Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Traders are meant to be good at picking the right time to sell, so it's no surprise that Glencore just got rid of another 10 percent of its agriculture business.

Prices for sugar, soybeans, sunflower seeds and canola -- as well as coffee, which Glencore doesn't deal in -- are all hovering around multi-year highs. Since Bloomberg first reported the planned stake sales last September, agriculture has been the best-performing sub-set of the Bloomberg Commodity Index. That suggests now is a good time to be offloading a business that's never been a major contributor to the bottom line.

Bumper Crop
Agriculture has outperformed other subsectors of the Bloomberg Commodity Index since Glencore's sale plans were first revealed
Source: Bloomberg
Note: Figures have been rebased. Sept. 26, 2015=100.

The price being paid by British Columbia Investment Management is boringly identical to the one agreed in April for the sale of a 40 percent stake to Canada Pension Plan Investment Board.

Both deals value the entire business at $6.25 billion in equity, which comes to an enterprise value of $9.85 billion adding the $3.6 billion in net debt as at Dec. 31. At about 13 times the unit's $734 million 2015 Ebitda, that's a sliver above the 12.2 times multiple in comparable deals over the past three years .

Grain Elevator
The Bloomberg Agriculture subindex has ticked up in recent months, but remains at historically low levels
Source: Bloomberg

Are Canada's retirees being sold a pup? It's tempting to think so, given the run-up in commodity prices. But if your investment horizons are measured in decades, farm products actually look pretty cheap. The sale price was effectively struck at the time of the Canada Pension Plan deal back in April, when the Bloomberg Agriculture subindex was at 53 -- not far above its record-low 48, and well below the average of 81 since it was first compiled in 1991.

While agriculture is a low-margin industry whose profits are notoriously volatile year-to-year, the big four traders -- Archer-Daniels-Midland, Bunge, Cargill and Louis Dreyfus -- also very rarely lose money, an attractive feature for an annuities business. Glencore's agri division is arguably big enough to be considered alongside those firms, with its Ebitda level-pegging that of Louis Dreyfus over the past two years:

Join the Club
Ebitda at Glencore's agriculture business is on a par with the industry's big four traders these days
Source: Company reports, Bloomberg
Note: Data shows adjusted Ebitda where available; Louis Dreyfus is for non-adjusted Ebitda. Cargill data not available after 2013. All companies have December year-ends except Cargill, which is May.

Other assets really ought to be ahead of agriculture in the divestment queue, such as coal -- but of course, there are no buyers for that. Reducing the exposure to agriculture, the company's most marketing-heavy division, also leaves it more dependent than ever on its capital-hungry industrial mining businesses. Still, what Chief Executive Officer Ivan Glasenberg needs most right now is cash.

Glencore's stock has gained 61 percent this year, making it the best performer in the Bloomberg Europe 500 Metals and Mining index after Anglo American.

That in many ways reflects a rebound from the brink-of-doom conditions it was facing at the end of 2015, and the picture on the credit side is less bullish.

Glencore's $1.5 billion of 4.125 percent notes are still trading at less than 90 cents on the dollar, while credit-default swaps protecting its debt against nonpayment are at 420 basis points, more than double the perceived risk of BHP Billiton or Rio Tinto. Glencore may be leaving its farmland behind, but it's not out of the woods yet.

(Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.)

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Based on 16 deals worth more than $100 million in the agriculture, grains and sugar industries over the past three years for which Bloomberg has data. We've excluded tobacco transactions, which tend to go for higher multiples.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net