KGB: Alison Watkins

GrainCorp chief executive Alison Watkins tells Business Spectator's Robert Gottliebsen and Stephen Bartholomeusz:

– The company's focus is not on grain trading and international arbitrage, but building relationships with customers who seek specific grain qualities.

– Reduced government involvement has enabled better supply chain efficiency, but there's still room for improvement.

– Port operation is "pretty productive", with a different work environment to other Australian companies.

– Glencore's acquisition of Viterra, owner of ABB, doesn't greatly affect Australia's competitive landscape.

– Globalisation of the brewing industry is a positive for GrainCorp.

– The company is in a prime position to benefit from a boom in Asian demand for grains, where it expects to see traded grain volumes double over the next 30 years.

Stephen Bartholomeusz: Alison, last time we spoke it was about two years ago and you had just been appointed chief executive of GrainCorp. And you had just announced the merger with AWB, which didn’t go ahead, but at the time you decided the need to service global customers with a bigger balance sheet to survive globalisation of the sector. Have the imperatives changed?

Alison Watkins: No. Well look, thanks, Stephen, and yes I remember that interview very well and that was an exciting moment to take over as chief executive. And look, as it’s turned out I think it would have been a terrific combination if we had been able to go ahead with the merger with AWB. However, I’m really pleased with the progress we’ve made since in building our own business, particularly in developing our international marketing business, which was one of the strengths that AWB would have brought to us. It no doubt would have accelerated, but I have to say I think our team has done a terrific job in the two years since I’ve been CEO. So, look, I think you know these opportunities sometimes they work out and sometimes they don’t – and with the benefit of hindsight I think we are actually in a pretty good place without it.

SB: How do you develop a global presence without making major acquisitions?

AW: Well, for us it’s about being very, very targeted and very focused on building relationships with the end customers – the buyers of grain – who particularly want the qualities of the grain that we can source through our network. So we are never going to be a major international trader, and we’ve got no desire to do that, but what we can do is supply logical customers, Middle Eastern flour millers, Asian flour millers, for example, with high quality east coast Australia grain, which is what they like for their particular kinds of bread. And I think we’re very, very well placed there because of our network in country Australia, east coast country Australia. We can source the grains that they want and give them a great deal of confidence that we can get it to them when they want it and exactly to their specs.

RG: Who are your rivals in that sort of service?

AW: Well look, the international grain markets are very, very competitive and there are many participants. Obviously there are the big names which you’d be familiar with, like Glencore and Cargill, who operate out of Australia and also who are important customers for us because they use our ports. But I think that our customers, the end user consumers of grain, see that we do have a different proposition perhaps than some of the other players. And sometimes that proposition is what they want and they’ll deal with us for that reason.

Robert Gottliebsen: Do you think you’re too small to play in that game? These are very big companies you’re competing with.

AW: Yes. Look, there are many different strategies I think in international grain and by being very, very focused, we’re very much about connecting growers and end consumers. We focus on buying as much as we can directly from growers and selling as much as we can to end consumers.

Our focus is not so much on trading grain, on buying from traders and selling to traders and trying to take advantage of international arbitrage opportunities. We really want to focus on those consumers of grain who want particular qualities and characteristics that we can use our network to source for them. And I think that that’s a very viable strategy and, as we’ve shown with our growth over the last couple of years, a very successful strategy for us.

SB: Alison, you talked about GrainCorp seeking to increase its global sourcing of grains. Is that a diversification and risk mitigation strategy or is it about growth?

AW: Yes. Look, I wouldn’t want to overemphasise what we are trying to do there. It’s really about being able to add value to those core relationships that I’ve described, so those relationships where we’re really well placed out of Australia to serve specific requirements. Of course, the east coast of Australia is quite volatile in a production sense. Some years we will have big yields like we’ve seen in the last couple of years. Other years we’ll have poor yields. And by having small positions in other markets we’re able to selectively source where it makes sense to maintain the continuity of those relationships. But the focus is very much on those core relationships and you will see that we will stay very focused on the core brands, which for us are wheat, barley and canola.

RG: Alison, how do Australia’s grain costs compare with other countries? How competitive are the wheat and canola industries?

AW: Well look, ultimately we can only participate if we are competitive and if the grower who ends up really bearing all the costs associated not only with production, but also the supply chain costs involved in getting grain through to an end consumer. And I think that the Australian growers actually are pretty efficient. We did a good job in Australia of removing a lot of the subsidies and the government involvement, heavy government involvement with having this sector and that’s driven the Australian producer to be one of the most efficient in the world. Where I do think there is opportunity for improvement is around the supply chain efficiencies and obviously we at GrainCorp have a strong vested interest in making sure that we do as much as we can to promote the supply chain to be able to support as much throughput as possible, however we do also need support from government, particularly to assist with making sure our rail infrastructure is sound because cutting grain on rail long distance anyway makes a lot of sense, and also to remain light touch and regulation around our port assets. So the more flexibility we can have in the supply chain to make sure that the grain can pass through at the lowest possible cost, the better off we’ll all be and the bigger the opportunity for the Australian growers to meet what is very strong demand in our region; that, you know, if we can respond to it, we’ll provide a lot of growth for our industry over decades to come.

RG: And it’s true though that the growers are getting a rough end of the stick because they’re efficient as you say, but our supply chain, whether it be ports or rail, just simply have much higher costs than our rival countries? And we stay in the business because we’ve got very efficient growers, but as soon as it leaves the farm gates, the money is wasted by bad practices?

AW: Look, I think there are definitely opportunities to improve supply chain costs and as I’ve said we are very focused on playing our part in that and working with governments. We had some terrific support from the Victorian government last year where we co-invested with them to bring a line that runs up to Rainbow back up to standard which will put about a 150 thousand tonnes of grain back on rail that was previously going on road. And more of those sorts of opportunities will definitely help and less regulation around the ports which allows us to work with our exporters to get the rail and road working together more efficiently than the current regulatory regime facilitates.

RG: Would our costs be like that overseas? Would our supply chain costs be twice that overseas?

AW: I think if you compared us with say Canada where there are some pretty vast differences pretty covered by rail, yes you could look at it that way. But look, growers are pretty rational.

RG: So, our supply chain costs are about twice that of Canada?

AW: Depending on the distance that the grain is travelling, yes that can be the case, but as I was saying growers are very rational.

RG: That’s just terrible though. Isn’t that the most awful thing that here we have an efficient farmer and a supply chain that costs twice as much as Canada, you know, in rough terms? That’s awful, isn’t it?

AW: Look, we definitely think there are opportunities to improve. I think it’s not realistic to have that as a benchmark because the geography of Australia is different from Canada in terms of the concentration of grain. It’s easier to get larger trains carrying more grain because of the way the grain is grown and the concentration of grain in Canada than it will be here in Australia, but we can definitely do a lot better.

And look, I mean growers are pretty rational. They will do what makes most sense for them and many of them will have alternate uses. As an industry we need to make sure that grain is an attractive option for them, and definitely improving supply chain costs will help.

SB: Alison, in relation to improving the efficiency of the ports I think you’ve talked about using the ports for non-grain products and for imports as well as exports. Can you explain how that would work?

AW: Yes. In fact, we’re already doing that to quite a large extent, so one areas of focus for us are woodchips where we’ve made quite a big investment down at Portland in Victoria and we now export quite a large quantity of woodchips through our terminal down there. At Geelong we import quite a lot of fertiliser as well. And there are other examples right across our east coast Australia network. So, that is useful income for us because, as I say, our ports can be very busy like they are at the moment or they can be very quiet like they were a few years ago with virtually no grain exports at all. So having a greater diversity of income and utilisation of those assets makes a lot of sense.

RG: Are our ports productive or are they a mess?

AW: Look, our ports are pretty productive. We have very good relationships with our workforces and a very sort of good motivated group of employees who work hard when we need them to – like right at the moment where we’re certainly pushing the supply chain to the max. And we’re very pleased with how it’s performing. We have a very different environment in our ports than you’d see in other port workforces.

SB: Alison, you’re about to face the first opposition you’ve ever had in New South Wales. I think Glencore and West Australian CBH Group are building a new terminal with some others. Is that going to impact you markedly?

AW: Our focus is on doing a great job for our exporter customers with our ports. We’ve got seven bulk ports across the east coast of Australia and given the way the crop goes you never quite know where it’s going to be in any given year. So we can offer our exporter customers the benefits of a very strong network and we think there’s a lot of value in that. We understand that exporters will have their own reasons for possibly wanting to construct other capacities. We don’t think it’s necessary because we do have plenty of capacity and the particular port you’re referring to I think is being built at Newcastle and will provide I think the export facilities for a number of commodities apart from grain, but as I say we’ll just put our head down and make sure we can do the very best job we have to offer our exporter customers excellent service and I think we’ll get the results from that.

SB: Glencore is involved in that.

RG: Alison, do you think you’re a takeover target?

AW: Look, I think that the best thing that we can do is run our business as well as we can and I’m really pleased with the progress we’ve made and we’ve had some kinder conditions over the last couple of years and I think that we are getting on and making the most of those. We’re very intent on investing well while we’ve got some better financial returns to really improve the strength of our grain handling networks, develop the grain marketing activities, particularly offshore, and to strengthen our malt business which was an important acquisition for us three years ago. So, we’re going to get on and do those things as well as we can and I certainly don’t lose any sleep over being a takeover target or not.

SB: Alison, we recently saw Glencore acquiring or announcing the acquisition of Canada’s Viterra, which had earlier acquired ABB here. Does that change the competitive landscape much for you?

AW: I don’t think so. Glencore is a very important customer for us. They use our ports here on the east coast a lot. They are a very active marketer of grain, obviously a very different kind of marketer than we ever would want to be, very large, very capable, particularly in barley here in Australia. I think that they’ll a good owner of that South Australian business and yes from our point of view I think this is all part of the maturing of the market since deregulation where we’re seeing, you know, some consolidation occurring which from a supply chain management point of view is actually not a bad thing because from a planning point of view we’re dealing with some pretty large, mature, capable exporters for whom the planning task is well understood and, you know, it could be the pretty well run professional organisation.

SB: Another sector that’s been consolidating quite significantly has been the global brewery industry and we saw SABMiller take out Foster’s here. How has that impacted your malt business which deals with those global brewers?

AW: We’ve got I think the top four brewers accounting for over fifty per cent of the world’s beer production. It’s been very significant over the last ten years and actually it plays I guess right in to the model that we’ve created with our malt business and we’ve got eighteen malt houses around the world now covering North America, the UK and Europe as well as here in Australia and we are focused very much on turning what was really five to six malt businesses that we owned into one integrated business that can really approach these global customers as one and offer them a lot of flexibility around where they… where we supply from and helping them manage their barley risk as well. So, we think that globalisation for us is a positive because we have a great proposition for those global brewers.

RG: Alison, the end customers of most of the grains are food processors and their customers of course are supermarkets and food retailers. The sort of squeeze that has been put on the Australian food processing industry is that being duplicated around the world and does that affect you in the ultimate?

AW: Well, we’re certainly involved in food processing ourselves here in Australia through Allied Mills which we own sixty per cent of with Cargill. Allied Mills is Australia’s leading flour miller. So, we do understand those pressures and we work closely with our customers and we work with the retailers themselves to supply them with some of their ingredients, particularly for their instore bakeries. And look, I think that phenomenon is something that we see around the world and, you know, I know it’s a very, very tough transition. I’ve been involved in the food processing industry in a number of ways myself over the years. But I do believe that the retailers understand that long term their interests are served by having a capable supply chain, having capable processes here in Australia that will be important to their future and I expect that they will act in line with that. So, there’s no doubt some painful readjustments for many participants in this sector to go through.

RG: What you’re saying is that if you’re a food processor, you’re going to have to reduce your costs to international levels – or close to it?

AW: Yeah look, I think if you’re a food processor here in Australia, you need to make sure that your business is well run, that you’re investing in your business and also that you can generate the kind of innovation that will support some premiums and a long term relationship with the retailers here in Australia because otherwise, you know, import is an option. I don’t think from a retailer’s point of view it’s an ideal option though because it leaves you open to the vagaries of the exchange rates and also just the risks of supply chain disruption and so forth. So, all else being equal I think strong Australian suppliers will definitely have an important role and a role that will be valued by the retailers going forward.

RG: The difficulty is that going right the way back say quite a few years ago the food processors were among the most inefficient of our industries. They did very bad sweetheart deals with the unions and didn’t invest in their plants, partly because of those deals – and it really has been a mess. Do you think that they can be cleaned up or in the process of cleaning up they all just simply have to shut?

AW: No. I definitely don’t think that’s the case and I see many of our food processors be, including our own Allied Mills, really responding to the pressure and in a very, very positive way and also recognising importantly the need for innovation and the desire for retailers to innovate. The development of instore bakeries is a great example of where there’s been, you know, tremendous improvement in your offering that you can get now when you walk in to a supermarket and experience their instore bakery and that’s been very much driven by partnerships of the retailer working with companies such as ourselves to develop new products that excite consumers. So, I think that with that sort of mindset, it’s definitely a strong future for food processing in Australia.

RG: It must be very hard for your old workers at Allied Mills because Allied Mills, not in your day, but it was one of the most inefficient food processors, in the old days.

AW: You’re showing your age, Robert, if you don’t mind my saying.

RG: I thought…

AW: Those days were hard and we’d be delighted to show you over the Allied Mills of today. I think you’d see very different things.

RG: Would I? That’s good.

SB: Alison, last one from me. There have been a lot of discussions on the great opportunity for the Australian agribusiness sector in the economic development occurring in Asia and the increase in demand for proteins and therefore grain. How well placed are you to participate?

AW: I think we are very well placed. You’re absolutely right. We’re in the right place at the right time as a country. You know, we’re going to see population growth increase by about a third over the next sort of thirty years or so. Grain consumption will increase by 50 per cent. And importantly for Australia traded grain will increase by a hundred per cent, so it’s going to double. That’s about 150 million tonnes extra. So, that’s very, very exciting for Australia because of course we do have quite a substantial trade surplus of grain and everything that we can produce to respond to that need we will satisfy and go to satisfy that demand. So it’s a terrific opportunity for us.

It’s happening right in the markets like Africa, the Middle East, Asia and the Asian markets where we’ve got a geographic advantage, so we’ve got a supply chain advantage in to those markets. The imperative for us is to focus on the R & D that’s going to allow us to improve yields, to respond to that demand signal and also to really work hard to keep our supply chain costs as low as we can and that’s what will allow us to participate fully in a tremendous opportunity for Australian agriculture.

RG: Alison, here we have a market as you point out that could actually double or certainly increase substantially and yet the developments of the Murray Darling Basin are going to make it extremely difficult for us to participate in that.

AW: Yes. Look, I think that there are, you know, there is a range of conditions for Australian agriculture and you know, if I think about it from a grain point of view, we’re fortunate that the vast majority of what we produce is dry land production, so the irrigation is not the driving issue for us. There are plenty of opportunities around new variety development as well that will allow us to be a more reliable producer in the somewhat extreme dry and wet conditions that we can have, so from a grain’s point of view I don’t think that that’s going to be an issue.

RG: Okay. Finally, from my point of view, how does it look for the next twelve months both in terms of our production capacity and production and the world market?

AW: Well, there are some interesting things. As far as the Australian crop and particularly the east coast crop goes, the crop forecasters have the crop somewhere in the range of sixteen to eighteen million tonnes for wheat, barley and canola production and that’s certainly an above average crop, so if that plays through, we’ll be all very pleased. The crops are all now largely planted and we’ve had some pretty decent rain across most parts of the east coast of Australia, so we’re feeling reasonably positive about the prospects for next year. On global prices I won’t even try to speculate. We’re seeing quite a lot of nervousness coming out of anxiety around the US crop corn and soy and lack of rain there and what that might mean and really it’s a little bit too early to say. We just need to wait until July I think when we get some better information on what that crop actually looks like.

RG: But there’s a chance we’ll have a bad year with crop?

AW: Well yeah, other parts of the Northern Hemisphere though are looking pretty favourable at the moment as well, so it’s really the corn and soy and the impact that has – particularly on seed, because around about half of the world’s grain is consumed by animals and corn and soy obviously form parts of that.

SB: Okay. Alison, thank you very much indeed for your time. We appreciate it as always.

AW: Okay. Thank you, Robert. Thank you, Steve.

RG: That was great. Thank you, Alison.

AW: Thank you.