Will pay dirt slip through farmers' hands?

Fortune will continue to favour GrainCorp and Warrnambool Cheese - but international takeovers would pass rewards from farmers to managers and the supply chain.

The GrainCorp takeover bid from the US agricultural giant Archer Daniels Midland is suddenly becoming a wake-up call to farmers -- they are going to lose long-term market power.     

And that potential loss of power underlines the fact that in the last few decades a big proportion of the rewards from farming have shifted from growing crops to those providing transport, processing and retail services. 

In major international takeovers of agricultural transport and processing, the winners are the shareholders and the management. All too often the losers are the farmers.

As we have seen in both Warrnambool Cheese and GrainCorp, shareholders are being offered substantially more than the pre-bid market value for their shares. And the mangers of both GrainCorp and Warrnambool will be essential for the overseas bidders. They will almost certainly receive international style salaries.

When an international giant acquires the farmers’ supply chain then, longer-term, local farmers will be in competition with growers overseas for market share -- particularly in times of glut.

 Very similar considerations will apply to dairy farmers, assuming the global dairy processing giant Saputo acquires Warrnambool Cheese, although in that case there are more complex factors.

In the case of GrainCorp in past years the company has not mobilised capital to undertake the investment required in the Australian grain transport and storage network. Part of the reason for this was bad government in the states. Nevertheless until recent takeovers, GrainCorp had almost no gearing. Almost certainly Archer Daniels Midland will lift the leverage, which will reduce the Australian taxation revenue.

Farmers will benefit from the better infrastructure that will come from the GrainCorp takeover, although Australia now has a pool of capital hungry for good infrastructure opportunities so that infrastructure could have been funded locally.

When your infrastructure is controlled by an international giant it means that rewards pass from farmers to the supply chain -- longer term that will apply to both American and Australian grain farmers because one is played off against the other. In sugar, farmers in Brazil have received a beating from this process. In Australia sugar farmers, for the most part, still control the ports so they have been insulated but they are in a weaker position because of the sale of the mills.

In the case of dairy, farmers still control Murray Goulburn so the global giant Saputo will have competition via Murray Goulburn. But if Murray Goulburn is ever privatised and acquired then dairy farmers will face the same pressures as grain farmers.

City slicker Joe Hockey not surprisingly sided with shareholders and managers in Warrnambool by approving the global bid and making it tougher for the farmers’ Murray Goulburn by deliberately putting them at an unfair disadvantage to the global giant. Hockey is still deliberating on GrainCorp.

The good news for farmers is that new computer technologies are enabling much better monitoring of crops and animals, which will lift productivity markedly.  It’s a question of who will receive the rewards.

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