Winnipeg-based United Grain Growers (UGG) will continue to pursue international alliances in a bid to survive the ongoing transformation of agribusiness into a global, high-tech and vertically -integrated industry, says Brian Hayward, UGG’ s chief executive officer.
“The complexity and technical sophistication of how food moves from the lab to the field to the processing plant is leading to general integration” said the strapping CEO, who stopped in Toronto for an interview on his way to the all-stars hockey game in Tampa, Florida. “We don’t want to be in research and development and we don’t want to be flour millers but we want to be allied with these organizations.”
Since going public in 1993, UGG has evolved from its traditional role as a grain handler into a diversified agribusiness that not only handles and sells grain but also supplies fertilizer, herbicides, seed and trade publications to farmers across the Canadian prairies.
Although its customers are domestic, UGG’s partners represent a diverse international group ranging from Australia’s government-funded research agency, the Commonwealth Scientific and Industrial Research Organization (CSIRO), to the world’s largest breeder of designer seeds, Pioneer Hi-Bred.
The 93-year-old firm’s closest connection is with Archer Daniels Midland (ADM), which purchased a 45% interest in UGG in 1997. Illinois-based ADM is a multi-national manufacturer of food ingredients with a stake in hundreds of processing plants around the world.
The ADM allegiance provided UGG with a source for its grain, a supplier of ingredients for its growing feed business and a large injection of capital to finance the company’s most ambitious program: the construction of giant grain elevators to replace a network of older, smaller facilities.
Hayward readily admits that outside forces, such as the growing use of biotechnology in seed generation and the diminishing role of government in agricultural sector, are dictating UGG’s business strategy. He says these trends are changing the nature of agribusiness, one of last industries to break loose from the apron strings of protective tariffs and government intervention.
“The marketplace is now being allowed to infiltrate an industry that is traditionally highly regulated,” he says. “There is going to be a continued trend to consolidation.”
One of the most recent examples of this trend is Cargill Inc.’s proposed acquisition of Continental Grain’s commodity marketing business to create one of the biggest grain handlers in North America. The proposal has raised concerns in the U.S. about the consequences of creating agricultural behemoths that leave farmers with little control over to whom and for how much they sell their produce.
Hayward declined to speculate about UGG’s potential as a takeover candidate.
Montreal-based Hayward, who specialized in agricultural economics at McGill before joining UGG 18 years ago, was appointed CEO in 1991. He was at the reins when the company issued its first public offering six years ago and is now facing the challenge of maximizing shareholder value in an era of low demand for agricultural products, especially wheat and livestock.
It is a hard row to hoe. UGG’s share price has been flirting with its 52-week low of about $9.35 since the company announced its first quarter earnings earlier this year. For the three months ended Oct. 31, 1998, UGG lost $5.2 million as the Canadian Wheat Board (CWB), UGG’s main customer, reduced grain shipments by 45% compared to the previous year.
“There is pall over the whole agriculture industry at the moment” says Hayward. “But since we make 90% of our profit in the final quarter of year (from May to August, when farmer’s are buying supplies for their crops), the prospects for the company are not evident until the year is complete.”
Analyst Steven Holt at Scotia Capital Markets is a fan of the enterprising prairie firm and believes the company is undervalued.
“With its aggressive capital expenditure program, UGG’s earnings are depressed by heavy depreciation and other non-cash charges, such that net earnings do not reflect the potential of the company to generate cash,” Holt wrote in a recent research report.
Last year, UGG achieved record earnings and cash flow of $16.3 million and $35.9 million respectively. It also doubled its capital expenditures to $41.2 million by building and expanding high-throughput elevators in Alberta, Saskatchewan and Manitoba, and acquiring several farm supply businesses.
Holt sees the greatest growth potential in UGG’s crop production services division, which sells fertilizer, herbicides and seeds to farmers and generated 35% of UGG’s operating income in 1998. He says earnings from the division, which hit a record $20.5 million in 1998, should grow at a rate of 10-15% per year.
He is also optimistic about the long-term prospects for the grain market, saying 1999 “will mark the nadir for industry dynamics.”