ONE of Archer Daniels Midland's (ADM) most senior executives has described competition among global agricultural companies as "brutal" but argues larger players will be well placed to take advantage of growing Chinese demand for food.
US-based ADM is trying to buy GrainCorp in a $2.7 billion deal being considered by the board of eastern Australia's biggest grains handler.
It would give ADM a strong foothold in Australia, which due to its proximity to Asia and the Middle East enjoys lower freight costs to customers than many of its offshore rivals.
In an interview with The Australian Financial Review ADM chief operating officer Juan Luciano, who presented ADM's offer to GrainCorp chairman Don Taylor in Sydney on October 19, outlined his company's bullish view on global agricultural markets and how the Illinois group hopes to benefit.
"The fundamental trends in the industry are not only population growth but incredible social transformation as people move from $2 a day income to a little bit higher than that," Mr Luciano said.
Higher incomes would fuel demand for protein, which required grain in the form of animal feed.
"China is 20 per cent of the global population but has only 8 per cent of the arable land and 6 per cent of the water," he said.
Mr Luciano declined to comment on GrainCorp beyond what he told investors in the US overnight Tuesday, when the company delivered a drought impacted 60 per cent fall in first quarter earnings.
"We like the fact that this is a global business with a lot of scale," Mr Luciano said.
"We like that it has a good position with their customers."
The battle for GrainCorp could intensify after Russia's biggest port operator, Summa Group, was linked to a possible counter-bid as it raised cash for Asia acquisitions.
Mr Luciano said the increasing importance of scale did not mean there was no space for smaller operators with a regional focus but it often made sense to leverage larger distribution networks.
"There are certain business models and certain groups that could see an acceleration in prospects by being part of a larger entity as you can access more customers," Mr Luciano said.
He said it was also becoming more important to be agile, allowing local management in regions to make quick decisions, while being a good operator with efficient transport systems was critical because margins were "thin".
With a market capitalisation of $US18 billion ADM is nearly 10 times larger than GrainCorp and ranks as one of America's 30th largest companies by revenue.
Its deep pockets allow it to spend between $1 billion to $1.5 billion a year on capital expenditure.
Mr Luciano said 75 per cent of that was spent on improving its costs through investing in storage sites, rail and port operations.
By comparison, GrainCorp's capital expenditure was about $100 million in fiscal 2011.
ADM has a colourful history, including links to the Watergate scandal and charges and fines for price fixing, largely in the 1990s.
