Bunge taking the long view
March 6, 2012
by L. Joshua Sosland
With change comes opportunity, and no major ingredient segment in recent years has undergone more change than the edible oils sector. The opportunity has not been lost on Bunge North America.
The dramatic changes in the oils market and equally dramatic moves taken by the North American subsidiary of Bunge Ltd. were among the major topics discussed in a recent Milling & Baking News interview with Soren Schroder, chief executive officer of Bunge North America.
Even in this difficult time for oilseed crushing, perhaps the toughest in a generation, Mr. Schroder and Bunge remain optimistic about prospects for the edible oils business.
It was early in the 2000s that St. Louis-based Bunge North America shed a number of non-core businesses to heighten its focus on the oils and grain markets. The growth Bunge has achieved in recent years in the North American oils business has not been limited to the United States.
“Canada, where we have a very strong position, was a niche market five or so years ago,” he said. “Now it is a global force.”
During this five-year period in which the U.S. soybean crush has been flat or even contracting slightly, canola production in Canada has increased dramatically.
“Canola has become a major oil not only in North America, but in China and Japan,” Mr. Schroder said. “Production in Canada was about 5 million tonnes in 2005-06. Now it is 15 million tonnes and heading higher.”
Explaining the increase, Mr. Schroder said canola currently offers Canadian farmers better returns relative to alternative crops like wheat.
“With better hybrids and more experience, it seems clear the yield expansion will continue,” he said.
Against this backdrop of expanding supply has been demand growth, Mr. Schroder noted. The United States alone is annually importing more than 2 million tonnes of canola oil, driven by the product’s superior health profile relative to soybean oil. U.S. consumption is up 150% since 2004-05.
The increase in U.S. canola oil demand has come largely at the expense of soybean oil, which has seen consumption decline by 1.3 million tonnes. Still, at 6.4 million tonnes, the U.S. soybean oil market remains far larger than canola oil.
Bunge gained a foothold in Canada in 2002 with its acquisition of Cereol, but Mr. Schroder was quick to describe Cereol as a “starting point” for pursuing its ambitions in the crushing/refining market.
Currently, Bunge operates plants in Canada in five different locations spread across the country.
“The refineries we acquired from Cereol were not what I would describe as ‘world class.’ So we have been making major investments,” he said. “For instance we have a new refining plant in Hamilton that serves the eastern United States and Canada.”
The Hamilton move was followed by a project at the company’s Altona, Man., canola processing plant. The expansion, which began in 2010 and should be completed in 2013, will increase capacity to 2,500 tonnes a day from 1,100. A new deodorizer to fully process the oil will be added as part of the project.
“These are very significant investments, but it is the right time to be making these expenditures,” Mr. Schroder said. “We’ll move to the Fort Saskatchewan, Alberta, plant next. The future looks interesting.”
Health and wellness have been a principal catalyst for change when it comes to what else Bunge sells in 2012. While soybean oil in various forms accounted for more than 90% of the company’s volume in the early 2000s, the proportion is closer to 60% today, Mr. Schroder said. The largest shift has been to soybean oil alternatives for formulations requiring hydrogenation. With the need for trans-free options, hydro-genation has been fading from the picture.
Helping ease the market shock to the oilseed crushing market from this shift to canola from soy has been increased demand for biodiesel, Mr. Schroder said. Still, the U.S. soybean oil industry is crushing 10% less than three or four years ago, which is wrenching change.
“The reduced soybean crush is very much related to the substitution for soybean meal of feed products from the corn ethanol industry,” Mr. Schroder said. “We produce as much D.D.G. (dried distillers’ grains) in the United States as soybean meal.”
A second related change emerging in the edible oils markets in recent years has been the growth of no-trans enzymatic interesterification (E.I.E.), Mr. Schroder said. E.I.E. is a process that improves the functionality in food application of trans fat free oils. Exactly how this market unfolds in the years to come remains open, Mr. Schroder said, anticipating competition between high-oleic soybean production and high-oleic canola.
“We have a plant in Indiana ramping to full capacity,” he said. “We’re revamping our plant in Alabama (Decatur) to include E.I.E. production capacity.”
Deterioration of the soybean crushing market has prompted major painful actions at Bunge, Mr. Schroder said.
“We’ve done a lot of heavy lifting,” he said. “We’ve closed three crushing plants in the past four years. None of it we liked doing. The domestic meal demand just wasn’t there. We needed to be sure what we were operating is efficient. We feel the footprint we have now is as efficient as it gets. We’re running our facilities close to capacity.”
Bunge’s U.S. oilseeds operations remain larger than its business in Canada, but the latter is growing.
A recently announced joint venture with a Malaysian partner will bring Bunge’s total Canadian crushing capacity to 3.5 million tonnes. While the largest in Canada, the total remains much smaller than Bunge’s U.S. operations, with daily capacity of 10 million tonnes.
“We have a much better balance than our competitors,” Mr. Schroder said. “South of the Canadian border is very challenging. To the north, we’ve had very good performance. It speaks to the importance of being diversified. Canada represents the best of both worlds in that you have a growing supply combined with a growing market for healthy oils. It’s a conducive environment for efficient crushing.
“In the U.S., it is a troubled industry, there is no doubt about it. You’ve seen the references made by our competitors. And it is difficult for us. Between Canada and the U.S. it’s not great, but it’s certainly not as bad as it would be if we were only in the United States.”
Opining on what will bring the industry back to health, Mr. Schroder said capacity rationalization will
offer some short-term relief.
“One solution, but it’s a long-term solution, is expanding meat exports from the United States,” Mr. Schroder said. “We believe there probably is a much bigger future for the U.S. in pork and poultry, meat products exported to China and other destinations. The U.S. is globally competitive with Brazil. That could balance things out again, but it will take time. It’s a solution for 2020 but won’t help anyone tomorrow.”
If helping shortening users reduce or eliminate trans fat from their products has been a principal focus of Bunge over much of the last decade, Mr. Schroder identified two priorities in the years ahead. Most pressing on the agenda is reducing saturated fats, particularly those added in recent years as a trans alternative.
“The trans thing is more or less solved from a production scale capability point of view,” Mr. Schroder said. “We can produce whatever non-trans products customers want. This year, the focus is on various reduced saturate products.”
Longer term, very different issues will be of concern to shortening customers, Mr. Schroder said.
“Tomorrow, it will be brain health,” he said. “It’s about the various omegas. We are going to shift from heart health and trans to things that are good for cognitive function. We know different oils have those capabilities, and the objective is to place those oils in the right proportions through various blends. It’s clearly what’s next on the horizon.”
For Bunge, still another area of potential growth in the oils sector is margarine. In August 2011, the company acquired the margarine production assets of The C.F. Sauer Co., including a production facility
in Sandston, Va., and production equip-ment from a plant in New Century, Kas.
The two facilities have annual capacity of nearly 400 million lbs of margarine, with products ranging from 5-gram portion cups that are used by restaurants to one-ton Totes sold to food processors.
The investment gives Bunge a significant foothold in food service and food processing as well as private label retail applications. Mr. Schroder was particularly optimistic about the opportunity to tap into the growing market for high end, competitively priced “healthy” margarines at retail through private label.
“We made this acquisition because it’s a way to add value and because we believe it will be a vehicle for innovation from the Bunge Ingredient Innovation Center,” Mr. Schroder said. “We really feel we have ways to develop margarine blends that address all of the health concerns in a super cost competitive way.”