Soybeans | Frontier Markets

Saudi-based Savola’s “expansion drive” was temporarily halted after the Middle East’s largest sugar refiner announced that it would not bid for the six sugar beet processing mills being sold by the Turkish government, as previously expected. In October the firm said that, along with farmers’ union Turkey Tarim Kredi and the Nesma Holding Company, it would set up a joint venture in order to increase production at the plants from 300K to 500k tons/year, while “orient[ing] some of the output to foreign markets,” per one Savola executive. Yet there are other options [for expansion] on the table, reiterated its chief executive, Sami Baroum, including “options in Sudan and Egypt.” And according to at least one analyst at Shuaa Capital in October, “expanding outside of the Gulf Arab region is part of Savola’s stated expansion strategy in the food sector, where its sugar business is a major component alongside edible oil.”

The missed opportunity should be an opportune time to beginning ramping into shares of Savola for our mock frontier fund. The firm is an attractive long-term investment on multiple fronts: one, its highly diversified business operations involve the firm not only in the production of edible oil and sugar, but also in retail and real estate. Savola Foods, however, can be considered part of the bedrock of its identity: in addition to being the world’s largest manufacturer of branded cooking oil, its total sugar refining capacity of 2 million tons/year is nearly double that of its closest regional competitor, UAE-based al-Khaleej Sugar Co. That said, at the end of 2008 the company’s retail segment (highlighted by Panda, the largest retail food chain in the Middle East) was the major revenue generator, accounting for 43.8% of the total company’s revenue followed by edible oil and sugar segments with a share of 32.6% and 17.6% respectively. The company is also targeting expansion for this latter segment; per a report issued in mid-October by Global Investment House, a Kuwaiti investment firm, “expansion in the company’s retail segment is based on two types of strategies: (i) acquisition of other retail chains (e.g. Giant and Geant stores); and (ii) adding new hyper and super-Panda stores. This is expected to increase company’s overall retail stores to 110-116 in 2012, out of which 15-20 will be hypermarkets and remainder will be supermarkets.”

Financial Times notes that China’s growing appetitite for soybeans (it is the world’s largest buyer), which are crushed into vegetable oil and also into livestock meal, coupled with droughts in both Brazil and Argentina (the world’s second and third largest exporters) and dwindling inventories in the U.S. (the world’s largest) are causing a price spike in the old crop. The new crop, however, which will be harvested in November, is expected to be a bumper harvest, meaning that while the crop’s current steamroll may still have a bit more pace to it, prices should ultimately wane. Likewise, the rise in the price of palm oil, another source of vegetable oil, which is increasing in the short-term (up 60% YTD) thanks to decreasing inventories in Malaysia, its largest exporter, should converge back to the mean as supplies have a chance to react.