Commodity risk or volatility and profit margins are two key drivers of company valuations for companies in the food and ag supply chain. As a company moves closer to its underlying commodity, its margins become smaller and more volatile. This leads to greater unpredictability for an owner and thus greater discounts on the company's valuation. To thwart commodity risk, companies tend to vertically integrate and move closer to their end markets. Buyers in this area of the supply chain tend to be large strategics with global footprints across a variety of commodities who understand commodity market volatility. Scale and operating efficiencies drive valuations higher and the asset intensiveness of these companies allow buyers to greater utilize debt to fund acquisitions.

As a company moves closer to the consumer they are able to typically capture greater margins and are further insulated from commodity volatility. This area of the supply chain can be crowded as companies compete for the consumer's attention and the retailer's shelf space. Companies with a niche product offering that appeals to consumer trends and has loyal, almost cult-like following, will attract the greatest valuations. Financial buyers are important sources of capital for companies with nascent products as they are willing to take greater risk to take a fledgling product that is gaining consumer awareness and supply it with capital to accelerate its growth. Strategics get involved with these branded product companies when a clear following has been established and it can use its existing supply chain to drive growth further and create efficiencies in production. Valuations are typically based on multiple of sales, growth potential, and consumer trends.

Here we will highlight key deals that have occurred since our last newsletter and highlight current valuation trends. In this newsletter, we look at how large agri-business companies, ADM and Ingredion, and an established retail food company, WhiteWave, are working to stay competitive in the face of changing consumer preferences.

The earnings spotlight highlights several companies in the natural food, commodity processing, and protein industries and will provide an understanding of how these companies are operating and positioning themselves within their industries.