CHS: Taking It To The Next Level
When opportunity came knocking for Carl Casale last year, it was worthy of serious consideration. John Johnson was getting set to retire as president and CEO of CHS Inc., the diversified agricultural cooperative, and the search was on for his replacement. Casale, then executive vice president and chief financial officer of Monsanto and a friend of Johnson, had admired the company for some time, feeling it was making the right moves in a fast-changing and globalizing ag marketplace.
“I recall about six years ago, CHS entered Brazil and I called John to tease him a bit. I told him that if he could convince a conservative, farmer-oriented organization that it needed to be originating grain from competitors that he must be doing something special. That’s the day I learned that CHS had a different orientation toward the world, and understood what it took to be competitive in global markets.”
This was part of the reason Casale put his hat in the ring to succeed Johnson as president and chief executive officer at CHS, but there was more to it. First and foremost, the diversity of CHS was appealing, a company involved in food processing, traditional and renewable energy, grain marketing, crop nutrients and retail distribution, with net revenues at $25.3 billion in fiscal year 2010.
If you think of an acre of land as essentially a manufacturing plant, you think about all the inputs it takes to create the product,” says Casale. “You have crop nutrients, seed, energy, crop protection, and CHS plays in all that. And when you think about linking to the output of that manufacturing plant, CHS can play in that area as well. In looking at the total spectrum there’s no other company that can connect the farmer to as much of it as CHS can. I thought that made the company unique in this space.”
The second big factor in making the move was ownership structure. “In my view it is not coincidence that most of the largest firms in agriculture have some form of private ownership and that includes cooperatives. There’s a different view, and a different patience that goes along with that. Private companies tend to maintain the perspectives of the longer term that I think you really need to have to be successful.”
Casale didn’t spend a lot of time at CHS headquarters the first few months. He immediately hit the road, meeting with farmer owners and getting a sense for the business challenges facing folks in the countryside. In other words, meet the owners, meet the employees, and listen.
“We got a very good feel for the issues at the owner update meetings, and I would say the biggest issues mentioned were access to capital, access to talent, and the changing competitive landscape. That’s what they were saying in January, and our sense is that the issues are even more intense today. What that is going to look like longer term is what our owners are trying to sort out right now.”
CHS also held 13 employee meetings in conjunction with the owner events, something that had not been done before. The diversity of divisions and locations made the meetings both challenging and exhilarating for the management team. “We, and all the employee participants, really gained a sense of appreciation of how diverse we are,” says Casale. “Employees who would never have otherwise gotten to know each other across divisions got to meet and interact; it was really a lot of fun.”
The owner meetings are serious listening sessions when CHS executives can ask questions and get to the heart of what they need from the company.
“What we took out of meetings with owners and what we told them our goal was that we have to earn as much of their business as we can every day as we possibly can. It’s not their job to do business with us just because we are CHS and they happen to be our owners — we have to earn that business with high quality and fair prices. I’d like to think that we win all the ties, but we still have to go out and earn the business.”
Meeting follow-up with the location management was equally critical. “We’ve done a fair number of follow up calls with individual co-ops and asked them three simple questions: ‘Tell me what your long-term objectives are, how can we help meet them, and how do we earn your business.”
Internally, CHS is more formally organizing and gearing up to deliver the answers to these questions through its Business Solutions group. “We’ve actually developed a business development function that’s no different than a relationship manager at a bank who can sit down, ask those questions of the owner and, be it energy or seed or crop nutrients, they can go back and assemble a team for the cooperative and start discussions. We’ve seen some results from that already where we’ve gone back with teams of senior management to sit down and ask, ‘what do we need to do to be of value to you.’ It’s a simple thing, but it is part of the enterprise-wide approach we are trying to implement across CHS.”
Setting The Bar
At a higher level, CHS management has been directing a project that identified the company’s core “aspirations,” work that started a couple of years ago and is nearing completion under Casale. “This work was done along with codifying our key mission, vision and values,” he explains. “The idea was to identify what CHS aspires to across the enterprise. The five aspirations are focused around the energy business, global commodities, food and processing, producer focus, and leveraging enterprise value.”
Casale notes that literally thousands of employee hours and about two years were carved out to do the work, but at the end of the process CHS had five high level aspirations. In recent months, the project has moved to the audit phase to determine where CHS is today vs. these key aspirations — as Casale says, “How do you know where you need to go unless you know where you’re at?”
Now, management is working on fully vetting out each aspiration to ensure all employees understand the goal and their role in making it happen. “For example, with energy if the aspiration is to be ‘the leading energy supplier in rural America,’ do we mean ‘A’ leading supplier or ‘The’ leading supplier? What exactly is ‘rural America?’ The ultimate goal is for an employee of CHS to be able to look at that aspiration and say, ‘I get it, and I know what I have to do today to help the company achieve that.’ It will also inform us on our investment decisions we need to make across divisions to make these aspirations a reality.”
Changes On The Ground
The need to raise capital was one of the concerns that emerged from meetings with the local cooperatives, which is leading more of them to consider exchanging equity with CHS. “They retain local board management, so they basically run on our balance sheet,” explains Casale. “Generally that happens when a cooperative needs to get bigger but there’s no other local cooperative to merge with, or there’s a need for significant capital investment in the business so they look to us to help them strengthen the balance sheet.”
Casale puts aside the discussion of whether federated or central ownership is the best approach, and is focused on creating what he calls “aligned” ownership. “You can have alignment in a federated system or a central system, and because of our heritage you have both kinds of ownership at CHS,” notes Casale.
Capital needs, along with competitive pressures and the changing dynamics of growers, are forcing cooperatives and independent dealers to reevaluate whether they have the size and scope to compete in their markets. “On the crop input side the largest cooperatives I talk to — those in excess of $250 million — tell me their biggest challenge is keeping pace with the growth of their owners,” says Casale. “They’re telling the cooperative, ‘Hey, I’m getting bigger, you need three more floaters to keep up with me.’ I would argue that they need to get bigger just to keep up with this trend.”
Fresh off a 10-day trip through Asia, Casale is even more convinced that grain demand will continue to grow driven by China, India, and other emerging markets with a burgeoning middle class and improving diets. Producing food to meet the increasing demand is one issue, but another concern looming on the horizon is grain logistics here in the U.S.
Demand And Logistics
“Without any new capacity we will run out of rail capacity by 2035. The good news is that rail is run by private entities in this country, so if there is enough incentive they will likely invest. The greater concern is the situation with our waterway system. Our locks and dams are getting old. A great example of this is the corps of engineers said they received $35 million for dredging, they needed $100 million, and when they ran out they were done. Every foot of draft that you can’t load in a Panamax vessel is basically $1 million in lost cargo. And the freight companies don’t care, they charge by the boat, not by the weight.
Name me a sector of this economy where we have a better competitive advantage than agriculture. Wouldn’t you think we would be investing in it heavily?
To The Next Level
As its 2012 fiscal year began on Sept. 1, CHS was sharing more detail with its owners and employees about the alignment options that will become available for consideration. Once the domestic plan is firmly in place, Casale will turn part of his attention to growing and developing the international business.
“It’s really important for us on the grain side to be a reliable supplier to international markets 12 months out of the year,” he says.
CHS is established in many areas internationally but will need investment in infrastructure and people in several key areas, including Brazil and the Black Sea region. “We’re also looking beyond grain at how we can take advantage of other opportunities to diversify our business — more of an enterprise-wide approach,” says Casale.
Reflecting on the first six months of his tenure, he recalled telling the organization that “the hardest company to change is a successful one. It took a lot of time to explain to employees the reasons why we were making changes in strategy. There was a lot of communication internally, and probably four times that much discussion in the countryside.”