WHEN David MacLennan put plans in motion to step down as Cargill’s chief executive officer, his transformation of the global grains trader into a protein powerhouse was looking particularly shrewd.

During his nine-year tenure at the top of America’s largest private company, he’d turned 158-year-old Cargill into the US’s third-largest beef processor, engineered its return to chicken and posted two straight years of record profits.

Meat had become such a big deal that when MacLennan moved on at the start of the year, he passed the baton straight to the former boss of Cargill’s protein division, Brian Sikes.

But now the animal protein business is faltering. After years of raking in cash, inflation is rapidly eroding meat demand, slowing the company’s profits fast.

Processing beef is just barely profitable today, and industry insiders say margins for the unit at the centre of Cargill’s recent growth are likely to go negative at points over the next two years.

“Our beef business is still modestly profitable, but certainly not anywhere near where it has been in the last couple of years,” MacLennan, now executive chair, said Wednesday in an interview. In terms of challenging beef margins, “I think we’ve got a couple of years of this.”

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That’s a stark change for the world’s top agricultural commodities trader, which had gotten used to fat profits from its beef business.

Margins for meatpackers like Cargill – founded in 1865 with a single grain warehouse in Iowa – have recently slumped after drought forced US ranchers to cut herds, pushing up cattle prices just as cash-strapped consumers started to shy away from expensive cuts. At the same time, the war in Ukraine inflated crop prices, making feeding herds more expensive. 

Trimmer profits

Global beef consumption is expected to stall this year and even fall in the US; after that, industry experts expect growth to recover to just around 1 per cent a year for the next two decades.

More than 50 per cent of Cargill’s 2022 earnings before interest, taxes, depreciation and amortisation came from the animal nutrition and protein segments, according to Fitch Ratings, so any decline in meat demand threatens an outsized impact. 

Company profits slid to US$3.2 billion for the first nine months of the fiscal year that ends in May, according to a presentation to bondholders seen by Bloomberg earlier this month.

That puts the company on course for a less profitable year after posting a record US$6.7 billion of net income last year. Meat has contributed to the tougher 2023; so has a decline in volatility, the lifeblood of commodity traders like Cargill, the ‘C’ in the so-called ABCDs group of merchants alongside Archer-Daniels-Midland, Bunge and Louis Dreyfus that historically have dominated crop trading.

After years of supply disruptions, many parts of the commodities market have started to normalise. That means fewer chances for the big “profit dislocations that led to strong profits last year,” said Seth Goldstein, a strategist at Morningstar.

“For all grain merchandisers, the challenge is to generate the strongest profit possible even as conditions normalise.”

There are bright spots for Cargill, too.

Profits are higher than in recent years including 2018, 2019 and 2020. And MacLennan still sees a lot of opportunities including health and nutrition, plus renewable diesel – an area where investors and competitors could end up seeing more deals, including joint ventures and acquisitions. 

The interview with MacLennan, 63, offers a rare insight into a company that usually remains fiercely private.

Owned by the descendants of the founding Cargill and MacMillan families – who added US$13.6 billion to their fortune last year, according to the Bloomberg Billionaires Index – Cargill stopped publicly reporting quarterly income data during the pandemic, releasing the information only to its investors.

Even some employees, who used to have access to the data, have been left in the dark, with many now finding out about their own firm’s performance through reports on Bloomberg News, according to people familiar with the matter, who asked not to be identified because they aren’t allowed to speak to the media.

Cargill employs about 155,000 people across 70 countries. The company releases its earnings to all employees, according to a spokesperson.

Chicken push

As beef demand slows, chicken promises some future relief. Chicken demand is set to grow faster than beef over the next decade and is on track to account for 41 per cent of all meat-eating by 2030. Since chickens get slaughtered faster, the current oversupply in the market won’t last long.

Last summer, Cargill closed on its US$4.5 billion deal to buy Sanderson Farms, the third-biggest chicken producer in the US, in a joint venture with Continental Grain Co.

The company is also investing in innovation, with a range of labs developing everything from better-tasting fake meat and pea-protein ice cream to plant-based beauty products to replace the traditional ones made from petroleum.

“Innovation was driven around making something better or cheaper or both,” Florian Schattenmann, Cargill’s chief technology officer, said in an interview in Minneapolis earlier this year.

There’s also now a “third dimension of sustainability. If your new product is a better product but it somehow leads to a worse carbon footprint,” it won’t succeed.

Investors have recently flocked to buy the company’s bonds, and Fitch ratings says it sees “solid” momentum in the company’s trading, processing, food ingredients and animal nutrition businesses helping offset softer meat markets.

The company has a policy of paying out 20 per cent of earnings in dividends and retaining the rest for investment in the business, and there are no plans to change that now that Sikes, 55, is at the helm.

Also unlikely to change, for now: Its ownership model.

“Family shareholders are committed to private ownership,” MacLennan said earlier this year. “There’s no reason that’s going to change in the near future.” BLOOMBERG