It has gone on an investment spree, but will that be enough to insulate the food and agribusiness giant from another surge in commodities prices?
Corporate America is replete with giant companies, from Microsoft to Wal-Mart, that have grown and grown and grown -- only to stagger under their own weight.
Cargill Inc., however, is not among them.
The Minnetonka-based food and agribusiness company has turned its size into a competitive advantage by plowing billions of dollars into new businesses and acquisitions at a time when volatile commodity prices have placed unprecedented strain on the balance sheets of many of its smaller competitors. Over the past eight years, Cargill has gone on an investment spree, buying or building businesses all over the globe, from feed mills in China to a new wheat-processing plant in Poland.
This targeted expansion strategy has enabled the company to reap enormous profits just as the worldwide demand for food and crops and fertilizer has surged, and world grain stocks have dropped to their lowest levels since the early 1970s.
On Tuesday, the company reported that its earnings for the fiscal year ended May 31 rose 69 percent, to $3.95 billion, from $2.34 billion a year ago. The company's revenue rose 36 percent to $120.4 billion -- further cementing Cargill's place as the largest company in Minnesota and one of the largest in the world.
It was the seventh consecutive year Cargill posted improved earnings.
"We operated successfully in the most volatile agricultural and energy markets in decades," said Greg Page, who became chief executive officer last year, in a prepared statement. "Despite tight stocks of many agricultural commodities, we maintained reliable supply chains for our customers."
But the company is hardly immune to the growing turmoil in the world's food and agricultural markets. Indeed, Cargill has required an additional $15.5 billion in total assets over the past two years to run the company, partly because of "persistent turbulence in credit markets," Page said in Tuesday's statement.
Like many of its competitors, including some grain cooperatives in Minnesota, Cargill has been forced to borrow more as prices for corn, wheat, soybeans and other commodities have soared. Crop prices have fallen considerably since June, but Cargill and its competitors are still under pressure to increase their assets in order to finance higher-priced inventories.
The situation is manageable so long as Cargill continues to generate robust profits that it can reinvest in the business. But if margins decline at the same time that commodity prices rise, the company could face financial pressures like those of its smaller rivals, said agricultural analysts. In May, near the peak of the commodity price boom, rival Archer Daniels Midland Co. of Decatur, Ill., announced plans to offer $2 billion in equity -- partly to pay growing debt.
In an interview Tuesday, Cargill Chief Financial Officer David MacLennan dismissed the idea -- circulating in agricultural circles -- that Cargill might consider an equity offering of its own.
"No," he said. "We like the benefits of private ownership." Yet he acknowledged that funding costs for inventories have increased, and that it takes more money to operate Cargill than before the commodities boom.
"This industry has been utterly transformed," said David Swenson, an associate scientist in the Economics Department at Iowa State University. "Cargill is expected to hold and maintain much larger grain positions ... and that requires a lot of borrowing and financial acumen."
Strength in size
For now, much of Cargill's strong performance comes from two of its five business units. One is origination and processing. The other is industrial, a unit that includes Cargill's 65 percent stake in Mosaic Co., a fast-growing fertilizer company. Profits have declined elsewhere, including in its risk management and financial segments and agricultural services. Cargill generated a $310 million gain in the fourth quarter, ended May 31, on the sale of a 69 percent ownership interest in a gas turbine power plant in the United Kingdom.
High commodity prices, while generally positive for Cargill's origination and processing segment, can hurt the company in other areas. For instance, it now costs Cargill more money to produce some of its food and beverage ingredients. Cargill is one of the largest providers of beef, pork and turkey in the nation, and rising prices for feed have eaten into the company's profit margins for meat.
Even so, the company's size and diversity -- it now boasts 160,000 employees in 67 countries -- will enable it to fare better than smaller rivals in a period of volatility, said Michael Swanson, a senior agricultural economist at Wells Fargo.
"Their business model doesn't have much to offer in a period where prices are stable," Swanson said. "Their services and their sophistication are needed more at times like this -- when volatility is high and risk is everywhere."
Chris Serres • 612-673-4308