GrainCorp's strength comes from its core assets. Photo: Robert Rough
GATHERED around a lengthy board table in Sydney, some of Australia's biggest farmers were near unanimous: the sharemarket was no place for agriculture.
Farming was intrinsically volatile, dependent on the weather. Institutional investors were too focused on short-term returns. A public listing was simply not worth the hassle. It was chalk and cheese, ships in the night, never the twain shall meet.
Who was there? The finance director of the country's oldest company, the Australian Agriculture Co (AACo), with 600,000 head of cattle spread over 7 million hectares or 1 per cent of the country's land mass - but with a paltry market capitalisation just above $400 million. The founders of the Laguna Bay Pastoral Company, who spent two years trying to channel expansion funding to up-and-coming farmers, but wound up instead buying 10 per cent of PrimeAg, an ailing sub-$300 million stock about to delist.
Rubbing it in was ''rock-star'' farmer Ron Greentree, the former GrainCorp chairman whose family company is Australia's largest graingrower, and who joked how his board meetings nowadays took place when he fronted the mirror for a shave.
The lunchtime discussion - an annual get-together hosted by broker Octa Phillip in September - moved quickly on to other subjects, such as foreign investment (most welcome), the supermarkets (a problem), and the dollar (just when would it come back to earth?).
Fast-forward two months, and events have borne out the mood around that table. GrainCorp, Australia's largest listed agribusiness, described by one sector analyst as the ''last man standing'', is the subject of a $2.7 billion takeover bid from US grain trader and crop processor Archer Daniels Midland.. ADM's management must see value where local investors obviously don't. GrainCorp shares jumped almost 40 per cent on October 22 when ADM's $11.75-a-share cash bid was confirmed, and have since hovered around $12.20, indicating a higher offer is expected.
ADM - which has already pounced on a 15 per cent stake in GrainCorp - is trying to bulk up to compete with the world's biggest agricultural commodities houses - Bunge, Cargill, Louis Dreyfus, and the proposed combination of giants Glencore and Viterra. ADM, which also bid for Viterra but was trumped by Glencore, needs GrainCorp to establish a footprint in the growing Asia-Pacific market and reduce its exposure to the kind of crop downgrades seen as a result of this year's US drought.
It is by no means a foregone conclusion, but most pundits expect GrainCorp will fall prey either to ADM - perhaps with a sweetened offer - or another foreign bidder. Certainly there is no Australian company in a strong position to mount a counter-bid. The only rival of size, Western Australia's CBH, is our largest wheat exporter but is constrained by its co-operative structure.
A diversified, international-scale global commodities trader would need to be five or 10 times the size of GrainCorp to have the balance sheet strength to compete in world markets, says David Robinson, the chairman of Australian Food & Fibre who was also at the Octa Phillips briefing in September. ''It is hard for local companies to grow beyond the point where they become a takeover target,'' he says.
By now it's a well-trodden path. A spate of foreign buyouts followed wheat industry deregulation and abolition of the single desk in 2008. South Australia's ABB Grain was sold to Viterra in 2009, and disappeared from the stock exchange. In 2010 GrainCorp was outbid for AWB by Canada's Agrium, which paid $1.2 billion. It may be coincidental, but some commentators see ADM's move on GrainCorp as well timed to take advantage of the second wave of deregulation with legislation to abolish the Wheat Export Authority finally passing through Federal Parliament a week ago.
Pete Mailler, himself a northern New South Wales farmer and grazier, is chairman of lobby group Grain Producers Australia and believes GrainCorp has probably been undervalued given its near-monopoly position on the east coast. "It has the ability to exert an enormous amount of power in the market and the supply chain. And it has full vision of everybody's stock position. So it has a natural advantage in terms of how it trades,'' he said.
Mailler is concerned there will no longer be any statutory oversight of GrainCorp's monopoly market position.
"It's a fine time to be trying to take it over," he told BusinessDay. "They're just about to get more or less a free run."
GrainCorp disputes this. Its storage and logistics infrastructure is already subject to an open-access regime monitored by the Australian Competition and Consumer Commission. Under a deal hammered out with the Greens, the new Wheat Export Marketing legislation makes mandatory an industry code of conduct governing port access, and establishes a taskforce to examine wheat export standards.
The only bar to a takeover of GrainCorp - apart from shareholders - is a national interest test assessed by the Foreign Investment Review Board, which includes the impact on competition. But given the takeovers of ABB and AWB were waved through, the test is not expected to present an obstacle.
Queensland Premier Campbell Newman, who worked in senior roles for state predecessor GrainCo until 2001, warned that a foreign buyer of GrainCorp would gain an ''almost unfettered monopoly'' on grains handling on the east coast. Shadow treasurer Joe Hockey has voiced ''serious misgivings'' about the bid, and Nationals leader Warren Truss complained: "These facilities were built and paid for by Australian farmers, but within weeks they may own none of them.''
GrainCorp's strength comes from its core assets, which date back to 1916, when the NSW government formed the Grain Elevators Board. Privatised for $100 million in 1992, GrainCorp listed on the stock exchange two years later and went on a buying spree - buying Victoria's Vic Grain in 2000, GrainCo in 2003 and Hunter Grain in 2007 - to become Australia's leading grain handler. GrainCorp's network of 280 storage sites and seven (out of eight) grain ports on the east coast handle 75 per cent of the crop, and 90 per cent of exports, from Queensland to Victoria. In round figures, this core storage and handling business accounts for 40 per cent of the company's earnings, while grains marketing - GrainCorp has only a one-third share in this highly competitive game - generates another 10 per cent.
Despite its near monopoly, especially at the east coast ports, this is a volatile business geared to grain volumes - a problem the company has addressed by diversifying into flour (buying Allied Mills with Cargill in 2002), malt (buying United Malt Holdings in 2009), and oils (paying $472 million for both Goodman Fielder's unwanted Integro Foods division and the private Gardner Smith Group).
GrainCorp charges for storage and handling by the tonne, and takes a percentage of gross value when it sells grain on growers' behalf. To an extent, GrainCorp's profits are not directly linked to grain prices - although that has not stopped its shares tracking wheat prices historically. But grain yields vary wildly from season to season: GrainCorp's record country grain receival of 14.9 million tonnes in 2010-11 was more than double the previous year's 7.4 million tonnes. The low point over the past decade was 2.3 million in the drought year of 2006-07.
Octa Phillips is forecasting receivals of 14.2 million tonnes in 2011-12 and reversion to the longer-term average of 9 million tonnes for the following three years to 2015.
On Thursday analyst Paul Jensz noted the NSW government downgraded its overall state winter crop forecast by 7 per cent to 10 million tonnes, due to a dry October. Private forecasters had also downgraded their east coast estimates to about 19 million tonnes for both winter and summer crops, he wrote, about 10 per cent below the official forecasts by the Australian Bureau of Agricultural and Resource Economics and Sciences that are relied on by GrainCorp.
There will presumably be an update next Thursday when GrainCorp releases its annual results, and is expected to deliver a formal response to ADM's offer. While GrainCorp chairman Don Taylor is expected to demand a higher price, Jensz observed: "We do expect some tempering of the price the board can demand from ADM." He expects a sweetener - perhaps including the franking dividends of no value to a foreign owner - to lift the bid to $12.50 a share. As Jensz told BusinessDay, ADM is paying a "premium on a premium season". He does not believe a counter-bidder will emerge.
Mailler says it makes little difference for producers whether GrainCorp is owned by local shareholders or a foreign owner. "If they push too hard, people will try to find alternative routes to market," he says.
And competitors are making inroads. On a quick tour this week, shipping containers stamped Louis Dreyfus were being loaded up at GrainCorp's Moree sub-terminal, and shiny new on-farm storages were visible, popping up from one property to another.
The new $28 million Newcastle Agri Terminal is under construction by a private company, the first major grain port development in 25 years.
It is often said 20 per cent of the farmers produce 80 per cent of the tonnes. Based near Gurley, in north-western NSW, the family-owned Tyrone Pastoral Company is one of the region's major growers, harvesting 12,000 hectares. Tyrone's Scott Carrigan this week told BusinessDay: ''Seeing effective control of the eastern seaboard, port, major rail and storage facilities going to a foreign owner never sits all that well … but the reality is it's probably inevitable.''
For Tyrone's operation, however, an ownership change would make little difference. ''I wouldn't have thought anybody who is going to invest $3 billion in a business is going to want to let it go backwards,'' he said. ''Whoever owns it has to look after lots of customers, who are the growers. If they don't look after their grower customers, it's not going to work for anyone.''
SO GLOBAL consolidation continues. A fortnight ago another of our most venerable companies, Elders Ltd, flagged it would sell its core business, the 1800 rural services outlets dating back 173 years. The third sharemarket listing in Elders' long history will be over.
At PrimeAg's annual meeting on Monday chairman Roger Corbett told disappointed shareholders the board was facing up to the fact that the company's assets were chronically undervalued in the listed market - much like peers Tandou and AACo. ''We have in effect said to the market, 'Is there a better and more effective way that these assets can be held?','' he said.
Australia has some of the world's best farmers and hopes to double its agricultural output. Many believe the next boom will be in soft commodities: a recent ANZ insight paper estimated Australia had up to $1.7 trillion of export opportunities to 2050, requiring $600 billion in investment, as the world population exceeds 9 billion. Arguably more important than global population growth is the rising Asian middle class that will want more of the high-protein food we can supply.
AACo is the world's largest wagyu beef producer and is investing $85 million to build a new abattoir in Darwin. AACo chief financial officer Phil Beale, a long-standing agribusiness executive agrees the opportunities are huge, particularly in the top end.
''We all believe in the mega-trends. We've got finite land in Australia. We've got robust population growth in the regions around us. There is ecological degradation taking place and we've got rapid income growth. If someone can own the north, turn it into what it should be, then we can start to service these markets.''
Beale flagged that AACo was considering a listed property trust or real estate investment trust (REIT), as a way of recognising the true value of its assets.
''The hidden thing for AACo,'' Beale told the Octa Phillips gathering, ''is we cannot recognise the increase in our land value. I've got $600 million of assets sitting on my balance sheet, some of them go back to 1936. I've got $400 million of revaluation reserves sitting within that. I don't get a jot of recognition of that in the P&L [profit and loss account]. But it is a value-add. If I was a REIT, it'd be wonderful. I'd book it as a profit and the market would get excited. Because across the last 30 years, the grazing properties have averaged a 15-20 per cent compound rate of return.''
Australia has the world's fourth-largest pool of savings, but despite the farm sector's growth prospects, institutional investors appear unable to capitalise on one of this country's core strengths. Why can't we build our own multinational commodities powerhouse, a BHP of agriculture? Should agriculture be recognised as a separate asset class - perhaps alongside other so-called alternative assets such as infrastructure and private equity.
Australia's own sovereign wealth fund has tried to address this conundrum. Last year it committed $125 million to invest in Australian cropping properties and water entitlements, alongside PrimeAg, which also kicked in $125 million. The unlisted PrimeAg Agricultural Fund was meant to grow to $600 million but in its first year, despite various offers, it made no acquisitions and the strategy is now on hold.
Speaking after the AGM this week, Corbett, the former Woolworths CEO (who is also chairman of Fairfax Media, owner of this newspaper), told BusinessDay that the Australian market was ''enormously dependent'' on financial institutions judged on their monthly, quarterly and yearly returns.
''Many investments are not possible to judge in those time frames,'' he said. ''Our major investment funds are there to produce the best possible returns for their beneficiaries, and the moment you take some of those assets and you force them to do something other than the managers think are in the best interest of those superannuants, then you start to compromise those funds, and I don't think you should do that.
''However, we've got an enormous [savings] pool and we should find some way of supporting our own agricultural assets. The truth of the matter is, the world is looking at these assets and realising their long-term upside. Arable land and water are going to be the gold of the future.''
Australian Food & Fibre, a major grower of cotton and other crops, delisted from the stock exchange in 2007. Chairman Robinson says the cost of maintaining a sharemarket listing outweighed the benefits. Access to finance, for example, was the same, and so was liquidity, given 80 per cent of the stock was owned by five shareholders. AFF owns 11 per cent of PrimeAg. Last year Robinson tried to spill the board and take control, but withdrew a month later.
He believes both AFF and PrimeAg were ''just too small, and too asset-rich for the market to recognise their true value''. Like Beale, Robinson believes unlisted or property trust models may be more appropriate for investment in agriculture.
Paul Jensz believes the future lies either in vertically integrated agribusinesses like Tassal Group (salmon) or Select Harvests (almonds) or very large, diversified agri-specialists. It's the mid-size companies that struggle.
Or maybe the sharemarket has got it broadly right: farming is just too tough. Many investors remember the drought years and it does not take a particularly fervent imagination to see more drought coming - particularly with climate change.
A Centre for Policy Development warned that without action to adapt to more variable and extreme weather, by 2050 Australia's rural production could fall by 13-19 per cent, losing up to $6.5 billion each year in wheat, beef, mutton, lamb and dairy production.
Ron Greentree, who has publicly supported a GrainCorp sale, sounds a cautionary note: "We hear in the media every day about how bright the future is going to be for agriculture, and the world's going to run out of food, and we're going to double our population … all these rosy pictures will always be the rainbow.
''You won't quite get that pot of gold. It will always be just out of reach. It will always stay a tough business. What happens every time?
''We've seen it three or four times since 2008. Agflation. The more people believe commodity prices are up, up goes input costs."