The explosion in global population, driven primarily by Asian economies, is giving policy-makers and environmentalists sleepless nights. Martua Sitorus could be forgiven for not being quite so concerned. As joint founder and COO of Wilmar International, Asia’s largest agribusiness, Sitorus (Indonesia’s fourth-richest person) is perfectly positioned to satisfy the hungry hordes. His October 2012 increase of his stake in the company to a little over 10% suggests he is confident of doing so.
Wilmar is only 21 years old, but it has grown up fast. While palm oil is its staple product – trading and refining it accounts for more than half the company’s income – it also has interests in edible oils, biodiesel and grains across more than 300 manufacturing locations. And though it is lower in profile and less diversified than many of its agribusiness rivals, its US$16.4bn market cap means it has quietly grown to become a significant player in the industry.
The short-term outlook is less rosy. Palm oil prices are under pressure and Citigroup has estimated a US$100-pertonne fall this quarter, which it says would impact Wilmar’s net results in FY2012 by 3% and put further pressure on an already subdued share price. Announcing a fall in net profit to US$373m for the half-year to July 2012, the company’s Chairman and Chief Executive Kuok Khoon Hong acknowledged: “The Group’s business model is sound and long-term prospects remain intact as we are well positioned to capture the growth in demand for agricultural commodities, especially in Asia and emerging markets like Africa. However, in the near term, the operating environment remains challenging, particularly in China, due to excess capacity in oilseed crushing.”
Optimism comes courtesy of the region’s demographics. From its Singapore headquarters, Wilmar has key footholds in some of the world’s fastest-growing markets. Current global population forecasts show an increase of 1.7 billion people before 2030, averaging around 75-80m new mouths to feed each year to 2050. Almost all the capital expenditure of expanding agricultural production will come from private enterprise.
And then there’s China. For the past 17 years, the country’s acreage for growing rice, wheat, soybean and corn has been stuck at 19 million hectares – but just to become self-sufficient in soybean would require 36 million hectares. This year, China will import close to 60 million tonnes of soybean, a number inconceivable a decade ago. Its requirements for beef, grains and fats have exploded as its population shifts from agricultural to urban lifestyles.
Australia is another key frontier. There has been considerable media coverage of farms being bought up by multinationals, and a popular perception that the country can feed Asia but may have more difficulty looking after itself, with foreign companies increasingly taking ownership of the local supply chain.
Phillip Napier, a KPMG Australia Partner and the firm’s Agribusiness Sector Leader, says: “Even in an advanced nation like Australia – with a long history in agricultural production – the industry is fragmented, with a plethora of different industry bodies all vying for attention but providing no clear voice to act on behalf of the industry with government.”
Napier says Australian agribusiness is going through significant change as small producers who cannot recoup increasing input costs exit the industry, providing significant opportunities for consolidation. Wilmar, for example, in 2010 made a significant acquisition by seeing off China’s Bright Food to pick up Sucrogen, the world’s fifth largest sugar refiner. In one swoop, it controlled half of Australia’s sugar production, and hinted in analyst briefings at similar purchases across Asia.
Citi analyst Patrick Yau expects Wilmar’s position as a leader in oilseed processing and its “best-in-class” focus on consumer products will allow it to “benefit from scale and logistical advantages to consolidate an overbuilt Chinese oilseeds-crushing industry and capture the profit opportunity from China’s growing deficit in soybeans.” He sees catalysts for growth including the company’s interests in sugar in Indonesia and Africa, as well as its ability to scale its consumer division in China for higher margin products such as rice and flour.
In September, Wilmar took a key strategic step in this direction by announcing a joint venture with Kellogg’s to use Wilmar’s Chinese distribution and supply chain capabilities and the cereals giant’s brand recognition and expertise to market cereals and snacks across the world’s second largest economy.
It’s the type of joint venture that’s likely to become more common as Wilmar seeks to dine at the captain’s table of an industry undergoing radical upheaval. But the future of soft commodities is still up in the air: the mining industry, which went through a consolidation exercise years ago, has in many ways come full circle as value-added processes such as smelting and refining are increasingly decoupled from core activities. Napier says an integrated focus remains right for agribusiness while there is still so much opportunity for consolidation. Sitorus is betting such a hunch proves correct.