(Bloomberg) -- Flying over the southern Brazilian coastline in 2014, Ning Gaoning saw the future. From his airplane window, the chairman of Chinese trader Cofco Corp. spotted scores of trucks and trains laden with agricultural products — all headed to the port of Santos.
Ning, who also goes by his English name Frank, realized then, he later wrote in his memoir, that his company needed to own a piece of South America’s largest port. It would catapult the state-run group into the upper ranks of agricultural traders, he hoped.
Some of that has come to pass. Cofco won a concession in 2022 to build a large terminal in Santos that is due to open next year. Once focused on trading and producing agricultural products for the Chinese government, the company now handles crops to over 50 nations.
Its dramatic rise, a rarity in the closely held world of agricultural trading, has created a behemoth with an entrepreneurial edge and a part-private ownership structure that stands out among China’s largest state-owned enterprises. It has also amplified China's insight — and influence — over the global food supply chain.
But in its first decade of competing with the so-called ABCD quartet that dominates agricultural trading, interviews with current and former employees, rivals and government officials portray a company that has also seriously stumbled.
While its overseas expansion has been remarkable, it has had to juggle competing domestic and global ambitions, which do not always align with the priorities of an international trading giant. The company is China’s key importer of staple crops, some of which help bolster state reserves, and a well-known household name through consumer brands spanning processed meat to milk.
“Cofco has a unique position,” said Jay O’Neil, senior agricultural economist at Kansas State University. None of the ABCD traders has as direct a political advantage anywhere they operate, he added — but Cofco is China’s domestic champion. “We can’t ignore that China is the biggest importer of many commodities, whether it is soybeans or corn.”
Today, the group’s main client is still Beijing, but it has climbed to nearly $100 billion in annual revenue, triple where it was a decade ago and second only to Cargill Inc. Now it has to contend with the return of an old foe. US President-elect Donald Trump has already pledged to enact 60% tariffs on Chinese goods and a ratcheting up of trade tension, which could in turn throttle Cofco’s ambitions.
Brazil, where Cofco will soon have one of the continent’s largest grain terminals at Santos, has become key to China’s efforts to diversify its purchases — it now supplies most of China’s soybeans and corn, dwarfing the US’s share.
“China is ready for another trade war, if that’s what we’re going to have,” said Ker Gibbs, who has worked with Cofco officials and frequently met with the company as former president of Shanghai’s American Chamber of Commerce.
Brazil Bet
Cofco was founded in 1949, and its focus was on bartering with other Communist regimes on behalf of the new Chinese government. It later sought to earn foreign exchange and supported nascent diplomatic initiatives, and when Coca-Cola Co. returned to a cautiously opening China in 1979, it was via Cofco consignment.
The global, market-oriented Cofco that exists today emerged under Ning in 2014 through the Geneva-based Cofco International. Taking advantage of Beijing’s newly permissive stance toward overseas expansion, it splurged on deals, including a combined $4 billion to buy the agricultural trading assets of Noble Group Ltd. and Dutch grain trader Nidera BV. The company was also able to offer top traders competitive salaries plus bonuses that directly compensated their performance, instead of complying with a Beijing-ordained structure.
Eager to understand trading strategies in international markets, executives like former Cofco International Chairman Patrick Yu frequently invited traders to explain the mechanics of their business. Chinese traders working at rivals said they had been quizzed by Cofco executives over casual drinks on the latest trading strategies, or their views on China’s large-scale purchases, according to some of the traders who attended such gatherings.
Still, its first foray overseas was not an easy one. Ning’s visit to address Nidera employees in Amsterdam began with a lengthy interrogation by immigration officials and concluded with a flood of questions from his own staff on Cofco’s motivations and management style, according to his memoir.
The early years of Cofco’s Geneva unit were marred by cultural clashes and internal bureaucracy, according to people who worked with the company at that time. Another headache was the group’s heavy dependence on traders in the acquired businesses. New arrivals were put in charge of even the most important trading books, including soybeans, a vital import for China, and not all decided to stay. A major departure was former Archer-Daniels-Midland Co. rising star Matt Jansen, who became chief executive officer of Cofco International in July 2016 and quit the next year.
Ning’s series of acquisitions raised questions over their financial viability. Indeed, in the first few years, the new assets not only failed to deliver growth, but also brought troubles such as $200 million in unauthorized trading losses on its Dutch biofuels desk, then a $150 million financial hole in Nidera’s Brazilian operations. Ning himself departed in 2016. His ambitions, according to people familiar with the company at the time, were no longer in step with a government that had pulled away from encouraging splashy overseas deals.
But the deals proved to be prescient. Just as Ning left Cofco, the Trump era began, putting into doubt China’s relationship with the US, its long-standing major food supplier. Nidera’s Brazil assets became extremely valuable as China sought out alternate grain suppliers, while Cofco leaders made clear their determination to invest in Brazil for the long term on multiple occasions.
Cofco had other challenges to overcome. In 2018, Cofco International lost more than $100 million due to bad bets. The turmoil started to stabilize in 2020 when the unit made money from trading for the first time and posted a record profit on the back of volatile markets. Its plan to list its agricultural trading operations, however, stalled due to the pandemic and regulatory changes that paused other high-profile initial public offerings, curbing more expansionist ambitions.
Brazil is an “essential agricultural hub for our business” and has “unparalleled potential as a global leader in agriculture,” a Cofco International spokesman said in an emailed statement. “We are steadfast in our commitment to investing responsibly in Brazil,” the statement added.
US Pullback
The tensions between Beijing and Washington also curtailed some of Cofco’s ambitions in the US, where it tried and failed to expand significantly beyond the operations that Nidera and Noble already owned. A partnership Cofco International announced in 2017 with Growmark Inc. to jointly own and operate a barge, rail and truck terminal in Illinois ended this year, when the companies entered into an asset swap that included the sale of the trader’s Chicago grain terminal. Cofco, which also offloaded its Milwaukee facility last year, failed to gain access to US export terminals.
Expected intensifying geopolitical tensions under the new US administration and a nearing-saturation domestic market suggests Cofco’s ascent may not continue at the same pace, according to Abdolreza Abbassian, an independent food market analyst and former economist at the UN Food and Agriculture Organization.
“Its close ties to the government continue to present a significant problem because the interplay between state support and market dynamics will continue to limit its ability in responding to global market challenges,” said Abbassian.
That makes its growing foothold in Latin America all the more vital. During a visit by President Xi Jinping to Lima and Brasilia in November, he inaugurated a massive port in Peru that promises to shorten vessel trips to Asia, and signed multiple agreements to open the Chinese market for Brazilian products including sesame and sorghum.
Santos will dramatically accelerate Cofco’s ability to make the most of the trade shift, quadrupling the company’s Brazilian port capacity to 14 million tons annually and allowing it to load 200 ships a year.
The terminal’s connection to railways, which is cheaper than trucking, should make the company more competitive in sourcing soybeans and corn from Brazil’s top producing region. It also lowers the chance of running out of storage or having to pay costly fees due to shipping delays, which are not unusual in Santos.
Meanwhile Cofco is racing to buy more soy, sugar and corn from Brazil’s farmers, hire more traders or even acquire local businesses. Earlier this year, the company was involved in talks to buy sugar mills, according to people familiar with the conversations. Cofco International declined to comment on the talks.
All that is bolstering Cofco — and China — against looming US trade tensions, even if it can't fully blunt it.
“The fact that they have already put a lot of volume through the trading relationship with Brazil is certainly going to help China,” said Gibbs, the former AmCham president. “But a trade war is going to be damaging to both sides.”
--With assistance from Clarice Couto and Vinicius Andrade.
©2024 Bloomberg L.P.