Managing Asia

Managing Asia

From McDonald's burgers to specialty Japanese chocolates, diversity is key for Olam

Olam's recipe for success in agri-business

If you've ever had a McDonald's burger, there is a 70 percent chance the onions in that burger were supplied by Olam's U.S. business, says Sunny Verghese, Olam's group CEO.

The agri-business is the world's biggest producer of dehydrated onions; it's one of many superlatives the company lays claim to, including being world's largest almond-orchard owner and its biggest sesame-seed supplier.

And it keeps on coming. "We're now the world's largest farmer," Verghese tells CNBC's Managing Asia.

With approximately 3.3 million hectares of land in 26 countries under its ownership and management, the Singapore-listed company has come a long way since starting in 1989 by exporting cashew nuts from Nigeria.

Olam's strategy has been based around transitioning from an asset-light supply-chain trading company to an integrated global agri-business. Upstream investments in plantations, as well as downstream ones in manufacturing, brought greater synergy and helped Olam to differentiate itself from competitors such as global trading giant Cargill and regional commodities player Wilmar, Verghese says.

But this kind of investment also results in reduced returns on equity, making it crucial to have a patient, aligned shareholder base, Verghese adds. This is particularly important because investments in farming assets require a long view - palms take seven years to mature, while edible nuts such as pistachios can take ten to eleven years.

"You have to be a patient investor," Verghese notes.

Temasek, the Singapore state investment company, is Olam's majority shareholder, and Verghese says support from Temasek was a shot in the arm for Olam in 2012 when the agri-business came under attack from famed U.S. short-seller Carson Block. Now, long-term investors comprise close to 90 percent of Olam's shareholder register.

Workers pour cocoa beans into a floor trap for cleaning and micronizing at the Olam Cocoa factory on Friday, May 13, 2016.
Bryan van der Beek | Bloomberg | Getty Images

The Mitsubishi Corporation is another important investor and partner, Verghese says. Olam sources cocoa for the premium Japanese chocolate market as part of a joint venture with Mitsubishi, as well as producing specialized cocoa liquor and cocoa powders, such as a unique dark cocoa powder that is made without the use of alkalizing agents - the only product of its kind in the world. (Alkalizing agents give chocolate a milder taste and are used in most modern chocolate production.)

Outside Asia, Olam has a strong presence in Africa due to the continent's population boom and availability of arable land. With operations in 24 African countries, Olam's downstream investment in the region include infrastructure developments that have synergies with its existing businesses. For example, the company is building a port in Gabon to accommodate the commodities it exports from the country.

"Africa is a big focus for us," Verghese says, "[It's] a unique differentiator for us because none of our competitors have [the same] operating capability of that network."

However, Verghese also acknowledges that agricultural risks, such as the impact of the El Niño weather pattern on crops, can be unpredictable. To limit exposure to environmental disruptions, the company pays close attention to its water conservation practices, he says, reducing, for example, the amount of water it uses in onion harvesting.

Diversification also plays a role in weather-risk management; Olam's operations are spread across both the northern and southern hemisphere and 21 different agricultural commodities.

"[We] don't put all our eggs in one basket in one country," Verghese notes.

After more than 30 years in the agriculture business, Verghese says that he continues to enjoy his work. He spent his early years running one of Africa's largest cotton plantations and looks back on the experience as a rite of passage. Today, Verghese gives Olam's executives the same experience, to ensure that they understand the realities on the ground.

"I cannot sit here ten thousand miles away from operations and tell my people on the ground [what to do]…," the farming veteran explains. "They'd just … turn around and say you're sitting in [an] ivory tower. You lose credibility."

As he looks to the future, Verghese says Olam's 25th anniversary in 2015 was a huge milestone, but that there is more to do.

"We want to be the world's most differentiated and most valuable global agri-business," he says.

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