PRIMARY INDUSTRY: by Jeffry Babb News Weekly
US grain giant's $2.7 billion bid for Australia's GrainCorp
, November 24, 2012
“We’ll all be rooned,” said Hanrahan in the famous poem, “before the year is out”. He then cites the obstacles to agricultural production in Australia — drought, floods and bushfires, to name a few.
“John O’Brien” (pen-name of Father Patrick Hartigan) certainly understood his country people. Farmers know there are few certainties in agricultural production in Australia. So do stock-exchange investors — and they don’t like it. “Agribusiness may be better off in private hands as shares lose lustre” was the headline to business commentator Paddy Manning’s column in the Sydney Morning Herald (November 10, 2012).
It’s not that public companies don’t last. The Van Diemen’s Land Company was established by Royal Charter in 1825, one of only three such companies still trading outside of England, and is going stronger than ever. Its dairying business in north-west Tasmania is an attractive enterprise in a world which is absorbing all the milk products it can produce. But the Van Diemen’s Land Company is a public company in name only.
The Australian Agricultural Company (AACo) is an ASX-listed company struggling to get the recognition it thinks it deserves from the investing public. Established in 1824 by an act of the British parliament to develop agriculture in New South Wales, it is one of Australia’s oldest continuously operating businesses.
It is the world’s largest producer of Wagyu beef, prized by Japan’s gourmets above all other beef for its texture and marbling. The company’s management are scratching their heads over how to extract more shareholder value from the business, which runs some 600,000 head of cattle over an area that is equal to approximately 1 percent of Australia’s land mass.
By far the most controversial move to privatise a listed company that was until recently in public hands is the $2.7 billion bid by United States grain-handling giant, Archer Daniels Midland (ADM), for GrainCorp, which has a near monopoly on grain-handing on Australia’s east coast.
GrainCorp handled a record 14.9 million tonnes of grain during the 2010/11 financial year and controls seven out of eight grain export ports on the east coast. It began its life as the Grain Elevators Board in 1916, formed by the NSW government. Privatised for $100 million in 1992, it began gobbling up other grain-handlers until it became the dominant force in east coast grain-handling.
What can stop America’s ADM from achieving its aim? Only Australia’s Foreign Investment Review Board (FIRB). Shadow Treasurer Joe Hockey says he has “serious misgivings” about the US bid, and Nationals leader Warren Truss says GrainCorp’s assets were “built and paid for by Australian farmers”. But, unless the FIRB puts its foot down, which most observers think is unlikely, then GrainCorp will end up in American hands.
Vernon Dempster, director of WA’s Cooperative Bulk Handling (CBH), says ADM is “the most ruthless” of the big US grain-traders and said it would be “highly dangerous” if ADM took control of the east coast grain-supply chain. ADM has a colourful history of being prosecuted by authorities in the US, Canada, Mexico and the EU for bribery and price-fixing, including facing a then-record fine of $100 million for price-fixing. Three of its executives have served time in jail.
Observers say ADM will have to sweeten its offer, but so far no other bids are on the horizon. If ADM’s bid is successful, what will be in it for Australian farmers? Not much, apparently.
GrainCorp will become part of a global supply chain, but will this give east coast grain-farmers the best returns? East coast farmers are far more dependent on the domestic market than are Western Australian farmers, who are more export-oriented.
What is the alternative? CBH dominates grain-handling in Western Australia. Many a successful doctor or engineer put his mental arithmetic to the test working on CBH silos during the university vacation, when the wheat harvest is at its peak. CBH is 100 per cent grower-owned and advertises itself as “Australia’s leading cooperative”.
CBH turns over $1.3 billion annually and employs 1,000 staff. In 2003/04, its peak year — still a record — CBH shifted over 14 million tonnes of grain. Since its beginnings in 1932-1933, when, as we were taught in primary school, many farm families were living on boiled wheat and rabbits because wheat was hardly worth harvesting, CBH has accumulated $1 billion in assets.
CBH aimed to reduce the cost to the grower of getting his crop to port and to eliminate the cost of bags used to ship the wheat. Now it ships from three ports — Geraldton, Kwinana and Albany — and hauls grain using its own locomotives.
Many more farmers use trucks to move their grain, as the old Western Australian Government Railways network was under-maintained and allowed to run down. In addition to wheat, CBH handles barley, lupins and canola. CBH markets wheat to China, Indonesia, Japan, South Korea, Pakistan and Iran.
Given Australia’s boom-and-bust seasons, patient private and cooperative ownership certainly has something going for it.