Hockey's game missed the goal

The decision to block ADM’s takeover of GrainCorp was always wrong in principle

THERE was a good reason GrainCorp’s board supported the company’s proposed takeover by American agribusiness giant Archer Daniels Midland (ADM): it needed the money.

Even the nationalists and socialists who screamed blue murder at the prospect of the company falling into the hands of foreigners must now be starting to realise they have not done rural Australia any favours by opposing the deal. When ADM executives flew back to the US, they took with them the promise of much-needed infrastructure investment for the Australian grains industry.

At the company's recent annual general meeting, GrainCorp executive chairman Don Taylor noted that over 90 per cent of grain received into its system now comes through 65pc of the company’s receival sites. Some sites are going to be closed.

While a number of these are not viable due to low volumes, few are due to lack of grain production in the area. More often they require substantial repairs and maintenance or are victims of poor quality rail access that restricts load weights and wagon speed. State governments have been in no hurry to spend money on repairing railway lines that have little use apart from transporting grain.

For growers who need to deliver and unload their grain as quickly as possible during harvest, this is not good news. Closed silos means trucking the grain longer distances, and increases the risk that queues at remaining silos will be longer.

GrainCorp has four reporting divisions: marketing, malt, oils, and storage and logistics. This structure is new and reflects the recent strategy of diversifying earnings. Whereas storage and logistics accounted for three quarters of earnings just four years ago, it is now down to about a third of earnings.

A good number of the hundred or so sites being considered for closure could be retained if some money was spent on them. But given the opportunities in the other divisions, investing in storage and logistics is relatively unattractive. Even if all the sites were brought up to the standard of new facilities, it is questionable whether additional earnings would be sufficient to cover the interest cost.

A key factor is the changing competitive environment. As Don Taylor noted, the days of monopoly are well past. There are numerous competitors vying to purchase grain and, he said, enough country storage capacity to hold the average east Australian crop two-and-a-half times over, with more being built all the time. Moreover, there are now four competing bulk export terminals, none of which is subject to the Australian Competition and Consumer Commission's (ACCC) disclosure and capacity allocation requirements that apply to GrainCorp’s terminals.

In the year ending 30 September 2013, GrainCorp made $141 million profit after tax (down $60 million on the prior year). Of this, $101 million was paid to shareholders as dividends. Even after adding back non-cash items, there are clearly limits on the availability of capital to fund future growth.

In fact, capital expenditure during the year amounted to $141 million, much of it funded by debt. Of this, $60 million was attributable to storage and logistics. But this level of emphasis seems unlikely to continue - the company says this year $125 million is being invested in its edible oils manufacturing operations and a further $70 million to expand the capacity of its bulk liquid port terminal facilities. Storage and logistics is no longer the centre of attention.

GrainCorp is not in any danger of going broke or disappearing. But neither is it the same company it was five years ago.

So how might things have been different if ADM had bought the company? The main difference would have been its willingness to invest in storage and logistics. While ADM did not rule out a few site closures, it had signalled an intention to invest $250 million in facilities, including rail.

That sounds right. Grain handling and marketing are fundamental to ADM. Having paid top dollar for GrainCorp, it would have been certain to have wanted to receive every tonne of grain available.

Those who lobbied for the Treasurer to block ADM’s acquisition of GrainCorp were clearly not thinking of the changing nature of the company and how this would affect things if the deal did not proceed.

Now they can see: GrainCorp may still be the biggest grain storage and handling operator on the east coast, but its focus is on generating returns for shareholders, not grain growers. It is investing to achieve the best return, not where history might suggest.

The decision to block ADM’s takeover of GrainCorp was always wrong in principle. Governments should keep their noses out of market activities. But it was also wrong in practical terms. The company is no better for it and if it was meant to benefit Australian farmers, it is becoming clear it won’t do that either.

Page:
1
FarmOnline
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

Discusted
10/03/2014 3:58:42 AM

It was the record of ADM that was the problem...not the investment itself. They are corporate grubs and we don't need that type of business investing here. We dodged a bullet by knocking them back. Grincorp should look for better corporate citizens to invest in their business as we do not need all the grief that ADM would have brought!
Bushie Bill
10/03/2014 6:45:36 AM

Perhaps all those who believe GrainCorp's first priority and obligation must be to serve the interests of grain growers will now have the time and opportunity to reflect upon their ignorance and stupidity, as they count the costs and pay the penalties.
Simon
10/03/2014 9:04:22 AM

There is a significant difference between INVESTMENT and TAKEOVER. ADM's proposal was a takeover. Joe Hockey demonstrated leadership and courage in the face of his own part's ideology in making that decision.
Geronimo
10/03/2014 11:32:27 AM

"Those who lobbied were clearly not thinking." Full stop.
Bushie Bill
10/03/2014 1:55:36 PM

And more than likely, Geronimo, were not capable of doing so.
LTF
10/03/2014 2:00:00 PM

Get over it David et al. Governments of all colours, have made much worse decisions than the Joe Hockey one on ADM. And the public made even worse decisions at the 2007 and 2010 Federal elections. Get stuck into GC to lift their performance if you want to help the grain industry, and stop making excuses for them.
Mark
10/03/2014 3:43:17 PM

David you certainly show that you have absolutely no idea what you are talking about and you have nothing to lose if the deal had gone through. Stick to what you know and what will affect your wallet and keep your nose out of what we will suffer under your armchair expertise!!!!!!!!
Geronimo
10/03/2014 4:22:26 PM

Within a generation, eastern grain growers will realise how far back they have set their industry compared to the rest of world. Reasons given by grain growers on Sunday's Landline for opposing ADM are totally confusing to any reasonably thinking business person observing Australia's grain industry.
Percy
11/03/2014 11:30:05 AM

Only us shareholders should have been allowed to lobby (which I did) and if those who wanted to keep Graincorp Australian owned have not taken up shares or increased their holding since the deal went down then they have no right to complain next time a takeover is mooted. Best off-farm investment on offer if you use the Graincorp system (and only two thirds of the price offered by ADM). I am quite happy to have paid the price of losing this buyer because I do not think only with my wallet and missing that higher price is only crying over spilt milk. Better GNC management is the key.
Jude
12/03/2014 5:53:41 AM

Please save the rural industry from politicians like David, they do more harm than good. Look at Ludwig and the LE, what next? ADM were found guilty of bribes just after Hockey refused their takeover. We don't want those sort of companies here.
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