End of an era with AWB purchase

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.

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18/01/2011 4:15:55 PM

Not so fast Gregor. Cargill have not succeeded in buying AWB commodity management and the sleeping dragon has been roused-do you really think that Australians are going to continue to allow their iconic and important assets to fall into foreign hands? And another thing-please do not continue to put a positive spin on where the industry now finds itself-we have gone from the best in the business to the also rans in a very short time.Our political masters have been cajoled into dumping a system on grain growers that has not worked anywhere else in the world without Government subsidies as in the US and EU.
18/01/2011 6:10:58 PM

End of an era and start of a new prosperous era for grain growers. Cargill have a much bigger reach than AWB and apart from the storage it is just a brand that is pretty much worthless to anyone but misguided growers who are clinging onto the past. The single desk is gone, get over it.
19/01/2011 6:53:58 AM

Yes Blahblah...you have hit the nail on the head. Why do farmers cling on to the single desk. It's gone forever. Move on and stop being so bitter.
19/01/2011 7:02:31 AM

The "sleeping dragon" is a really good name for the flat earth society that truly does live in fairy land. Perhaps though the sleeping dragon's name is puff and NSWFA proposal was dreamed up over a few joints. Cargill is a far better option for growers than the backward looking grains committee of NSWFA. The reality is that AWB has been lacking enough capital to sustain the business and provide a stable marketing and risk management platform to service growers needs. If NSWFA can present a compelling business case that actually has some commercial basis rather than the ideological rantings we are used to from them, growers may be interested in supporting a grower owned national marketer. However, I can guarantee growers will not forego competitive market forces now. As a result AWB now or in the future will not be guaranteed supply of grain at any level. On this basis, AWB will struggle to survive without significant capital injections. To make AWB a grower owned company again means growers will have to pay that money. NSWFA would be better served working with Cargill, to get the best deal for growers, rather than poking them in the eye with childish rantings.
19/01/2011 7:50:58 AM

Blab blah,Karen and Billy Goat(appropriately named), You ought to find out a little more about Cargill before you belittle the NSW farmers proposal-for a start there is no mention of a single desk-this all about growers having a rightful presence in the marketing oif their crop and to keep the benefits acrued in the organisation over 60 years. Cargill are a ruthless unaccountable organisation which will have no regard for the profitability of Australian wheat growers. You can rest assured that if Cargill gain control of AWB Commodities,the brand will disapear,the handling sites will become cargill only and the grade spreads will disappear. Talk to people who have seen them in action in other countries.Discover how they have been able to bully Governments-be realistic -is this what you really want?
balanced view
19/01/2011 3:15:38 PM

Realist do you really think that in a capital intensive business such as grain trading that a group of farmers will be able to sustain the business requirements for operating capital, let alone risk management and re-investment in feasible infrastructure. Grain Trading takes a lot of capital to operate and also takes a company that is not riosk averse to drive it.
19/01/2011 3:30:20 PM

If Cargill win the day because of grower apathy and ill informed people who make statements which are from a fairyland book I bet you will all run and hide and be the first to start winging about how good it could have been if growers still had a place in the supply chain and marketing of their grain and not just working class serfs to foreign owned companies where all the profits go back to their country and they don't invest in our infrucstructure. Gregor needs to get out of the office and travel around the states a bit more and talk to a few more farmers outside his close freinds. Where in all of this did NSWFarmer mention the Single Desk? It was clearly stated that it wanted a grower owned and controled entity marketing all grains and said clearly the Political will is not their to go back to a Single Desk. It was about a grower Coop. Learn to read you lot before you make stupid statments that belittle your own argument.
Spray Fallow
19/01/2011 6:22:46 PM

Billy Goat, Check out the farmomline poll-421 votes-70% are against the acquisition-you are well and truly in a minority. As for capital-the AWB Commodities business already has a capital base of over $875 million and a high potential for growth with prudent grower focused management. There is no doubt that the financiers will back the company especially if Government has a hand in putting in a scheme of arrangement to allow grower ownership and control. How about putting some thought into this.
19/01/2011 7:25:17 PM

Cargill is a profit oriented organisation with a ruthless legacy, they are not an egalitarian organisation and its worth looking at how they have treated famers with contempt in other countries were they are the major trader.
20/01/2011 4:33:51 PM

I'd like to see a joining of forces between NSWFA, Graincorp and AWB. I'd back it 100%.
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