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Tickers in this Article: BG, CPO, ADM, TSN, KFT, CAG
The world's current population is estimated to be 6.7 billion people according to the United Nations population division (as of June 2008). By 2045 the world population is expected to surpass nine billion people. This massive population growth, coupled with rising incomes of workers in emerging nations like China and India, is just one factor that points to higher future demand for quality food. Investors interested in following global agricultural trends will find a relevant case study in Agribusiness firm Bunge Limited (NYSE:BG).

All about Bunge
Bunge's core businesses are focused on the following segments:

  • Agribusiness - soybeans, wheat and corn processing
  • Fertilizer - sold primarily to South American Farmers
  • Edible foods - vegetable oil, margarines, mayonnaise
  • Milling products - wheat flours, corn meal, grits

Its main customers have been animal feed manufacturers and livestock producers, and Bunge's net sales increased 44% to $37.8 billion for the year ending December 2007.

Bunge's Merger Announcement
Bunge's management recognizes that the winners of tomorrow will be the companies that can control their cost of inputs, manage risks and offer a broad product mix. Bunge's focus on the future and its surging stock price led to their recent announcement to acquire Corn Products International (NYSE:CPO) in an all-stock deal. While Bunge reports on four business segments, CPO focuses solely on corn refining with 30 manufacturing plants split between North America, South America, Asia and Africa. As a result of the merger Bunge gets to add to its product mix by leveraging the years of experience CPO has in processing its sweeteners and starches. CPO gets to protect its business operations from larger competitors like Archer Daniels Midland (NYSE:ADM), privately held Cargill, and Tate & Lyle Ingredients Americas.

Corn Products International
CPO's sweeteners are found in everything from chewing gum to beer, and the company's starches are used in the food, paper and corrugating industries. CPO reported its best quarter ever in net sales and operating income after the first quarter of this year. Driven by increased sales in its North American and South American regions, operating income for CPO was up 22% for the first quarter of 2008. CPO's ability to have a successful quarter is impressive due to the challenges it faced in the form of higher corn costs, currency translation to a weaker U.S. dollar and higher energy costs.

Net sales at the end of 2007 totaled $3.4 billion - more than doubling operating income from 2002 to $347 million. CPO results also reflected dismal performance in its Asia region, caused by transportation costs and poor demand. CPO is hoping to expand its operations in southeast Asia and India. (Find out how to put this important component of equity analysis to work for you in our related article, Analzying Operating Margins.)

Merger Arbitrage
Investors should also note that hedge funds may target these two companies for a merger arbitrage strategy. In an all-stock deal a hedge fund would buy shares in the target firm, CPO, and short shares of the acquirer, Bunge, banking on the deal getting approved. There's not much individual investors can do except to understand how large buyer or sellers can affect investments in your portfolio.

The take away
Other food companies that are affected by inflation, fluctuating commodity prices and the earth's growing population include: Tyson Foods (NYSE:TSN), Kraft (NYSE:KFT) and ConAgra Foods (NYSE:CAG). Bunge's end game is product diversity - and likewise an investor's portfolio should adopt the same philosophy.

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