Hockey's game missed the goal

There was a good reason GrainCorp's board supported the company's proposed takeover by American agribusiness giant Archer Daniels Midland (ADM): it needed the money.

Even the nationalists and socialists who screamed blue murder at the prospect of the company falling into the hands of foreigners must now be starting to realise they have not done rural Australia any favours by opposing the deal. When ADM executives flew back to the US, they took with them the promise of much-needed infrastructure investment for the Australian grains industry.

At the company's recent annual general meeting, GrainCorp executive chairman Don Taylor noted that over 90 per cent of grain received into its system now comes through 65pc of the company's receival sites. Some sites are going to be closed.

While a number of these are not viable due to low volumes, few are due to lack of grain production in the area. More often they require substantial repairs and maintenance or are victims of poor quality rail access that restricts load weights and wagon speed. State governments have been in no hurry to spend money on repairing railway lines that have little use apart from transporting grain.

For growers who need to deliver and unload their grain as quickly as possible during harvest, this is not good news. Closed silos means trucking the grain longer distances, and increases the risk that queues at remaining silos will be longer.

GrainCorp has four reporting divisions: marketing, malt, oils, and storage and logistics. This structure is new and reflects the recent strategy of diversifying earnings. Whereas storage and logistics accounted for three quarters of earnings just four years ago, it is now down to about a third of earnings.

A good number of the hundred or so sites being considered for closure could be retained if some money was spent on them. But given the opportunities in the other divisions, investing in storage and logistics is relatively unattractive. Even if all the sites were brought up to the standard of new facilities, it is questionable whether additional earnings would be sufficient to cover the interest cost.

A key factor is the changing competitive environment. As Don Taylor noted, the days of monopoly are well past. There are numerous competitors vying to purchase grain and, he said, enough country storage capacity to hold the average east Australian crop two-and-a-half times over, with more being built all the time. Moreover, there are now four competing bulk export terminals, none of which is subject to the Australian Competition and Consumer Commission's (ACCC) disclosure and capacity allocation requirements that apply to GrainCorp's terminals.

In the year ending 30 September 2013, GrainCorp made $141 million profit after tax (down $60 million on the prior year). Of this, $101 million was paid to shareholders as dividends. Even after adding back non-cash items, there are clearly limits on the availability of capital to fund future growth.

In fact, capital expenditure during the year amounted to $141 million, much of it funded by debt. Of this, $60 million was attributable to storage and logistics. But this level of emphasis seems unlikely to continue - the company says this year $125 million is being invested in its edible oils manufacturing operations and a further $70 million to expand the capacity of its bulk liquid port terminal facilities. Storage and logistics is no longer the centre of attention.

GrainCorp is not in any danger of going broke or disappearing. But neither is it the same company it was five years ago.

So how might things have been different if ADM had bought the company? The main difference would have been its willingness to invest in storage and logistics. While ADM did not rule out a few site closures, it had signalled an intention to invest $250 million in facilities, including rail.