Private investors should look to team with state-led Chinese acquisitions designed to improve agricultural input quality, according to a lead author of a recent Rabobank report.
Titled A 56 Billion-Dollar Shopping Spree and released last week, the report examines a wave of recent agricultural deals by Chinese companies, namely: CITIC’s $1.1 billion purchase of Dow AgroScience’s Brazilian corn seeds business, COFCO’s $2.25 billion takeover of Noble Agri and ChemChina’s $44 billion merger with Syngenta, among others.
The report concludes that the “shopping spree” is line with China’s 13th Five Year Plan (2016-2020) and reflects state-led desires for higher-quality agricultural inputs, control over import flows and arbitrage opportunities that serve both economic and political ends.
“Having arbitrage options makes sense from a financial-economic point of view – through supplying your own market in the most economical way, or even supplying other countries if opportune,” the report’s authors wrote. “From a political perspective, arbitrage opportunities regarding trade flows give China the option to weigh in regionally and even globally.”
Rabobank farm inputs analyst Ruud Schers, one of the report’s lead authors, told Agri Investor that while controlling import flows and attaining arbitrage opportunities are likely too political to involve foreign investors, participating in investments focused on improving yields for China’s domestically-grown crops could provide opportunities for private equity.
Schers added that while much of China’s investment in the sector is government-led, ongoing efforts to reform state-owned enterprises make the role of private investors increasingly relevant.
“I refer to the difference in the return on assets between SOEs and private players. In general, the criticism is that if you have shareholders in place that are not state-owned, that the focus is too short term. But, on the other side, it also prevents from overpaying for acquisitions,” he said, adding that private investors might also prove to be more skilled in integrating new companies after purchase.
Schers said he has not seen any evidence that recently-reported government efforts to scale back overseas investment in other sectors has yet impacted agriculture, and in the report, Rabobank predicts China’s acquisitions in the sector will continue. Looking ahead, Schers said that investors should expect a priority to be placed food safety investments and technology designed to improve the productivity of domestic livestock.
Even investors not looking to participate directly in China’s efforts to modernize its agricultural sector need to be aware of them, Schers said.
“On farm inputs, over the past 20 years we have seen consolidation in seeds and ag chem, we expect more moves in fertilizer going forward,” Schers said. “The Chinese moves are also spurring some of these developments, so that could actually be an opportunity, not to be part of a Chinese consortium, but being on the other side of the equation with other non-Chinese players that also want to ensure they have a big enough role to play.”