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WIKI ANALYSIS
Bunge (NYSE:BG) is an agribusiness and food company that is the largest producer of soybean oil and which has an immense stake in the South American fertilizer market. It also deals with commodities and works a great deal with Biofuels, especially Brazilian sugar-cane ethanol.
Bunge faces several risks as a result of the nature of its operations. Government Agricultural Subsidies, Environmental Regulations, weather conditions, and Health trends all play a roll in determining the success of the company.
Bunge trails its competitors Cargill and Archer-Daniels-Midland Company (ADM) in revenue and net sales but both of these metrics have been on a fairly consistent upward climb. Net sales in 2007 totaled $37.8 billion, compared to ADM's $36.6 billion and Cargill’s $75.2 billion. On June 23rd, 2008, Bunge announced that it would go through with a $4.4B purchase of rival Corn Products International to take advantage of rising crop prices[1]. Corn Products is the leading pure-play franchise in corn refining and will add higher-margin starch and sweetener products to Bunge's product portfolio; the merger is also expected to produce between $100M and $120M in savings[2] and will be completed some time in the fourth quarter of the 2008 fiscal year.
Business Lines
Bunge is currently a world leader in the agribusiness and food industry. Operations are segmented into four major divisions: agribusiness, fertilizer, edible oil products, and milling products. Edible oil and milling products are grouped together into a collective “food products” category. While fertilizer accounts for a mere 10% of revenue, it is a unique sector and separates the company from other U.S. competitors such as Archer-Daniels-Midland Company (ADM) .
Agribusiness
The agribusiness sector involves the purchase, storage, transport, processing, and sale of agricultural commodities and products. This sector works primarily with grain and oilseed but also includes sugar (mainly exported from Brazil) and Biofuels (mostly biodiesel and corn-based ethanol).
Bunge markets its grains and oilseed products to feed manufacturers, wheat/corn millers, other oilseed processors, livestock, poultry, and aquaculture producers, edible oil processing companies (including its own food division), and biofuel customers, all of which operate among approximately 80 countries. Bunge also works with farmers (mainly in Brazil) as a financier, chiefly with prepaid commodity purchase contracts.
Fertilizer
Bunge is currently the largest supplier of fertilizer to South America. In Brazil it is involved in every stage of the process, from mining to marketing. It also controls 26% of the Brazilian NPK (nitrogen, phosphate, potassium) fertilizer retail market. A foothold in Brazil allows the company to greatly cut-down on transportation expenses to South America.
Food Products
The food products sector is divided into edible oil products and milling products.
Edible Oil Products
This sector includes bottled, packaged, and bulk oils, mayonnaise, margarine, and shortening, among other products. The company has refining and packaging facilities in North America, South America, Europe, and Asia. Customers include snack food producers, restaurants, food distributors, and baked goods companies.
Milling Products
This sector provides wheat flours chiefly to Brazil and corn products (corn grits, meal and flour, corn meal, corn-soy blend, etc.) to North America, used both for human and animal consumption.
Business Risks
Expansion
Bunge seeks to generate fiscal value in conjunction with other companies, through both acquisitions and joint ventures. Problems with these companies could negatively affect the business and could divert the management’s attention from other matters. Likewise, success with these undertakings could be a boon to the company as it tries to compete with giants such as Archer Daniels Midland and Cargill.
Financing Operations
In Brazil, where there are very few third-party financing options, Bunge provides financing services to farmers through prepaid commodity purchase contracts and advances. At the end of 2006, Bunge had approximately $866 million in prepaid contracts. This assumes that the farmers will be able to fulfill their obligations and that the prices will not suddenly change. Bunge also sells fertilizer to Brazilian farmers on credit. In fact, 63% of 2006 fertilizer sales were made on credit.
Capital
Bunge operate a capital intensive business which requires a great deal of external financing for continued function. At the end of 2007, Bunge had issued $4.45 billion in standing debt. Significant outstanding debt could limit the company’s ability to procure further funding.
Trends and Forces
Bunge is Dependent Upon Oil Prices
Bunge's Operations are Energy Intensive
Bunge relies heavily on coal, natural gas, and oil products, to power its processing plants and transport its products. Fluctuations in the prices of any of these energy sources can have a dramatic impact on Bunge's operating expenses. Rising prices imply higher operating costs, while falling prices can save the company a great deal of money.
If Oil Prices rise so do Biofuel Prices As oil prices rise, the demand (and prices) for alternative energy sources increases as well. Though higher oil prices can cause Bunge's operating expenses to increase, it also stimulates demand for the company's products like biofuels. In recent years, the overall trend for oil prices has been upward, and this shows no sign of changing in the near future. Since oil is a nonrenewable resource (meaning that once our current supplies are gone, that's it), prices are likely to continue their upward hike as we draw closer to the inevitable end of the global petroleum supply.
Adoption of Hybrid and Fuel Cell Vehicles Threatens Ethanol The widespread adoption of Hybrid and Fuel Cell Vehicles might render gasoline obsolete thereby posing a threat to Ethanol prices.
Agriculture Subject to Weather Conditions
Large-scale agribusiness is vulnerable Temperature and Precipitation Fluctuations, and Agricultural Diseases. Because of the fluctuations in production quantities, it is very difficult to gauge capacity when building a new processing plant. Mistakes in calculations could lead to a surplus or a scarcity of commodity, both of which would negatively effect profitability until the imbalance has been corrected. These uncertainties make an investment in agribusiness inherently high-risk.
With Such a Global Presence in Such a Politicized Industry, Bunge is at the Mercy of Government Policies
As an agricultural major with operations in over 80 countries, Bunge is at the mercy of international politics. Government Agricultural Subsidies and trade laws plague the agricultural industry, leaving Bunge subject to increased government interference, higher tariffs, tax regulation, political instability and trade barriers. Bunge is subject to a wide array of environmental laws. Bunge also faces laws effecting the labeling, storage, and disposal of hazardous wastes.
Consumer Trends Impact the Food Industry
Health concerns ranging from trans-fats to organic foods to Genetically Modified Foods constantly change the demand patterns of consumers. Genetically Modified Foods are currently a hot topic, especially in the European Union and Brazil where consumers oppose their usage. The delivery of GMF products to customers requesting GMF-free products could tarnish Bunge’s reputation and result in a loss of customers. Consumption of organic foods has been on the rise of late. Outbreaks of diseases such as Avian Flu and Mad Cow Disease in the poultry and livestock market lead to great losses for Bunge.
Competition
While Bunge competes with many different companies across each of its operating segments, it does not have a competitor with which it competes across all of its segments. Bunge’s primary competitor in the public sector is Archer-Daniels-Midland Company (ADM), a slightly bigger and much more profitable business. In the private sector, both of these companies are dwarfed by Cargill the world’s second largest privately held business. As the graphs show, Cargill has a clear advantage in terms of revenue over both ADM and Bunge, but in the past two years, Archer-Daniels-Midland Company (ADM) has made a huge leap in net earnings while Bunge has failed to achieve the same.
Recently U.S. corn production has skyrocketed, eclipsing all estimates. Most of this increase has been due to Ethanol demand. This increased corn production has lowered Corn Prices and led to a decrease in the plantings of other crops such as soybeans and wheat. Unlike small agribusiness companies, larger companies such as Bunge and Archer-Daniels-Midland Company (ADM) have invested overseas in Brazilian agriculture. This Brazilian presence has allowed them to produce the needed soybeans and import them into the US thereby giving them an advantage over companies who rely on the U.S. corn belt.
China has stated that it will not use food products to produce ethanol and some U.S. companies have taken the lead in researching cellulosic ethanol as an alternative to corn-produced ethanol. These companies would gain an advantage over ADM if they succeed.
References
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