Fitch Ratings has assigned an 'A' rating to Cargill Incorporated's multi-tranche benchmark-sized senior notes offering.
Cargill's Rating Outlook is Stable. Net proceeds from the senior notes offering will be used for general corporate purposes.
Cargill's ratings reflect its strong business profile, supported by the substantial scale of its diverse agricultural operations geographically, logistically and across key commodities, that is underpinned by a robust risk-management framework. Cargill is benefiting from strong operating momentum and improved margin environment given tight supply/demand fundamentals with Fitch projecting EBITDA after associates and minorities in the upper $10 billion range for fiscal 2022.
Cargill's financial profile is also strongly supported by abundant liquidity, reflecting robust cash, significant availability under committed credit lines and liquid readily marketable inventories (RMI). Fitch expects RMI-adjusted leverage to be less than 1.0x in fiscal 2022 with long-term RMI adjusted leverage normalizing between 1.0x to 1.5x.
Key Rating Drivers
Strong Recent Performance: Cargill's performance has been strong during the past two years with operating momentum increasing over the period supported by strong demand for food, fuel, and feed. Given the tight commodity supply environment, this resulted in good profit generation and structurally higher margins for global agribusiness companies, including Cargill.
Supportive fundamentals include strong profitability in the beef business, reflecting good demand fundamentals despite pandemic-related slowdowns. Other supportive factors include strong crush margin environment given growing renewable green diesel demand. As a result, with higher earnings across all four segments, EBITDA after associates and minorities, based on Fitch's adjustments, was about $9.2 billion in fiscal 2021 (ended in May) with the Animal Nutrition and Protein segment generating more than 40% of Cargill's EBITDA. This compares with $6.5 billion in fiscal 2020.
FY2022/2023 Expectations: Fitch believes Cargill can effectively manage increased geopolitical risks by leveraging its significant diversification geographically, logistically and across key commodities along with effective risk management and abundant liquidity to adapt to evolving global trade flows. Additionally, Cargill's direct exposure to Ukraine and Russia is relatively modest in comparison to its global asset footprint. With operating momentum expected to continue supported by good near-term demand and tight supply/demand fundamentals, Fitch projects EBITDA after associates and minorities in the upper $10 billion range in fiscal 2022.
Fitch's forecast assumes elevated commodity prices and higher inflation could result in slowing demand particularly in a sustained inflationary environment along with a tempering of the margin environment over the medium term. Fitch projects 2023 EBITDA could decline to the mid-to-upper $8 billion range for fiscal 2023.
Substantial Scale, Operational Diversification: Cargill is the largest U.S.-based agricultural company and one of the world's biggest privately-owned companies, with significant product and geographical diversification that materially benefits its business profile. Fitch believes the company's scale, product diversification and extensive geographic presence, spanning nearly all agricultural commodities, give Cargill a clear advantage versus its competition.
Abundant Liquidity Sources: The diversified sources of external liquidity that support the CP program and short-term working capital financing combined with cash, short-term marketable securities and high liquid RMI provide Cargill with substantial financial flexibility. Fitch views the company's abundant liquidity as particularly important given periods of earnings volatility associated with agricultural cycles, as Cargill mitigates financial risk from higher gross debt balances when working capital needs increase.
Fitch expects Cargill will maintain significant sources of external and internal liquidity for use in financing its operations worldwide, including cash, FCF and external committed facilities, with $7.0 billion in total committed credit facilities.
Low RMI-Adjusted Leverage: Fitch expects RMI-adjusted leverage, defined as total debt with equity credit less RMI/EBITDA less RMI interest, to be below 1.0x in fiscal 2022, reflecting strong EBITDA generation. This compares to RMI-adjusted leverage of 0.5x in fiscal 2021 and approximately 1.5x in fiscal 2020 due to elevated debt levels to increase liquidity during the coronavirus pandemic. Over the longer term, Fitch expects Cargill's RMI adjusted leverage will normalize between 1.0x to 1.5x.
Balanced Capital Allocation Strategy: Fitch views Cargill's capital allocation as disciplined, with the company focused on making organic investments and generally pursuing bolt-on acquisitions; targeting an expanded geographic reach, particularly in Asia; increased exposure to the health ingredients, bio-industrial and protein sectors; and increased technology capabilities. Fitch's forecast incorporates M&A of about $3 billion in fiscal 2022, which includes the agreement to jointly acquire Sanderson Farms, and then averaging around $750 million annually thereafter.
Fitch views the transaction for the poultry joint venture with Continental Grain Company to acquire Sanderson Farms, which creates the third-largest poultry processor in the U.S., as consistent with Cargill's acquisition strategy. Cargill will contribute around $2.3 billion to the joint venture for its 50% interest, subject to regulatory review and approval, with an expected close in the first half of 2022. Fitch's forecast assumes dividends and share repurchases will be consistent with Cargill's long-term financial policy.
Other Operating Environment Factors: Cargill and other agricultural processors are subject to commodity price variations affected by a wide range of unpredictable macroenvironmental conditions, including weather, crop disease outbreaks, export taxes and retaliatory tariffs. The company can also be exposed to pricing swings in agricultural commodities stemming from periodic supply/demand imbalances, inflationary cycles and timing of cash payments or foreign exchange movements, which can negatively affect exports.
Fitch's forecasts for Cargill take a through-the-cycle view on credit-protection measures and profitability, as operating earnings can be pressured or debt can rise. Fitch currently views Cargill as having significant operating flexibility, reflecting its strong business and financial profiles.
Derivation Summary
Cargill's 'A' rating reflects its strong business profile, supported by the substantial scale of its operations as the largest agricultural company based in the U.S., with significant diversification geographically, logistically and across key commodities. Cargill's financial profile is strongly supported by abundant liquidity, reflecting robust cash, cash equivalents and short-term investments; significant availability under committed credit lines; and liquid RMI. Fitch expects RMI-adjusted leverage to be less than 1.0x in fiscal 2022, reflecting good operating fundamentals across multiple business segments.
Fitch views Cargill's business risk profile as considerably stronger than Bunge Limited's (BBB/Stable), due to its larger operational scale, greater product diversification across segments and a better record of implementing its corporate strategy. Cargill's financial profile is also much stronger than that of Bunge.
Bunge's rating reflects the scale of its global agribusiness and food ingredient businesses focused on the handling and processing of agricultural commodities, including a leading position in oilseed operations that represents more than half its agribusiness earnings. Its ratings are tempered by the material profitability exposure to crush margins, with roughly half of core segment EBIT generated by the oilseeds segment. RMI-adjusted leverage for Bunge was in the low-1x range in 2021 reflecting strong EBITDA generation, with leverage expected over the long-term around 2.0x assuming EBITDA normalization and increased debt levels.
Cargill's business profile is similar to that of Archer Daniels Midland Company (ADM; A/Stable). ADM is one of the largest global agribusiness firms, with significant product and geographic diversification supported by its core operations, which include processing assets for oilseeds and numerous other agricultural commodities, crop origination services, carbohydrate solutions and the fastest-growing of the above businesses, nutrition.
ADM also benefits from several joint ventures and equity stakes in various companies, which generate significant cash dividend contributions to the company, including a 22% minority stake in Wilmar International Limited that increases ADM's exposure to Asia. Fitch expects ADM will continue to demonstrate good financial discipline, including consistent capital allocation policies that support leverage expectations in the mid-1x range over the long term.
For credit purposes, Fitch considers RMI-adjusted leverage when evaluating agricultural processors, and calculates RMI-adjusted leverage by first subtracting the structural inventory required to operate a downstream processing facility on a steady-state basis. This inventory is generally not readily available for liquidation purposes with a going-concern entity. An additional 10% discount is taken for the remaining merchandisable inventory to account for potential basis risk loss.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include
EBITDA after associates and minorities in the upper-$10 billion range in fiscal 2022 with operating momentum expected to continue supported by good near-term demand and tight supply/demand fundamentals that supports strong profitability. In fiscal 2023, the forecast assumes EBITDA moderating to the upper-$8 billion range as elevated commodity prices and higher inflation could result in slowing demand particularly in a sustained inflationary environment along with a tempering of the margin environment over the medium term.
Capital spending in the upper $2 billion range;
RMI levels higher given elevated commodity prices;
Normal cadence of dividend and share purchases in line with financial policies;
Underlying average FCF in excess of $3 billion, which excludes the combined effects of swings in working capital and financial services;
RMI-adjusted debt leverage of less than 1.0x.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Further diversification of core operations that leads to lower volatility in operating earnings and higher FCF, with FCF margin sustained in the 2%-3% range;
Commitment to sustaining long-term RMI-adjusted leverage below 1.0x.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
RMI-adjusted leverage sustained above mid-1x, driven by EBITDA compression or meaningfully higher debt levels, most likely from a sizable acquisition, changing macro-environmental conditions or an increase in working capital;
Adoption of a more aggressive financial policy;
Lack of FCF generation lasting over multiple crop seasons.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Abundant Liquidity: Cargill has abundant liquidity, supported by approximately $5.5 billion in cash and short-term investments, and significant availability in committed U.S. and international credit facilities as of Feb. 28, 2022, with $7.0 billion in total committed credit facilities, including $5 billion that backstops its CP and industrial revenue bond (IRB) programs. Following fiscal 1Q22, as part of a renewal of its credit facilities, Cargill combined the existing $1 billion, 364-day facility maturing in March 2022 with the $1.25 billion, 364-day facility maturing in October 2021 and the $3.75 billion multiyear revolving facility maturing in October 2024 that backstops the CP/IRB program. The renewed credit facilities consist of a $1.5 billion, 364-day facility maturing in October 2022 and a $4.5 billion, five-year facility maturing in October 2026. At the end of fiscal 3Q22, Cargill had $500 million CP borrowings outstanding, and industrial revenue bonds backed by the facilities totaled $720 million.
Rising commodity prices have resulted in a significant increase in working capital usage for Cargill, with total RMI at $16.3 billion as of Feb. 28, 20212 compared with $12.6 billion a year earlier. In response to increasing commodity prices, Cargill has taken additional steps similar to other agricultural peers to bolster short-term committed liquidity sources through additional incremental facilities. This includes the renewal of a 364-day, $600 million facility maturing April 2023 and a roughly $400 million equivalent in bilateral committed facilities maturing March 2023. In 2021, Cargill also issued senior notes of $1.25 billion in November, $500 million in August and $1.5 billion in January that were used for general corporate purposes to supplement liquidity.
Long-term debt maturities are manageable and include $500 million and EUR500 million in fiscal 2023 and $1.3 billion in fiscal 2024 which Fitch expects will be refinanced.
Issuer Profile
Cargill is the largest U.S.-based agricultural company and one of the world's biggest privately-owned companies with significant product and geographical diversification. Cargill's key business segments include: Animal Nutrition & Protein, Origination & Processing, Food Ingredients & Applications and Industrial & Financial Services.
Summary of Financial Adjustments
Add-backs to total debt include obligations related to Cargill's accounts receivable factoring program and guarantees related to third parties and nonconsolidated subsidiaries.
Cash distribution received from and/or paid to affiliates is reflected in leverage metrics.
Reported RMI is reduced by determining the structural level of processing RMI required that supports Cargill's processing facilities, along with a discretionary 10% of the remaining RMI to determine adjusted RMI available for credit purposes.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
Date of Relevant Committee
19 October 2021
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
Entity / Debt
Rating
Cargill Incorporated
senior unsecured
LT
A
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SANDERSON FARMS, INC. 
