Why GrainCorp is ripe for a golden harvest

GrainCorp has potential for a strong future, but government mistakes have held it back. That places its prospective American owners in a very powerful position.

Australian farmers desperately need someone of the calibre of Barnaby Joyce looking after their interests in Canberra.

In the last six years Canberra, and to some extent the states, have given the farmers a hard time. Yet there is an enormous potential if we can overcome some difficult hurdles created by government indifference or mistakes.

The potential good and the bad emerge in a fascinating KGB interview with GrainCorp chief executive Alison Watkins.

In a way that is unusual for a chief executive advocating a takeover of her company, Watkins effuses enthusiasm for the prospects of grain farming and GrainCorp. And the way she kept dodging persistent questioning from Alan Kohler would indicate that she expects to receive an offer of employment from the bidders. (Watkins under Doug Shears helped build up the Berri Juice business and helped in its sale to San Miguel and its integration.)

Watkins was so enthusiastic about the longer-term GrainCorp prospects that I questioned why she was advocating that GrainCorp shareholders sell to the Americans. The answer was clear: the Americans’ bid is about 50 per cent above the GrainCorp pre-bid price, is endorsed by Grant Samuel and there are a series of potential nasties that could prevent farmers (and GrainCorp) enjoying the boom they look forward to.

In particular, low priced and plentiful gas in the US means that American farmers are going to pay far less for fertiliser than their rival Australian farmers.

Thanks to bad decisions by Canberra and the states, the Australian gas industry on the east coast is a total mess and Incitec will erect its next fertiliser plant in the US.  

In addition, the rail infrastructure that transports grains in some states is not up to standard and requires major investment. GrainCorp should have been more active in bringing this about but it was not easy to achieve in the mining boom. If the Americans gain control of GrainCorp I have no doubt they will be much more aggressive.

Barnaby Joyce will also be aggressive in making sure the proper infrastructure is put in place and he will try to fix the fertiliser problem. But I fear that the Gillard/state government mistakes are very hard to reverse.

Meanwhile Joyce does not want our rivals, the Americans, to control the bulk of our grain transport and handling systems because, in a capital limited world, in the longer term investment will be spent not in Australia's national interest but where the best returns are. In the future, that may be in the US rather than Australia.

We saw with Singapore Telecom that they did not invest big sums in Optus because returns in Asia were better. In part, that is why Telstra regained so much power.

In the case of GrainCorp, investment choice goes to the heart of the grain rivalry between the US and Australia. But, of course, GrainCorp has already invested offshore.

Having paid $3 billion for GrainCorp (assuming the bid is successful) it’s unlikely the Americans will not want to improve the business. But longer term they are in a very powerful position given that they can choose where much-needed investment goes and/or determine the level of government support that is required.

But GrainCorp, with its current shareholders, does not have the ‘US rival’ muscle in dealing with governments, which may be one reason why Alison Watkins believes American ownership ultimately will be in the farmers’ best interests.

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