Lead Story

Kneading a growth story

Having perfected the art of trading in grains, Cargill now wants to make its mark in branded staples

Siraj Chaudhry was on his honeymoon in Pachmarhi, Madhya Pradesh, in November 1992 when the 25-year-old came across a day-old newspaper in the hotel lobby. The ITC executive glanced through it, saw an ad for a commercial manager of a proposed citric acid plant in Uttar Pradesh and told his new bride, “That’s the next company I am going to work for.” The company was Cargill, the-then 127-year-old agribusiness giant Chaudhry had heard much about and been impressed by. She wasn’t as enthusiastic — ITC had a stellar reputation while the American multinational was still new in India and was soon going to be in the news for all the wrong reasons.

You couldn’t really fault Chaudhry’s wife. The early 1990s were a fertile time for MNC-bashing and Cargill was among those that bore the brunt — in 1993, agitating protestors vandalised its office in Bangalore. But Chaudhry was determined to get on-board even as Cargill spent the next two years interviewing him since the citric acid project was shelved. “They must have liked me but they didn’t know what to do with me. They didn’t want to let me go so they kept interviewing me to keep me happy,” he recalls with a laugh. Chaudhry joined Cargill in November 1994 in the sugar business and when, in March 1995, India opened up edible oil imports, he promptly moved there since that was his forte at ITC and prior to that, at State Trading Corporation.

Nearly two decades later, it seems clear that Chaudhry made the right decision. Not only is Cargill India an important procurement centre for the parent, it is also the second-largest buyer of grains in the country, after the state-owned Food Corporation of India, moving close to 2.5-3 million tonne of grains every year. India is only one of three markets, besides Brazil and Venezuela, where Cargill has a consumer presence but the lack of experience clearly hasn’t been an obstacle. The Gurgaon-headquartered Cargill India is not only present in branded edible oils and atta, its institutional sales ensures that there’s a bit of Cargill in almost every bite you take, from baby food to the flour in Parle and Britannia biscuits or the sugar in your cola. How, then, did Cargill India grow so big, so quietly? 

Breaking ground 

It wasn’t easy. In the late 1990s, when BK Anand went around introducing his company to traders and commission agents in the wheat mandi of Anupshahr in UP, the name Cargill drew blank stares. Now the head of Cargill India’s grains and oilseeds crush business, Anand recalls, “We would tell traders that Cargill belongs to the Cargill family, headed by James Cargill and so on. But the young traders used that to have a laugh at our expense. On our repeat visits, they used to introduce us to their fathers and grandfathers saying, ‘Inse miliye, yeh saab Cargill Seth ke betein hain.’ That was how we were greeted in the earlier days.”

Fifteen years later, the company is taken much more seriously. The flagship business accounts for 50% of overall sales, with grains, oilseeds, sugar and cotton accounting for the bulk, at ₹5,191 crore. But not a rupee’s worth of grain is grown by Cargill, on its own or through contract farming. Instead, the company sources everything from the market yard and manages inventory for its clients. Edible oils are sourced either directly from the parent or from shippers in Argentina, Brazil, Indonesia, Malaysia or Ukraine. 

This is how Cargill has built its reputation as a commodities giant in over 65 countries: its heft flowing from its super-efficient supply chain. Over the years, the company established deep ties with farmers, millers, grain traders and shippers all over the world. These relationships help it source, process and distribute grain from an area of surplus to where it is needed for either industrial or consumer use.

Sounds simple? It’s anything but that, given the number of uncontrollable moving parts. Crop output is subject to the vagaries of weather, and shipping grains across oceans comes with its own risk. But over the decades, Cargill perfected walking this tightrope to a fine art and is now the biggest dry bulk charterer in the world. Its chartering expertise is availed of not only by its clients but its competitors as well.

India, though, comes with its own set of issues. Infrastructure, not surprisingly, is one of the biggest. Anand says that, at any given point in time, Cargill has roughly 100 to 160 different grain and oilseed locations in the country. “These are all flatbed (open storage) warehouses, which are hired on short- and long-term lease from various state or central warehousing companies. Not only is using so many locations uneconomical, nowhere in the world does Cargill use flatbed storage but here.” But rather than set up its own warehouses, Cargill has so far followed an asset-light model — it has only one storage facility, at Rajasthan, acquired through its buyout of AWB’s commodities management business in 2011.

Then, Indian ports are not equipped to turn around bigger vessels. So, Cargill restricts itself to small size vessels of 15,000-25,000 tonne capacity. Anand says, “They are a little less economic from the freight point of view, but it evens out for customers in the form of avoided detention and quality issues.”

Also, unlike a China, India is not a global supply and demand shaker and in commodities such as edible oils and pulses, being chronic importers. Palm oil is imported from Malaysia and Indonesia, soyabean from Argentina and Brazil, while sunflower oil comes mainly from Ukraine. Yes, we tend to be exporters in wheat, sugar, corn and cotton or even onions in spurts, depending on the whim of policy mandarins, but largely we are price takers owing to our low productivity.

And nowhere does it hurt more than in edible oils where not only is oilseed production low, but even a rise under area of cultivation is not helping. Govindbhai Patel, co-founder of GGN Research and a veteran of many crop seasons, points out, “The area under soya has increased, but soya is a low oil-content seed, so even though its production has increased, it has not contributed to the availability of edible oils. This year, our total edible oil supply may increase by 400,000 to 500,000 tonne, while incremental growth in consumption will be 800,000 to 900,000 tonne. So, that is the minimum incremental import we have to do.”

Of course, the shortage of high oil-content seeds such as groundnut, rapeseed and sunflower presents its own opportunity for edible oil importers such as Cargill and has enabled others such as Adani Wilmar to build multi-billion dollar businesses in the country. The Ahmedabad-based Adani Wilmar, for instance, had sales of ₹14,253 crore and profit of ₹75.42 crore in FY13, and has a 30% share of the 4 million tonnes branded edible oils market. Says Pranav Adani, managing director, Adani Wilmar, “Our ideal mix of domestic and port-based processing infrastructure, strong brand and global trading expertise of our joint venture partner, Wilmar International, helped us become the leader in the branded edible oil segment.” For its part, Cargill hasn’t been slow to react, either. The company’s foods business now accounts for nearly half its consolidated sales (more on that shortly). 

Cargill has also positioned itself to take advantage of trading opportunities in wheat, sugar and cotton. India is the largest consumer and the second-largest producer of sugar and for the past 13 years, Cargill’s sugar business unit has been helping millers, traders and end-users secure supplies of raw and refined sugar. Depending on the demand and supply conditions at play, the volume handled has varied from as high as 1 million metric tonne to 50,000 metric tonne.

For the sugar industry, regulation and interference have always been a sore point, until now — in April 2013, the government partially decontrolled prices, allowing companies to sell their produce in the open market. Swati Shukla, business head, sugar business, feels that post-deregulation there could be a whole lot of opportunities for millers looking to de-risk. But while trading opportunity will certainly increase, so shall risk. Besides non-delivery and credit default, the other big risk is exchange-rate fluctuation and that hurts Cargill’s interest across the board.  

Money in the bank

While rising inputs costs have been a common bugbear for all edible oil companies, Cargill tries to keep costs lower, courtesy its forecasting and trading edge. Chaudhry says, “While we don’t have control on international edible oil prices, we have a better ability to forecast prices and take positions. This keeps our average cost lower than other players in the category.” Cargill’s shield against forex risk is its trade and structured finance (TSF) unit. The 170-people strong global division has a balance sheet size of a couple of billion dollars. Its funding is a mix of internal and partner bank financing.

The India team consisting of 15 people is an important cog and its total contribution is about 10-12% in terms of balance sheet and profit. TSF helps the respective business unit finance either its suppliers or buyers depending on how the transaction is structured. Says Gopul Shah, treasurer and managing director, trade structured finance, “Forex and commodity hedging do not happen in isolation. Whenever we work on a transaction, we monitor all markets, be it capital, futures or OTC, and that gives us a good understanding of risk. All those factors are taken into account when we price our services.”

Depending on the opportunities available, Shah either carries the risk on his books, places it with a counter party or hedges it using exchange-traded products. He explains, “Credit rating is static because it is always determined at a particular point in time, counter-party risk is dynamic because it changes everyday. Our business units constantly monitor these relationships by keeping their ears to the ground.” 

In partnership with Deutsche Bank, Cargill has also has put in a cash management system in place to pay farmers and traders. Shah says farmers are happy working with Cargill owing to its prompt payments. “They know they don’t have to spend sleepless nights worrying about receiving their money; the money will come on time. We reach about 2,000 locations all over India.” The same cash management system is also useful for collecting cash from small traders who buy 500 or 1,000 litres of edible oil from an overall shipment of $30-40 million that is refined and distributed all over India. Indeed, a lot of Cargill’s business comes from small traders and farmers, who deal with it either as suppliers of grain or as consumers of animal feed. 

High protein

Anand recalls a recent interaction with farmers at Etawah, UP. Cargill sources wheat, barley and corn from the district and earlier, farmer queries would be to the tune of, “How do we grow more?” “How do we get a better price” or “Why don’t you buy our onions and garlic?” This time, though, not only farmers but traders, too, wanted to know how they could increase milk productivity from the existing 4 litres a household to 10 litres. “We soon realised that milk-buying companies have started going to interior areas and knocking on the doors of farmers. Milk that used to sell at ₹12-14 a litre today sells at ₹36 and has become a good source of secondary income.” Farmers, therefore, are more open to suggestions on what they need to feed their cattle. And this is where Cargill India’s increased focus on animal feed and nutrition fits in neatly.

Worldwide, too, this is a priority area for Cargill and in 2011, it beefed up its presence with the $2.1-billion buyout of global animal nutrition company, Provimi. “Within the animal feeds division, we say that we feed anything that moves. That includes dairy, poultry and aqua, which, besides fish and shrimps, also include alligators,” says Achyuth Iyengar, head, animal feeds and nutrition. And no, he’s not kidding about the alligators: globally, the company is the No.1 producer of alligator, crocodile and caiman feed; customers include breeders, zoos and national parks.

But despite the potential, the animal feeds business has its own challenges. Over 90% of the 18 million metric tonne (valued at ₹102,000 crore) Indian dairy feed market is unorganised — there’s a feed mill at almost every 100 km across India. Most small farmers use this home-mix of grass fodder and leaves available from such feed mills rather than buy composite feed sold by the likes of Cargill India. 

Growth, therefore, is a function of the pace at which unorganised users switch to organised and is different across the country. In Punjab, Haryana and Rajasthan, for instance, adoption rates are much faster because farmers are open to experimentation, while in Kerala, where there is not much forage, the market has shifted completely to feed. In Karnataka, Andhra Pradesh and Tamil Nadu, the switch is lower and it is highest in Gujarat and Maharashtra owing to the presence of cooperatives. As a start, therefore, Cargill — which entered the animal feed business in 2006 — is focusing on markets such as Punjab, Haryana and Rajasthan where farming practices are progressive and whose farmers are open to suggestions on increasing yield at a cost.

The poultry market is exactly the opposite of the dairy market — the ₹36,000 crore, 15 million metric tonne market is 90% organised; with players such as Godrej Agrovet and Venky’s present, the market has been growing at 8-10% over the past decade. Here, so far, Cargill has stayed away from integrators who have their own feed mills and is instead focusing on the backyard farmer who has 500 to 2,000 chickens at a time. Similarly, the aqua feed market is valued at ₹9,000 crore and the volume of 1.5 million metric tonne is growing at 5-6% every year. But where shrimp feed is entirely organised, 70% of the fish feed market is unorganised as people use de-oiled rice bran or groundnut cake as feed.

Given that all these businesses have different cycles, it is Iyengar’s task to balance an up-cycle in dairy with the down-cycle in aqua or poultry. “In winter in the North, from October to April, dairy will have its peak season while for aqua, December to February is the worst season as temperatures drop, fishes become dormant and don’t eat. As for the poultry business, it depends upon the replacement of chicks,” he says.

Such ease with talk of poultry and fish seems incongruous coming from the vegetarian Iyengar, but he’s a veteran who has gone through the rites of passage as the general manager for the US aqua feed business. Hear it from the man himself: “Picture a vegetarian Indian guy, 5’10”, who goes into a small town of 3,000 people in southern Louisiana, and meets a 6’3” Texan sales manager and a 6’1” African-American production manager. It is a culture where boiled crayfish with onions and potatoes is considered a delicacy. I had to eat that as a way of showing acceptance and solidarity.”

Routine animal feeds business, though, is devoid of any such excitement, even though 80% of the 300 employees in Iyengar’s team are under 35. “Milking happens at 5 am. So, the employee needs to get up at 4 am and head out on his motorbike to collect milking statistics. Or you need someone to go out in 40-45 degree heat to a shrimp farm and test the pH and ammonia levels and advise the shrimp farmer on what to do that day,” says Iyengar, explaining the team composition. 

Aqua feed, especially, is a complex business, he adds: unlike for a buffalo or a chicken where you can see the feed being eaten, in aqua you do not know how much of the feed was actually consumed. “You have to be completely sure of what you are doing; otherwise, because you could ruin that farm,” he adds. For now, times are good. This year shrimp farmers in Andhra Pradesh, which accounts for 70% of the market, are having a whale of a time as a disease outbreak (early mortality syndrome) in China, Thailand and Vietnam has taken supplies off the market. Consequently, shrimp prices are at a 12-year high, and with it farmer delight too. As it happens, apart from animal feeds, branded staples is the only business where Cargill India connects directly with consumers and has big plans.  

Home bound

When it came into India, Cargill clearly had the global expertise but not the assets or the brands. Today, its foods business clocks a turnover of about ₹4,500 crore, ₹3,000 crore of which is edible oil sales to retail consumers and about ₹1,500 crore is institutional sales, which includes flour, sugar, edible oil, ingredients etc. Most of its institutional customers for edible oil and flour were in the food space and since most foods have an element of oil or flour, Cargill decided to enlarge its footprint by moving into the consumer space. 

That was an unusual step for the multinational — as we mentioned earlier, only in three markets does Cargill have a consumer-facing presence; the nearly 150-year parent is largely a non-consumer facing agribusiness company and has so far shown a decided preference for remaining so. So, what explains the divergence from the norm? The major reason for the move was that most food in India is consumed at home. Most developed countries consume a high amount of processed foods: bread, pasta, noodles, pre-cooked bakery stuff or vegetables or meat that has been conditioned or seasoned. In India, in contrast, everything comes in pretty much fresh, be it meat or vegetables. Granted, processed foods are now making inroads but the base is minuscule and biscuits and snacks still constitute the biggest chunk. “As the market is so consumer driven, we could not have attained significant scale just through the B2B model. We had to include the consumer and that is why B2C became important here,” explains Chaudhry.

There’s another reason. By its very nature, a commodity business is low margin; therefore, a high throughput does not necessarily mean a steroid-powered bottomline. That is clearly visible in the case of Cargill India, where the net margin is estimated to be around 1% to 2%. “Cargill’s quality is comparable with leader Adani Wilmar but even while its capacity has increased, its volume in India has not increased commensurately for a global player of its size,” points out GGN Research’s Patel. While Patel thinks Cargill should step up its brand building and marketing efforts, the company has been precisely doing that for the past couple of years. But when it initially entered the consumer space, there was one major problem. Since the decision was a move away from the parent’s traditional focus on institutional customers, there was no template to draw from. Cargill’s consumer focus in India, therefore, has been an exercise in trial and error. 

The first step into the branded staples space was with the launch of NatureFresh atta in 2001. Cargill was one of the earliest entrants in the space but didn’t have enough conviction to take advantage of its first mover status. By 2004, the company had withdrawn its brand from the market.

Recollects Viraraghavan S, director, sales and marketing, “The parent asked us to step back and look at it in an integrated manner and that is why we continued with the NatureFresh brand in the edible oils space, which was familiar to Cargill.” On his part, Chaudhry says, “In hindsight it was a mistake to get out of the atta business. It would have been better if only we could have sustained it a little longer. We gave up a little sooner than we should have.”

The strategy adopted for growing branded edible oils, though, was inorganic. In 2005, Cargill took full control of its joint venture with Pune-based Parakh Foods, bringing the Gemini brand into its fold. Since then, it has made three more acquisitions, including Rath, Sweekar and Sunflower. Exact numbers aren’t available, but all Cargill acquisitions have been reported to be in the ₹40 crore to ₹300 crore range. 

Most branded edible oil companies are using the perception of health to sell. As a consequence, olive oil is considered the healthiest, or sunflower is considered healthier than soyabean or palm oil and vanaspati comes at the bottom of the heap. In such a scenario, why has Cargill acquired not one but two vanaspati brands (Rath and Sunflower)? Chaudhry says, “Our strategy has really been about building access before assets. Building assets here also means buying access. That has been one of the drivers behind buying brands, which means I get access immediately.” 

But isn’t vanaspati a dying category? Chaudhry justifies, “We sell about 10,000 tonne a month of vanaspati and the biggest selling market for Rath is North India. It is the only branded palm oil and links in well with our existing plant at Kandla. Sweekar and Sunflower are Maharashtra brands. While Sweekar is national, its largest sales happen in Maharashtra. The Sunflower brand is available in South and West India, but its largest sales, too, happen in Maharashtra. Given our large share in Maharashtra through Gemini, those two brands became a natural fit.”

Importantly, Cargill has picked brands with a strong regional presence, a clear indicator of its current B2C strategy: grow the market one region at a time. It’s a strategy that competitors, too, have taken note of. “Cargill has good sourcing capabilities backed by good manufacturing practices. It has acquired a few regional brands and that seems to be its growth strategy,” says Adani. But he is not sitting tight either. “Along with value-added oleochemical products, we have further improved our product mix by offering high value products such as Fortune rice bran and diversified into agri products such as rice, besan, pulses, soya nuggets etc,” adds Adani. 

Cargill’s strategy maybe regional but it has got three-fourths of the country covered. It sells soyabean, mustard and palm oil under the NatureFresh brand in North, Central and East India. And through its sales team of 300 executives and 1,500 distributors, Cargill’s branded edible oils such as Gemini and Sweekar, as well as vanaspati brands Rath and Sunflower are available at 250,000 outlets across India. Its presence in South India, though, is weak both in terms of assets as well as distribution. Through Gemini, it does have a presence in Karnataka but is nearly absent in Andhra Pradesh, Tamil Nadu and Kerala. Chaudhry explains this vacuum. “We have refrained from investment in the South due to overcapacity but will assess the opportunity at an appropriate time.”

Cargill has re-entered the branded atta business as well. The current branded atta market is valued at ₹4,000 crore and accounts for about 3% (2 million tonne) of the overall atta market (64 million tonne) by volume. But it’s also a very crowded market with several national and regional players. So, why the comeback? “Because now we have a distribution network for branded edible oil and the cost of putting another category onto that distribution network is much lower,” says Chaudhry.  

And this time round, the company is relying on a clear differentiator to stand out — its atta has the coarse chakki atta (mill flour) feel that will appeal, Cargill believes, to most unbranded atta users. “All branded atta offerings are targeting users seeking convenience, but 90% of the population still buys chakki atta. Other brands do not have that touch and feel and we have been able to mimic that,” says Viraraghavan. Having launched nationally in August 2013, the company is targeting a 5% market share in the first year. As it happens, flour is a big part of Cargill’s institutional foods business as well. 

Launch enabler 

About ₹1,500 crore of Cargill’s food revenue comes from its institutional customers. On offer is a range that extends from something as basic as palm oil to a patented cholesterol-reducing ingredient. The client list includes names such as Britannia, Parle, Pepsi, Coke and McDonald’s, and Cargill supplies various ingredients to all of them. For a company that manufactures noodles, for example, some of the flour, the oil and texturiser could be from Cargill; in a chocolate, the fat could be from Cargill; while in a biscuit, the flour and fat could be from the company.

“Large customers such as Parle or MNCs such as Nestlé and Kraft were saying, ‘You do so much for us in other parts of the world, why aren’t you supplying us more than edible oils here?’,” says Viraraghavan. Consequently, the food ingredients business was started in 2010. Now, says Viraraghavan, Cargill is developing a back-end for its customers so they launch their entire range of products in India. For instance, unless Kraft is supplied specialised flour, it cannot launch its complete portfolio of high-end cookies and snacks in the country. Similarly, a Minute Maid variant in the US is co-patented with Corowise, a Cargill-patented cholesterol-reducing ingredient. 

Cargill is also sensing a growth opportunity in helping its MNC customers deal with rising input costs. “Several consumer food brands have grown on the back of very aggressive price points, at ₹2, ₹5 or ₹10. Now they are stuck with those price points and are looking at reformulating the products to preserve their gross margins,” says Viraraghavan. 

Lowering the cost of formulation plays to Cargill’s strength as it requires knowledge across ingredients across a variety of products. One hitch, though. Is there not a limit to doing that? After all, costs have gone up across the board and the health angle may come into play once ingredients are tinkered with. Viraraghavan believes there should not be much of an issue. “Though the price difference is huge, it is possible to replace cocoa butter with vegetable fat without compromising on the taste or health aspect. But some of our reformulation may require different labelling so that the consumer is free to decide wisely.” Chaudhry is confident that rising food ingredient sales and growth of the consumer business will lead to more profit stability.  

Point of fruition 

Cargill has continually tailored its approach to suit the fragmented Indian market. Hence, it has a diversified sourcing footprint and operates off a relatively short supply chain. Its facilities, too, are located closer to the raw material point or where the customers are. Cargill has three refineries at Paradeep, Kandla and Kurkumbh with a total capacity of 3,750 tonne per day. It is now expanding capacity by 1,000 tonne per day at the Kandla refinery.

This thinking has also gone into the $100-million investment at Davangere, Karnataka, where it is setting up a corn milling plant with a capacity of 800 tonne per day. Chaudhry says, “Cargill is one of the biggest buyers and exporters of corn from Karnataka. We have a very good understanding of where good corn is produced and how to handle it.” The company is setting up a greenfield unit instead of acquiring one because most corn milling plants in India have been set up for supplying starches to the paper and textile industry, not to serve the food industry. 

As it has amply demonstrated, Cargill’s core strength is moving commodities across and within geographies. Its great sourcing skills are equally matched by timely delivery. Chaudhry says as margins shrink with increasing competition, supply chain efficiency will become even more critical. “Our back-end is an inheritance but we have also built a reasonably well front-end. Given that combination, we are very well placed for the future.” Cargill is already part of our lives, every time we buy some processed food item. If the company has its way, as the years roll by, it will be hard for you to go into a kitchen or restaurant without touching something that Cargill India has processed.