Japan's biggest potential investment in U.S. agriculture can be summed up in a single word:China.

Marubeni's interest in buying U.S. grains merchant Gavilon to help provide grain to its hungry Asian neighbor would be a quantum leap from the 1970s and 1980s. Back then, Japanese trading houses tried to improve their own country's food security by obtaining footholds in the U.S. grain supply chain.

"Consumption in Japan is flat to declining so this is all a game of supplying China," said Gary Blumenthal, president of the consultancy World Perspectives in Washington, D.C.

"There are projections for China needing 20-25 million tonnes of corn in the next few years for its rapidly expanding livestock herds," he said. "That's the big enchilada that everybody is trying to position for," Blumenthal said.

Marubeni, Japan's fifth-largest trading company, is in advanced talks to buy Gavilon for about $5.2 billion including debt, a source close to the deal said on May 8. Marubeni later said it was interested in Gavilon but no decision had been made. Tokyo-based trading sources said this week that some board members may be concerned about the price tag on the deal.

Two other Japanese trading houses -- the so-called "sogo shosha" who dominate Japan's trade -- have also explored a bid.

Obtaining Gavilon would deepen Marubeni's "origination," or control of actual grain supplies, at a time when big changes in grain merchandising and use are unsettling North America, the world's top grain exporting region.

Gavilon now has about 320 million bushels of storage in the United States, ranking third behind Archer Daniels Midland (ADM.N) and Cargill CARG.UL but ahead of global giants like Bunge (BG.N) and Louis Dreyfus LOUDR.UL.

A deal could help Marubeni challenge ADM as the biggest supplier of U.S. grains and oilseeds to China. Marubeni has already grown into the second-largest exporter of U.S. grain to China, with its soybean shipments surging five-fold since 2008, based on data from trade intelligence firm PIERS.

Marubeni handled nearly 20 percent of China's soybean imports in 2010, according to its annual report.

A spokeswoman for Gavilon declined to comment on the possible deal. A Marubeni USA spokesman also had no comment.

MARUBENI WELL PLACED FOR U.S. EXPANSION

Marubeni is the best-established "sogo shosha" -- Japanese general trading firm -- inside the U.S. grain belt.

In 2010 it overtook Japan's national federation of farm cooperatives Zen-Noh as the biggest Japanese exporter of U.S. grains and oilseeds, according to the PIERS data, and accounts for more than a third of all shipments by Japan-based companies.

"These are not new players in the business," said Vince Peterson, vice president of overseas operations for U.S. Wheat Associates, the U.S. industry's export grouping.

Unlike 34 years ago, when Marubeni bought a Portland export elevator to improve its ability to supply Japan, its Gavilon bid is all about the world's fastest-growing food importer, China.

Marubeni said in 2009 it signed a letter of intent with Sinograin, a Chinese state firm, to "work closely in coming years" to build state reserves and commercial grain supplies.

"There's been a lot of effort by Japanese firms to own more of the origination capacity not just here in the U.S. but in South America as well," Blumenthal said.

In part, the shosha may be betting that Japanese companies can make in-roads where China's state-owned traders fear to tread.

Last fall, COFCO said it was seeking acquisitions to secure supplies in the U.S., Australia, Russia and South America, but it has not advanced any major purchases although it has sent teams to various countries for discussions, sources said.

Beijing-backed firms have shied away from attempts at large U.S. takeovers since a political furor scuppered offshore oil driller CNOOC's bid for Unocal seven years ago, analysts say.

"Chinese companies do not want to be deeply involved in the U.S. domestic grain business because they're well aware of the political sensitiveness of the farm sector," said Noriyuki Chino, a veteran trader and president of Continental Rice.

But Japanese traders -- massive buyers of U.S. grain for decades -- are viewed no differently than a Cargill or an ADM.

"We graduated from the days say in the 1980s when everyone thought the Japanese were going to buy everything. Then they thought the Chinese would. And it hasn't happened," Peterson said.

"SHOSHA" HAVE DEEP ROOTS IN US GRAIN

With its subsidiary Columbia Grain commanding a growing share of Pacific Northwest exports, Marubeni has grown its U.S. business far faster than its rivals, doubling shipments from a decade ago. But other "shosha" have a solid U.S. reputation.

Mitsui's United Grain Corp, formed in 1969, is now in the midst of a major expansion of its Vancouver, Washington, export terminal to ship more corn and soybeans.

Another big exporter, Agrex Inc. of Overland Park, Kansas, is owned by the biggest Japanese trading firm, Mitsubishi.

Zen-noh exports feedgrains from its own terminal in New Orleans and owns Consolidated Grain and Barge, a big shipper on the Mississippi River system, with trade house ITOCHU.

Zen-Noh this month set up a new venture with the biggest U.S. cooperative, CHS Inc., to ship wheat and barley to Japan, giving CHS a new grains partner after its venture with Mitsui -- called United Harvest -- was dissolved at the end of 2010.

So analysts say a Marubeni transaction to buy Gavilon would be seen as business as usual in the U.S. grain belt.

"I don't see this being even a blip on most people's radar screens," said John Anderson, senior economist at the American Farm Bureau Federation. "I don't expect to see any real push back from farmers or other ag business groups due to the fact it's a foreign investment."

GAVILON A NICE FIT?

A purchase of Gavilon could push Marubeni into the top ranks of global grain exporters. Gavilon, established in 2008 when hedge fund manager Dwight Anderson led a $2.8 billion deal to buy the trading unit of food giant Conagra, grew rapidly through its base of Peavey Co elevators and through acquisitions of big grain handlers like DeBruce Grain.

Marubeni has ruled out equity financing for acquisitions, pointing to asset sales as a partial source of funding. Gavilon's extensive fertilizer and energy trading assets would be good candidates for such sales.

Analysts say a combination of Marubeni and Gavilon makes sense commercially, with Gavilon's presence in the central Plains and Midwest fitting in well with Marubeni's PNW channels.

Gavilon has a port on the Great Lakes, which would boost its ability to source U.S. and Canadian spring wheat, barley and canola. It also buys grain in Australia for export. And unlike Marubeni, it has not made deep in-roads to China; over the past two years, it exported less than 10,000 metric tons (11023 tons), data show.

Marubeni with Gavilon would also be a formidable source of corn, soybeans, sorghum and other grains and oilseeds.

The rise of biofuels has intensified competition for U.S. corn and soybeans. The opening of Canada's prairie grains to commercial exporters with the end of the Canadian Wheat Board in August 1 has also heightened competition with acquisition's like Glencore's (GLEN.L) C$6.1 billion purchase of Canadian grain handler Viterra (VT.TO).

"Bigger foreign companies are trying to get themselves into position to play different markets," said Paul Bertels, a vice president with the U.S. National Corn Growers. "So you're not frozen out if there is a bad crop."

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