THE DISTILLERY: Neglected grain

Some jotters say ADM's GrainCorp takeover shows Australia undervalues homegrown firms and local investors lack the patience to harvest longer-term rewards.

Is it surprising that a giant like America's Archer Daniels Midland managed to grab a jewel like GrainCorp for just $3.4 billion? What does it say about those Australian investors and is this still a good result for them?

These are some of the questions brought up by Australia's business commentators following one of the most anticipated deals of 2013 – which isn't yet done, by the way. If Australian shareholders won't recognise the long-term strategic importance of GrainCorp, regulators will.

We start with The Australian's John Durie and Fairfax's Malcolm Maiden, who tackle the concept of value through the words of GrainCorp's chair.

"GrainCorp chairman Don Taylor yesterday bemoaned the fact that superannuation managers can't see their way to investing for longer than six-month cycles, when agriculture demands a horizon of four to eight years. Nufarm's Doug Rathbone enthuses at the reaction he gets when he talks to US food giants Archer Daniels Midland or Sarah Lee about his own inventions, such as gluten-free sorghum, which is potentially revolutionary. But it barely raises an eyebrow when he mentions it in local presentations."

Here's Fairfax's Maiden picking up on the exact same beat.

"Asked why foreign groups thought Australian agribusiness groups were worth buying when locals evidently did not, GrainCorp chairman Don Taylor said first that it was a discussion for another day...Taylor did say, however, that this market was caught in a time warp. Agricultural companies didn't run to the quarterly or six-monthly performance cycles that guided the investment decisions of superannuation fund operators in this country, he said. They laid their plans and considered the results over periods that ran for about five years. That required patient capital, and while there were investment funds that were able to supply it in the United States, it was in short supply here."

The Australian Financial Review's Chanticleer columnist Tony Boyd similarly focuses on the lack of demand from local funds for long-term, strategic investing that produces big gains, particularly in grain.

"Over the past few years control of a range of food and agricultural companies has passed into the hands of interests in Canada, the United States, Japan, Thailand and Singapore. Over the same period, several Australian agricultural companies, notably Elders and Nufarm, have suffered declining earnings and poor returns to shareholders...The ADM deal is significant for a number of reasons beyond the American takeover of control of the storage of 75 per cent of eastern Australia’s grain production and 90 per cent of Australia’s bulk grain exports. ADM is also gaining control of the company that markets 35 per cent of grain to overseas consumers, owner of 35 per cent of Australia’s malt, 40 per cent of Australia’s canola oil and the producer of 35 per cent of Australia’s flour."

The Australian's Richard Gluyas makes the rather elementary, but perhaps not so obvious, point for an isolated nation like Australia: that GrainCorp is a bolt-on acquisition for a company the size of ADM.

"The big question for growers is whether GrainCorp will be run for short-term profit or long-term sustainable growth. If it's the former, farmers have a lot to be worried about, and they'll find out sooner rather than later. The pace of GrainCorp's restructuring will be stepped up, and the less economic handling facilities – the older, more remote and slower infrastructure that demands larger licks of capital investment – will be surplus to requirements, leaving local farmers stranded."

And with the final word on GrainCorp-ADM, Business Spectator's Stephen Bartholomeusz points out that the ASX-listed player might be a compelling target, but it's still an agribusiness company, vulnerable like the rest of them to the elements.

"While its expansion into processing activities has dampened the volatility of the group’s earnings and chief executive Alison Watkins last year initiated a business improvement program forecast to generate an extra $110 million of earnings over the next four years, GrainCorp does remain exposed to agricultural cycles. With ADM making it clear it wasn’t going away and was prepared to wait for the cycle to turn and make GrainCorp vulnerable and GrainCorp itself demonstrating an unemotional attitude towards the prospect of being acquired, there was always the possibility of a pragmatic and agreed outcome, particularly as ADM had made it clear it wanted access to due diligence before it committed to an offer."

In other company news, Fairfax's Adele Ferguson and Peter Cai jumped on a story that this columnist has been wondering about. Chinese telco giant Huawei is so determined to use Australia as a place to boost its international image that it has taken its sponsorship of the Canberra Raiders one step further by getting star player Sandor Earl's upper thigh tattooed with its logo.

Meanwhile, The Australian Financial Review's Matthew Stevens runs a cautious eye over the new greenfield employment agreements that Hutchison Ports Australia has signed with the Maritime Union of Australia.

Elsewhere, Fairfax's Ross Gittins investigates what the point of inflation is, taxi driver style – which is the most underrated school of economics.

The Australian's economics editor David Uren looks at the unmistakable trend that the Reserve Bank has been dealing with since it started cutting rates in November 2011 – i.e. that inflation is consistently weak.

And finally, The Australian Financial Review's economics editor Alan Mitchell runs his experienced eyes over the scale of the fiscal challenge facing the incoming Abbott government. It ain't fun.

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