As the first elevator along the Mississippi River where a ship can dock, Louisiana’s state-owned Port Allen grain facility has always had the potential to be a game-changer. Now, with new long-term tenant Louis Dreyfus and a major infrastructure improvement plan in place, the aging port facility is set to reach that potential. And Louisiana agriculture officials believe the impact of Dreyfus’ takeover will mean more money for farmers who deliver grain to riverside grain elevators.
When the strategically-located elevator’s lease came open “we had a fiduciary responsibility to consider what’s best for farmers, for the region, for the state, for the port,” says Mike Strain, Louisiana Commissioner of Agriculture.
That meant weighing lease proposals by Cargill and Dreyfus. Cargill, which had leased the facility for 55 years, has a long history in the area. Dreyfus was the enthusiastic fresh face.
“For the most part, we were pretty happy,” with the first 45 years of Cargill’s lease, says David Bollich, with the Louisiana Farm Bureau.
Farmer displeasure with Cargill roughly coincided with the company buying out Continental Grain, another export elevator, just prior to 2000.
“Port Allen is 55 years old and it’s close to obsolete,” says Bollich. “In order to compete in the export market, it needs – and has needed – big improvements. It has an obsolete barge unloader and, despite the local grain they buy, the bulk of what is loaded on a ship still comes from barges. It’s inefficient and expensive to do it, now. The actual system for loading vessels is simply obsolete.”
By picking up another elevator, “Cargill picked up efficiencies that pretty much allowed them to put Port Allen on the backburner. At that time, I think they were thinking ‘we’ll continue to buy local grain. But we’ll pay less for it because it isn’t critical for us. We’ll have a nice profit margin in it.’”
And for a decade, “it worked well for them. No one faults them for that. It impacted farmers’ prices but it was a business decision.
“However, to farmers’ credit, they – and Farm Bureau – realized what had happened. Years ago, they began asking ‘hey, is there another tenant that could take over Port Allen? An international trader, who is not already on the Mississippi River and would like a facility on the Gulf?’
Those questions – often peppered with irritation over basis and the price paid to farmers for grain -- only picked up steam in 2010 as the new lease approached and the Port Allen Commission wrestled with the possibilities.
“It’s well known that there has been some discontent amongst farmers in this region regarding the current operation of the elevator,” says Strain. “I’d had discussions with farmers on this for a number of years. The major (cause) of the decision was based on economics. But I can tell you many farmers were discontent and that was a factor.”
Initially, there was concern there would be little interest in bidding for the facility. Those worries proved unnecessary.
Eventually, the bids were narrowed to three: Cargill, Louis Dreyfus and Noble Commodities. Noble is an international trader but has no presence in the United States. They dropped out of the running late last summer. It came down to Dreyfus and Cargill.
“At the end of the day, working with (Louisiana) Gov. (Bobby) Jindal’s office, I requested that the LSU AgCenter, working with the Department of Economic Development, do a study on the port,” says Strain. “I wanted a realistic, hard, look at the overall economic impact of the port – specifically for the farmers and the region.”
For more, see study.
Mike Salassi, LSU AgCenter economist, was an author of that report and says Cargill’s initial lease was for 30 years. “It has been renewed in subsequent years, but I am not aware that any outside bids from other companies were ever solicited.”
“Cargill has been leasing the elevator for a base lease of around $275,000 annually with a bit over 7 million bushels of capacity,” says Bollich. “That’s a song for that elevator.”
“If you look at the basis history prior to about 2000, Cargill was pretty competitive in their bids for grain at Baton Rouge,” says Salassi. “They were using the Baton Rouge facility as a primary export facility. So, they were very competitive buying grain. The basis at Baton Rouge below the Gulf price for corn and soybeans was 10 to 15 cents per bushel in the 1990s.”
After Cargill bought out Continental Grain and began using elevators at Reserve and Westwego as primary export facilities, “the basis widened and the prices at Baton Rouge really dropped off,” says Salassi. From 2007 through 2010, “Cargill’s grain prices at Baton Rouge averaged $0.64 per bushel below the Gulf price for corn and $0.77 per bushel below the Gulf price for soybeans.”
Salassi says “the grain volume declined dramatically in Baton Rouge. In the 1990s, through-put volume at the port regularly exceeded 1 million tons. However, over the past 10 years, Cargill’s volume at Baton Rouge averaged less than 350,000 tons, as the Baton Rouge facility had ceased being their primary grain export facility.”
In its bid to remain at Port Allen, Cargill proposed paying $5 million in rent annually for 10 years with a 5-year option. Of the $5 million per year in rent, $3 million could be converted to capital improvements.
“So, they could pay $2 million in rent and $3 million in improvements annually,” says Salassi. “There was a limit of $30 million in total capital improvements with a minimum of zero – so, they could do nothing to improve the facility.
“Dreyfus, meanwhile, proposed a 20-year lease with an additional 10-year option. They’ll pay a minimum of $1 million in annual rent plus additional rent based on volume, which could bring the rent to the port up to $2 million.”
The “important thing” according to Salassi: Dreyfus proposed spending $75 million to $100 million in capital improvements on the facility. “On the initial 20-year lease, they proposed spending $75.6 million by the seventh year. In order to get the additional 10-year option, they proposed spending $100 million by the fifteenth year.”
Once the numbers were crunched, Salassi was not surprised with the results. “In our study, we converted Cargill’s 10-year and 15-year proposals and Dreyfus’s 20-year and 30-year proposals to annuity equivalents. That’s the way to compare investments of differing lengths equally. Dreyfus’ numbers came out higher. Annualized total outlays to the port -- in rent and capital expenditures -- were estimated to be $5.15 million to $5.24 million annually for Cargill compared with $5.28 million to $7.29 million annually for Dreyfus.”
Following the release of the LSU AgCenter study, “based on a number of factors, it was decided Dreyfus would be the best operator,” says Strain. At day’s end, “it will mean between $10 million and $30 million annually in farmers’ pockets.”
In late February, the Port Commission unanimously agreed to strike a deal with Dreyfus. The company is expected to take over the facility in mid-June.
In order for Dreyfus’ plan to work, all interviewed say the company must aggressively buy grain.
To reap the benefits of such infrastructure investment and be able to compete in the export market, “I think (Dreyfus) will have to make the investments as quickly as possible,” says Bollich. “You can’t go halfway – you either have efficiencies where needed, or you don’t. If you have efficiency in barge unloading but not in the ship-loading capacity, it doesn’t help you.
“I think Dreyfus has to get the facility up to speed, as soon as possible. And they’ve stated the same. Once that happens, we’ll really have something here.”
Could Dreyfus impact prices farmers get in other states along the Mississippi?
“No question, it will,” says Bollich. “Dreyfus plans to put 5 million metric tons of grain through the port – ballpark, say 200 million bushels. In Louisiana, depending on the acreage mix and yield, we’ll grow 100 million to 110 million bushels of corn and soybeans. So, if we have a big corn crop, Dreyfus could get 1 million tons from Louisiana. But that leaves 4 million metric tons – 150 million bushels -- for Dreyfus to pick up from points north.”
The $10 million to $30 million estimated annual impact from the Dreyfus deal “is for farmers across Louisiana. It wasn’t just for those who deliver to the Port Allen facility,” says Strain. “We also expect to see an increase in price or a lessening of the basis all up and down the river.”
In the LSU AgCenter report “we said based on the market and the basis history, conservatively, if Dreyfus came in not only would they bid up prices in Baton Rouge but every bushel of grain taken that exceeds the recent norm will push everyone’s price on the river up,” says Salassi. “Dreyfus is proposing to run 4 million to 5 million metric tons of grain through the Baton Rouge facility. That could raise the price of corn and soybeans in Louisiana by 10 cents to 30 cents per bushel.”
To handle that much grain, Dreyfus will “have to buy 3 million-plus metric tons that haven’t been bought there before. That’s going to reduce the supply available to the other elevators on the river. In order for these elevators to keep their volume at current levels, they will also have to bid up prices. That should raise everyone’s price – all the way up the river.”
Unlike more well-known grain companies, Dreyfus doesn’t have a network of country elevators or barge facilities.
“They’ll get what they can out of Louisiana,” says Bollich. “Then, they’ll have to deal with private facilities and independent co-ops. As I understand it, this isn’t an altogether new game for Dreyfus. It has been a very successful trader in U.S. markets for decades. They just don’t have the brick and mortar throughout the country. They may be looking for acquisitions. Right now, though, they’ll be looking for grain that isn’t already controlled by the other exporters.”
Regardless, “any way you cut it, this is good for farmers,” says Bollich. “You start off with the same-sized pie – the U.S. crop won’t grow so much just to accommodate Dreyfus. Instead, there’s one more buyer competing for the same pie. Add a competitor to any commodity situation like that and it’s good for the producer.”
Dredging the Mississippi River to allow for barge and ship traffic is not an issue specific to the Port Allen facility. But in recent months keeping shipping channels open has become a major concern because the Army Corps of Engineers, tasked with the dredging, says it is underfunded.
“Dredging must continue,” says Strain. “It’s that simple. I have on my desk a letter to President Obama requesting immediate attention be given to dredging the river. We’ve had several meetings and have sent letters to our entire congressional delegation about this.”
The National Association of the State Departments of Agriculture, “unanimously passed a resolution to support action to fully utilize all funds in the harbor maintenance trust fund for the purpose of dredging our nation’s ports, rivers and waterways to fully meet navigational channel requirements,” says Strain.
Sixty percent of the nation’s grain – worth some $240 billion a year -- comes down the mighty Mississippi River. That amount doesn’t count “coal, iron ore or petro-chemicals,” says Strain. “Break it down and that’s 45 percent of the nation’s soybeans, 50 to 60 percent of all total U.S. corn exports. The Mississippi River contains the largest port system in America and enables 30 states to ship their goods to export markets. It’s absolutely huge.”
In order to meet President Obama’s export initiative calling for the doubling of exports “we must fund these infrastructure needs and do it properly,” says Strain. “That’s true not just for the Mississippi River but all our ports and harbors.”
The bright side
All along, “all Farm Bureau wanted was to see if we could bring a company in that could return Port Allen to the status of flagship export facility, a one-and-only for that company,” says Bollich. “In Dreyfus, we have that. We’re confident, based on what their investment plans: probably over $100 million over the life of the lease.
“American agriculture – whether you farm here, or Minnesota, or wherever (and I worked for Cargill in Illinois for four good years) -- need to celebrate things like this Dreyfus deal. We’re fortunate to have the big, international grain exporters already in place. But anytime you can add another player on the river, that isn’t an intangible benefit to farmers. It will be a direct benefit to U.S. grain farmers. To have another competitor, one without its own network, is a huge plus for Mid-South and Midwest agriculture.”
Salassi says “probably the most important point to underscore about this is that this is a deal in which everyone comes out a winner. The port has a new tenant which will provide increased revenue and significant facility improvements to the port. Increased shipping activity will provide more work for pilots, longshoremen and others working on the river. And, most importantly for agriculture, a new entrant into the Mississippi River grain market will be competitive in bidding up prices for grain producers.”