of COFCO’s expansion strategy say the state-run conglomerate is struggling to integrate businesses it bought three years ago, deals which made it a significant global agricultural trader but are now hindering its ability to swoop on rivals.

Illustrating the problems, the sources said that at times different arms of the agribusiness had tried to compete against each other in commodity deals. On top of this, several senior staff had recently left its trading operations while a heavy group debt burden presented another impediment to further mergers and acquisitions.

“For now, the focus is on reorganization and digesting the acquisitions,” said a COFCO official, who declined to be identified. “Thoughts of further aggressive M&A or building assets are on the backburner for at least a couple of years,” the official told Reuters.

Spokespeople for COFCO Group and its newly-formed COFCO International trading arm did not respond to requests for comment.

One of about 100 conglomerates controlled by China’s central government, COFCO Group has interests that include hotels, real estate and some of China’s leading food and drink brands including GreatWall wine.

It trades more than 78 million tonnes of grain a year, according to state media, and in 2014 agreed to buy Dutch grain trader Nidera and the agribusiness of Singapore-listed Noble Group for more than $3 billion.

The deals gave COFCO assets in some of the top grain, vegetable oil, sugar and coffee producing regions. They also allowed it to start challenging the “ABCD” quartet of agricultural commodity traders – Archer Daniels Midland (ADM), Bunge, Cargill [CARG.UL] and Louis Dreyfus Company [AKIRAU.UL] – which have long dominated the global business.

These firms were once highly profitable but in recent years record stocks of commodities such as corn, soybeans and wheat have sliced margins and dampened trading opportunities.

A first sign of sweeping change for the industry emerged last month when Swiss mining and commodities group Glencore Plc made an informal approach to Bunge to discuss “a possible consensual business combination”.

While Bunge said it was not engaging in such talks, some kind of industry consolidation seems unavoidable and some people had said Glencore’s move might spur COFCO into M&A action.

“For the past year I’ve expected that it would be COFCO that would go after Bunge. This may motivate them further,” Jay O’Neil, an agricultural economist at Kansas State University, said last month.

Sources familiar with COFCO’s thinking, however, also played down this possibility. “The company has suffered a lot because of the lengthy process of going toward one group,” one of the sources said. “It will take some time to repair the damage of the last couple of years.”

As COFCO Group is a state-owned enterprise, any acquisition would also need Chinese government approval, which could be a lengthy process.

COFCO INTERNATIONAL

COFCO unveiled its new division, COFCO International, on April 24, bringing together Nidera and its Swiss-based grain arm COFCO Agri under new chief executive Johnny Chi.

According to its website, the company aims to expand its business globally and “strengthen worldwide origination, logistics and trading capabilities” supported by COFCO’s unique position in China.

The company has increased staff numbers in Geneva, home to COFCO International’s headquarters and the center of its grains and oilseeds business. Its Rotterdam office separately plays a core role in trading activities.

Since the start of the year, COFCO has tried to replace two top officials at COFCO Agri, who sources said left due to disagreements over the direction of the group.

Company memos seen by Reuters showed that there has also been a string of departures in recent weeks, including head trader Wolfgang Stiehler, who had joined Nidera only in January this year to provide strategy also. Stiehler did not immediately respond to a Reuters request for comment.

Other officials who have left included traders, back office staff and local country managers, the memos showed.

A second source said Nidera and COFCO Agri had recently tried to compete for the same grain deal. While the duplication was eventually prevented, there were other similar instances and it was unclear whether those were stopped. “How is this supposed to happen if it’s one company?” the source added.

“The transition into a merger is looking more difficult than people thought. The merger is complex and will not be quick,” a third source said.

Two of the sources said separately that COFCO Agri was still buying grains from bigger rivals such as ADM, even though COFCO International was operational. This was due to the need to hedge deals, or to ensure they are completed promptly, one of the sources said.

DEBT AND CASH

Another obstacle to more acquisitions is COFCO’s debt and cash position. Data from its results showed the group’s total debt had risen to 51.88 billion yuan ($7.6 billion) in 2016 from 50.63 billion yuan the previous year.

Separately, the parent group’s cash and cash equivalent position dropped to 1.28 billion yuan in 2016 from 4.13 billion yuan in the previous year. COFCO group’s operating profit fell to 0.85 billion yuan in 2016 from 1.96 billion in 2015.

COFCO International’s shareholders also include Singapore state investor Temasek, China-based private equity firm HOPU Investments, Standard Chartered and the World Bank’s private sector investment arm IFC, according to regulatory statements.

Temasek, HOPU and Standard Chartered all declined to comment, while COFCO’s investor relations department declined to provide details about the size of shareholdings in COFCO International. An IFC spokesman confirmed it had invested in the company but gave no details of the stake.

SOUTH AMERICAN GROWTH

Since first investing in Nidera, COFCO has reported several major problems, including a $150 million financial hole in its Latin American operations and $200 million in unauthorized trading losses on its biofuels desk in the region.

However, it has also made progress there. Data seen by Reuters showed COFCO, through Nidera’s and Noble Agri’s existing operations, has become the second biggest grain exporter from Argentina, behind Cargill.

In Brazil, data showed that COFCO had moved up to the no. 4 grain exporter slot in 2016, ahead of Louis Dreyfus.

“It’s a new company with a lot of people coming from other firms,” said Joseph Reiner, COFCO International’s Brazil-based global head of coffee. “Growth has to be sustainable, considering resources and results,” he told Reuters.

COFCO is already gaining prominence in the sugar market. Last month it sold the bulk of sugar – primarily sourced from Brazil – against the May ICE futures raw sugar contract. This was the second-largest delivery against the contract.

COFCO is estimated to rank as Brazil’s no. 6 sugar player. Marcelo de Andrade, Sao Paulo-based president of global sugar at COFCO International, said the firm had looked at possible purchases of sugar mills in Brazil “but decided to abort any deals”.

“At the moment we are not looking (at buying) any more and we are keen to fill as much as possible our current crushing capacity,” he told Reuters.

Source: www.reuters.com