Wary Green Giant
from Summer 1999
by Russ Arensman
With more than $50 billion in sales, Cargill is
- the world’s largest grain exporter
- the world’s second-largest salt producer
- the second-largest U.S. meat processor
- the third-largest U.S. food processor
- the eighth-largest U.S. steel maker.
Bigger than all but 10 U.S. companies, it would rank behind AT&T and ahead of BankAmerica on the Fortune 500 list. But you won’t find it on that roster of massive public corporations. Reason: Cargill is a closely held company—the largest private company in the world.
For 134 years Cargill has done quite nicely, thank you, as a family-owned business. Since 1865, when founder William W. Cargill opened his first grain warehouse on the Iowa frontier, the company has survived the Depression, wars, and other calamities, all the while steadily extending its reach into a myriad of commodity-related enterprises. Its annual sales have multiplied 25-fold in the past 30 years, and its profits, despite constant reinvestment in business expansion, approach the $1 billion mark in a good year.
Unfortunately, the last good year was 1997. Since then, the company has seen its sales and earnings slump as economic crises in emerging markets dampened farm exports and prices. It wasn’t a complete surprise, then, when Chairman and CEO Ernest S. Micek, 63, recently announced plans to retire early. He has agreed to remain chairman for one year but has handed over chief executive duties to Warren Staley, 56, a 30-year Cargill executive who has been president and chief operating officer since February 1998.
Even in Minnesota, where the company is based and most of its owners live, Cargill remains largely a mystery to outsiders. The company’s private status helps shield it from the prying eyes of competitors. Paul Prentice, president of Farm Sector Economics Inc., a consulting firm in Colorado Springs, Colorado, says that veil is especially important in the high-pressure world of international trading, where secrecy is essential and being undercut or betrayed is a constant fear. “If you want to understand Cargill, the best thing to do is to read a James Clavell novel,” he says. “Staying private makes a lot of sense strategically because it has to be light on its feet. It has to be able to do things quickly. It has to do things that you could not do if you were publicly traded and accountable to public stockholders.”
Cargill heir and senior board adviser W. Duncan MacMillan explained in a rare interview last year that a tradition of secrecy has permeated the grain trade since the early days of Greece and Rome. “When a fellow going into port had more cargo than he sold and other people found out about it, the market would collapse. So they tended to be that way about their whole lives, not just inventories and stocks.”
Ownership reportedly remains largely in the hands of the founding family’s eight senior members—James R. Cargill, Margaret Anne Cargill, Pauline MacMillan Keinath, Cargill MacMillan Jr., John Hugh MacMillan III, W. Duncan MacMillan, Whitney MacMillan, and Marion MacMillan Pictet—who rank among the world’s richest individuals on Forbes’ annual list. Another 100 or so heirs control many of the remaining shares, although some 24,000 employees collectively own about 9% of the company’s outstanding shares through an employee stock ownership plan. When the ESOP was set up in 1992, the employees’ shares represented close to 17% of Cargill’s value (the ESOP shares have a higher per-share value than other classes of Cargill stock). Cargill refuses to disclose the exact value of the ESOP shares.
To their credit, the Cargills and MacMillans have long believed in hiring professional managers and, at least in recent years, allowing them to run the company with little apparent interference. From their sprawling French chateau-style headquarters on a wooded compound near the shores of Lake Minnetonka, Cargill officials preside over a global trading and processing empire that employs more than 80,000 people in 65 countries. In addition to agribusiness and steel, its operations include shipping terminals, petroleum, chemicals, and trading in currencies, bonds, futures, and financial derivatives.
The company is so powerful, in fact, that it regularly draws the ire of farm groups and the scrutiny of market regulators. Its offer last November to buy competitor Continental Grain Co.’s grain-trading business for an estimated price of more than $300 million raised antitrust concerns and is being reviewed by the Justice Department. Together, the two companies account for about 35% of U.S. grain exports, and the proposed acquisition prompted nearly two dozen senators to call for an inquiry into concentration in the agriculture industry.
In its latest fiscal year, the company’s $468 million profit was a little over 1% of its $51.4 billion sales and a little more than half its 1996 earnings. And while Cargill reported a hefty $779 million profit for the nine months ending in February, most of that came from a one-time, after-tax gain on last June’s $1.4 billion sale of its international seed business to Monsanto. After the sale closed, however, Cargill was sued by competitor Pioneer Hi-Bred International Inc. for selling corn hybrids containing genetic material developed by Pioneer. Last February, Germany’s AgrEvo GmbH cancelled its planned $650 million purchase of Cargill’s North American seed business after Cargill admitted some of its seeds contained Pioneer’s genetic material. It’s not clear whether Monsanto will try to renegotiate or seek a refund for part of its earlier purchase.
Regardless of how the seed sales are resolved, it seems obvious that Cargill’s remarkable growth rate of the ’70s and ’80s is slowing. In the four years from 1969 to 1973 the company’s revenue nearly tripled, from $2 billion to $5.2 billion, as the grain industry reaped windfall profits from sales to Russia. Over the next 15 years, Cargill’s business grew more than sevenfold, as it poured money into diversification and expansion.
As recently as 1991, Chief Financial Officer Robert L. Lumpkins asserted: “We still have the ability to double the company every five to seven years.” But Cargill’s growth in the 1990s has hardly approached the furious pace of the previous two decades. In fact, annual sales grew just $2.3 billion, less than 5% in total, over the seven years to the end of fiscal 1998.
“Cargill’s growth is slowing because the world has gotten more challenging,” says Prudential food analyst Jeffrey G. Kanter. “Agricultural markets worldwide are relatively depressed.” Indeed, U.S. farm exports fell 11%, between 1996 and 1998, and are expected to fall another 8% this year. Corn prices are down 20% from a year ago, wheat is down 21%, and soybeans are down 28%, with prices recently hitting a 23-year low.
“We’ve been hit by the thing that’s hitting a lot of global companies—the downturn in Asia, and the spillover effects in Russia and Brazil and a lot of what were, for most of the decade, very fast-growing markets,” concedes Cargill spokesperson Linda Thrane. Adds Farm Sector Economics’ Prentice: “There’s a tremendous slowing down occurring around the world. You’ve got over 50% of the world’s population living in recession conditions or worse.”
Yet Cargill is mainly a middleman rather than a producer of commodities, so price declines should have far less effect on its bottom line than on the bottom line of farmers. Many of its processing businesses actually benefit from the availability of less-costly raw materials, a factor that has brought some improvement in profits in the latest quarter. Yet slumping markets and recent asset sales are shrinking the company’s total revenue, which fell almost 10% through the fiscal year’s first nine months.
Patrick Schumann, a food analyst with Edward Jones & Co. in St. Louis, Missouri, sees a parallel between the growth patterns of Cargill and one of its competitors, ConAgra Inc., which grew very quickly to about $24 billion in sales, then leveled off. “You grow at a very high clip and then you have to take a breather,” he says. Schumann also wonders whether some of Cargill’s dominant businesses may be approaching limits to their market-share growth. “They’re running up against some barriers,” says Schumann.
Others, however, warn against underestimating Cargill. “This is a long-term business, a business that needs to run over a number of years and cycles to see benefits. And you have to have the stomach to withstand volatility,” says Kenneth Drucker, a director of corporate ratings for New York City-based Standard & Poor’s. He adds that Cargill’s private ownership helps it to weather unfavorable markets better than many of its publicly listed rivals, which face pressure from impatient equity investors and analysts. “It just plays much better as a private company,” Drucker says.
One sign of Cargill’s long-term outlook is its record of substantial reinvestment. The company is known for reinvesting most of its available cash into expansion, rather than paying large dividends to shareholders. In fiscal 1998, for example, it reinvested $1.4 billion, or 87.5% of its $1.6 billion cash flow. And while dividend information is seldom disclosed, the company has reportedly kept dividend payments at less than 5% of net income.
Cargill’s curtain of secrecy parted ever so slightly when the family restructured its board and agreed to sell some $730 million worth of stock to set up the ESOP. These changes were approved only after tense negotiations between the elder Cargills and MacMillans and their younger heirs, who reportedly wanted more say in management and an outlet to cash in some of their stock. In the end, two younger family members were added to the board. Five independent directors also were elected—the first outsiders ever on Cargill’s board.
Until recently, that restructuring seemed to pacify Cargill’s family shareholders. In April, however, a prospectus for bond investors revealed that Cargill has offered to use an additional $106 million from the sale of an equipment-leasing subsidiary to buy back more shares from family members, some of whom reportedly are upset by declining profits and dividends. Such discontent, if not addressed, could increase pressure on the company to go public.
For years, company officials have denied any interest in changing the company’s closely held ownership. Chairman Micek, in a 1996 speech, applauded “the patience and commitment” of the company’s owners. “Generation after generation, they have been willing to reinvest in Cargill’s growth, always with an eye to the future,” he said. But as in any family company, each generation geometrically increases the number of shareholders, making it increasingly hard to keep everyone satisfied.
David Nelson, a food analyst with Credit Suisse First Boston Corp. in New York City, points out that companies tend to go public either to finance business expansion or to allow the owners to take cash out. And while it’s difficult to fathom the intentions and needs of Cargill’s family owners, the company seems to have little trouble borrowing or generating sufficient funds from its internal cash flow. Cargill retains an investment grade A+ bond rating and has about $8 billion of debt outstanding. “It really hasn’t needed the public equity markets,” says Nelson.
Despite its recent difficulties, Cargill is widely viewed as a formidable company, which could make it an attractive public listing candidate if it ever chose that route. Edward Jones & Co.’s Schumann reckons Cargill’s shares could fetch as much as $25 billion today, based on current valuations for competitors like ConAgra and Archer Daniels Midland. Whether private or public, he expects Cargill to be a major global commodities player for years to come. Says Schumann: “They’ve obviously run the company very well over a long period of time.”
