ONE of the options for dealing with excess debt, a problem facing many farmers, is to sell surplus assets. Off-farm investments are obviously among these.
In Western Australia around 4500 wheat growers own CBH Group (formerly Co-operative Bulk Handling), a grain storage, handling and marketing co-operative. CBH owns and operates the only wheat facilities in WA including 197 receival points and four bulk export port terminals. It has a turnover close to $2 billion, employs 1000 permanent staff and has net equity of just over a billion dollars. Divided among its shareholders, this represents approximately $220,000 each.
However, growers are unable to sell or borrow against their shares to reduce debt, something many would love to do following several poor seasons. Nor do they receive dividends. All they can do is tell each other that they “own and control” their industry, and even about that they are mistaken.
The storage and handling division of CBH, its main asset, is a so-called “non-distributing co-operative”. That means it cannot distribute profits to shareholders. In 2010 the company won a court case against the ATO in which it argued it was “established for the purpose of promoting the development of Australian agricultural resources and is not carried on for the profit or gain of its individual members". Moreover, under state legislation, if the company is wound up any surplus assets must go to the State Treasurer rather than to members.
The company has subsidiaries and joint ventures that are not exempt from tax, including the grain marketing division CBH Grain. But shared service fees and dividends flow to the parent company and are thus equally untouchable.
CBH argues that members benefit from their shareholding (a single $2 share is awarded after delivering a cumulative 600 tonnes over three years) through lower storage and handling charges. It claims “the lowest cost, most reliable grain export supply chain in the nation”, arguing this is its primary way of returning value to growers, and proposes to give greater emphasis to “patronage based rewards” this year.
Reducing storage and handling costs was the reason CBH was established almost 80 years ago. Yet much has changed since then, especially in the last decade. In 2002, when the company merged with the grower-owned marketing co-operative, Grain Pool (now CBH Grain), there was a statutory monopoly over the export of barley, canola and lupins from WA while wheat was controlled nationally by the Australian Wheat Board. These days growers are free to sell their wheat, barley, canola and lupins to anyone they choose, domestic or international, with dozens of companies competing for their business.
However, there is still nobody competing with CBH to provide storage and handling services. That’s no longer due to legislation but because they would be unable to compete with CBH and its co-operative structure.
If CBH were privatised and the proceeds returned to shareholders (assuming legislation was amended), as occurred with ABB and AWB, it could be used to reduce debt or invested elsewhere. With interest at 6-8pc, this would deliver a return of $13,200 to $17,600 based on the average value of each shareholding.
That raises a rather obvious question – are the savings in storage and handling provided by CBH greater than this when compared with what they would be if normal, profit-oriented businesses were providing them? Many growers might be happy with the service they receive from CBH, and there is no denying its investment in infrastructure, but with so many companies now competing to buy their crops, growers would inevitably have a range of competitive options if CBH was not there.
For a grower who delivers a modest 200 tonnes of wheat a year, the minimum required to retain a $2 share, CBH would need to be at least $66 per tonne cheaper in order to match the benefit of having the money. Yet ironically, it is the smaller growers who are most vociferous in their support for CBH’s co-operative structure. The state’s largest growers, of whom rougly 270 grow 25pc of the state’s crop, are increasingly by-passing CBH with on-farm storage and direct delivery to customers.
There is another aspect to consider as well, and that is the diminishing value of CBH. The company’s net equity in 2011 was $1087 million, almost exactly the same as it was two years earlier. Return on equity, the usual yardstick for measuring business performance, is abysmal. The company’s Annual Report makes it sound like a charity.
There are the competitive threats. As a result of ACCC prodding, the company must now allow access to its port facilities to competing wheat exporters on the same terms as CBH Grain. The ACCC is also reviewing Grain Express, a service in which CBH provides storage and handling services on condition growers and marketers use other CBH services.
CBH Grain has also struggled to generate a respectable return in the deregulated market notwithstanding its huge volumes, and there are strong rumours of other companies intending to establish port facilities in WA.
Then there is the sheer injustice in the fact that CBH was built entirely from grower funds, yet they would receive nothing in a liquidation. And no matter how big a grower might be and how much he has paid for storage and handling over the years, his $2 share is cancelled the moment his property is sold or he stops delivering enough grain.
In fact, the sovereign wealth funds and other foreign investors so feared by many CBH supporters, now investing in wheat properties in WA and delivering grain to CBH, are among the new beneficiaries thanks to the growers who went before them.
By any measure CBH is an anachronism in a free market environment. Growers do not really own it and it no longer provides them with any control over their market. It is an underperforming asset whose value ought to be returned to its rightful owners.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at email@example.com