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Is This a Half-Baked Idea by ConAgra?

By Rich Duprey - Dec 3, 2013 at 10:15AM

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Can this agri-giant's domination of the flour-mill industry withstand regulatory scrutiny?

The massive combination of two U.S. agricultural milling operations announced back in March will be delayed until sometime in the first quarter of 2014 after ConAgra (CAG -0.14%) said regulators and the Justice Department are giving the deal closer scrutiny. If approved, it could provide the spark for even further consolidation in the industry.

Earlier this year ConAgra said it would merge its flour-milling business with the nation's largest miller, Horizon Milling, to create the country's biggest operator, doubling the size of its nearest competitor, ADM Milling, a division of Archer-Daniel Midland (ADM 2.92%). Observers suspect that just to be able to effectively compete against the behemoth, ADM would need to go on an acquisition spree of its own.

Horizon Milling is a joint venture between privately held Cargill and agricultural cooperative CHS (CHSCP 0.07%), which together commands an industry leading 18% of the market. ADM is the second largest operator in flour milling with a 17% share, and Cargill comes in third at 16%. By combining their resources into a new venture called Ardent Mills, more than a third of the U.S. flour market will be concentrated into the hands of the agri-giant, which would have combined sales of $4.3 billion, operate 44 flour mills, three bakery mix plants, and a specialty bakery facility, spread out in the U.S., Canada, and Puerto Rico. The venture would operate independently, with Cargill and ConAgra each owning a 44% stake, and CHS controlling a 12% piece.

Opponents of the deal such as Food & Water Watch worry the deal gives Ardent too much market power, which would lead to wheat farmers being paid less for their grain and consumers paying more for their baked goods.. 

Flour consumption in the U.S. is slowly declining as low-carb diets proliferate. The Agriculture Department says that although consumption has recovered from the lows it hit in the 1970s, the amount of area in the U.S. where wheat is harvested is down nearly 30 million acres, or about one-third from its peak in 1981 due to declining returns compared with other crops. Total production in 2014 is forecast at 2,114 million bushels, down some 155 million bushels from the 2012-2013 period.

The wheat industry was nearly brought to its knees earlier this year after the discovery of a genetically modified strain of the grain that Monsanto (MON) tested years ago inexplicably found its way into an Oregon farmer's field. Because most of the rest of the world rejects GM wheat, and the wheat from the Pacific Northwest is mostly targeted for export, the ramifications of the discovery were massive and people fret over consolidation anywhere.

Ardent has selected Denver, Colo., as its headquarters, and according to opponents that gives it a base of operations providing a "nearly captive" market in the Midwest and Pacific Northwest as wheat growers' choice of mills is dramatically reduced. Moreover, with nearly a quarter of all bread manufacturing being performed in the New York, New Jersey, and Pennsylvania region, the ability of the mills to increase prices to bakers rises considerably.

Others aren't so sure, however, contending the market is so big and operations so diverse that the impact on consumers will be negligible at best. Considering the international market for U.S. wheat, the joint venture would be constrained in its ability to dictate pricing too much. Bunge (BG 2.69%) recently bought wheat mills in Mexico to leverage its North American wheat-origination operations. And with consumption at best flat, pushing prices higher wouldn't benefit the industry.

The biggest loser seems to be Archer-Daniels Midland, which will come under pressure to grow or die if the deal goes through. Expect to see more acquisitions announced that allow it to at least tread water while growth gets baked into ConAgra's business. 

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Archer-Daniels-Midland Company Stock Quote
Archer-Daniels-Midland Company
$86.60 (2.92%) $2.46
Monsanto Company Stock Quote
Monsanto Company
Bunge Limited Stock Quote
Bunge Limited
$101.24 (2.69%) $2.65
Conagra Brands, Inc. Stock Quote
Conagra Brands, Inc.
$34.39 (-0.14%) $0.05
CHS Inc. Stock Quote
CHS Inc.
$30.15 (0.07%) $0.02

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