The GrainCorp deal: Choosing between open for business or grower control

Prime Minister Tony Abbott says that it will be federal Treasurer Joe Hockey’s decision alone if a foreign acquisition of Australia’s largest agribusiness GrainCorp will go ahead. Tim Mazzarol provides background to a contentious issue.

By 17 December 2013 federal Treasurer Joe Hockey will need to make up his mind over whether or not to allow the sale of GrainCorp Ltd to the U.S. giant Archer Daniels Midland (ADM). The issue of whether or not to allow this take over to proceed has inflamed passions from the farming community and opened up significant splits in the ruling Liberal National Party (LNP) coalition.

Deputy Prime Minister and leader of the National Party Warren Truss has spoken out openly against the sale citing concerns that it would cede control of Australia’s ports and grain handling infrastructure to foreigners. He also argued that it would risk harming Australia’s reputation in financial markets. This is because GrainCorp is the nation’s largest publicly listed agribusiness.

In response Joe Hockey gave an impassioned press conference in which he stated that he would not be “bullied or intimidated by anyone”. Other liberal and national MPs have appeared in the media expressing arguments for and against the sale. This has highlighted a serious fault line within the ruling coalition over foreign direct investment into Australia’s agriculture sector.

Why is the GrainCorp deal so contentious? – A history lesson

To understand the reason why the sale of GrainCorp is so contentious we need to take a quick look at the history of Australia’s grain handling and export industry. By the early years of the 20th Century the system of handling and storing wheat and other grains in jute bags was becoming untenable. The cost of jute bags was high and the manual handling and storage inefficient and wasteful.

Farming was becoming mechanised, railway networks were linking rural communities, and sailing ships were being replaced with steam ships. This triggered momentum across Australia to establish bulk handling systems for grain. These systems were already increasingly common in North America.

During the First World War Australian state governments undertook feasibility studies into the adoption of bulk grain handling and storage. Each state adopted a slightly different approach. In NSW the state government passed the Grain Elevator Act 1916, which led to the construction of grain terminals and elevators at the ports of Sydney and Newcastle.

Between 1916 and 1921 grain handling and storage terminals were constructed across the state. This work was undertaken by the Grain Elevators Board of NSW which was the forerunner of today’s GrainCorp. Victoria followed a similar path to that of NSW. It too passed a Grain Elevators Act 1934, and built a state wide grain handling system under the Grain Elevators Board of Victoria.

In both Western Australia and South Australia the approach taken was based on the formation of grower owned co-operatives rather than state owned enterprises. Co-operative Bulk Handling (CBH) was established in WA in 1933, and the SACBH was founded in 1954 following intensive lobbying by growers from that state over the previous twenty years.

The last grain producing state to establish a bulk handing system was Queensland. It was not until 1955 that the first silo was built and the first port terminal did not open there until 1958. The approach taken in Queensland was a mixture of public and private grain terminals until 1983, when Bulk Grains Queensland was established as a state wide monopoly.

Market deregulation and the rise of GrainCorp

Market deregulation in the 1980s and 1990s saw the transformation of these state owned enterprises into publicly traded corporations. GrainCorp emerged in 1992 following the privatisation of the Grain Handling Authority of NSW. This sale netted the NSW Government around $100 million.

GrainCorp listed on the ASX in 1998 and the company quickly proceeded to acquire other grain handling entities across the eastern states. This saw GrainCorp take over Victoria’s Vicgrain (formerly the Grain Elevators Board of Victoria) in 2000, Queensland’s Grainco (formerly Bulk Grains Queensland) in 2003 and then Hunter Grain in 2007.

The acquisition strategy undertaken by GrainCorp in the period from 1990 to the present also saw the company acquire the NSW Grains Board in 1991. This gave it control over the marketing of barley, oats, sorghum and oilseeds. The acquisition of Grainco also provided it with control over the marketing of barley, wheat and sorghum from Queensland.

By 2010 GrainCorp was the largest integrated bulk handling and marketing enterprise in the Australia grain industry. Its dominance on the eastern seaboard was and remains significant. In South Australia the former SACBH grower co-operative was restructured into ABB grain in 2004 which listed on the ASX, but was promptly acquired by Canada’s Viterra in 2009. This left WA’s CBH as the only major bulk grain handling and marketing enterprise that was owned and controlled by growers.

GrainCorp’s market position and the structure of Australia’s grain industry today

In 2013 GrainCorp has a market capitalisation of $2.9 billion. It is the largest grain storage network operator in the east coast of Australia with over 280 storage sites and seven bulk port terminals. Its marketing arm operates in over 25 countries and it has subsidiaries in the area of malting, edible oils and flour milling. Just over half its annual revenues were generated from bulk storage and logistics, while some 38% of its total revenue was generated in Australia.

This reflects an interesting characteristic of how Australia’s grains industry is structured. In the eastern states of NSW, Victoria and Queensland and the eastern half of South Australia, grain is sold for both domestic use and export. This is particularly the case for wheat.

GrainCorp controls the majority of the bulk grain storage and handling facilities in NSW, Victoria and Queensland, with some overlapping with Viterra’s operations in South Australia.

According to a Productivity Commission report of 2010, the only competition within NSW, Victoria and Queensland is through on-farm storage, some independent bulk handlers and the transport and storage of grain in containers and bags within the domestic market. GrainCorp controls the access to the nation’s grain export terminals thereby giving it significant influence over key national infrastructure.

In WA and the Eyre Peninsula of SA, almost all wheat is exported in bulk. In SA the export market is dominated by Viterra. It is worth noting that Viterra is now a wholly owned subsidiary of the giant Anglo-Swiss GlencoreXstrata.

Within WA grain exporting is dominated by CBH, which is a fully integrated business with its own marketing, rail, shipping and flour milling operations. These are undertaken via a joint venture “Interflour” located throughout South East Asia. Within its core storage and handling business, CBH operates as a not-for-profit, non-distributing grower owned co-operative.

This structure of the Australian grains industry explains why there is so much anxiety over the sale of GrainCorp to ADM. The east-west divide within the Australian grains industry has previously led to tensions in the LNP when they were in opposition. Something I have written about last year in “The Conversation”.

Why should Australia’s farmers be worried about ADM buying GrainCorp?

Much of the concern over the sale of GrainCorp to ADM is focused on the loss of Australian control over critical food supply chains. In an interview with ABC’s Fran Kelly, long time grain grower Jock Munro expressed his concerns over the ADM takeover bid. Despite the reassurances from ADM’s Ian Pinner that the takeover would not be harmful to growers Munro said that he was not reassured:

“…because we will have our major infrastructure on the east coast, which is 80% of the up country storage network and most of the ports on the east coast controlled by a foreign entity. It will be run from the boardroom in the United States”, he said.

According to Munro large foreign entities such as ADM would be in such a powerful position that they would be able to “…gouge growers from the farm gate to the customer”. He felt that the claims by ADM that their acquisition of GrainCorp would enhance market access by growers was misleading, because there had been no problem selling Australian grain overseas in the past.

Also of concern was the offer by ADM to purchase GrainCorp shares at a premium, risking the likelihood that they would have to “gouge growers in order to get their money back”. Despite the presence of around 160 companies bidding for grain on the east coast, most were not engaged in export due to their inability to handle the risk. According to Munro:

“The only competition that exists now is between the growers, scrambling for a price, because where we once marketed our wheat as a cooperative single entity, we are now at the mercy of the merchants”.

He also claimed that ADM had “a shocking reputation as a company”, with engagement in bribery and corruption claims. Under further questioning from Kelly, he suggested that the only outcome for Australian growers of the takeover would be the forcing down of farm gate prices. In his view large overseas companies such as ADM deal in global commodities trading and have little regard for Australian growers.

So what is Archer Daniels Midland?

ADM was founded in 1923 and in 2012 was turning over around US$89 billion with total assets of about US $41.6 billion. A global food commodity trader, ADM is based in Illinois and has a broad portfolio comprising food, beverages, feeds and biofuels.

The company has attracted a good deal of controversy throughout its long history. In his book “Rats in the Grain”, James B. Lieber outlines the history of ADM and its engagement in politically lobbying and influence. According to Lieber:

“Among the most political of companies, ADM makes its influence felt in myriad ways from lobbying through trade associations to providing direct and ‘soft money’ contributions in electoral campaigns to its pervasive commercials on the Sunday morning talk shows watched and performed on by policymakers. “ (p. 81)

Within his book Lieber traces the history of how ADM engaged in a process of active political lobbying in order to secure commercial advantage. In particular the trial of ADM executives who engaged in price fixing in the 1990s.

The story of ADM’s price fixing of animal feed supplement lysine and citric acid markets resulted in the imprisonment of the company’s vice chairman Michael D. Andreas plus heavy financial penalties.

The role of the former ADM Chief Operating Officer Mark Whitacre as a company whistle-blower and FBI informant has been portrayed in the media. This included the 2009 film “The Informant” in which Whitacre was played by Matt Damon. Yet Whitacre was also gaoled on embezzlement and tax evasion charges.

Since that time ADM has sought to impose a strict code of ethical conduct. In 2010 it introduced a revised code of conduct. This 36 page document encompasses a wide range of issues. However, the section dealing with “Fair Treatment of Suppliers” is worth repeating:

“We are committed to dealing fairly with all our suppliers. We choose our suppliers based on legitimate, business-related criteria. This includes quality of products and services, technical excellence and cost, among others. In addition, we never take unfair advantage of our suppliers through manipulation of our position or relationship, concealment of important fact, abuse of confidential information, misrepresentation of material facts or any other unfair dealing practice.” (p. 17).

A tough decision with significant consequences

As Joe Hockey contemplates his decision over whether or not to allow the GrainCorp sale to ADM, it is to be hoped that he examines all sides of the debate. Under the new federal government policy Australia is “open for business” and this means that foreign direct investment in Australian agribusiness is welcome.

The Australian Competition and Consumer Commission (ACCC) has already given the Treasurer a “green light” on the ADM acquisition of GrainCorp. This judgement was based on the argument that the deal was unlikely to substantially lessen competition due to the presence of other competitors in the market. However, when interviewed on ABC radio by Fran Kelly, the ACCC Chairman Rod Sims made it clear that there were two key issues that needed to be considered.

First, the ACCC examined the overlap between ADM and GrainCorp in the eastern seaboard grain market. According to Sims the only overlap found was in their purchasing of grain from farmers, which he dismissed as not significantly impacting on competition. Even after a take over there would “…still be plenty of people buying the grain”, he said.

However, he went on to note that the issue that has concerned farmers is the almost monopoly control that GrainCorp has over the port grain terminals and storage in east coast Australia. This is a different issue. According to Sims:

“If you own a monopoly and someone else buys that monopoly off you, that’s not a lessening of competition, that’s just a transfer of monopoly. There is nothing that the merger laws can do about someone who owns a monopoly selling that monopoly to someone else. You’ve got a monopoly beforehand; you’ve got a monopoly afterwards, no change in competition.”

He went on to note that the issue with this monopoly is that it must be regulated. According to Sims the ACCC has an access regime that will ensure that other competitors within the market will be in a position to gain access to these ports if they need to export their grain. He noted that if conditions were placed on the sale of GrainCorp relating to port access the ACCC would be in a position to enforce them.

Looking for the best deal for Australia’s growers

Growers such as Jock Munro fear that they will be placed at the mercy of a potentially powerful American company with the ability to bully them. Unlike their counterparts in WA who own and control their bulk grain handling and export system via the CBH co-operative, growers across the eastern states are not in a strong bargaining position. The sentiment was expressed by many growers who gave evidence to the Productivity Commission review of the wheat export industry. As one farmer commented:

“We were and still are very strong supporters of the single desk system of marketing Australia’s bulk wheat exports and believe the decision to deregulate has not been in the best interests of ‘family farmers’ like us who make up the majority of Australian growers, or our rural communities which are vital for Australia’s future, or for our national economy as Australia fights for survival in a world market economy dominated by much bigger players supported by government subsidies and more and more influenced by speculators completely out of our control”. (R H & M J Billing, sub. 30, p. 1)

There is nothing inherently wrong with foreign investment in Australian agribusiness. However, the fact remains that most global agricultural supply chains are “choked” by a hand full of major commodities traders. I have written about this in a previous column. Despite significant improvements in farm productivity, the returns to investment by Australian farmers have been decreasing. The value adding they create has been passed down through the supply chain due to their lack of bargaining power.

Joe Hockey may not be bullied in relation to his forthcoming decision, but he will need to weigh up the pros and cons of the sale on the basis of what is best for Australia and Australian growers, rather than any ideological motivations.

The issue has the potential to further fracture existing fault lines within the government over issues effecting Australia’s rural communities. Free trade and an open door policy on foreign investment has many benefits, but if it leads to a further erosion of farmer bargaining power and squeezing of prices the political consequences will be significant.

This article appeared first in The Conversation and is republished with the permission of the author.