Bunge of St Louis, USA has built a $12 billion market cap agribusiness company specializing in soybeans and palm oil. Unlike wheat and corn, soybeans have the dual secular tailwinds of the obesity reduction and clean energy themes. Palm oil is the most efficient large scale biodiesel crop.
Limited substitutability among grains makes means limits on the supply of any one of these grains in the intermediate term, resulting in the dominance of a few giant companies. The five largest control 70%-90% of global commodity trade in commercial grains.
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The world grain growing acreage has been relatively stable for the past 20 years. New acreage is typically created either by conversion of pasture, or deforestation. Increased supply has mostly by higher productivity of land.
Grain growing land is most efficient when corn, soybean and wheat are rotated, making it difficult for farmers to completely switch from one to another. This places lower and upper limits on the growth in supply of any one of these grains.
Larger agribusiness companies, i.e. COFCO, Cargill and Archer Daniels Midland ("ADM"), mostly use different facilities to process each type of grain. Over the past 7-10 years, Bunge has restructured, shedding unprofitable business lines and concentrating on soybeans, enabling it to gain the same benefits of scale.
Over the past three years Bunge has purchased its soybeans at lower gross margin than ADM purchases its range of crops, 6.5% vs 7.5%. But their operating margins are a nearly identical 4%, due to Bunge's more efficient operations.
Lower margins at purchase enable Bunge to grow faster in that sphere. Although it is a smaller company, it can use scale within that specific area to become a preferred buyer. Its more efficient operations are a competitive moat.
Bunge has also entered the palm oil processing business. While corn and wheat can be used to make ethanol for gasoline powered vehicles, and soybeans can be used for biodiesel, palm oil is easily the most efficient fuel producing crop among these.
Although agribusiness in general can be susceptible to government regulatory whims and unpredictable commodity prices, Bunge's greater operating efficiency shield it somewhat from price fluctuations.
Next up, active pharmaceutical ingredients from Hyderabad.
Bunge SOMO Elsevier Khairul Azly Zahan Manabu Kano Kyoto University