Inside the Chicago School: Ingredion’s Success in the Corn Market

   Inside the Chicago School : Ingredion’s Success in the Corn and a leading global provider of ingredient solutions to diversified industries.

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Lynn Krueger, Hugh Parker and their team run one of the most successful commodity team in what can be considered today as one of the most successful company in Corporate America.

It is not a far-flung business, they don’t trade trendy ethanol nor run a commodity fund like an hedge fund, they just simply do what they know;  supplying their plants with Corn and make quality ingredients out of it for the food industry.

 

CORPORATE

Quick facts:

  • The largest high-fructose corn syrup makers in North-America are Cargill Inc. (Wayzata, Min, Archer-Daniels-Midland Co. (ADM) (Decatur, IL) and Tate & Lyle Plc.( London, UK) and Ingredion Incorporated ( Chicago, IL)
  • Ingredion was formerly known as Corn Products International Inc.
  • The company completed its biggest deal three years ago with the $1.3 billion purchase of National Starch but the business is also driven by high organic growth with adjusted earnings per share that are growing by 10 to 12 % year after year. This is a sweet spot.

By volume their main business is corn fructose, but they do much more than just Food and Beverage Sweeteners; Corn oil, Corn gluten feed, Corn gluten meal, Food and Beverage Sweeteners, Personal Care, Food and Beverage Starches, Industrial polymers, Pharmaceutical, amino acids, antibiotics, vitamins, and degradable plastics.

Do you know ?

Bunge’s attempt to acquire Corn Products International (Ingredion) for $4.4 billion in 2008

Asked by World Grain about the greatest disappointment of his tenure, Bunge’s CEO Alberto Weisser cited his attempt to acquire Corn Products International for $4.4 billion, an effort that ultimately proved unsuccessful.

On Mon Jun 23, 2008, the deal called for the exchange of one share of Corn Products for $56 in Bunge stock, a 31 percent premium to the company’s closing price of $42.90

The transaction was undone in the fall of 2008, in part, by a collapse in equity prices. Bunge shares fell by 64% from May to November — from $119.37 to $42.46.

A BIG Corn Buyer.

There is a difference between a buyer who is willing to buy grain and one that’s needs to buy it, Ingredion is in the second category.

A consistent supply is the single most important thing for a processing company; a plant has to run every day and can’t afford to run out of commodities.

The processor needs a steady supply at a reasonable cost. A reasonable cost is a mix of (quality, reliability, and price). It is big business, the price is a big factor, and it is their job to lower their cost basis if they can, they prefer to schedule a 65 rail-cars train and purge the local basis(price at the location). They will certainly do if they feel that grain is not flowing the way it should. Sometimes they have to do so not only for arbitrage but to avoid serious supply problems.

Since Processors like Ingredion are constantly looking for nice grain, usually they are receptive to the idea of forward sales when you approached them.

 Ingredion logo 1

They run an hungry 20000 MTPD Plant feeded by rail and trucks and located on 5.48 km2 field in the middle of Chicago.

In Canada, the main Corn producing region is Ontario and Ingredion has 3 plants there where they buy a gigantic amount of corn (roughly 2.8 MTPA) about 33% of the crop in Ontario. (It is a big chunk of grain if you compare with global commodities companies handling less or about 1 MTPA.)

Corn Structurual Demand in Ontario

A big buyer in a corn producing region affects the local market structure; one major buyer in a market can become the price maker in rayon of 50 miles.  Smaller buyers relied upon the price of the local market structures and become price takers.

In Ontario, corn produced is used for both feed (60%) and industrial (40%) uses.  80% of the Food industry in Canada is based are based in Ontario, the Guelph-London corridor is Canada’s Agribusiness -Food backbone and the demand is really high for corn, livestock.

Ingredion has a  33% market share in the Ontarian corn market.  Ingredion buy all the Corn they can for their plants and about 82.5% of  Grade 2 produced in Ontario goes to Ingredion.

According to Shelley Wybo (the Queen of Corn),  at their  London, Ontario plant they can buy cheaper, lower grade No.3 Corn if they can buy it at a discount and make the necessary set-up.

However sporadically, it can create some bidding friction in the trade.  An Ethanol plant (namely IGPC Ethanol Inc., another big corn buyer located just outside London).

Another interesting effect of two major agri-business buyers commingled in the same radius is the  the behavior change in the local basis.

More competition into the local basis for grain will diminish the natural crop seasonality at harvest.

Put it another way; it will put a floor on the Local at Harvest.

But  it does not necessarily imply a good thing for farmers since the good selling opportunities rarely coincides with the harvest period anyway/or when Basis High.

I hope you’ve enjoyed this, if you’d like to learn how they manage the success at Ingredion I suggest you to read.

http://www.forbes.com/sites/jennagoudreau/2013/03/18/the-ceo-of-5-billion-ingredion-reveals-her-secret-to-having-it-all/

And https://jacquessimon506.wordpress.com/2013/04/01/midwest-wet-co…nd-hfcs-part-i/

The Trade Shipping and Finance Wizard.

 

 Table: Corn Grading in the U.S

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(GRADE 1,2 = Human consumption, Food Grade)

(GRADE 3,4,5 = are split between Ethanol Producers and Feeders)

References

http://www.fao.org/docrep/005/X0513E/x0513e15.htm

http://www.corn.org/wp-content/uploads/2009/12/NSFC2006.pdf

http://www.ingredion.com

http://edition.cnn.com/video/?/video/business/2013/07/16/leading-women-ilene-gordon-ingredion.cnn

http://www.argocorn.com/index.cfm?show=10&mid=5

http://www.igpc.ca/index.php?page=home

http://www.omafra.gov.on.ca/english/crops/field/corn.html

http://www.usda.gov

Trade shipping and Finance Wizard

Addendum

Ingredion has grown at a faster rate than rising production costs. It’s impressive.

I don’t know a lot of businesses who can reduce costs faster than their earning drops.

 

If INGR stock can be used as a earning proxy, the company has benefited from an unprecedented period of earnings growth despite rising costs.

High Fructose Corn Syrup  (HFCS) prices are quite stable https://jacquessimon506.files.wordpress.com/2013/04/sans-titre3442.png

In 2012, 2013 negative correlation appeared marking a shift in the corn trend, but actually Ingredion and Corn are moving in two opposite directions.

Ingredion 10 years ago was concentrated in Corn Products but

Ingredion 2013 today is more and more concentrated in selling ingredients solutions, specialty starches to food companies who design products that the young consumers like: food that tastes good but is lower in calories.

I think they will continue to do extremely well as they can lower their costs faster than sales decreases ( due to competition and or demand destruction), they have an embedded hedge.

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