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Shekhar Anantharaman: Commodity trading will probably never revive

By Nicholas Norbrook
Posted on Wednesday, 25 July 2018 09:18

Nimble agribusinesses must be constantly on the lookout for threats on the horizon. Chief operating officer Shekhar Anantharaman is part of the hard kernel of leaders at Singaporean agribusiness Olam who have been there for decades. Growing up with the company, he and his colleagues take strategic and long-term views of how the agricultural market is changing.

That does not always please the capital markets. In 2012, Muddy Waters Research, run by US short-seller Carson Block, started to take aim at Olam’s accounting practices, with Block telling an investors’ conference that Olam had “reacted to the 2008 [financial] crisis by deciding to take huge leverage and invest in illiquid positions”. That certainly proved a tumultuous period. Singapore’s sovereign wealth fund, Temasek, stepped in to take a larger shareholding. Japan’s Mitsubishi also took an equity stake and is now Olam’s second-largest shareholder.

They wouldn’t listen

“Despite [our] being at pains to explain our strategy”, says Shekhar, Olam’s short-term investors preferred businesses whose balance sheets were asset-heavy and leaning on short-term debt. But Olam has had the last laugh. In 2017, profits were up 65% to more than $550m. Part of this, says Shekhar, is down to the turnaround from some under-performing units, such as the dairy business – “a big drag in both 2015 and 2016” – as well as a spate of divestments that Olam made to rationalise its portfolio after a long acquisition drive.

However, the primary reason for the big jump in profitability is that those investments made from 2009 onwards, which had so concerned the short-sellers, are now starting to come good. “These investments are bearing fruit, and we believe that will continue,” Shekar says.

The strategic turn has been upstream and midstream, a strategy that was “populated year after year, across multiple crops and geographies on a very deliberate basis between 2009 and 2015,” says Shekhar, “with a big chunk of investment – almost $1bn of investments – every year.”

That decision was triggered by a few realisations. First, that margins in the commodity trading segment were going down and “will probably never revive”. So, just leaning on the traditional trading strengths of financing, information and reach is not a viable long-term strategy for Olam.

Secondly, there were significant changes going on in the climate that hit agriculture-related businesses hard. “This may sound frivolous, but the fact that climate change is real has taken governments, corporates and even civil society a lot of time to connect with,” says Shekhar. “The writing was on the wall 20 years ago.”

Crop-level view

Staying as a simple trader would therefore expose the company to more volatility. Getting closer to suppliers – and even farming in some cases – could help Olam manage the instability. Shekhar explains: “That made us start looking at yields and cost comparisons for each crop to see what the long-term bets are going to be.”

Olam has underestimated some of the challenges. In Nigeria, for example, a greenfield rice plantation has required much more runway than expected. “It seemed fairly a slam dunk economically”, says Shekhar, “so much domestic consumption and still such a big importer. But the ability to get the whole ecosystem going in Nigeria was a big challenge.”

With infrastructure problems surmounted, yields are up to 4.5tn per hectare and the project finally produces enough rice to run the mill at full capacity. And that potential has been noticed: Aliko Dangote, Africa’s richest man, has announced a $1bn investment in rice in Nigeria. Imitation is the sincerest form of compliment.

Photo: Shekhar Anantharaman, Group chief operating officer, Olam – Credits: Olam International

From the June 2018 print edition

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