Hockey made the right call

In my view Treasurer Joe Hockey made the correct call on GrainCorp. If GrainCorp can find the right management and directors, the company now has the opportunity to be the ‘Big Australian’ of agriculture. In other words it could duplicate, in agriculture, what BHP Billiton has done in minerals.

Australia has set up agriculture as the next major growth industry for the nation. But the world of agriculture is changing and the rewards of the industry are going to the transporters and processors of agricultural products. If agriculture is indeed going to be a growth industry we will need a national champion in those growth areas. And GrainCorp is our one and only opportunity to have such a champion. 

Joe Hockey almost certainly made his decision without my assistance. But as the treasurer and his people were deliberating last week I set out very clearly why the losers in the GrainCorp proposal were the farmers and the Australian nation. The winners were the management and, in the short term, the shareholders (Will pay dirt slip through farmers' hands?, November 25).

Of course I recognise that my colleague Stephen Bartholomeusz and others have a different view (ADM's rejection goes against the grain of logic, November 29).

I always respect and admire Steve’s views and analysis but sometimes we disagree. This is one such occasion.

In my view, the three main reasons stated for agreeing to the takeover of GrainCorp either do not stack up of are offset by the disadvantages. People like the Business Council of Australia indicate that the GrainCorp rejection will frighten off overseas investors. Overseas investors only have to look at how we approved the Canadians bid for Warrnambool Cheese in a way that severely disadvantaged local bidders to see that there is no general anti-foreign bias.

Most realistic overseas investors would understand that bids to change a national infrastructure company, which provides the lifeline for the farming community, into an international player in competition for capital and resources with rival overseas agricultural industries will usually be blocked.

The second reason that is touted is that Archer Daniels Midland would have provided the $250 million to $500 million required to improve the GrainCorp infrastructure. In the last 10 days I have addressed the trustees of more than 1500 self-managed superannuation funds. If a proper agricultural infrastructure company is set up then Australia can raise that money very easily. And setting up that structure must be the first task of GrainCorp management. I have no doubt that Archer Daniels Midland would have been aware of the global thirst for good infrastructure investment projects. However they may not have been aware that, in Australia, that desire is strongest among the self-managed funds, which are the largest players in the superannuation capital arena with a market share of over 31 per cent.

The third reason people give for acceptance is that Australian farmers would have gained access to the Archer Daniels Midland customer base. That sounds like a good idea but Australian grain is in big demand and GrainCorp should know who the large buyers are and also be able to contract with large trading houses like ADM without giving them ownership.

It’s true that shareholders would be much better off in the short term accepting the takeover offer. They have been badly treated. But when you own part of a nation’s vital infrastructure you cannot assume that you will be allowed to sell that infrastructure to people who are overseas rivals –particularly in an industry that we have earmarked for national growth.

The board of GrainCorp first needs to set up an infrastructure arm so it can raise capital at low cost. Then it needs to look at BHP Billiton and study how over time the 'Big Australian' has given a degree of stability to minerals even though it is a wildly fluctuating business. BHP invested in five major plays – iron ore, oil/gas, coal, aluminium/nickel and potash. It is now transferring its operating skills from one minerals industry to another but the five plays have fluctuations, which in most years offset each other and provide a degree of stability (in recent years they have all boomed but that is rare).

GrainCorp needs to think about how to implement a similar strategy over time. Prior to the ADM bid GrainCorp was buying international assets to lessen income variation, so was heading in that direction, but the strategy lacked clarity and required an associated infrastructure investment strategy.

The existing board and management need to undertake some deep soul searching as to whether they have the skills to implement a BHP style strategy. Alison Watkins clearly does not believe she has that ability and opens the position for a champion. If GrainCorp is to achieve the potential of the looming food boom, the board should choose a CEO who is willing to talk to self managed super investors about infrastructure investment.

Footnote: America is a major wheat growing rival. The fact that the Americans didn't like our rejection makes you think we got it right.