Breaking with tradition, the top executives of America's largest private company talk candidly to Caroline Daniel in the first of two articles about the global food and agriculture group's future

FEATURES: Company Profile, Part One of Two
By Caroline Danielm, Financial Times
London, UK, Wednesday, February 25, 2004, Page 7

Few people know much about Cargill. It has often tried to keep it that way. Even its chief executive admits that when he joined he could not tell his own father how much money it made. Yet Cargill's reputation for secrecy has masked a compelling story: how a business founded in 1865 has been able to grow into one of the 20 biggest in the US by revenue. More significantly, it has been able do so by remaining in private hands, relying chiefly on reinvesting its own cash.

Cargill is easily the largest private company in the US. Last year it generated revenue of $60bn, putting it ahead of Boeing, Merrill Lynch and Procter & Gamble. The commodities it trades in and processes feed billions of consumers round the world every day and include all the eggs used in McDonald's stores in the US and much of the sugar in Coca-Cola and the malt used in beer.

The company, which started with a single grain-elevator in Conovor, Iowa, now controls 25 per cent of all US grain exports. It has consolidated its position in the meat industry, controlling about 22 per cent of the US market, equivalent to processing 22,500 cattle a day. It has 21 per cent of the US turkey industry and 9 per cent of its pork.

It is also a true global conglomerate, with 101,000 employees in 60 countries, including chocolate oper- ations in France, beef processing in Argentina and malting plants in Canada. Cargill is the largest exporter from Argentina and the biggest poultry processor in Thailand. It ships more than 6.5m metric tonnes of sugar a year and has a huge trading arm, dealing in price hedging and financial risk management.

Yet it is not satisfied. Cargill wants to be "global leader in nourishing people".

For a company so keen to protect its privacy, it is not a good sign - although perhaps not surprising - that as I walk up the wooden staircase in its headquarters, the first question someone drily stops to ask is: "What are we doing letting the FT into our hallowed halls?"

In interviews in Minnetonka, Iowa and Wichita, however, senior executives offer some unusual - and candid - insights. They tell how Cargill has fended off the vituperative personal politics that have destroyed many family empires. They also reveal how Cargill has sought to reinvent its strategy after a turbulent few years in the commodity markets in the late 1990s. The company has tried to move away from being a pure commodity business to offering higher-margin products and greater service to its customers. It has also embraced acquisitions, recruited outsiders to senior roles and overhauled the way it is organised.

Warren Staley, Cargill's chief executive, a spry man of 61 with an amused manner and a commanding, agreeable voice, has spear-headed the changes since 1999. He is the third non-Cargill family member to head the company since its creation 139 years ago by William and Samuel Cargill, sons of a Scottish sea captain. Two branches of Cargills, and the MacMillan family, still hold about 90 per cent of the equity.

Growing up in a blue- collar family in Illinois and Kansas, Mr Staley says, he had not even known what a chief executive was. Instead, inspired by Sputnik, he studied engineering, before escaping to South America. Marriage brought him back to the US. He then joined Cargill and never left.

He has been there for 34 years. In fact, all seven of Cargill's top executives have worked at the company for 30 years or more. For Gregory Page, the 53-year-old president and chief operating officer, who joined from college, this is a reflection of Cargill's scope.

"Because of its decentralisation and management it seemed the kind of place where generalist skills were most likely to be valued . . . We have over 1,100 locations where people have the authority to take risks, set price, extend credit and take commercial decisions."

Yet joining Cargill was also like joining the Roman Catholic Church, a conservative institution teamed with a Midwestern, paternalistic ethic. "[It was] historically run more like the Catholic Church. It was very hierarchical; you understood who the cardinals were."

If managers are cardinals, that makes the chief executive the papal authority. If not exactly papal, Mr Staley has the air of someone able to focus on the long term. He is, after all, only the seventh person to run the company. As head of a private company, Mr Staley is free from talking to analysts, "explaining why you are off by three-tenths of a cent a share this quarter. We can take a medium to longer-term view and don't worry about the fact we are in cyclical businesses that have volatility."

Without the tyranny of quarterly disclosures, Cargill executives answer questions directly, with an intellectual engagement beyond the re- gurgitated answers of some executives. They can also focus on subtler features of the global economy, such as trends in protein consumption, not just the short-term turbulence of oil prices or currency movements.

Mr Staley says: "We are constantly debating what do we think the consumption of food will be . . . we have to think about what is changing, like GDP per capita - will it be [spent on] wheat or cereal or rice? How much arable land does China have, or Indonesia? And what do we feel, in 10 or 20 years, is going to be the bias and approach of the government; and are the people there today going to be there in 20 years; and, if not, will there be a real shift?

"Are we going to invest because we think people will grow and process the food there, or are we going to invest somewhere else, like a Brazil or Argentina or Australia? These are big decisions and the sizes of these plants are in the hundreds of millions of dollars, so we can't make many of those mistakes . . . We have to start ahead of time to have a competitive advantage down the road."

This long perspective does not ensure success. In the 1990s youthful family members demanded more cash than the dividends generated by Whitney MacMillan, the last family member to run Cargill. Family members sold 17 per cent of their stake to the company in return for about $750m in cash. The board was reduced to 17 members: six family, six independents and five management appointees.

Managing the cultural transition after Mr MacMillan's exit proved challenging for Mr Staley's predecessor, Ernest Micek, admits Mr Staley. "Whitney was a more intuitive person. He wasn't a person who particularly liked processes and detail, and had the luxury of growing up on his father's knee and his grandfather's knee."

Cargill was then hit by the Russian and Asian financial crises in 1998, and tumbling commodity prices. Revenues fell from $55.7bn in 1997 to $51.4bn in 1998 and $45.7bn in 1999, while net income fell from $814m in 1997 to $468m in 1998, and $220m in 1999.

"It was clear in the late 1990s that the business model of the company to be effective in trade and processing was breaking down," says Bob Lumpkins, finance director. "There was consolidation of our customers. Our offering wasn't very differentiated. We were up against focused competitors and our cost structure was too high."

In mid-1998 a team was created to set the direction until 2010. The review - dubbed Strategic Intent - involved considering four strategies, from reinvention as a volume supplier to focusing on speciality ingredients and consumer branding. They brainstormed around core competences," says Ray Goldberg, professor at the Harvard Business School, who has written a case study of Cargill, after taking 10 years persuading the company to co-operate. "The exercise they went through has put them ahead of their competitors. They have been more thorough in thinking about the future."

The foundation was the families' desire to keep Cargill private. Yet they recognised the need for innovative ownership structures for businesses it could not fund internally. In January, Cargill said it would merge its fertiliser operations with IMC Global, a publicly listed group, the first time part of Cargill has gone public. The company is also carving out some of its riskier capital markets operations, about $10bn of its assets and liabilities, into a hedge fund: Black River Asset Management.

The second step was to focus purely on agriculture and food and to move into higher margin-activities, such as bio-sciences and expanding the processing of raw materials. About half of Cargill's revenues come from trading, which is volatile and low-margin.

Cargill has therefore sold about $2bn of assets. Although as a cash buyer it has limits on acquisitions (it must retain a strong balance sheet to support its debt ratings and it borrows $10bn to cover its trading activities), it has pursued deals more aggressively. It paid $1bn for Cerestar, a European maker of starches and sweeteners. It plans further global expansion, especially in China and Latin America. "Since Strategic Intent we went from 80 per cent [growth through] green-field sites to less than 50 per cent," says Mr Staley.

But the biggest changes have been internal. "We said we were not getting out of commodities but we needed to change the commodity mindset," he says. "We had to change our self-image," adds Mr Page, "instead of saying: 'I'm a flour miller' people had to say:,'No, I'm a solution provider to bakers.' "

To be credible in persuading customers, such as McDonald's, that Cargill is part of their "solution" rather than a rapacious supplier, it has recruited from outside. Ten years ago, only 20 per cent of managers above a certain salary came from outside. Now about half do.

Mr Page concedes the challenge will be keeping them. "They can't help but be asking themselves: can a person who came here mid-career aspire to the most senior jobs? - because that role model with the seven of us is not in place."

Cargill has also taken a knife to itself, "atomising" its businesses into 90 units, up from 40, grouped under 14 platforms. It took 25 senior managers and labelled them "platform leaders". Rather than judge them on a profit and loss account, they had to become team coaches. The plan was boiled down to a white binder of notes, dubbed "the White Bible".

"Everyone said: 'What? Are you nuts?' Because everyone grew up wanting to have a P&L . . . and tell people what to do," says Mr Page.

So far, at least, the changes - aided by improving commodity prices - appear to be paying off. In the second quarter Cargill's net income rose 39 per cent to $518m. In 2003, net earnings rose to $1.3bn, the first time it exceeded $1bn, while sales rose 19 per cent at $59.9bn. Cargill continues to plough back about 85 per cent of these earnings into the company, with the rest paid out in slowly increasing dividends to appease its family owners.

Perhaps it is a mark of confidence that at the end of last year the last family member left. "The family want to continue to keep this as a privately owned company and to allow it to grow by reinvesting earnings," says Mr Staley. "It has remained private for almost 140 years. We are told no one else has done this. The will of the family is to keep it private." If Mr Staley's "White Bible" continues to deliver the goods, Cargill's reinvented cardinals will be able to do just that.

Stephen Giunta, a former personal chef of Ronald Reagan, is one of Cargill's more unusual recent recruits. As culinary director of its Meat Solutions division, he is now bringing the catering skills enjoyed by Washington's elite to the masses that Cargill feeds daily.

In an industrial-sized kitchen in Wichita, on the site of a former Cargill slaughterhouse, he is busy chopping asparagus and making barbecued applewood brisket sandwiches. He has decorated the strawberries with chocolate dinner jackets.

Mr Giunta's move from cooking in the White House (Nancy Reagan liked nouvelle cuisine, her husband liked duck and hominy, a processed maize dish) to advising Cargill customers, such as McDonald's and Applebees, on how to cook Cargill meat products, is just one sign of its efforts to get closer to its customers and transform itself from being a commodity provider of beef, pork and turkeys.

"We used to be totally reactive to what customers wanted and we delivered it. Now we have to build better relationships and be more aligned with their needs. Applebees, the food chain, may want a steak of a certain thickness, cost and cooking time. I need to make sure that the cut we provide hits their goal of 12 minutes cooking time."

This emphasis on customers also includes spending more on research and development. The facility has cubicles to test the tenderness of meat and a room for shelf-life tests, with displays of meat, some looking glossily fresh, others unhealthily brown.

Cargill has also looked to "the blue-collar side of R&D", its slaughter operations. It has automated parts of the meat- removal process to reduce industrial injuries. Since 2001 all its pigs have been rendered unconscious with carbon dioxide, rather than electricity. "We call this pork quality improvement. It is less stressful for hogs, which improves muscle tone and the quality and colour of the meat."

A few miles away from the Wichita facility, Bill Rupp, executive vice-president of Excel, Cargill's meat subsidiary, and leader of the beef business unit, is dealing with similar issues of how to get closer to customers. After 20 years in the industry, he looks as if he would be as much at home on a ranch as in the office.

"It used to be that we would just sell beef in a white Styrofoam tray with Saran wrap, and sold the three government grades. Now we talk to our customers about what they want in tenderness and consistency. There are more than 40 different grades, based on carcass attributes and what the customer wants."

Yet Mr Rupp admits it will take time to undo Cargill's domineering habit of using its 22 per cent market share to dictate prices. "Some trust us easily but it can be frustrating when others don't want to trust you . . . The challenge is: how do we get closer when our past relationship used to be adversarial, to maximise profit at their expense?"

"You don't get to meet anyone [at these events], so I said I would send someone. So they said: 'If it was a smaller lunch?' There were about 30 of us and I had a chance to talk to him," says Mr Staley.

Two months later he met the Chinese vice-premier in China. They discussed what Cargill, one of the world's largest agriculture businesses, would do next in the country, where it has been active since President Richard Nixon's visit in 1972. The meeting, scheduled for 20 minutes, ran to 50.

"They encouraged us to continue in China and, in a way, it was to say thank you to us for being there for 30 years and for positively supporting their entry into the World Trade Organisation," says Mr Staley.

His admission could be seen by some as further evidence of the incestuous links between powerful agri-businesses and politicians. Even so, his comments are less a betrayal of arrogance than a simple reflection of the political reach - and trust - that Cargill has quietly accumulated over 140 years in business.

Moreover, with 101,000 people in 60 countries, including Brazil, Egypt and El Salvador, and revenues of more than $60bn last year, Cargill has considerable economic clout across the world. The China meeting was not a one-off: Mr Staley has dined with Fidel Castro of Cuba, and visited heads of state from Turkey to the Ivory Coast.

"When there is a new president of Central America, it would be courteous of me to call on them to explain our culture and investments," he says. "In the US, I don't have to do so much of that. A lot of people are very welcome with senators, with the administration and secretaries in Washington. In the UK, [as in] the US, I'm not going to call on heads of state."

Yet Mr Staley is sensitive to the dangers of being seen as "arrogant Americans over there, telling them how to run their business or government". He adds: "When we suggest to someone we have an issue and would like to meet them, the doors are almost always open because of the courteous manner in which we approach things, and our credibility. We don't present something as fact and they later find out it was wrong or biased."

At the heart of Cargill's philosophy is a belief in the benefits of free trade, which has led it to back China's drive to join the WTO and to support trade with Cuba. Such corporate beliefs are driven not by ideological imperatives but by economics, says Gregory Page, president and chief operating officer of Cargill.

The company tracks the evolution of diet across four components of food, including animal protein. "They show remarkable patterns. What they basically say is we need a wealthier world because there is a period from above $1,000 per capita [gross domestic product] up through $6,000 or $7,000, when diets evolve very interestingly for companies like Cargill.

"So we have been ardent proponents of free trade because we think it raises the per capita GDP of the world, and not because we have some pure political agenda," says Mr Page.

Sounding almost professorial, he offers the example of China. "The evolution of their diets has probably modestly succeeded historical trends we have observed elsewhere, which is to say that the Chinese love their food. It has created a huge opportunity, and we see that in wheat imports, imports of vegetable oil, total uses of chemical fertiliser. But it is all riding on the back of per capita GDP. So ours is a real simple business model."

That consistent focus has brought admirers in Washington. "What I appreciated was that they had a strong ideological position, and I mean that as a compliment. Their principles stayed true," says one former US government trade official. "They weren't simply looking in a short-sighted way at the bottom line but had an eye on the longer term. It made me more and more inclined to listen to them for trade negotiations."

For example, Cargill, drawing on its experience of operating around the world for more than a century during turbulent times, offers a nuanced and intelligent analysis of the problems that China faces in moving towards free trade.

"As China tries to develop its 1.1bn people, people guess there are 600m-700m farmers with very small holdings. For China to become what it thinks it can be in 25 years, it can't just tell the farmers we are going to absolutely free trade . . . what are you going to do with 600m people? They are going to move to the big cities, and that's the last thing China needs - more people heading for the big cities . . . It's a social problem, not just an economic problem," says Mr Staley.

In addition, Cargill has built up political credibility by sending its own executives to speak in person. "Rather than sending a bunch of partial facts to lobbyists, we use line managers to go to Brussels, Washington or Brazil. It is part of our model. It enriches their jobs, makes them realise policy does matter and keeps the right tone - that we don't lobby; we go and share information; it's an educational thing," says Mr Page.

This ability to carve out a unique path is a reflection of its ability, as a privately held company, to be insulated from short-term, earnings-driven lobbying imperatives. "They are not the kind of company that comes to Washington and takes a high profile and tries to throw their weight around," says one former US trade official.

Another says: "It was very rare that Cargill would call, compared with Monsanto, which called every hour. The two were book-ends in how to approach government, I wish other agribusinesses operated with their standards."

Cargill takes a longer-term view of its political priorities, distinguishing between structural changes and noise. "I'll take August 1998 in Russia," says Mr Page. "At that moment it was the most important thing in my life but, [in] the context of the evolution of the world food economy, it was noise, and time has proved that."

While some companies were angered by the failed round of trade talks in Cancun, Mr Staley dismisses it as "noise". He takes a similarly Olympian view of attempts to manipulate currencies. "We don't think anyone in the short run can affect currency movements. This is the invisible hand of Adam Smith. I kind of get amused when people get all exercised [and] someone ought to do something about the currency.

"The IMF has not had a good track record of pushing people to do this in the last 10-20 years . . . [in China] I don't think it is going to happen at all."

Closer to home, Cargill critics, opposed to agricultural consolidation, typically argue that it has had a sinister hand in setting US agricultural policy. William Pearce, a former vice- president under Nixon, helped draft a report calling for the removal of trade barriers. Dan Amstutz, a Cargill assistant vice-president, was chief negotiator for agriculture in the 1987-89 General Agreement on Tariffs and Trade negotiations and in 2003 was appointed to lead agriculture reconstruction efforts in Iraq.

Kevin Watkins, Oxfam's policy director, attacked the move as being on a par with "putting Saddam Hussein in the chair of a human rights commission".

Close political ties remain. Ernest Micek, Mr Staley's predecessor, sat on Bill Clinton's presidential export council, while Mr Staley sits on George W. Bush's. Last year he became a "pioneer", having raised more than $100,000 for Bush's campaign. "I'm not actively involved in the Republican party. I've been a person who raised money for this particular campaign, as I did last time," he contends.

In spite of these personal links, Mr Staley remains critical of the direction of US agricultural policy, and says that although Cargill will go on investing in the US, it expects the country's overall share of investment spend will continue to shrink. "Over 20 years you have fewer farms and the government is clearly involved in agriculture, otherwise why did you have declining commodity prices until just recently, and ever-increasing land prices? We sit here as a company and say that's probably not the healthiest investment climate for us.

"At the same time Brazil has very free markets. They have internal infrastructure challenges that can only improve. So Cargill makes a choice. Are we going to put a whole lot more money and grain and agriculture processing in the US, or in Brazil, Argentina or Russia or China?

"We don't react and we don't get excited or jump off the bridge because something doesn't go our way, or there is a surprise like the Russian shock. We sit back and say: 'OK, what is the opportunity here?' "

For all its ability to meet heads of state, and Cargill's personal ties to some politicians, its growth for almost 140 years has depended on taking a longer view than the gyrations of political careers or economic cycles.

"There will always be protectionism, which will be stronger in one place than another, which will depend on economies, or some new president coming in, or on ideology. For four or eight years we may revert, but we can't think in even four years, of a term of president. We just can't invest that way."

Off a desolate stretch of road in Eddyville, Iowa, built around a 1950s power plant, is a sprawling 1,500-acre industrial agricultural complex. Two giant grain silos loom over a remote- controlled railway network and a docking station for the 500 grain trucks that trundle past "Heartland Drive", feeding the facility with raw materials every day.

Each year the plant - Cargill's largest processing facility for maize (or "corn", as it is called in the US) in the world and also its largest capital investment, costing more than $1bn - processes 85m bushels of maize, all of it sourced within 100 miles. The plant uses as much energy each day as a town of 100,000 and discharges 8m gallons of treated water into the Des Moines river.

The global reach of the Eddyville plant is evident from the visitors' entrance, where flags from the 54 countries it services, from Uzbekistan to Mexico, flap in the breeze. It started in the mid-1980s around basic grain processing activities, such as making high-fructose corn syrup for Coca-Cola and Pepsi, and gluten animal feeds, which it funnels, still soggy, into rail cars to be sent to farms in Nebraska and Oklahoma.

Over the past decade, however, Cargill has sought to escape the meagre margins of basic processing. It ferments grain into fuel-grade ethanol and citric acid, used in products from Kool Aid to processed cheese. Two of the largest cheese processors are based within 150 miles, and account for 70 per cent of the market.

Cargill has also harnessed biotechnology, for example transforming what was once a waste by-product into natural vitamin E, dubbed "golden oil", produced in partnership with Hoffman- La Roche, the Swiss group. Overall, less than 0.5 per cent of raw materials used at the plant end up as waste.

More recently Cargill has begun making food supplements such as phytosterol esters, composed of vegetable oil, fatty acids and plant lipids. This shift into more complex processing has taken on a new importance following Cargill's strategic review in 1998. It now wants to apply its old skills in the trading, supply chain management and processing of commodities in "food systems design", which it hopes will become one of its biggest sources of growth.

The unit has been formed over the past three years from existing businesses and acquisitions, such as the Duckworth Group, a British flavour company, and Cerestar, a European maker of starches and sweeteners. Robert Parmalee, food systems design president, says Cargill "is looking at key acquisitions to fill gaps".

Rather than selling commodities, the aim of the food systems design unit is to create "new-to-the-world things, ingredients and finished foods", says Mr Parmalee. It wants to work with its customers, not just sell to them.

He cites a new orange juice developed with Minute Maid that contains Cargill's new phytosterol esters. "We have a unique proprietary ingredient and are working with customers to help them create differentiation."

Yet new blood has been required to manage the transition. Paul Hillen, a brand management executive, recruited from Procter & Gamble, says: "One of the first changes when I came to Cargill was that the word 'consumer' was not brought up that often."

Since then he has created Cargill's first consumer research unit and a sensory testing laboratory. "For years, Cargill had analytics around wheat and flour and where to source it. We are taking that appreciation of the raw materials and applying it inside the food system," he says.