ADM: Sky fall or windfall?

... forcing growers to transport their grain further is not a formula for peace and harmony.

IT IS a fairly big deal when a semi-monopoly grain handling company looks like changing ownership. The devil you know becomes a devil unknown, with the potential for bigger horns and a longer tail.

And if the sky does fall? What is the worst that can happen?

Rather than join those predicting doom and ruin, I think it is more useful to consider exactly how bad the situation could get for eastern states grain producers.

GrainCorp handles at least two-thirds of the NSW and Queensland grain crop in its silos, trains and port facilities. It also markets about half in its own right. Given the potential to make life difficult for competitors, the ACCC requires GrainCorp to provide access to its facilities to other grain marketing companies at acceptable prices.

Thus a grain grower can deliver wheat to a GrainCorp terminal which is transported in a GrainCorp train to a GrainCorp port facility, but have no direct relationship with the company. Many organisations buy and market grain but use GrainCorp’s facilities. It is a similar situation to phones, where there is a wide choice of suppliers but only three mobile networks and a single fixed line network.

One scenario regularly mentioned is that a new owner of GrainCorp might seek to freeze out competitors, locking logistics customers into its marketing services. This would probably lead to higher profits at the expense of returns to growers.

For this to occur, the ACCC would need to relax its rules or the company would have to find a way around them.

Neither is at all likely.

In any case this does not require a change of ownership; if it was an option GrainCorp would have done it already. Having a new owner makes no difference.

Another scenario is that a new owner will close silos or reduce collections in locations that are less profitable. Again, this is something GrainCorp could have done already (and has done to some extent), and controlling costs is something every company must do. But it is possible Archer Daniels Midland (ADM) might take a more strict approach.

The point here is that forcing growers to transport their grain further is not a formula for peace and harmony. Annoyed growers will inevitably look for someone else to market their grain. GrainCorp cannot afford to antagonise its supplier network if it wants to remain a major player in marketing.

The same applies to fears about short-term profits versus long term sustainable growth, which in practical terms means cutting costs to boost immediate results without regard for the long term impact.

Again this is not something that a foreign owner is any more likely to do than one owned by domestic shareholders. Short-term thinking is common everywhere.

Moreover, commercial vacuums never last very long. If a business drops the ball, another always picks it up. Thus if ADM were to slash and burn at GrainCorp, this would merely attract more competitors.

Similarly, if GrainCorp were to offer lower prices for grain or apply bigger discounts for quality or moisture, competitors would outbid them. In the end, the market deals quite effectively with shenanigans like that.

Perhaps the most serious risk to grain growers is the potential for ADM to completely screw things up. By that I mean, assume something that works overseas will automatically work in Australia merely because we look and sound similar. Plenty of foreign companies have made that mistake, American firms in particular.

But even if the silos were to all rust, the trains seize up and the ports stop, markets for Australian grain would still exist both domestically and globally. Others, probably ADM’s global competitors, would happily step in to take on the marketing and operate trains and ports. It would not be long before things were flowing freely again.

After all that, perhaps it is also worth considering the best that can happen. ADM might decide GrainCorp has seriously underinvested in infrastructure and there is a need to upgrade the company’s facilities, thus helping growers get their grain to market more quickly.

Perhaps it might manage the company better, reducing costs and charging less for handling. And being a global company with access to more markets, it might be better at marketing and able to generate higher returns to growers.

It all looks a lot less devilish when you get down to specifics.

NOTE: David Leyonhjelm will be taking a break for the rest of this month and will return in June, as will his regular columns.

  • David Leyonhjelm has been an agribusiness consultant for 25 years. He may be contacted at reclaimfreedom@gmail.com
  • Page:
    1
    David Leyonhjelm

    David Leyonhjelm

    has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
    Date: Newest first | Oldest first

    READER COMMENTS

    Jock Munro
    2/05/2013 1:26:50 PM

    Is our friend David suggesting that the market can be an ass? He should think himself lucky that he only gets to write about it. Me and my fellow growers will pay for the stupidity, zealotry and sheer treachery of those who got us into this mess.
    Dickytiger
    2/05/2013 2:45:50 PM

    You shouldn't use words you don't understand, Jock. Like 'market'.
    Jock Munro
    2/05/2013 4:47:39 PM

    Thank you for your kind words Tigerdicky.
    ecnerwal
    3/05/2013 4:16:29 AM

    By any standard, the bulk of GC storages are old, low throughput capacity, unfit for segregation, unfit for safe insect control, and high maintenance. The reason an ADM would offer such a premium for such a wreck of a system is for the control it will get over the eastern Aust grain crop. If I was an ADM competing trader, I would be at a distinct disadvantage using the ADM system to receive, pay for and manage my grain. In USA, there are many Traders who each own and manage their own silo facilities and sharing of the kind ADM is boasting now just don't happen. How can it work here?
    the advocate
    3/05/2013 6:46:40 AM

    Spoke to a banker friend last week and he said much the same as David. They dont realise the chaos and cost to farmers that could be caused by the likes of adm stuffing up -even for one season. Also, it is not likely the mythical "someone else"will build new ports and/or silos in a short time frame. GRAINCORP should have been made to divest some export terminals years ago - we should push for ADM to do so if they wanto to get GRAINCORP
    Jockstrap
    3/05/2013 7:54:39 AM

    ADM will invest in vertical integration. Oilseeds are their specialty. Go to Decatur Illinois. 42,000 people, 30,000 of which are directly and indirectly employed by the massive value adding corn and soy plants on the outskirts of town. Soaks up all grains in a 200km radius. Jock your simple bulk commodity export mind can't ever understand the potential of the products you grow. You are a product of your own farm.
    Jock Munro
    3/05/2013 12:57:26 PM

    Where is the market for the value added product from Illinois, Jockstrap?
    Ken
    3/05/2013 6:21:05 PM

    The east coast grain trade now belongs to the foreign and mostly American grain trade, they are and will do what they want to who they want when they want and the only card left for Oz farmers to deal is to not grow grain. What a great brave "new paradigm" our treacherous, dumb and the stupid have provided for us. It’s now accountability time.
    Global-Investor
    6/05/2013 5:38:34 PM

    One thing that ADM can bring to the table that trumps the current capability of GNC, is a deeper awareness & connectedness into China. China has yet to revolutionise the ag commodity trade in the way that its demand for minerals has and you cannot stop feeding people - which is becoming a bigger priority every year in China. International companies with long term experience in global trade flows as well as sufficient capital & the right risk appetite, are the logical owners of grain assets - globally. Farmers need multiple buyers to access such markets & the right competitive access regime.
    Jock Munro
    8/05/2013 6:45:18 AM

    multiple buyers that accumulate grain at the lowest cost for end users Global Investor?!
    1 | 2  |  next >
    Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

    COMMENTS

    light grey arrow
    I'm one of the people who want marijuana to be legalized, some city have been approved it but
    light grey arrow
    #blueysmegacarshowandcruise2019 10 years on Daniels Ute will be apart of another massive cause.
    light grey arrow
    Australia's live animal trade is nothing but a blood stained industry that suits those who