Hi-Fert reaches a crucial Landmark

Elders and Landmark are fierce rivals in rural services, similar to Coles and Woolworths in the grocery market. Their combined share in farm merchandise, including fertilisers, is around 50-60 per cent.

Despite that they jointly own a fertiliser company, Hi-Fert, which imports fertiliser from overseas, buys locally made fertiliser from Incitec Pivot, and sells it via Elders and Landmark outlets plus a few independent resellers.

Over the last six years Hi-Fert has lost money for its owners, distracted their management and muddied their involvement in the fertiliser market. In the last couple of years neither of them wanted to keep it, but nobody wanted to buy it either, at least not at an acceptable price.

Now, finally, Landmark is proposing to buy Elders' share for a 'nominal price' plus assumption of the debt. Elders will book an abnormal loss of $10.6 million.

Elders and Landmark have always sold fertilisers to farmers, but in 2004 they became alarmed at the merger of Incitec and Pivot. In their view this not only threatened their profits but indicated Incitec Pivot was intending to sell direct to farmers. That prompted the establishment of a joint venture (Elders Landmark Fertilisers – ELF) to purchase fertiliser on their behalf and also acquire a share in Hi-Fert. They then revoked supply agreements with Incitec Pivot, telling the company it would use it only as a supplier of last resort.

Hi-Fert was acquired in 1985 by Western Mining, later WMC, mainly to provide an independent distribution channel for its production facility near Mt Isa in Queensland, then in the planning stage. By 2004 the mine had commenced production and was able to supply ELF with fertiliser independently of Incitec Pivot.

But things soon became ugly. Incitec Pivot and Elders went to court over disputed rebate payments; Incitec Pivot (which never had any intention of selling direct to farmers) established accounts with a lot of independent resellers who competed with Elders and Landmark; and then BHP Billiton acquired WMC, on-selling the Queensland plant to Incitec Pivot and the rest of Hi-Fert to Elders and Landmark.

Hi-Fert put on a brave face, acquiring Summit Fertilisers a year or so later, but it was to no avail. Most independent resellers refused to purchase from a supplier owned by their major rivals, Incitec Pivot naturally did it no favours and, when fertiliser prices crashed during the GFC, it got caught with a lot of expensive inventory.

Underlying it all, it did nothing to improve the position of Elders or Landmark in the fertiliser market but prevented them from competing with each other through purchasing. But for the fact that a write-off would have come on top of poor performance overall, it would probably have been closed down by now.

Landmark's offer to take over Hi-Fert is a consequence of its acquisition by Agrium (via AWB). Agrium is a very significant global player in the fertiliser market, with nitrogen, phosphate and/or potash production units in North and South America and North Africa.

Agrium's business model in the US and Canada is based on providing cropping farmers with a one stop shop for inputs and services, with private label crop protection and nutrient lines, a focus on long term relationships with key growers in key regions, and achieving economies of scale.

It is easy to imagine those at Agrium being reluctant to let go of Hi-Fert, no matter what its history might be.

Whether acquiring Hi-Fert turns out to be a smart move will depend on how successful it is in bringing this model to Australia. It certainly won't be easy. Cropping farmers, the primary target for added value services, tend to be independent-minded and like to keep their options open. It is not certain they will accept agronomic advice, fertiliser and crop chemical purchases, plus spreading and spraying services, all from Landmark in a bundled service.

Landmark may even struggle to offer such a service given the competitive market for precision farming experts and agronomists, along with limited spraying and spreading contractors and the preference of many growers to do it themselves.

But if nothing else Hi-Fert's storage and blending facilities will be useful as Landmark ramps up its efforts to win a bigger share of the fertiliser market. With Agrium's competitiveness in supply, the company is likely to need all the capacity it can get. Hi-Fert may finally have found someone who cares.

David Leyonhjelm works in the agribusiness and veterinary markets as principal of Baron Strategic Services and Baron Senior Placements.