Graincorp deal sows Coalition tensions

The ADM takeover of Graincorp has inflamed tensions between the Liberals and Nationals, and Joe Hockey is determined to have the final say.

It was inevitable that once the federal election was out of the way, there would be serious tensions within the Coalition about the $3.4 billion takeover of Graincorp by North America’s Archer Daniels Midland.

The Nationals’ hostility towards the takeover of the last of the big-listed grain handling businesses has intensified. It has led to Treasurer Joe Hockey – who will have the deciding say on whether the acquisition is approved –  to say that he is not going to be bullied by anyone over the decision.

The Nationals’ leader and the deputy Prime Minister, Warren Truss, has related the acquisition to food security issues as well as referring to the lost potential to have an ‘international standard’ global agribusiness.

Farmers and the Nationals worry that ADM might increase grain-handling fees, or rationalise Graincorp’s silo infrastructure, or somehow favour its own North American operations at Australia’s expense. Some of his own party favour imposing conditions on ADM, capping Graincorp’s charges and regulating access to its infrastructure.

The decision Hockey makes – he has said it will be made by December 17 – will be the first (and perhaps most significant) decision the Abbott government will confront with regards to foreign investment in agriculture. The decision also has the potential to be interpreted as a signal of the government’s attitude towards foreign investment.

Some of the concerns about the takeover are misconceived.

Graincorp already dominates the east coast grain store and logistics infrastructure, owning and operating 280 storage and handling sites and seven bulk grain port terminals. ADM has a limited presence in grain trading in this market and virtually no presence within the export terminal segment of the supply chain.

In other words, an ADM takeover of Graincorp by itself changes almost nothing in the sector. Whatever Graincorp might or might not have been able to do in the past is what ADM might or might not be able to do in future. If it acquires Graincorp, there is no increase in market power or altered incentives within the framework within which it operates.

That’s why the Australian Competition and Consumer Commission decided not to oppose the takeover.

In reaching that decision, the ACCC noted the merged entity would not have any increased market power, would continue to face competition from other storage providers and would still have to comply with the commission’s port access undertakings.

It also said that from September next year, access to Graincorp’s port terminals was expected to be be governed by a mandatory code of conduct that it (the ACCC) would enforce.

ADM has been trying to reassure grain growers they have nothing to fear. It has promised to invest hundreds of millions of dollars in upgrading infrastructure, the establishment of community consultations and the sponsorship of rural scholarships.

Logically, it wouldn’t be in ADM’s interests to pay such a high price to acquire Graincorp – the bid is a massive premium over the prices at which Graincorp traded previously – and then operate Graincorp in a sub-optimal fashion to favour its existing operations.

Graincorp’s own executives see advantages for the organisation and its customers from being part of a global and vertically-integrated group with a far wider range of customer relationships and deeper market intelligence than it has today.

Australia’s position as a major supplier of grains into the world markets, the particular qualities of those grains and our proximity to the faster-growing markets in Asia explain why ADM is so keen to acquire Graincorp and work against the notion that it might somehow undermine the local industry to advantage North America’s.

There might be a risk that it would seek to increase fees to generate an acceptable return on the $3.4 billion investment. However, the ACCC believed there was sufficient viable competition to create competitive disciplines.

The commission could, of course, be charged with monitoring grain-handling costs with the threat that it might be empowered to intervene further if there were any signs of an ADM-owned Graincorp attempting to exploit its dominance.

The Australian agricultural sector needs big lumps of capital and expertise if it is to exploit the potentially massive opportunities that should flow from the growth in middle classes across Asia. Given the unwillingness of the local capital market to invest significantly in the sector, it is inevitable that much of that capital will have to come from offshore.

North America is a less controversial source of capital than others that come to mind, which is why the decision that Hockey ultimately makes probably has implications well beyond the Graincorp deal itself  – and probably beyond the agribusiness sector.