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Mitsui Harvesting
Opportunities in Agriculture

by Web Page
Mitsui & Co., June 30, 2013

Temco's grain terminal on the Columbia River is doubling its rail handling capacity. An active response to global market changes

Mitsui & Co has a long history as a grain trader. Traditionally, the focus of our business was purchasing grain at ports in producer countries for import into Japan. This business model worked well until 1995, when China's emergence as a soybean importer started to transform the dynamics of the global market.

Driven by demand for soybean meal used in animal feed, it took China a mere five years to displace Japan as the world's top soybean importer. From 2000 to 2013, as Japan's annual imports fell 40%, China's imports rose to 60 million metric tons -- twenty times the level of Japan's. Currently, Chinese imports absorb one-fifth of global soybean output and account for half of total traded volume.

With China's appearance on the world stage, the stature of Japanese companies in the market place -- including Mitsui -- was diminished. Securing grain to trade became increasingly difficult. More than that, hyper-competition made buyers less interested in minor price differentials than in getting a timely and reliable supply. Clearly, the best way for a trader to win customers' confidence was to secure upstream assets: both grain and the infrastructure for transporting and storing it.

In response to the radically changed environment, Mitsui decided to overhaul its approach, developing a new asset-based trading model built around securing assets in producer nations.

Zeroing in on Brazil

Brazil stood out as the most appealing of the great producer nations. Why? Because while Brazil and the United States both exported the same volume of soybeans at the time, Brazil -- unlike the U.S. -- was nowhere near the limits of its productive capacity. Output there was growing fast (it actually rose 166% between 2000 and 2013 to over one-quarter of total global production), and huge new tracts of land were coming under cultivation as grain production expanded into the midwestern state of Mato Grosso, and to Maranhao, Tocantins and Piaui in the northeast.

Going into an emerging agricultural nation was never going to be problem-free. In contrast to the U.S., where agribusiness has had a century to establish cost-effective river and rail routes to deliver grain from the Corn Belt to either coast, Brazil's transport infrastructure is not yet keeping pace with soaring production. Grain often has to be trucked expensively across country for several days; ships sometimes have to wait months at sea before loading.

Nonetheless, Mitsui judged that Brazil's combination of the potential to increase production and underdeveloped logistics presented the perfect recipe for growth. We just needed to find new partners: firstly, an agricultural producer with its own farmland, and secondly, a grain originator with its own infrastructure.

The Move into Farming: Investing in Multigrain and Xingu

Mitsui spent four years exploring Brazil's agribusiness sector before making a decisive move in 2007. In August that year, we acquired a 25% share in Multigrain AG, an originator chiefly of soybeans, with control of its own storage elevators and ports. Then, in November, we bought a stake in Agricola Xingu SA, a major agricultural producer specializing in the growing of corn, cotton and soybeans on 120,000 hectares of its own farmland. We made Xingu into a 100% subsidiary of Multigrain, which in turn became the operating company for all our agricultural activities in Brazil. We later increased our stake in Multigrain to 45%, buying out our original partners, U.S. agribusiness company CHS and Brazilian grain trader PMG Trading. Multigrain became a wholly owned Mitsui subsidiary in May 2011.

Switching from minority shareholder to all-out owner came with its own challenges. Thanks mainly to the Xingu acquisition, Multigrain had 120,000 hectares of farmland -- an area slightly larger than the entire city-state of Singapore -- in central Brazil. Mitsui, whose expertise was in trading, suddenly found itself in charge of the farming side of Multigrain's business, which CHS had been responsible for until then.

Traditionally, the grain majors like to keep out of the production side. The reason? Farming is perceived as somewhat riskier than trading. Mitsui, however, decided to take up the challenge. Thanks to five years of careful crop rotation, Multigrain's farmland was rich and fertile, and a new law prohibiting majority foreign-owned companies from buying land made the company's 120,000 hectares a more desirable asset than ever.

Reducing Risk through Partnership

Operating the farming side of Multigrain came with two main risks: The first -- and greatest -- was weather risk; next came country risk (Brazil has a somewhat changeable regulatory framework).

Mitsui managed to successfully mitigate both risks with a single deft move: establishing SLC-MIT, an agricultural production joint venture, with SLC Agricola, a branch of SLC Group, Brazil biggest agribusiness company, in August 2013.

SLC Agricola controls around 390,000 hectares of land in 14 locations throughout Brazil. Gaining access to this huge land portfolio means that Multigrain can now shift production of its soybean, corn and cotton crops from the center of the country to different parts of Brazil in line with changing weather patterns, thus significantly reducing weather risk.

Country risk was mitigated by splitting the SLC-MIT joint venture 50.1/49.9, with SLC taking the majority share. As a result, the JV can avoid restrictions on majority foreign-owned firms buying up farmland. The JV arrangement also gives Multigrain's managers the chance to learn from seeing the most up-to-date farming methods and technologies in action.

Getting directly involved in farming has had clear benefits for Mitsui: It has taught us about the challenges the production side of the business faces -- knowledge we can leverage in the trading side of our business. But most importantly, it gives us a presence at the very first link of the whole agricultural value chain, something none of our competitors can claim to have.

There is one other significant point of difference in Mitsui's involvement in farming: our commitment to producing non-genetically modified (non-GMO) soybeans. Although more than 80% of Brazil's soybean output is GMO, we are actively resisting this trend with around 70% of our output being non-GMO. Europe and Japan -- both very substantial markets -- are passionate about non-GMO soybeans. Not only do the non-GMO soybeans that Multigrain grows sell for a premium relative to the GMO variety, they also fit with Mitsui's mission of contributing to society through providing a safe supply of food.

A presence in the world's key producing regions

Mitsui's involvement in agribusiness extends well beyond Brazil. For example, United Grain Corporation (UGC), a company established in Vancouver, Washington, in the United States in 1969, became a 100% Mitsui subsidiary in April 2011. For many decades, UGC was known as one of the largest exporters of wheat in the Pacific North West, but in 2012 the company renovated its export elevator, enabling it to handle corn and soybeans as well. In 2012/13, the United States ranked as the top global grain exporter by volume, and Mitsui plans to keep expanding its grain collection and trade operations there.

Mitsui wanted to build on its solid presence in the United States (through UGC) and Brazil and Argentina (through Multigrain) to establish coverage of the world's top four grain-producing regions. Geographical diversification can act as a risk hedge, helping to protect supply from localized weather events such as drought.

Mitsui moved into Russia by acquiring a 10% stake in Sodrugestvo, Russia's largest oilseed crusher, in October 2012. Sodrugestvo's assets include an ice-free port in Kaliningrad, Russia's largest oilseed-crushing plant and a fleet of 4,000 freight wagons.

The collaboration between our two companies is multifaceted. For example, Sodrugestvo has been able to improve its cash management through a wagon lease back arrangement with MRC1520, a joint venture between Mitsui and Russia's ICT Group. Sodrugestvo uses its wagons and port facilities to supply Mitsui with wheat and barley for export to North Africa and the Middle East, with the first cargo being shipped in October 2013. Developing new markets like these is yet another example of Mitsui using geographic diversification to reduce risk.

Mitsui rapidly went on to establish a foothold in Western Australia through the purchase of a 25% stake in Fremantle-based grain originator Plum Grove in January 2013. When Plum Grove took over New South Wales-based Agrigrain in August 2013, the company's operations expanded to cover the east coast of Australia too. Both Plum Grove and Agrigrain specialize in wheat, particularly wheat for export to Asia.

A robust base and a fertile future

In this way, in less than a decade, Mitsui has evolved from a Japan-focused grain trader to a geographically diversified, fully integrated grain producer, originator and trader serving the global market. More than that, we are advantageously positioned for the future because:

Mitsui is actively exploring the rice business in Myanmar, which was formerly the world's top exporter. We are conducting a feasibility study on building a rice processing plant with Myanmar Agribusiness Public Corporation (MAPCO).

Mitsui has the potential to work with Brazil-based SLC Agricola to produce in Portuguese-speaking countries like Angola and Mozambique, should Africa open up to large-scale agriculture.

As Brazil's northern and northeastern states come under the plow, Mitsui can help construct essential transport infrastructure through VLI, the former logistics unit of Vale, in which we hold a 20% stake.

As both a producer (Brazil) and an originator (Australia, North America), Mitsui is ready to respond should China decided to open its market to corn imports.

With world population projected to rise from around 7 billion now to over 9 billion by 2050, demand for food can go only one way: up. Against such a backdrop, providing people around the world with the food they need makes excellent business sense while also enabling Mitsui to fulfill its mission of making the world a safer, more connected and more prosperous place.

Web Page
Mitsui Harvesting Opportunities in Agriculture
Mitsui & Co., June 30, 2013

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