MARKETS SPECTATOR: Graincorp acquisition trigger

Archer Daniels Midland's impending takeover of Graincorp could be the beginning of a wave of consolidation in Australia's food sector.

GrainCorp’s acceptance of Archer Daniels Midland’s $13.20 a share offer ($12.20 plus a $1 dividend) today puts the US company in a dominant market position in Australian grain handling. GrainCorp manages 75 per cent of eastern Australia’s annual grain production and 90 per cent of eastern Australia’s bulk grain exports. It produces 35 per cent of Australia’s flour and 40 per cent of the country’s canola oil. Not a bad deal for Archer Daniels Midland, which if nothing else likes to dominate a market. Being a chief executive of an Australian food company now means it is likely an interested buyer will call.

Investment bankers, eying a buck, have long been telling anyone interested that Australia’s ability to become a food exporter in the driest continent with poor quality soils was enticing to foreign companies and governments. Australia’s food and grocery sector is worth $108 billion. Those whose economies and populations are growing, most notably China, have made efforts to secure farmland and stock in Africa with direct investments to secure the supply of commodities for their hungry industries and people. Australia accounts for less than 3 per cent of global food trade yet its wool, beef, lamb, milk, fruit, vegetables and seafood are highly sought after on the tables of Tokyo’s most expensive restaurants and the world’s best tailors in Milan and Paris.

Oddly, Australia’s agricultural sector is suffering from a lack of investment. The federal government says research and development as a gross value of agricultural production fell to about 3 per cent in 2007 from about 5 per cent in the late 1970s. Food is treated as a commodity by rich nations such as Australia. Yet access to high quality food by many nations is lacking even in rich nations. Witness the continuing concerns over the effects of the Fukushima nuclear plant disaster on the ocean surrounding the ill-fated station as well the surrounding farmland and beyond. The image of frolicking lambs, contented cattle, vines and grain stalks blowing gently in the breeze in the cleanest environment on earth is appealing to foreign investors who can leverage off Australia’s “clean, green” image.

Private equity has recognized the power of such an image. Champ owns wine maker Constellation brands although its success to turn around brands such as Hardy’s have yet to be a success. Texas Pacific Group has bought Australia’s dominant poultry producer Inghams Enterprises. Clean Seas Tuna, whose stock has fallen 52 per cent in the last 12 months, may be a tempting target for an acquirer. Closely held companies such as cheese maker King Island Dairy or beef producer Atron Enterprises have brands that would prove valuable to an acquirer. Australia’s biggest dairy cooperative, the Murray Goulburn, says it will increase its stake in Warrnambool Cheese and Butter Factory to 14.5 per cent.

The fight for Australian food producers is just beginning. 

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