Inside Louis Dreyfus Company’s acquisition of Namoi Cotton

Louis Dreyfus Company will use economies of scale to bolster the Namoi Cotton business while pursuing opportunities in northern Australian cotton.

Truck transporting cotton bales
Cotton: Louis Dreyfus Company has been active in Australia for more than 100 years.

Australia’s largest cotton processor and marketer Namoi Cotton started life in 1962 as a cooperative of growers in northern New South Wales keen to establish a commercial cotton venture.

However, the company’s Australian ownership will end this year with French agricultural giant Louis Dreyfus Company buying the remaining 83 percent of shares in Namoi it did not already own for A$105 million ($68 million; €63 million) in total.

Namoi Cotton executive chair Tim Watson told Agri Investor that although some commentators expressed apprehension over the loss of another Australian company – other high-profile deals including Paine Schwartz Partners’ imminent takeover of agribusiness Costa Group, or Advent International’s acquisition of fashion label Zimmermann – the changing of hands is not a concern for him.

“Are you driving an Australian car? We don’t have Australian cars anymore. We’re all working on a global footprint,” he said.

LDC’s takeover may cement that global footprint, but the LDC-Namoi relationship has been under construction since their first joint venture – the Namoi Cotton Alliance – in 2013. Watson expects their strong relationship to continue.

“I can’t say for certain what will happen in five years’ time, but LDC sees value in the Namoi business and the Namoi brand, and they’re certainly long-term supporters of agriculture in Australia, so I don’t think anything significantly is going to change.”

Namoi has withstood many storms in its 62-year history.

In 1971, floods decimated much of the cotton industry’s harvest, with waters only receding from the New South Wales town of Wee Waa where Namoi was founded after 21 days.

“We’ve had to fight from a pretty low base post the 2012 disaster to get this company back on a good, even keel”

Tim Watson, Namoi Cotton

More floods, hailstorms, insects, and unfavorable currency movements plagued the next decade. Fast forward to 2008 and drought conditions forced six of Namoi’s gins almost to a standstill. In 2011, floods hit Namoi Cotton sites including the Moomin Gin and Toowoomba corporate office.

Amid cotton price volatility the following year – Namoi’s 50th anniversary – the company posted a net loss of A$67.5 million.

Watson said the business has been working its way back ever since.

“We’ve had to fight from a pretty low base post the 2012 disaster to get this company back on a good, even keel: we’ve reduced our debt; we’ve had a couple of successful capital raises.”

He said LDC will provide Namoi with the stability to endure future events.

“One thing we can’t change is the weather. We need to ensure that the company’s strong enough to withstand those droughts, because they will come. That’s the big advantage with combining Namoi with a company like Louis Dreyfus and the balance sheet it’s got.”

Watson said after the 2012 “disaster” Namoi did not have the capital to invest in its cotton gins, apart from minimal maintenance.

However, with the backing of LDC, a $21.6 billion company, Namoi now has the ability to pursue a longer-term approach.

Cotton field
Cotton Australia general manager Michael Murray says northern Australia represents the industry’s biggest opportunity for growth.

A natural progression

LDC Australia managing director Tony Geitz said the Namoi acquisition is a “natural progression” of LDC’s involvement in the company, which includes two joint ventures: the aforementioned Namoi Cotton Alliance and Namoi Cotton Marketing Alliance.

“If you look at places like the US, India, China, and Brazil, which are all large producers, efficiencies are driven by volumes.”

Tony Geitz, Louis Dreyfus Company

 

“The proposed investment in Namoi – which is one of the leading cotton processing companies – is very much aligned with LDC’s commitment to Australian agriculture and the broader cotton industry as well.”

Geitz said LDC will keep operating all 10 of Namoi’s gins across NSW and southern Queensland, as well as its Toowoomba office, while also retaining the Namoi brand name.

He said LDC will leverage its reach across global markets to secure a competitive price for farmers, while looking for efficiencies across supply chains to drive the company’s costs down.

“The biggest lesson we have from other countries is that it’s very important to drive higher volumes through our ginning assets.

“If you look at places like the US, India, China, and Brazil, which are all large producers, efficiencies are driven by volumes.

“Ginning assets have a large amount of sunken costs, and the economies of scale that you generate through additional volume on your variable costs become very important.”

A northern migration

LDC’s acquisition of Namoi Cotton comes along with Namoi’s 20 percent stake in the Kimberley Cotton Company, as well as its contract to build and operate KCC’s Kununurra gin in the far north of Western Australia.

The gin will serve growers in the north who may otherwise have to drive their cotton up to 3500km to the nearest gin in Queensland at great cost.

“There is still capacity for more rain-fed hectares to go in, but generally the opportunity for the industry to grow at present is across northern Australia”

Michael Murray, Cotton Australia

Geitz said LDC will pursue similar lines of investment and has already partnered with WANT Cotton to manage its gin in Katherine – the Northern Territory’s first cotton gin, which held an official opening ceremony in December.

“With potentially 15 ginning assets along the east coast and in northern Australia, it will require us to continue to invest in those assets to make sure that they’re operating efficiently and really trying to drive better value through that investment.”

Ginning in the north also makes sense from an export perspective, with the port of Darwin just 1600km from the port of Semarang in Indonesia – one of Australia’s biggest customers for cotton.

Industry advocacy group Cotton Australia general manager Michael Murray said that investors have been looking to diversify into the region, spurred on to an extent by the Murray-Darling Basin Plan’s impact on water availability in NSW.

“The opportunities to expand in the traditional cotton heartland of the Murray-Darling Basin are very limited in large part due to the Basin Plan, but also production in terms of hectares has at least peaked.

“There is still capacity for more rain-fed hectares to go in, but generally the opportunity for the industry to grow at present is across northern Australia.”