ADM dodges a bullet

The point I am making is, the Treasurer’s decision has screwed GrainCorp

DEAR ADM – consider yourselves lucky. Your first responsibility is to your shareholders. The offer to purchase GrainCorp was too generous and you would have struggled for years to generate a decent return. The additional $250 million you offered to inject into rail and other infrastructure would only have made it worse.

While Treasurer Joe Hockey’s decision to reject your offer was irrational and contradicts the government’s “open for business” claim, he has done you a favour.

If you are still interested in becoming a significant player in the Australian grain market, and I’m sure there must be plenty of attractive options elsewhere in the world, there are cheaper and less risky ways to do it provided you take a medium to long term view.

The immediate consequence of the decision is that GrainCorp is now a “koala” in financial terms. That is, it is a protected species. Like a number of companies including Qantas and the big banks, it is immune from foreign takeovers.

While that might keep the xenophobes happy, its effect is to limit sources of capital to domestic investors. Given their reluctance to invest in agriculture, a result of decades of meagre returns, GrainCorp is unlikely to suddenly become popular. Indeed, in 2011 grain growers themselves sold their shares in the company.

Thus raising additional capital will be largely off the agenda. That means no capacity to increase the current $17m allocation to addressing the immense backlog of maintenance and facility upgrades.

The company will have no option but to close its less profitable siloes, particularly those on rail lines where speed and weight restrictions have been imposed. Ironically, this will cause the most harm to those who strongly opposed your acquisition of the company. As they say, what goes around comes around.

In those locations, or indeed any location for that matter, Archer Daniels Midland could duplicate many of GrainCorp’s facilities for a lot less money than it would have cost to buy the company. Storage bunkers can be constructed for a fraction of the cost of concrete or steel silos. Moreover, you do not necessarily need access to the rail network; the cost of road transport is not the barrier it once was.

If you nonetheless prefer to use rail, you could lease wagons just as GrainCorp does. And if you wanted to win a few hearts and minds, you could probably negotiate an agreement with cash-strapped state governments to upgrade poor quality lines in key locations in exchange for exclusive use of them for grain transport. I’m sure it would cost a lot less than $250 million.

As for ports, there are several options. One would be to use GrainCorp’s facilities, the availability of which is guaranteed as a result of access undertakings required by the ACCC.

Another is to use the terminal at Newcastle owned by Glencore, Olam and CBH. This directly competes with GrainCorp and gives the lie to claims that there is a monopoly.

And because GrainCorp will eventually need to sell assets to raise funds, perhaps you will be able to buy one or more of its seven port terminals.

To give yourself a fast start towards critical mass, you might also like to pick up some existing grain accumulators, of which there are now quite a few.

The point I am making is, the Treasurer’s decision has screwed GrainCorp. The company needs capital to maintain and enhance the assets that underpin its competitiveness, and it needs a big brother to compete on equal terms in the global marketplace. The decision ensures it has neither.

But it has not screwed you. I know you will take a haircut if you sell your 20 per cent holding in GrainCorp, but my suggestion is do it now before the share price falls any further. There are no circumstances under which I can see it improving. Use the proceeds to set up in opposition to GrainCorp.

If you would like to be a little Machiavellian, you could offer to sell the shares to CBH. This company, a co-operative that similarly has problems raising capital, has delusions of grandeur arising from its near monopoly status in Western Australia. Buying your GrainCorp holding would weaken its financial position and make it even more vulnerable to competition in the west.

Within five years, everything will change. GrainCorp will have lost much of its value, something the Treasurer and his xenophobic colleagues can do nothing to prevent. Nor can they prevent you from hastening that loss by setting up in opposition, or from encouraging others (such as CBH) from doing so.

And when GrainCorp has shrunk to the point where nobody thinks it is worth keeping out of foreign hands, and perhaps CBH has over-reached and is suffering a similar fate, you may be able to pick up either or both of them relatively cheaply.

But if you prefer to leave Australia and its wheat export industry to those who think foreigners are wicked and untrustworthy and Australia has no need of their capital, knowledge or expertise, I could hardly blame you. In the end, the reality is that Australia is only a modest grain producer and there are plenty of other opportunities in the global market.

  • David Leyonhjelm has been an agribusiness consultant for 25 year and was recently elected to the Senate for the Liberal Democrats. He may be contacted at reclaimfreedom@gmail.com

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    READER COMMENTS

    GFA
    2/12/2013 4:58:06 AM

    David, your is only one opinion. On this subject you have always locked yourself rigidly into "some absurd characterization of irrational consistency of extreme free marketers, resulting in childish, silly criticism and clever stupidity". This is extracted from quotes in an article in Saturdays Australian by very highly regarded economist and commentator, Terry McCrann. Read the article and see why Joe Hockey is not to blame for GrainCorp's woes or the bleating of its shareholders. Ms Watkins and the GC Board simply have not done a good enough job for their customers or shareholders.
    san
    2/12/2013 6:22:24 AM

    All above plus current Graincorp has a poor management, with old ideas. bad luck for share holders .
    Drew
    2/12/2013 8:07:04 AM

    ADM still has plenty of opportunity. They are welcome to invest in the Australian grain handling industry by building their own network of grain handling infrastructure in competition with Graincorp. That would be an excellent outcome for everyone, and no corporate would be operating within a monopoly.
    Thomo
    2/12/2013 8:22:42 AM

    It sure smarts when you dont get what you want! Better luck next time.
    Crumbling Silos
    2/12/2013 8:22:51 AM

    ignorant NSW farmers can now suffer the pain of harvest hold ups in above average years as aging up country sites get the chop. and they will get the chop. graincorp's balance sheet is going to take a turn for the worse after this years drought
    newbroom
    2/12/2013 8:23:58 AM

    I cannot wait until this joker takes up his senate seat and stops writing for Fairfax. He does not seem able to read this newpaper's polls as well as he read the donkey vote.
    TR
    2/12/2013 9:08:01 AM

    I wonder where the anti ADM folk will be when GrainCorp is completely on its knees sometime in the next 10 years. I bet the offers coming from potential suitors won't be anywhere near ADM's monetary offer or capex guarantees. GrainCorp will be forced into the hands of someone like Cargill or Noble or Glencore. None of who will make any guarantees other than ones that benefit themselves.
    VJO
    2/12/2013 9:11:57 AM

    Since when is buying a business an investment for Australia or for its farmers. A promise of $200 million invested in fixing some rail - just a promise. Probably worthless in light of everything else Abbott/Hockey/Pyne are up to. Misheard their words comes to mind. Ignorant farmers! Rubbish. Many have their own silos. I think they're a smart lot.
    Freshy
    2/12/2013 9:28:40 AM

    Doesnt all of this just highlight the fact Graincorp is an asset that Australia really should get behind and make a world class leader so we have our own backsides covered? I would have thought this created a huge opportunity?
    VJO
    2/12/2013 10:12:56 AM

    Do you ever put up comments which don't entirely agree with you?
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    Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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