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China's Food Giant Emerges as Leading Exporter of Brazil Soy

(Bloomberg) -- Cofco International Ltd. has already overtaken some of the world’s oldest agricultural traders to become one of the biggest shippers of soybeans in Brazil, the top exporter. Now, the Chinese food giant is considering acquisitions that would extend its position even further.

The company is looking into buying warehouses and other facilities related to logistics deep in Brazil’s agricultural heartland, according to Valmor Schaffer, Cofco’s head for South America.

"There will be surgical investments in strategic areas," Schaffer said in an interview at Cofco’s regional headquarters in Sao Paulo. Most of the spending will be in Mato Grosso, Brazil’s top soybean state that accounts for a quarter of the country’s total output.

While century-old traders took decades to build a leading position in Brazil’s oilseed market, Cofco has been able to amass a similar stronghold within just the last couple of years. Shipping line-up data signal that the Chinese company in 2017 exported more than Archer-Daniels-Midland Co., Cargill Inc. and Louis Dreyfus Co., -- the A, the C and the D in the so-called ABCD quartet that dominates global agricultural trade. It’s become the No. 3 exporter, trailing only Bunge Ltd., the B, and Tokyo-based Marubeni Corp.

Cofco exported about 7 million metric tons of soybeans from Brazil in 2017, including shipments also made by companies recently acquired by the Chinese group, according to line-up data from Williams, a Brazilian shipping agency. That’s jumped from 2.4 million tons in the previous year. The figures only account for shipments where the exporting agency was disclosed, putting the nation’s total at 67.7 million tons last year. Brazil’s grain exporter group Anec pegs the total at 68.3 million.

The Chinese company is still reliant on other trading houses when it comes to supplying its Asian crushing plants and is now seeking more ways to acquire crops directly from Brazil’s farms.

"We want to connect the farmer in Mato Grosso to the Chinese consumer," Schaffer said. The company plans to double crop purchases from Mato Grosso farmers in the next few years, he said. "This should put us in a superior position."

Cofco’s strategy has upended the traditional supply chain, where trading houses acted as middle men between farmers and consumers. The disruption comes at a tough time for the ABCD’s of the world, which are also contending with historically low grain prices and a prolonged period of subdued market volatility.

"China is just cutting out the competition at source," said Alvin Tai, an analyst at Bloomberg Intelligence in Singapore.

China is the world’s biggest buyer of soybeans, used in everything from cooking oil to animal feed. Brazil’s dominance as a supplier has grown in recent years as bumper harvests made prices more competitive against the U.S. On Friday, soybean prices in Chicago fell to their lowest in two weeks amid prospects of another big crop in Brazil.

Cofco didn’t comment on Williams’ line-up figures, but Schaffer said the company exported about 7 million tons in the last year, while declining to specify how much came directly from farmers. Bunge and ADM declined to comment on Cofco’s expansion and on their export volumes. Dreyfus’s press office said the company’s purchases in Brazil are "much larger" than estimated by Williams’ line-up data, while declining to disclose the actual figures.

Cofco entered the Brazilian market through a $4 billion buying spree that saw the company take control of Hong Kong-based Noble Group Ltd.’s agritrading business as well as Dutch trader Nidera BV in 2014. Since then, it has focused on fully integrating the teams while also facing hurdles including a $150-million accounting hole in 2016 and allegations of slave-like conditions by Brazilian prosecutors last year. It also went on to buy the remaining minority stake in Nidera, with the deal closing in February 2017.

The company has since enacted a big cost-management program that made it more competitive, allowing it to grab a greater share of the exports, Schaffer said.

"We’ve left 2017 extremely prepared for the challenge of supplying China’s increasing demand and turning Cofco into not only a large-scale company, but also a profitable one," he said.

Cofco’s soybean demand exceeds 20 million tons annually and that will likely top 30 million in the coming years, Schaffer said. The Brazilian unit is the main supplier for the parent company, accounting for more than half of volumes -- including those originally purchased by other traders. Still, the company wants that share to keep rising.

"We need to gain scale in origination to continue supplying Chinese demand and growing as suppliers inside our company," Schaffer said.

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