Frontier Agriculture – ten years on

This year marks the 10th anniversary of the formation of Frontier Agriculture, the UK’s largest arable marketing business, through the amalgamation of Allied Grain and Banks Cargill. The joint venture, equally owned by Associated British Foods (ABF) and Cargill, began operating in April 2005. Here, chief executive Mark Aitchison reviews the last decade and the company’s future.

 

It had in fact taken 18 months to stitch the merger deal together. An initial approach from Banks Cargill, by then 100% owned by Cargill and led by Mr Aitchison, to ABF with a view to buying Allied Grain had been rejected.  A follow-up proposal to merge the two businesses in a joint venture to achieve industry-leading scale was then accepted.  Effectively, Frontier bought both businesses and amalgamated them into a single grain trading and inputs supply operation, although the reality was more complex and needed the 18 months to prepare for and implement the joint venture.

A decade on, the “success has exceeded our own expectations,” states Mr Aitchison.  The combined operating profit and turnover of the two legacy businesses in 2005 were £7.1 million and £780m. After “ten straight years of overbudget performance,” Frontier’s latest full year operating profit stands at £37m on revenues of £1.6 billion – “respective increases of more than five times and two times,” he notes. The business had net assets of £226m at the end of June 2015.

Over the period, staff numbers have increased from 600 to 1,000. Despite its joint ownership, Frontier is managed as a completely standalone business – the parent companies play no part in its day-to-day management. 

The initial £36m of start-up capital contributed by the two JV partners in 2005 has also grown. With a CAGR of 12% – a good investment by any yardstick – Frontier’s retained earnings now stand at £190m. Frontier hasn’t paid a dividend to its shareholders in this time as it concentrates on building a strong balance sheet – Mr Aitchison would like net assets of at least £275m before dividends are paid.  

It is important in UK Agriculture to have that balance sheet strength, Mr Aitchison argues. It allows Frontier to make long-term capital investments on up to 20-year cycles and to invest in acquisitions. In many ways, Frontier’s business structure is similar to that of many large farms, he notes. It is privately owned, has low debt, a strong balance sheet, and invests for the long term.

Nor does having crop processing parent companies make Frontier’s trading any easier, Mr Aitchison stresses. Around 45% of the 5.8 million tonnes of grain traded by the company each year is sold to its shareholders’ processing businesses – a proportion that has increased since ABF bought out BP’s share in the Vivergo bioethanol company earlier this year (ATN May 22nd). All business – even with shareholders – is done on arms-length contracts. In fact, shareholder buyers are some of the toughest to deal with, he adds – there are certainly no favours from being under the same ownership.  The remaining 55% of the traded volume is with third parties such as Diageo and Premier Foods.

Frontier’s annual 5.8m tonnes of domestic crop procurement includes 21% of the UK wheat crop.  It is a strategic objective to buy as much ex-farm grain as possible, and currently some 85% of the company’s grain is obtained this way. This philosophy has also encouraged partnerships with central storage businesses such as Camgrain, Woldgrain and Aberdeen Grain. “We get access to more ex-farm grain held in excellent stores through these partnerships, while Frontier can contribute risk management expertise, financial strength and security and more access to end use markets.” 

Frontier’s exclusivity agreement with Forth Ports over its Tilbury deep-water export terminal in Essex, which started in July, is also important in growth terms, says Mr Aitchison. “Tilbury works well with our recent GH Grain acquisition in Kent, where we now have 20% of that local market from nothing before. Tilbury also allows us a bigger presence in the Essex and Suffolk grain belts.

 

“Such largescale export facilities allow us to provide British grain to export customers through an identifiable supply channel – Frontier already solely operates the Southampton deep water terminal in a 50:50 ownership deal with Soufflet to service the south of England grain markets.”

Arable market growth

Mr Aitchison is keen to correct the common perception that Frontier is only a grain marketing operation. “Everybody thinks of Frontier as a grain business, and when we started, 60% of our earnings were from grain. But now grain accounts for 40% – the majority of earnings is from supplying arable inputs such as fertilisers, seed, crop protection and agronomy services. Our objective from the start of Frontier was to grow the crop inputs business, and we have done just that.”

Over the decade, Frontier has more than doubled its crop protection business to annual revenues of £150m and it now employs 140 agronomists. The company is the UK’s biggest seed processor and distributor since it acquired GFP Seeds in Lincolnshire; is the largest fertiliser distributor and is in joint second place for serviced agronomy in the UK behind Agrii.

“Frontier’s crop inputs business is now very significant, and differentiates us from other arable marketing businesses – we have the only national scale grain procurement and crop inputs businesses within the same stable in the UK,” Mr Aitchison states.

He also believes Frontier’s agronomy position puts the company in a strong position to adapt to the future as agronomic technologies change: “Improved genetics are now five to six years away, and we will see an increasing emphasis on more precise crop nutrition, soil health and integrated crop management systems to raise yields with a reduced environmental impact. At the same time, crops will be better tailored to meet the processor’s requirements. With our scale and reach, Frontier is well placed to interpret and act on these changes and ensure the needs of both our farmer suppliers and end user customers are met – connecting the supply chain.”


Having a whole chain approach is attractive to the market, believes Mr Aitchison, but there is no chance of a generalist approach – “our grain traders do grain and our agronomists agronomy. There is no cross over in our expert model. It’s like the modern top rugby side – we are a strong team and we pass the ball around but everyone has their role to play and you have to be an expert at it.”

The company has adopted the ICE concept – Integrity, Customer focus and Expertise to influence its culture at all levels from senior management to the shop floor. “A respect-based culture is central to the company – everyone inside and outside the business is treated as important,” explains Mr Aitchison. “While the business will compete hard to win, its word is its bond – everyone in the company strives to ensure we are decent people to do business with. Secondly, everybody in the company works hard to provide high levels of customer service, which starts with employees being highly motivated and proud to belong to Frontier.”

Expertise means all employees are supported by excellent facilities, equipment and R&D investment, so they can focus on effective trading and adding value to farmer customers. Frontier’s present and future performance depends on expert people who can add value, stresses Mr Aitchison. “There is no room for mediocrity – our business invests in training high-performing individuals who are prepared to commit for the long term.”

Industry consolidation

Mr Aitchison believes the UK farm sector will continue to consolidate into fewer but larger units, particularly through a lack of successors for existing farm businesses and the need to invest in updating or replacing ageing farm infrastructure such as grain stores. More land is being farmed on short-term agreements, which increases the need for merchant and central crop storage.

In turn, fewer farm accounts will drive further consolidation in the supply trade. “There is still plenty of opportunity  for consolidation in the merchant sector, but perhaps more in the middle-sized regional businesses, caught between the scale of the national operators and the nimbleness of the local companies,” he observes.

With its market share, Frontier is unlikely to be a major consolidator, but Mr Aitchison envisages continuing to make perhaps two to three acquisitions a year to fill gaps in its portfolio. “We have learnt how to acquire independent seed and agronomy businesses and run them under their own brands and management. This allows mutual business growth by combining their expertise, reputation, motivation and personal service with our financial strength, IT systems, product range, crop technology and market access. For example, we bought the Boothmans agronomy business earlier this year and GFP Agriculture in 2013 for its advanced seed processing plant and six mobile units. “

But Mr Aitchison rules out any expansion into Europe or further afield. Other EU country markets have different cropping, varieties and crop protection challenges from the agronomic point of view, as well as often a more disorganised farm ownership structure which influences their grain marketing.

“We have looked at overseas opportunities, but don’t think they fit with our firm belief that this is a relationship industry. Every farmer and every field is different – it takes considerable training and experience to enable agronomists to make the necessary recommendations on farm. Software decision support systems play a part, but can’t replicate the human judgements, which is why we invest so much in our agronomists. But we couldn’t just replicate our successful UK model in another country market – we would have to grow the relationships from scratch to suit the local conditions.”

Looking ahead, Mr Aitchison says: “We are looking to quietly grow the UK business with the same levels of service, quality and expertise that we have demonstrated over the last ten years. We are also prepared to invest our financial strength in helping our regular farm customers to ride out the tough times. For example, our balance sheet allows access to high levels of working capital to help support farmer customers whose cash flows are currently squeezed. In an uncertain world there is one thing you can bank on – Frontier is here for the long term and we will invest to stay ahead.

“We have a long term commitment to the UK – we believe in the future of UK farming, despite the short-term volatility, and intend to continue investing to support it. Low prices won’t last forever, and UK farmers need strong partners such as Frontier to ensure they can prosper.

“Perhaps the biggest achievement over the last decade has been to keep the company culture and values focused and to be good on farm at all levels of the business – I personally still spend at least three days a month out on farms talking to customers, so we are fully in touch from the board downwards.

 “People sometimes tell me that Frontier is too big – but we only have a 21% UK market share,” Mr Aitchison concludes. “That means there is still 79% of the UK market to go at – we can’t be that big!”