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Hurricane Sandy shows why ag groups must spread their wings

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Has the city that never sleeps reaffirmed something of a wake-up call?

Amongst the trail of destruction left in New York by Hurricane Sandy was a message to groups, such as agribusinesses, which depend to a large part on the elements.

And that is the importance of being global.

Weather extremes are making focusing on narrow geographies look risky.

Weather upsets

Sure, such an unusual storm, the first weather event to close the New York stock exchange in 17 years, following on from the worst US drought in more than half a century, does not prove that weather patterns are changing.

But, coupled with summer drought in Russia and Ukraine, the wettest summer in the UK for a century, and Argentine weather now swinging to too wet from last season's too-dry conditions, it certainly highlights the dangers of banking on average conditions.

You don't need to be a climate change fanatic to appreciate the disruptions that these setbacks have caused to the grain chain, from turning the UK to a net importer of wheat, to prompting restrictions on Ukraine wheat exports, to prompting US feed groups to look abroad for ingredients.

US corn imports are expected to hit a record 1.9m tonnes in 2012-13, more than twice the previous high.

Meanwhile, the European Union has cut back on plans for biofuels, to lower the competition for land between industrial and food crops.

Importance of breadth

Upheavals represent an opportunity for profit too, by groups which can, for example, export Brazilian corn to the US, or find the right grain to blend in poor-quality UK wheat and exploit a quality upgrade.

However, operators best-placed are likely to be those with a wide spread of resources to draw upon.

That has been highlighted in recent results from crop trading giants.

OK, Bunge enjoyed some fortune in its strong agribusiness results, as the bumper Brazilian corn crop, at a time of drought-hit US production, played to its strengths in South American exports.

But the thoroughly multinational, if US-based, Cargill – which even sponsors the local football team to Agrimoney.com, Hereford United – also enjoyed strong results.

Restricted stronghold

Archer Daniels Midland, meanwhile, in reporting a drop in earnings, was exposed for its US focus, which has left it particularly exposed to the disappointing levels of US corn to export, and resultant high prices which squeezed its ethanol division.

Sure, the group does fly its flag in many parts of the world, and for instance boasts more oilseed procurement sites in South American than North America.

But outside these continents, it has scant cover, with less than 7% of such facilities outside the Americas.

In agricultural services, only 12% of ADM sites are based outside North America, and none in Africa, Asia or Australasia.

Asia, Australia call

It's easy to understand why ADM is attempting to spread its wings and acquire GrainCorp, the Australian grain handler, which the group also sees opening up potential in Asia.

And buy now, when one potential rival suitor, Glencore, is busy attempting to seal its Canadian Viterra purchase, and another, Marubeni, digesting US-based Gavilon, and Cargill still absorbing purchases, such as Provimi, made during a takeover spree last year.

ADM's lack of scale in Asia is not down to a lack of imagination. It first teamed up with Singapore-based Wilmar International, in which it owns a 16% stake, in the 1990s to build in soybean processing operations in China.

But market contortions show the importance of having a direct presence.

And the idea of a broad footprint will only be reinforced by seeing one of the world's great cities brought, temporarily, low by the latest in a long chain of weather upsets.

By Mike Verdin

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