Buying CPI Puts Bunge in the Big Leagues of Grain

What happens when a low-margin commodity becomes -- in fairly short order -- a hot product? Mergers.

The soaring price of corn is behind Bunge's decision to buy Corn Products International, a supplier of high fructose corn syrup and other products to such customers as Coca-Cola, Nestle and Kellogg's. Bunge, the No. 3 grain processor behind Cargill and Archer Daniels Midland, serves some of the same companies, but until now had more of a concentration on soybeans, grain handling, storage operations and fertilizer.

As the Wall Street Journal pointed out on Monday, the deal will "give Bunge a presence in nearly every step of the so-called corn-value chain."

That is, even though Bunge will still be No. 3, it will now be playing in the same league as Cargill and ADM. It is paying $4.4 billion for CPI. Combining that with Bunge's market capitalization makes the combined companies worth about $17.5 billion. ADM's market cap is about $21.5 billion. (Cargill is privately held.)

The rising price of corn, and forecasts of ever-growing demand, have companies chasing scale. With CPI on board, Bunge will not only be able to spread its costs among a much larger number of sales, but it will also save money on "synergies" -- by combining sales forces, for example. And, as the Journal notes, it will give Bunge access to growing Asian markets.

Another thing Bunge gets: CPI's particularly savvy hedging operation, which, as noted in this space back in April, is deeply integrated into the company's business operations.