Tensions give ADM a grainy outlook

Archer Daniels Midland's declaration of its capital commitments to GrainCorp and price restrictions on grain-handling charges have helped assuage local growers' fears. But politics may yet get in the way.

Archer Daniels Midland has played its final card to try to defuse the ‘small p’ politics afflicting its $3.4 billion bid for GrainCorp. Whether that also removes the ‘big p’ threat to the agreed deal is another matter.

The US-based ADM had originally committed to adding $50 million to GrainCorp’s own plans to invest around $250 million in its businesses over the next four or five years. Today it added another $200 million to that pot, swelling it to $500 million.

The decision to add those funds, which are earmarked exclusively for GrainCorp’s storage and logistics business, came after extensive discussions with GrainCorp’s grain grower customers.

ADM has also committed to price caps on grain-handling charges at its silos and ports, an open-access regime for the ports and enhanced consultation with grower and community representatives.

That would appear to address growers’ fears that an ADM-controlled GrainCorp would raise grain handling or storage fees, or rationalise its infrastructure, or somehow limit access to its ports. Limiting growers’ access to ports would be difficult, given that third-party access to them is regulated and it is also in GrainCorp’s interests to maximise the volumes flowing across its logistics infrastructure.

Whether it defuses the red-hot debate occurring at more formal political levels is an open question. Since the federal election there have been obvious public tensions within the government about whether the takeover should be approved.

If it were left entirely to Treasurer Joe Hockey, as technically it should be, there is probably little doubt that he would approve the acquisition. To appease his National Party colleagues and the growers, it is probable that he would attach some conditions to that approval.

The commitments given by ADM today, both in terms of the capital and the behavioural and pricing restrictions, could make Hockey’s job easier. All he really needs to do is to convert them into formal and binding undertakings to the government via the Foreign Investment Review Board process that ends at his desk.

The offer should be approved. GrainCorp already dominates east coast grain storage and logistics infrastructure, including the ports. Its acquisition by ADM wouldn’t have any material impact on the extent of that dominance – a conclusion also reached by the Australian Competition and Consumer Commission – which also said there were viable competitive alternatives to discipline GrainCorp’s behaviour.

There is no obvious incentive for ADM to try to increase grain storage charges – there is some competition and prospective competition – and there is an open access regime in place for the ports. Given that it wants to outlay more than $3 billion to acquire GrainCorp, there would not be any incentive to undermine the business in order to favour its North American operations.

ADM, like other international grain traders, is anxious to add an Australian base to its international platform to diversify its exposures, take advantage of Australia’s proximity to the growth markets of the region and its position as a major supplier to those markets.  So anxious is it that it is prepared to pay a premium approaching 50 per cent of the pre-bid levels at which GrainCorp shares traded.

ADM’s offer price effectively capitalised the bumper grain harvest of two seasons ago. The most recent season and the one in prospect aren’t anywhere near as buoyant. GrainCorp’s shareholders would face an implosion in the value of their shares if the bid, which has been strongly supported by GrainCorp’s board and management, were blocked.

The $500 million ADM has committed to invest in GrainCorp’s operations and the $3 billion-plus inflow of capital associated more directly with the bid would be largely lost if the offer is stymied by politics.

GrainCorp, which has historically invested an average of only $17 million a year on growth capital expenditures in its storage and logistics business, simply doesn’t have the financial capacity or the incentives to match ADM’s commitments.

GrainCorp’s Alison Watkins has argued on many occasions that the Australian agricultural sector will need a lot of investment and access to global capital if it is to meet its potential in a region where the demand for agricultural commodities is growing rapidly.  Historically, domestic sources of capital for agribusinesses have been limited.

Hockey has said he will make a decision on the bid by December 17 and that he won’t be bullied by anyone over the decision.

He understands that the implications of his decision will reverberate beyond the Australian grains sector and the specific issues generated by the GrainCorp takeoever. His decision will be interpreted as a signal of the new government’s attitude towards foreign investment generally. There are more sensitive sources of foreign capital than North America.

ADM’s announcements today ought to help him reach a conclusion that balances legitimate concerns of the growers with the national interest in continuing to attract the foreign capital that is required to fund growth in the Australian economy.