ADM's rejection goes against the grain of logic

In blocking Archer Daniels Midland’s $3 billion-plus bid for GrainCorp, Treasurer Joe Hockey has made the wrong decision for the wrong reasons.

The rejection will deny the grains sector the investment it sorely needs and will send a signal to the world that Australia’s foreign investment decisions can be perverted by the internal politics of the Coalition.

It is all well and good for Hockey to say that since he became Treasurer, he has approved 131 significant foreign investment decisions. There hasn’t been another prospective takeover as politicised as the bid for GrainCorp, nor has Hockey had to refer to ‘bullying’ in any of the others. In this instance, the bullies have prevailed.

Hockey may have appeased the agri-protectionists within the Nationals and some of the noisier elements of their grower constituency. But in the process he has denied GrainCorp and the sector access to the extra $250 million of capital ADM had committed to investing in the east coast grain handling and store infrastructure – and the rail infrastructure in particular – over the next four or five years.

GrainCorp has made the point that it has historically invested an average of only $17 million a year on growth initiatives in its storage and logistics business. Had ADM succeeded, the total capital expenditure within the Graincorp network would have been about $500 million.

That level of investment isn’t going to come from any other source. If it can’t be acquired by a foreigner, nor can GrainCorp gain access to the global grains marketing and trading platform and customer base that ADM proffered.

Hockey has tried to soften the message by ‘allowing’ ADM to increase its current shareholding in GrainCorp from 19.9 per cent to 24.9 per cent. He argued this would provide ADM a platform to build stakeholder support for potentially greater participation in the Australian industry as it developed.

If ADM were to accept that invitation of a 24.9 per cent stake, it would not provide a conduit for large-scale capital investment. GrainCorp will come under acute pressure from its shareholders to lift its returns on capital as the best part of the $1 billion of takeover premium evaporates.

Hockey’s arguments for his decision are less than compelling. 

Post-deregulation, he said, it was taking some time for increased competition to GrainCorp – which handles about 85 per cent of eastern Australia’s bulk grain exports – to emerge. A transition towards more robust competition has continued and a more competitive network is still emerging.

‘’Many industry participants,’’ he said, had expressed concern the acquisition could reduce competition and impede grower access to the storage, logistics and distribution network.

The ‘high level of concern’ from stakeholders and the community could also risk undermining public support for the foreign investment regime and ongoing foreign investment more generally, which would not be in the national interest.

The ADM proposal would have done nothing to alter the competitive status quo adversely, which is why the Australian Competition and Consumer Commission approved it.

There are alternatives and potential alternatives to GrainCorp’ s network of silos. Access to its ports is regulated. In any event, the incentive for GrainCorp is to maximise volumes flowing across its infrastructure. The substantial additional investment ADM promised would have significantly increased that incentive.

Had Hockey approved the takeover, the concerns of some growers about the entry of ADM to this market might have had an ironically bigger impact on competing investment and competition more generally.

Blocking the bid does nothing to shore up public support for the foreign investment regime. Indeed, it risks encouraging the xenophobes and protectionists to lobby against foreign investment proposals even more strenuously in future.

There are more politically sensitive sources of foreign capital than North America and potentially more sensitive targets than GrainCorp. Hockey’s decision will be interpreted in some quarters as a surrender to the rural protectionists among the Nationals.

Australian agriculture needs capital in massive quantities if it is to take advantage of the potentially vast opportunity as Asia’s middle classes swell rapidly.

GrainCorp’s Alison Watkins has said Australia could increase the amount of grain it produces by 50 per cent by 2050 with improved investment-led productivity.  Given the dearth of local capital that flows into agribusinesses, the only sources of the capital required to exploit that opportunity are foreign.

The scale of the missed and frustrated opportunity was underscored by her chairman’s response to the decision today.

“Today’s events will have enduring implications that will be felt not only by our shareholders, but by the entire industry. Australian agriculture has been prevented from realising the potential benefits from the significant capital ADM would have invested in the long-term future of the industry,” Don Taylor said.

Hockey could have sought undertakings from ADM or imposed conditions. He said he carefully examined the option but considered there were no appropriate conditions that would mitigate the national interest concerns. He said that imposing conditions would have meant introducing additional regulation for just one participant in a changing industry that would have limited ADM’s capacity to respond to the changing environment.

ADM, of course, would have had to volunteer to accept any conditions, just as it volunteered the extra investment and price-caps on its storage charges. If it misjudged the pace or nature of change within the industry, or the cost of complying with the conditions, that would have been its problem as a consenting and sophisticated corporate adult.

One suspects it would have a better understanding of the risks of any commitments than Hockey. Also, Australian treasurers have imposed company-specific conditions in return for foreign investment clearances in the past.

Hockey’s decision is a poor one supported by weak, unconvincing logic that will deny a significant sector of agriculture access to the substantial capital it needs. It will do nothing to accelerate a transition towards the more competitive logistics and infrastructure networks that Hockey says motivated his decision.