MUCH was made of the end of the single desk when the wheat market was opened up, but the sale of AWB’s commodity business to Cargill brings virtually to an end another epoch in grain marketing, one possibly much less mourned in its departure by growers, the end of listed grain marketing businesses in Australia.
The only major listed companies remaining with significant grain trading interests are GrainCorp, which generates far more income from its bulk handling and malt businesses than its accumulation arm; and Elders, whose grain marketing arm operates as a joint venture with international grains giant Toepfer.
So why did the great experiment of floating grain marketing businesses fail?
First, it appears that the earnings volatility, especially in the harsh Australian climate, scared off investors used to nice predictable profits.
Businesses associated with grains in Australia rely on the most variable climate in the world for their profits, and no matter how geographically diversified a business is within Australia a certain boom and bust is to be expected.
Prior to its purchase by Viterra, ABB admitted as much, and looked to start originating grain out of the Black Sea in a bid to smooth the earnings peaks and troughs.
Secondly, buying grain is a capital intensive business, and there are long periods of carrying stocks.
It has become even more difficult with the increased preference for cash. With a pooling system, the grower is still holding some of the risk for the business while it markets the grain, however, offering cash prices can be very difficult for businesses, especially with the variable nature of international grain markets.
So we now see a different environment, dominated by large international players or joint ventures.
Large privately owned businesses such as Cargill and Louis Dreyfus, who are prepared to ride out the tough times, have proved there is money to be made in grain marketing, providing a business has the right risk appetite, and now they have identified opportunities in Australia.
Is this a good thing? By and large it probably is, with the more players the better. There are a couple of dangers, however.
First, although there appears to be ample competition, with over 25 accredited wheat exporters, many of these are small players, and farmers do not want a cartel of big businesses to end up cornering the market.
At this stage, there’s plenty of competition, but whether this is the case long-term remains to be seen.
Second, being listed on the Australian Stock Exchange meant there was a certain level of transparency and scrutiny of the businesses. There are no such obligations for privately owned companies, so farmers may not find out key areas of Cargill’s business unless it wishes to divulge them.
What else appears likely to be a trend in Australian grain marketing? East coast farmers are looking at the co-operative model in place in Western Australia and liking what they see.
While there are some disadvantages in remaining a co-op compared to going corporate, such as higher costs of finance and less access to capital, many growers believe this is a fair trade-off for having a business that must act on their behalf, rather than to maximise its own profits.
The NSW Farmers Association this week released an ambitious plan to trump Cargill’s acquisition bid to Agrium for AWB with a co-op model of its own.
While its unlikely a government that has been frugal, to say the least, with its agricultural spending, will finance the proposed bid, there’s nothing stopping NSW Farmers going ahead with their plan under their own steam.
On a smaller scale, the Emerald Group has been working successfully with local grower co-operatives for five years, proving there still can be a place for grower-owned businesses in grain accumulation.
Whether Australia can sustain another large-scale co-op is up for debate, but there’s no doubt there’s been a marked change in the grains landscape over the past 18 months, with grains giants such as Cargill, Agrium and Viterra all upping the ante in terms of their Australian investment.
Will the trend towards international investment cool off in favour of smaller local businesses? Only time will tell.