In a $6.1-billion deal, global commodities giant Glencore International PLC will buy Viterra, Canada’s biggest grain handler, this summer, pending regulatory approval.

It will then sell off some of Viterra’s parts to farm retailer and fertilizer producer Agrium and to privately owned Canadian grain handler Richardson International Ltd.

The takeover itself faces little opposition from farmers, some of whom relish the global marketing muscle Glencore would bring to the Canadian Prairies.

Agrium’s role has struck a nerve, however, as it would purchase 232 Viterra farm-supply outlets in a package worth $1.15 billion, becoming the dominant Canadian retail seller of fertilizer, seed and chemicals.

One group, the Western Canadian Wheat Growers, plans to ask the Competition Bureau to force Agrium to divest some outlets in areas where there would be little competition for farmers’ dollars as a result of the deal.

“Within a certain radius, there’s got to be good competition,” said Wheat Growers’ executive director Blair Rutter.

Some towns have only Agrium- and Viterra-owned outlets, and the Competition Bureau should also look at which independent dealers are supplied by Agrium to get a clear picture of how much competition there is, especially in southern Alberta, Rutter said.

Agrium already operates 65 Canadian stores under the Crop Production Services (CPS) banner, and is the top farm retail supplier in the United States.

For Wild Rose Agricultural Producers, the largest farmer group in Alberta, Agrium’s potential dual role as Canada’s biggest nitrogen fertilizer producer and its largest farm supplier creates the most concern.

Minority stake

By adding Viterra’s minority stake in the Canadian Fertilizers Ltd. plant at Medicine Hat, Alberta, Agrium would own 53 per cent of Canadian ammonia production capacity, and 49 per cent of urea production capacity, according to consultant Informa Economics, which reviewed the takeover for the Saskatchewan government last month.

“That’s the real concerning part, having that much ownership of the fertilizer part causing us trouble down the road,” said Lynn Jacobson, a farmer and president of Wild Rose, which plans to ask the bureau to scale back Agrium’s purchase.

Kevin Helash, Agrium’s regional manager of retail for Canada and the Pacific Northwest, said there will still be plenty of farm-supply competition since the cost of opening a store is as little as $150,000.

Agrium competitors would still make up two-thirds of the market, he said.

The Competition Bureau has already said it won’t block Glencore’s takeover of Viterra, but has not yet ruled on the side deals with Agrium and Richardson.

The Canadian government will decide in a separate process whether Glencore’s take-over of Viterra is of net benefit to Canada.

The Grain Growers of Canada sees a legitimate competition concern about Agrium, but only in some pockets of the Prairies, said executive director Richard Phillips.

“Ninety per cent of what Agrium is doing will be fine with producers,” he said, adding the group will not make a submission to the bureau.

GROW, a group of independent farm-supply dealers, sees Agrium’s potential new clout as mostly positive, since its expertise is in crop inputs rather than grain handling, said general manager Greg McDonald.

Suppliers nervous

But McDonald said farm suppliers are nervous about Agrium’s strength in the wholesale production of nitrogen-based fertilizer. Potentially, Agrium could supply its own stores more cheaply than it would sell to competitors, he said.

“We’re a bit concerned when one of your big suppliers also becomes one of your biggest competitors,” McDonald said.

Agrium will continue to run its wholesale and retail operations separately, Helash said.

“We do have to look every one of our customers in the eye and say, ‘we’re selling to you competitively.’”

Agrium is the No. 3 nitrogen producer globally, and faces stiff wholesale competition in Canada from the world’s biggest maker of the crop nutrient, Yara International ASA.

“The pond is not Western Canada for nitrogen production and supply,” Helash said. “We believe the pond is global.”

The Australian Competition and Consumer Commission is scheduled to report on the Glencore takeover of Viterra on Thursday. Under the deal, Glencore would acquire Viterra’s grain-handling and storage assets in Australia and sell off 17 farm-supply outlets there to Agrium.

Glencore’s takeover of Viterra is expected to close by the end of July.

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The deal was supported by 99.8 per cent of shareholders, far more than the required two-thirds majority.

Glencore offered Viterra $16.25 per share, or $6.l billion in March for the company, which owns the biggest share of Western Canada’s grain storage and farm supply outlets, as well as nearly all grain storage capacity in South Australia.

The acquisition, which still needs approval by regulators in Canada and Australia, would bring Glencore into the big leagues of agriculture, which are dominated by Archer Daniels Midland Co., Bunge Ltd., Cargill Inc. and Louis Dreyfus Corp., the so-called ABCD quartet of the industry.

In Canada and Australia, where Viterra is strong, “ADM, Bunge and Cargill will take notice of Glencore,” said Horst Hueniken, a former analyst based in Toronto who is working to launch a global agricultural hedge fund.

“The other concern will be that Glencore will continue to grow and start penetrating markets beyond Canada, parts of the U.S. and Australia,” he said.

Glencore’s move comes in one of the busiest merger and acquisition periods for agriculture since the late 1990s as improving diets and incomes in countries like China and India stoke interest in grain companies. Japanese trading house Marubeni Corp. swooped in to buy U.S.-based Gavilon Group for $3.6 billion May 29.

The growing use of corn and other crops to make biofuels has tightened supplies of food crops, Hueniken said, making agriculture a likely space for further deal activity.

“The economics are not marginal anymore. It’s become a space where merging or acquiring makes sense.”

Viterra has been quietly up for auction since late 2011, with approaches made by four bidders, including Glencore, according to public company documents.

On May 28, Russian investment group Summa bought a nearly 50 per cent stake in Russian state grain trader United Grain Co., while Louis Dreyfus is also looking to tap capital markets for the first time.

Glencore would get most of Viterra’s country and port grain storage in Western Canada, some food-processing assets, and its grain-storage and -handling assets in South Australia.

“We look forward to becoming part of the agriculture industry in Western Canada and to contributing to the expansion of the grains and oilseeds sector in those communities now served by Viterra, in Canada, Australia and elsewhere,” said Glencore’s director of agricultural products, Chris Mahoney.

To win political support in Ottawa, Glencore has cut side deals to sell some of Viterra’s assets to two Canadian companies, Agrium Inc. and Richardson International Ltd.

The end of the Canadian Wheat Board’s monopoly over Western Canada’s wheat and barley sales is expected to boost profits for grain handlers, who will be able to buy directly from farmers for the next harvest.

Century old

In Viterra, Glencore would get a company with roots nearly a century old in Western Canada’s farmer-owned co-operatives.

But there may be little nostalgia left among farmers after years of consolidation resulted in the emergence of Viterra in 2007 as the dominant player in the Western Canada breadbasket.

“I think people are quite excited about Glencore,” said Stephen Vandervalk, an Alberta farmer and president of the Grain Growers of Canada. “Glencore will now be a smaller player (in Canada) than Viterra was and they bring a world experience and view of things to Western Canada.”

Instead, farmers are worried about the increased clout that would be gained by Agrium, the dominant nitrogen fertilizer maker in Western Canada, Vandervalk said.

Agrium would get most of Viterra’s retail agri-products business, making it the market leader in Canada, including its 34 per cent stake in Canadian Fertilizer Limited, for which it will pay $1.8 billion.

Richardson will acquire 23 per cent of Viterra’s grain-handling assets as well as certain processing assets in North America for $900 million.

Canada’s independent Competition Bureau has already said it will not oppose Glencore’s takeover of Viterra, but it has not ruled on Glencore’s side deals with Agrium and Richardson.

Approval would also be needed from Ottawa, which decides if large foreign takeovers are of net benefit to the country, and from the Australian Competition and Consumer Commission.

The deal is expected to close by the end of July.

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The CWB, which loses its monopoly on Aug. 1 and becomes one of many buyers of farmers’ grain, is buying grain for its pools — which are a means of averaging out prices over a period of time and helping farmers avoid volatility.

But farmers are hesitant to commit to the CWB without assurance that they will be able to easily deliver their next crops, since the CWB owns no grain storage elevators of its own.

So far, CWB has struck agreements with only Cargill Ltd. — the third-largest Canadian grain handler — and the single-site South West Terminal.

“It is a concern,” said Lynn Jacobson, a farmer and president of Alberta’s Wild Rose Agricultural Producers.

“If the price (of wheat) starts to slide, you will do better in the pool.”

Jacobson has committed a portion of his expected spring wheat production to the CWB’s pool in hopes that it will strike agreements with more grain handlers, which include Viterra Inc., Richardson International Limited and Louis Dreyfus Corp. Viterra is the target of a friendly takeover bid from Glencore International PLC.

Under the monopoly, the CWB was the only selling option for western growers of wheat and barley for export or domestic consumption. Starting with the crop that farmers are now planting, farmers can shop around for the best prices based on a series of variables like quality grade and protein.

“There’s guys who have never been marketers and they don’t want to have anything to do with marketing, so they like that pooling,” said Norm Hall, a farmer near Wynyard, Saskatchewan, and president of the Agricultural Producers Association of Saskatchewan.

“It’s a whole new world out there.”

The CWB’s chief executive, Ian White, said he expects to reach agreements with all Canadian grain handlers.

“We understand farmers’ concerns and they’re going to want to make decisions as quickly as they can,” he said. “We’re working very hard to get these agreements in place as quickly as we can so farmers have that level of comfort.”

White declined to say how much wheat the CWB has secured so far, but the board has set a goal of pooling one-third of Western Canada’s wheat and barley, based in part on how pooling volumes have grown in Australia, which dumped its own wheat monopoly several years ago.

“At this stage, I’m very confident we’ll have agreements with everyone” handling western grains, White said.

The industry group that represents grain handlers also expects deals to get worked out eventually.

“All of the different elements that need to be negotiated are on the table,” said Wade Sobkowich, executive director of the Western Grain Elevators Association. “It just seems to be taking longer than people expected. It is very complicated.”

Pooling wheat on the Prairies dates back to the 1920s through provincial co-operatives and moved under the wheat board’s monopoly control during the Second World War. The board has long maintained that by pooling so much of the crop, it could command higher prices.

But it remains to be seen if the CWB, without its monopoly clout, can attract a similar volume of wheat, said Murray Fulton, professor of public policy at University of Saskatchewan.

“If you’re going to get the kind of premiums the board was talking about earlier (under its monopoly), you need a lot of volume,” he said. “It’s a bit of a chicken and egg.”

The CWB is already downsizing sharply to prepare for the open market. The CWB currently has around 300 employees, down from 400 in December, and will likely have fewer than 100 workers by the end of 2012.

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A broad swath of wheat buyers, including Japan, known as the most quality-conscious wheat importer, has raised concerns that the consistent, top-quality wheat they have long bought from Canada may not be the same in the open-market system, said Rex Newkirk, director of research and business development at the Canadian International Grains Institute (Cigi).

Canada is the world’s biggest exporter of spring wheat and durum wheat.

“We trust Canadian wheat, so if we didn’t have the quality we’ve had, it would be a catastrophe for us,” Miguel Montalban, production manager of the Harinera La Espiga mill in Mexico City, told Reuters through an interpreter.

The wheat board has held a marketing monopoly over Western Canada’s wheat and barley for export or human consumption for 69 years, but it will end on Aug. 1 under a new Canadian law.

Wheat buyers will then buy Canadian wheat directly from grain handlers such as Glencore International PLC, assuming it completes its takeover of Viterra Inc. this summer, Cargill Ltd. and Richardson International Limited.

Eight Latin American wheat buyers, including Montalban, attended a week-long Cigi program in Winnipeg to study the properties of Canadian wheat.

The wheat board aimed to give farmers the highest possible returns, but also sought to keep buyers’ loyalty by at times delivering better-quality grain than it was getting paid for, Newkirk of Cigi said.

“The concern (of millers) is that when grain companies are selling now, what they might do is sell everything to the lowest end of the grade,” he said. “The grain companies are going to want to keep those buyers happy, so I don’t think they’ll intentionally sell them the bottom of the grade, but… there’s going to be a bit of a push and shove for a bit.”

Cigi is an independent market development institute funded by farmers, the grain industry and Canadian government.

At least two private grain marketers — the Canadian arms of French grain trader Louis Dreyfus Corp. and German trader Toepfer International — have publicly said that Canada should grow more mid-quality wheat in light of stiff competition from the Black Sea region and elsewhere.

Canada’s grading and variety registration systems will remain in the open market, but handlers could encourage farmers to plant more varieties designed to maximize yield at lower quality by narrowing their price discount to top-shelf wheats.

If top-quality Canada Western Red Spring Wheat becomes scarcer, Montalban’s mill in Mexico would have to reluctantly buy U.S. spring wheat that it considers inferior, he said.

The Pastas Capri C.A. mill in Venezuela relies on up to 80,000 tonnes of Canadian durum annually.

“We are very tied to Canadian wheat,” said mill manager Freddy Rivas. “We’re concerned about availability in the future, and quality. We want to know that we can count on that.”

The solution lies in millers and wheat exporters clarifying up front exactly what specifications they need, from protein content to the level of disease presence, as buyers already do to source U.S. wheat, Newkirk said.

“We can still provide a reliable product, we just need to make sure we clearly understand each other.”

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The United States has long been a key export market for canola, Canada’s second-biggest crop after spring wheat, but its appetite has spiked in the past year.

In September, the U.S. Environmental Protection Agency (EPA) approved use of Canadian crops in U.S. biofuels, allowing fuel makers to collect tax credits for using them.

The move had an almost immediate impact on Canadian canola oil shipments.

“The growth into the U.S. is strong, very strong,” said Pat Van Osch, vice-president of oilseed processing for Richardson International Limited.

Biodiesel-based demand for canola from the United States tends to be sporadic, depending on market conditions for fuel makers and how the price of canola oil compares with soyoil, Van Osch said.

The U.S. food market for canola oil has also been strong.

“We’ve taken market share there as well and we’ve been able to do that because canola oil has been trading close to or at parity with soybean oil,” Van Osch said.

Canadian canola processors have crushed nearly 4.6 million tonnes of seed in 2011-12, well ahead of last year’s pace, which ended with a record 6.3 million tonnes crushed, according to the Canadian Oilseed Processors Association.

Much of the oil crushers produced headed south, as Canada exported nearly 770,000 tonnes of canola oil to the United States from August through January of 2011-12, up by almost one-third over last year’s record-high exports.

The U.S. Congress has set a goal of blending 36 billion gallons of renewable fuel into transportation fuel by 2022.

A fraction of that total — one billion gallons this year — is set aside for biodiesel produced by biomass such as crops, said Alan Weber, an adviser to the Washington-based National Biodiesel Board.

Biodiesel is made from a variety of feed stocks including animal fats, recycled cooking grease and soybean oil.

Canola oil is unlikely to threaten soyoil’s nearly 50 per cent market share, but is poised to carve out a piece of the U.S. biodiesel market with the other feed stocks, Weber said.

Crushing canola produces oil, which is used mainly as vegetable oil in salad dressings, margarine and no-stick sprays, as well as meal, used to feed livestock.

Meal is less valuable than canola oil, but still an important part of profit margins for crushers. Canola meal demand is also higher, with U.S. imports from Canada jumping 80 per cent year over year, due to U.S. regulators lifting import restrictions on some Canadian plants over bacteria concerns.

In the past several years, Cargill Inc., Richardson and Louis Dreyfus have dramatically expanded crushing capacity in Western Canada to tap new demand.

Bunge Ltd. plans to expand processing sites in Manitoba and Alberta, while Archer Daniels Midland intends to expand a canola-processing plant and build a biodiesel facility at Lloydminster, Alberta.

Just south of Manitoba, Northstar Agri Industries is set to open a canola-crushing plant at Hallock, Minnesota this spring.

Glencore International PLC., the world’s biggest diversified commodities trader, will run a Manitoba crushing plant if it completes its takeover of Viterra later this year.

Canadian farmers look poised to boost supplies to match some of the lucrative new demand and are expected to plant a record-large canola acreage this spring.

Canola was a minor Canadian crop with limited markets when Brett Halstead began growing it in the late 1980s. Today, Canada is the world’s biggest exporter of the rapeseed variant, and its many domestic and export buyers make it the centrepiece of many farmers’ production.

“From a grower’s perspective, it’s just the economics of it, the price,” said Halstead, a farmer at Nokomis, Saskatchewan and board chair of the industry organization SaskCanola. “Producers see it year in and year out as the crop, or one of the crops that has the best returns.”

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The vote will be taken at a special shareholder meeting in Calgary, Alberta, a Viterra spokeswoman said.

The deal’s completion requires approval of two-thirds of the votes cast by shareholders or their proxies. If it gets a green light, it is expected to close in Viterra’s third quarter, ending July 31.

Alberta Investment Manage-ment Corp., Viterra’s biggest shareholder with a 16.5 per cent stake, has already agreed to support the takeover.

Glencore said on March 20 it had reached a deal to buy Viterra and sell off some parts of it to Canada’s Richardson International Ltd. and Agrium Inc., giving Glencore a huge new presence in the grain industry.

The deal still needs regulatory approval in Canada and Australia. Because it is a foreign takeover, the Canadian government must decide if it is of “net benefit” to the country.

Prime Minister Stephen Harper noted Glencore’s global marketing reach in comments on March 26 that signalled Ottawa has little appetite for blocking the deal.

The takeover also requires a review by Canada’s Competition Bureau. The arm’s-length bureau consults with various industry players when considering a transaction’s impact on competition, spokesman Greg Scott said last week.

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