The Distillery: Food for thought

Given a market largely bereft of major deals for the past few years, a Canadian offer for Warrnambool Cheese and Butter has sent investors into a lather. For most scribes, the value of the deal means it will be manna from heaven for shareholders, but given the extent of foreign interest in our food sector, is it another sign we undervalue our agricultural industry? In a few years’ time we may know the answer to that.

More pressing however, is the answer to the question of whether America will lift the debt ceiling before the October 17 deadline. Markets are getting restless, but one commentator finds a signal to buy on the uncertainty.

First to Saputo’s $462 million offer for dairy group Warrnambool Cheese and Butter, one that has put foreign ownership of agricultural assets again on the agenda. News of the proposal and the board’s backing leads the Herald Sun’s Terry McCrann to ask if we are missing out on great long-term opportunities in the face of short-term gains.

“Do we have a full appreciation of the real long-term value of our rural assets and businesses, in a world in which two billion Asians become middle-income earners with the tastes and spending power that goes with that? Secondly, should the focus in Australian agribusiness be one of aggregation and consolidation among OUR businesses. So we build local versions of Saputo – and indeed Archer Daniels Midland, which is bidding for Graincorp – instead of selling out to them?”

The Australian’s Richard Gluyas continues on the same path, comparing New Zealand’s successful entry into the increasingly lucrative Asian dairy market to Australia’s limp efforts.

“New Zealand, principally through its dairy conglomerate Fonterra, has been riding the boom, controlling about 35 per cent of the world dairy trade. The contrast with Australia's highly fragmented industry could not be more stark. While the farmgate price in the southeast region is tipped to rise in the 2014 financial year, farmer confidence as measured in the National Dairy Farmers Survey has plunged to its lowest level since the survey was introduced almost a decade ago.”

Fairfax’s Malcolm Maiden, meanwhile, explains why the deal isn’t quite signed, sealed and delivered just yet. Indeed, the battle may have just started.

“If… Bega holds on to its stake in Warrnambool and Murray Goulburn also hangs in, almost 36 per cent of Warrnambool's shares will be locked up. Saputo would need to buy three-quarters of the remaining shares to get past 50 per cent and trigger its minimum acceptance condition. That is possible, but only just – and the task could become impossible if a third dairy group, Fonterra, say, also independently decided to buy in. The battle may have a way to run.”

The Australian Financial Review Chanticleer columnist Michael Smith also assesses the roadblocks, particularly the risk of pushback from regulators and the government. But for this, the Canadian company appears well prepared.

“The offer has been carefully constructed to try to pre-empt any political opposition. Saputo plans to keep the existing management team and is promising to invest in its operations that will benefit suppliers because demand for milk will increase. It is also keen to talk up its background as a family-run company in which milk is the lifeblood, rather than a faceless conglomerate swooping in to take control.”

Sticking with agriculture, the AFR’s economics editor Alan Mitchell puts the spotlight on Prime Minister Tony Abbott’s “quickie free trade deal” with China and concludes it may help accelerate much needed reform of the farm sector. The Australian’s Peter Alford also mulls free trade deals, assessing the optimistic agenda that could see trade minister Andrew Robb secure free trade agreements with Japan, South Korea and China within this term of government.

Moving offshore, the standstill in Washington persists, leaving America’s two largest foreign creditors – China and Japan – a little anxious, according to the AFR’s Karen Maley.

Philip Baker, Maley’s colleague at the AFR, also notes the increasing concern in the marketplace, spotlighting the rise in the ‘fear gauge’. However, a look at history, he says, shows brave investors should be able to capitalise on the recent market weakness.

In just over a week we will know whether ‘brave’ was the most appropriate term or whether reckless might have been more apt.