St. Paul to São Paulo
Inside the Inver Grove Heights headquarters of CHS, Inc., the world’s third-largest agricultural co-op and the largest in the United States, clocks are set to the time in St. Paul, Geneva, SÃ£o Paulo, and Shanghai—all locations where CHS, a Fortune 500 firm, conducts business. Flat-screen televisions located throughout the company’s offices are tuned to CNN. After all, a strike in Brazil, an economic slowdown in China, or drought in Australia could disrupt the company’s operations.
For decades, CHS and its predecessor firms have had one boot in the global grain-marketing business as an exporter of U.S. grain, most of it grown by its farmer members. Six years ago, president and CEO John Johnson began to push for CHS to place its other foot there and buy South American–grown soybeans to sell worldwide, and wheat from Australia and Eastern Europe to ship to the Pacific Rim. That would mean going head to head with major players in agribusiness—Cargill, Bunge, and Archer-Daniels-Midland.
The only possible objection to the idea: CHS is owned by 60,000 U.S. farmers directly—and 350,000 indirectly through 1,000 locally owned co-ops. How could Johnson convince Midwestern farmers to go along with his plan to open offices outside the United States? And to sell other countries’ grain?
But Johnson and his management team were able to prove to skeptics that having CHS sell other countries’ soybeans, corn, and wheat as well its own members’ production was essential to the company’s long-term financial strength. In other words, to continue selling its members’ grain and soybeans, it also needed to be a year-round source for these crops, even when its members’ soybeans were still in the ground.
“If we are going to be competitive 365 days a year, we need to be positioned to originate grain in those major areas,” Johnson says.
And originate it 365 days a year.
The Big Two
CHS became the biggest ag cooperative (perhaps more accurately, a company owned cooperatively) in the U.S. by coming out on top of an industry consolidation process that accelerated roughly a decade ago. It got its name from the merger of two St. Paul–based farmer co-ops, Cenex and Harvest States.
Founded in 1931 as the Farmers Union Central Exchange, Cenex opened its first offices in downtown St. Paul. Harvest States was born in 1983 out of the merger of Idaho-based North Pacific Grain Growers and the Farmers Union Grain Terminal Association, which opened for business in St. Paul in 1938. Over time, Cenex and Harvest States gobbled up other co-ops to become two of the largest in the country.
On June 1, 1998, they came together to form Cenex Harvest States Cooperatives. It was the first time two major regional cooperatives merged, and it’s still the single largest merger of two co-ops that has ever occurred in the United States. In 2000, the company changed its name to CHS Cooperatives. Three years later, it dropped “Cooperatives” from its name—primarily for brevity, but also to suggest that this was a new company, one that wasn’t an old-school farmers’ co-op organization.
CHS is now the third-largest agricultural cooperative in the world. According to the Switzerland-based International Co-operative Alliance’s 2008 Global 300 list (based on 2006 numbers), CHS had $14.4 billion in sales—about one-fourth the $56.4 billion in sales of Japan-based Zen-noh, the world’s largest cooperative.
As it has grown, CHS has branched out in some surprising directions. One: petroleum. The company owns and operates a refinery in Montana and co-owns another in Kansas, as well as 1,200 miles of pipeline. CHS kept the Cenex name for its fuels, which are sold at more than 1,600 retail outlets, including Cenex convenience stores—the 13th-largest such chain in the country. (See the sidebar on page 47.) It also manufactures feeds for all types of livestock, including its own Payback brand. In addition, CHS sells seed for a variety of crops.
Johnson, who grew up on a wheat and cattle ranch in South Dakota, began his career at Harvest States in 1976 as a feed consultant. In 1992, he was promoted to group vice president of Harvest States Farm Marketing and Supply; three years later, he took over as president and CEO. When the merger was completed in 1998, Johnson became president and general manager of CHS and was named its CEO in 2000.
Soon afterward, he set in motion what might have appeared to be a radical strategy. In any case, it didn’t portend to be an easy sell.
At the time, CHS was well positioned to supply corn to its customers year-round. It could fill all of its sales with grain grown in the United States, by far the largest corn-producing country in the world.
But that wasn’t the case with soybeans and wheat. Start with beans. The United States has been the world’s largest producer of soybeans for decades. But production in Brazil has been steadily gaining to close the gap.
“Brazil still has more area that it can plant,” says Terry Roe, agricultural economist with the University of Minnesota. Now the world’s second-largest producer of soybeans, Brazil harvested 31.3 million metric tons in 1998. A decade later, the country had nearly doubled output to 60 million metric tons. “That’s a phenomenal change in 10 years,” Johnson says. “They have become a very, very major player in global soybean supply.” Currently, he adds, “North America is probably the primary supplier of soybeans to the world for seven months out of the year. For five months out of the year, soybeans from South America pretty much take over the market.”
That Brazil was rapidly expanding production was not lost on top CHS executives. Considered a mature market both in terms of supply and demand, the United States has virtually tapped out its fertile fields. In 1998, U.S. farmers produced 74.6 million metric tons of soybeans, according to the U.S. Department of Agriculture. Ten years later, soybean production had risen only slightly, to 79.5 million tons.
“We took on South America first because beans were probably the most predominant grain that we were becoming less and less competitive with by being positioned only in North America,” Johnson says. But Brazil had long been considered a competitor by U.S. farmers. Brazilian farmers’ costs are cheaper; and because Brazil does not have the extensive agricultural infrastructure, including storage, found in the United States, its soybeans pretty much hit the market each spring regardless of whether there’s a global glut depressing world prices. Would U.S. farmers resist CHS’s moves?
Johnson and his management team pressed ahead, believing that they could make clear the advantages of the new strategy to CHS membership as long as they were up front about it. “Early on, we explained why we needed to get positioned in order to be a preferred supplier to customers around the world to represent North American farmers in a way we felt we could to create value for them,” Johnson recalls. “And they got it.”
CHS also helped its cause by promising not to push domestic production aside, regardless of price. “The North American grain of our U.S. farmer owners is always a priority grain,” Johnson says. CHS made it clear that it would buy grain from other nations only when U.S. supplies were unavailable. All told, he notes, “convincing the owners was not nearly as big a challenge as I thought it might be.” CHS’s farmer membership, he adds, “understands it competes in a global business.”
CHS opened its SÃ£o Paulo office in 2003. It’s now a chief supplier to CHS’s customers in China. And it’s a key reason why CHS membership’s cash returns have steadily risen, from $60 million in 2004 to $240 million in 2008. The payout is the direct result of rising net revenues, which have almost tripled in four years, from nearly $11 billion in 2004 to $32.2 billion in 2008. CHS’s 2008 revenues were nearly double its $17.3 billion in 2007. The dramatic increase was due in large part to escalating commodity prices that have since fallen by more than half from their peak in the summer of 2008, but also to sales growth.
Satisfied with how its initial soybean venture worked out, CHS took a bigger step into the Brazilian market in 2006 by purchasing an interest in a newly created grain-export company, Multigrain SA. (CHS now owns 40 percent of Multigrain. The other investors are PMG Trading of Brazil, which owns 20 percent, and Japanese conglomerate Mitsui, with 40 percent.) “That gave us access to warehouses and export and import facilities on the coast of Brazil,” Johnson says. Multigrain has since bought 247,000 acres of farmland, along with related processing operations.
Currently, about one-third of the soybeans that CHS exports come from Brazil. But another growth market for soybeans is Argentina. Together, the United States, Brazil, and Argentina produce more than 90 percent of the world’s soybeans. In 2008, global production was 235.7 million metric tons.
In 1998, Argentina produced 20 million metric tons of soybeans. Ten years later, its production was projected to more than double, to 50.5 million metric tons. “We’ve expanded somewhat into Argentina with plans of getting an office in Buenos Aires,” Johnson says. CHS is now buying soybeans from Argentina and hopes to open an office there by the end of this year. “We figure in South America, we’re really in pretty good shape now,” he adds.
With its overseas soybean business established, CHS has moved into wheat the past couple of years. The United States is the fourth-largest wheat grower in the world, behind the European Union, China, and India. (Canada ranks number five.) Over the past five years, according to U.S. Department of Agriculture (USDA) data, production in the EU, India, and Canada has remained relatively stable. Output in China and the United States has increased by a little more than 3 percent annually. Even with U.S. wheat production expected to jump 22 percent this year, CHS needs other sources of wheat to meet worldwide customer demand.
In 2008, the company launched CHS Europe, after opening an office in Geneva in 2007 and an office in Kiev, the Ukrainian capital, a year later. CHS Europe’s focus is on Black Sea wheat and barley, which it moves to Asia and the Middle East for food use; some is also sold to Europe as feed. About 10 percent of the wheat that CHS exported in 2008 was grown in Eastern Europe.
CHS has also been looking to Australia as a source of wheat. Australia isn’t a top wheat-growing nation, but CHS believes it could produce more. The company’s August 2008 strategic grain-marketing alliance with Sydney-based GrainCorp will encourage Australian farmers to grow more durum wheat, a high-quality variety used primarily for pasta.
On a global basis, the only major wheat-producing country that CHS has not entered into some type of business agreement with is Canada. The vast majority of wheat and barley exported from Canada is sold through the Canadian Wheat Board, a marketing agency jointly governed by farmers and the Canadian government. “There just isn’t much of an opportunity” for CHS in Canada, Johnson says. “But we keep our eye on it.”
Room to Grow
These moves have made CHS the third-largest exporter of U.S. corn, soybeans, and wheat. It sells more than 1 billion bushels, or 28 million tons, of grain a year, domestically and to 60 other countries. China is its largest foreign customer, followed by Japan and South Korea.
CHS still lags Cargill and Archer-Daniels-Midland in the volume of grains sourced overseas. That position likely will be maintained going forward, given the ownership of the companies. Cargill is a privately owned company, Archer-Daniels-Midland a public one (NYSE: ADM). Though CHS is a public company (Nasdaq: CHSCP), its farmer-members own most of the company’s preferred stock (it has no common shares). Because Cargill and ADM aren’t committed to buying grain from a membership group, as CHS is, they can buy cheaper foreign grain first when it’s to their advantage.
With world population predicted to grow about 1.1 percent per year between 2006 and 2015, according to World Bank development indicators, the world’s farmers would need to produce more food next year to meet the growing demand. That’s assuming that everyone eats the way they ate last year. Ag economist Roe says that’s not going to happen.
“There is a change in the make-up of the diet [worldwide] toward more animal proteins,” Roe says. As the developing world moves up the income ladder, aggregate demand for food rises. And according to the USDA, it takes roughly seven pounds of corn to produce one pound of beef, six-and-a-half pounds of corn for one pound of pork, and two-and-a-half pounds of corn for one pound of chicken. “Food supplies are slightly lagging growth in demand,” Roe says. “And that’s why there’s been upward pressure on food prices since 1992.”
Demand growth for animal proteins has been mostly concentrated in middle-income countries, defined by the World Bank and the United Nations as countries with per capita incomes of $936 to $11,455. Countries that meet this definition include China, India, Turkey, Mexico, and Argentina. Altogether, the World Bank classification rates 49 countries as low income, 95 as low-middle to high-middle income, and 65 as high income, based on 2007 gross national income per capita figures.
So for CHS, its members, and customers, there’s room for more growth, even given its large agribusiness competitors.
“The fundamentals of this business are pretty solid,” Johnson says. “We have growing populations around the world. We have growing economies around the world even though we are in a hiccup today. When you look at production agriculture, you have to feel pretty optimistic about this business long term.”
CHS: The Lay of the Land
• Approximately 7,000 employees, 2,000 in Minnesota
• 1,000 member cooperatives, 202 in Minnesota
• 2008 revenue: $32.2 billion in 2008 ($803 million in earnings)
• 2007 revenue: $17.2 billion ($756.7 million in earnings)
• Number 145 on the 2008 Fortune 500 list; number one on Fortune’s 2008 “America’s Most Admired Companies” list in the food and grocery wholesalers category
• CHS has recently opened offices in Hong Kong and Shanghai