By Jeff Wilson
CHICAGO (B)--Grain industry giants Archer Daniels Midland, Cargill, Cenex Harvest States, Louis Dreyfus and DuPont announced Oct. 25 they would form an Internet-based cash market for trading nine commodities and feed products. The grain market's focus will be on how this venture, along with many others in the same business, can improve information flow and price discovery in an industry that traditionally feared price transparency.
The question for many traders is whether these sites reduce grain market competition or intensify competition in an industry already known for razor-thin margins.
Starting a new Internet business at this time remains extremely challenging, given the steep stock price declines in many e-commerce companies during the past six to nine months.
But agricultural e-commerce faces even stiffer challenges because of the low grain and oilseed prices, historically narrow profit margins in this industry and a relatively slow adoption of technology in agriculture, sources explained.
"No one in e-commerce is having a good time," commented one industry insider. "It is not like you flip a switch and business suddenly appears," he said. And even if it does, can companies turn a profit?
Internet-related agricultural sites for farmers have grown quickly in the past several years. But the multi-billion-dollar grain merchandising business is largely private and in the past has been extremely secretive and competitive.
Darrel Good, agricultural economist at the University of Illinois in Champaign-Urbana, noted that the rapid vertical and horizontal integration of agricultural companies in the past decade has increased in-house hedging of commodity and product risks.
He noted Archer Daniels Midland has already said its business structure has reduced its hedging activities at the Chicago Board of Trade, since most of the commodity risk offset is now done in-house.
The new venture to be launched by Cargill et al, www.pradium.com, is an online grain market investment by the five powerhouses that plans to increase grain buying and selling transactions for grain handlers rather than the growers.
The new exchange will feature an automated "matching engine" for the complex bids and offers of nine commodities and feed products. It will be aimed initially at U.S. country elevators, processors, feedlots, exports and pet food and feed manufactures, Pradium said in a release earlier this week.
The three handlers in the Pradium venture, ADM, Cargill and Cenex Harvest States, represent about 23% of the total grain marketed by the top 20 grain companies in North America.
In turn, the grain merchandised by those top 20 companies represents as a whole about 34% of the total grain moved through marketing channels each year.
That means there is still 66% of the rest of the North American grain market that must decide how and with whom they will transact business, one source said.
The announcement of Pradium led to immediate fears about a concentration comprising two top grain handlers in ADM and Cargill, Cenex--the third-largest farmer-owned cooperative--and Louis Dreyfus, one of the top five grain exporters.
The whole would be knit together by chairman Daniel Amstutz: former president of the North American Export Grain Association; former head feed grain merchant for Cargill; former president of Cargill Investor Services; former chief U.S. agricultural trade negotiator.
But industry watchers and economists agreed it is highly unlikely the new exchange will try to create a one-desk marketing monopoly. Plus, including a farmer cooperative may help to reduce some industry anxiety.
"Given the anti-consolidation mode for agriculture in U.S. Congress and potential anti-trust scrutiny from the DOJ (Department of Justice), Pradium recognizes the risks," noted one analyst.
Pradium president and chief executive officer Rhem Wooten went out of his way to emphasize in this week's press release that the new venture will be a separate company from the investing firms.
"We must operate a neutral and transparent site with absolute integrity," Wooten said. "If we do not, we will fail. That will not be because regulators intervene. It is because customers will not participate."
Still, there remains an idea that this new venture is an industry merger, just not in name, some said this week.
Many farm groups, analysts and traders are hopeful the new cash market exchange, along with all the others already established on the Internet, will improve price discovery and allow the Internet to speed information flow.
But the key with all these cash grain e-markets is whether they deliver the market liquidity and price transparency they promise.
Some industry participants worry these new sites will improve business information for a few rather than the entire trading population.
"They will have to walk on eggshells to convince the regulators and potential market participants," an industry source said.
Some sources compared the Pradium plan with that constructed by the Enron Corp. in the energy markets. However, the difference is that Enron provides a one-to-money trading platform and makes markets in cash energy commodities. These agricultural sites are establishing a many-to-money platform for matching bids and offers anonymously.
The grain merchandising industry operates with very narrow profit margins already. Whether these new e-markets provide improved trading margins will be the key to both market use and liquidity.
But analysts remain hopeful that the adoption curve for using the new technology among grain handlers will be higher than that among farmers.
"We hope it will provide more market transparency and help to streamline business functions," added a manager for North American operations at a large Midwest company. "Our industry already operates with extremely thin margins, and this may be one way to optimize revenue streams."
Traders agree that e-commerce has proven to be a good way to increase market share in many industries, but not necessarily a sure-fire way to generate profits. The stock prices of some of the most prominent "dot-coms" has been a sign of this.
The specific challenge facing Pradium and its ilk in an attempt to reach critical mass is maintaining individual buyer and seller confidentiality and improving grain handling efficiency, noted one CBT trader.
"The question is whether this is just reshuffling the same deck--the deck where the other guys seem to have more cards than I do," he added.
Meanwhile, the introduction of this new trading platform seem poorly timed so some.
"The buzz is gone from the Internet and e-commerce," noted one industry source.
The real threat from Pradium and other e-market web sites may be to the cash buyers and back office personnel at some firms. Computers may replace these employees in the very near future as trading becomes more electronic. And regardless of the profits generated by the sites themselves, cutting the payroll is a sure-fire way to improve profit margins.
The other threat is for the Chicago Board of Trade, where electronic markets seem destined to eventually replace open outcry.