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ADM dodges a bullet

By David Leyonhjelm - posted Friday, 6 December 2013


Dear ADM – consider yourselves lucky. Your first responsibility is to your shareholders. The offer to purchase GrainCorp was too generous and you would have struggled for years to generate a decent return. The additional $250 million you offered to inject into rail and other infrastructure would only have made it worse.

While Treasurer Joe Hockey's decision to reject your offer was irrational and contradicts the government's "open for business" claim, he has done you a favour.

If you are still interested in becoming a significant player in the Australian grain market, and I'm sure there must be plenty of attractive options elsewhere in the world, there are cheaper and less risky ways to do it provided you take a medium to long term view.

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The immediate consequence of the decision is that GrainCorp is now a "koala" in financial terms. That is, it is a protected species. Like a number of companies including Qantas and the big banks, it is immune from foreign takeovers.

While that might keep the xenophobes happy, its effect is to limit sources of capital to domestic investors. Given their reluctance to invest in agriculture, a result of decades of meagre returns, GrainCorp is unlikely to suddenly become popular. Indeed, in 2011 grain growers themselves sold their shares in the company.

Thus raising additional capital will be largely off the agenda. That means no capacity to increase the current $17m allocation to addressing the immense backlog of maintenance and facility upgrades.

The company will have no option but to close its less profitable siloes, particularly those on rail lines where speed and weight restrictions have been imposed. Ironically, this will cause the most harm to those who strongly opposed your acquisition of the company. As they say, what goes around comes around.

In those locations, or indeed any location for that matter, Archer Daniels Midland could duplicate many of GrainCorp's facilities for a lot less money than it would have cost to buy the company. Storage bunkers can be constructed for a fraction of the cost of concrete or steel silos. Moreover, you do not necessarily need access to the rail network; the cost of road transport is not the barrier it once was.

If you nonetheless prefer to use rail, you could lease wagons just as GrainCorp does. And if you wanted to win a few hearts and minds, you could probably negotiate an agreement with cash-strapped state governments to upgrade poor quality lines in key locations in exchange for exclusive use of them for grain transport. I'm sure it would cost a lot less than $250 million.

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As for ports, there are several options. One would be to use GrainCorp's facilities, the availability of which is guaranteed as a result of access undertakings required by the ACCC.

Another is to use the terminal at Newcastle owned by Glencore, Olam and CBH. This directly competes with GrainCorp and gives the lie to claims that there is a monopoly.

And because GrainCorp will eventually need to sell assets to raise funds, perhaps you will be able to buy one or more of its seven port terminals.

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This article was first published on FarmOnline.



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David Leyonhjelm is the Liberal Democrat Senator for NSW.

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