The industry has long been dominated by its goliaths and this set the scene for the GrainCorp decision, writes Brian Robins.
Secretive, with its affairs conducted well out of public view, the international grains business has long been the source of angst for farmers internationally.
And from the outset of the attempt by US grains group Archer Daniels Midland to seize control of GrainCorp, the dominant grains handler in Australia, grower groups were up in arms, fighting a real – and imagined – foe.
For much of the post-war period there have been five global traders: initially Continental, Cargill, Louis Dreyfus, Bunge and Andre & Cie. Recently a couple have disappeared – Continental and Andre & Cie – and others emerged; principally, Archer Daniels Midland and Glencore.
Now, the industry is dominated globally by ADM, Cargill, Bunge and Glencore, which control grain trading and handling in all of the key growing regions globally.
And their power is expanding as demand worldwide for grains such as wheat, barley and soybean continues to expand as standards of living in large parts of north and south Asia, along with Africa, rise steadily. Their deeply entrenched reach and control of markets spur unease and fear on the land that the traders are able to look after their own interests at the expense of farmers.
Concern over the role of grain traders during a time of volatile prices resulted in a single buying organisation being established to handle the wheat crop during the world wars. But concern that traders had the upper hand in their dealings with farmers would not go away and there was ongoing agitation for a single buying organisation to protect growers.
At stake is not just getting their ability to get their crops to market, but also to get competitive prices. As a result, Australia had a single export desk, the Australian Wheat Board, until a few years ago, this despite rising pressure within the industry for change due to the view the export monopoly had outlived its usefulness.
Against this backdrop, GrainCorp has emerged to occupy a unique position in the local grains sector. From its roots as a government-owned entity, GrainCorp has emerged as the dominant grains handler in the country’s east. But the vagaries of the grain trade remain for farmers – from exposure to gyrating prices, to traders clipping the ticket at every turn thanks to their control of monopoly assets. And there is the boom-bust cycle that turns from good growing conditions and big crops to drought.
Just over a decade ago, the NSW Grains Board collapsed, its losses close to $100 million. This triggered an investigation by the Independent Commission Against Corruption. The board had failed to make the transition from public to private ownership, although some of its prime assets eventually found their way into GrainCorp’s hands, which helped it prepare for the full opening up of the local market.
The abolition of the Australian Wheat Board has resulted in a host of independent operators moving in. They are big and small. Many are mum and dad operators who load wheat into containers for shipment from farm to foreign buyers, which control a modest, but expanding, part of the trade.
Even so, they are just a sideshow. On the main stage, the global traders were quick to carve out prime position for themselves as liberalisation moved forward.
In 2009, South Australia’s ABB Grain was bought by Canada’s Viterra for $1.2 billion. Then, early last year, Swiss trader Glencore swallowed Viterra for $C6.1 billion.
Cargill paid $870 million for much of the former AWB trading arm, and it now boasts a network which can handle around 3.5 million tonnes of grain a year through Victoria and southern NSW. It has expanded by, for example, outlaying an estimated $US373 million to take control of Australia’s largest maltster, Joe White Maltings. It is also a large player in oilseed crushing, in which it competes head to head with GrainCorp following the latter’s purchase last year of Gardner Smith and Integro, and has a position in the beef sector as well.
Louis Dreyfus has strengthened its position, building a network of grain-handling facilities through the north-west of NSW over the past few years, as well as moving into the local cotton trade via a joint venture with Namoi Cotton as well as taking up a direct 13 per cent direct shareholding in the company.
After quitting Australia a decade ago, frustrated with the single export desk, Bunge recently moved back in. It has rebuilt its trading operations and invested in new facilities, such as a $40 million spend on a port at Bunbury, Western Australia. Along with controlling the South Australian grain crop, Glencore has a key shareholding in an export terminal being built in Newcastle, which will pitch it directly against GrainCorp in handling grain from NSW’s north-western wheat belt.
Others, such as Japan’s Sumitomo, have a strong position in Victoria. It controls its own facility at the Port of Melbourne.
But none can boast the comprehensive suite of assets of the dominant player, the Australian-owned GrainCorp. It handles three-quarters of eastern Australia’s grain crop and 90 per cent of bulk grain exports through its network of seven of the eight bulk export grain elevators.
Its entrenched position enhanced its attraction as a takeover target. ADM lifted its initial offer for the company to $3.4 billion and, earlier this week put more money on the table to win growers’ support for its bid – it promised to spend $250 million to upgrade the rail network, which will not now occur.
As the global groups have lifted their presence in Australia, GrainCorp headed offshore. To avoid big swings in profits as growing conditions move from feast to famine, which leave it vulnerable to unwanted takeovers, GrainCorp has spent much more than $1 billion in the past five years on assets with more stable earnings.
First it paid $757 million for international maltster United Malt Holdings in 2009, which it followed up with the €77 million purchase of German’s Schill Malz in 2011. Then last year it paid $472 million for Gardner Smith and Integro, which took it into the oilseed crushing and liquids storage businesses, which opened the door for ADM to swoop.
The US major was able to take advantage of a large shortfall in a $160 million share issue by GrainCorp to part-fund last year’s acquisition to establish a strategic stake in the company. From this it launched its ill-fated takeover.
Now with the return of dry growing conditions, the east coast grain crop is forecast to decline, which will reduce GrainCorp’s earnings and investment outlays, while potentially closing off its fund raising options for future acquisitions, since it will find it difficult to turn to sharemarket investors for funds.
It was against this backdrop that GrainCorp was willing to back the ADM offer, once agreement had been reached on price, as it is well aware of the industry’s shifting dynamics.
‘‘The industry is going through transition and that will be a difficult transition,’’ Treasurer Joe Hockey conceded when speaking with journalists. ‘‘I would not want foreign investment to be the lightning rod for blame associated with that transition, nor would I want to impede the transition or impede competition ... ADM has massive scale compared to GrainCorp and it has a range of options open to it.
‘‘When governments impose conditions on individual companies, it inhibits the ability of that company to be able to respond to movements in the marketplace.’’
Hockey said the Foreign Investment Review Board could not give him unanimous advice on whether to agree to, or block, the ADM bid.
GrainCorp concedes it faces much tougher competition in the southern states, which could be mirrored in the decade ahead as the Newcastle terminal makes its presence felt.
Grower groups argued from the outset the bid should be blocked. ‘‘These are monopoly assets, and growers could get no assurances on the way ADM would handle them if it succeeded in buying GrainCorp,’’ Dan Cooper, the chairman of the grains committee of the rural lobby group NSW Farmers, said. ‘‘GrainCorp was moving towards a closed-loop marketing position – as ADM does globally – that is, it buys from the grower, runs it through its system and delivers at the other end.’’
A closed loop made it harder for smaller, independent players to carve out a position, reducing competition and exposing the grower to higher charges, he said.
‘‘We’ve seen in South Australia where Glencore bought Viterra, which had bought ABB, a monopoly changing hands and competition has decreased,’’ Cooper said.
‘‘Competition is declining because mid-sized players without the infrastructure can’t afford to operate in Australia and some have now stopped buying on the east coast. Near-term, some significant players will be leaving the industry. We need to ensure fair and open access, from upcountry receivals and storage through to port, to avoid other operators from being squeezed out.’’
The industry has been calling for an ombudsman to handle complaints against the power of the grain traders and handlers, which was backed by a Senate committee last year. But a more fundamental risk to foreign control of GrainCorp runs to the way Australian grain is marketed abroad.
The US has long complained Australian growers have been able to access prime export markets such as Egypt, where the US has invested heavily on ports and the infrastructure. Australian exporters’ willingness to work with buyers to supply a product they want has helped to take business worth millions of dollars from the US. But in the absence of a single export desk, grower groups fear the gradual loss of much of this trade.
As a result, overhauling Wheat Quality Australia as well as formalising a national body to handle marketing initiatives were industry priorities for the new year, grower groups said.
One of GrainCorp’s largest individual investors, Don Seaton, who sold Gardner Smith to GrainCorp a year ago, campaigned against the takeover on national interest grounds despite standing personally to make about $30 million.
‘‘Australia is in the envious position of being the last piece in the global grain puzzle for foreign agribusiness companies,’’ he said. ‘‘The next step is to put in place industry-wide structural safeguards to ensure that future approaches by foreign agribusiness may be welcomed without the threat of damage to competition in our local industries.’’
■ Handles 75% of eastern Australia’s grain crop
■ Handles 90% of eastern Australia’s bulk grain exports
■ Markets 35% of eastern Australia’s grain to overseas
consumers and 25% to domestic consumers
■ Produces 40% of Australia’s canola oil and refined
■ Produces 35% of Australia’s flour
■ Produces 35% of Australia’s malt