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GrainCorp and the thorny issue of foreign ownership

No other product category generates as much emotion as food. This should come as no surprise as nations have fought to protect and to provide a reliable supply of food for their burgeoning population since…

ADM’s takeover bid on Graincorp is stirring foreign investment fears. AAP

No other product category generates as much emotion as food. This should come as no surprise as nations have fought to protect and to provide a reliable supply of food for their burgeoning population since the very dawn of civilisation.

These very same emotions are being triggered now as agribusiness in Australia struggles with the challenges and opportunities that foreign ownership presents. The latest chapter is the proposed takeover of Australia’s largest agribusiness, Graincorp, by US giant Archer Daniels Midlands (ADM), one of the world’s largest integrated grain handlers.

Now the government is in caretaker mode, any takeover deal will have to be approved by the Foreign Investment Review Board, and ultimately the Treasurer, following the election. The Nationals are opposing the deal, although they have stopped short of publicly calling for their Liberal coalition partners to announce their position.

The benefits of foreign ownership, which are well documented, include access to capital, superior technology, superior management and marketing skills, as well as reduced costs (in part through the economies of agglomeration) and improved market access.

But at the heart of the negative response to the takeover bid lies a perception that foreign ownership will potentially reduce or restrict the supply of product to the domestic market. However, with an agribusiness sector worth in excess of A$46.7 billion and a population of just 23 million, Australia is a net exporter (A$36.7 billion) of food, primarily to Asia.

Even in the worst-case scenario, there is very little likelihood of Australia facing a grain deficit, for in what is largely a free market, any company, irrespective of the country of ownership, will endeavour to sell its goods for the highest returns. Market forces will ensure that sufficient grain remains in Australia to meet the domestic demand.

The other and perhaps more sinister issues relate to transfer pricing and anti-competitive behaviour. Transfer pricing enables multinational firms to sell the goods they have produced in Australia to themselves or to an overseas subsidiary company at predetermined prices which minimise tax. These goods are subsequently resold in other markets at significantly higher prices where tax rates are lower.

In this instance, as grain prices are largely determined on the Chicago Board of Trade (CBOT), there is an element of price transparency. Farmers know what they should be getting at the farm gate, minus the costs of storage, transport, grain assessment and receival costs, freight to port, storage and fobbing and currency hedging.

As trading is very much a numbers game (the more grain you handle the cheaper it becomes), ADM’s costs will be lower, so it should therefore be in a better position to pay higher prices to Australian grain farmers. However, to expect ADM to pay any more than they need to in order to remain price competitive is unrealistic, just as it is to ask the supermarket duopoly to pass on more of their profits to producers, or the banks to pass on the full rate reduction to borrowers.

Concerns around anti-competitive behaviour centre around ADM’s potential ownership of the port facilities, sparking fears that it may exclude other users. However, with as much as 70% of the grain on the East Coast being handled by other exporters, it is not in ADM’s best interests to exclude other parties.

Furthermore, ADM have recognised the need to make a substantial investment in these same grain handling facilities. After years of neglect, transportation and logistics systems in rural Australia require an immediate investment to improve the efficiency of transport, especially rail - an investment that both State and Commonwealth governments will struggle to make in the short to medium term.

While we have welcomed such investments from the private sector in the mining industry and indeed, in the construction of toll roads in the major metropolitan cities, there is a reluctance to support parallel private investments in our food logistics system.

In any event, government has the power to ensure that any public-private infrastructure investments - especially at the ports - are available for anyone who wants to use them. How these facilities might be shared and the costs apportioned to those third parties who want to use them should not detract from the need to encourage that investment.

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12 Comments sorted by

  1. Garry Baker

    researcher

    Obviously the author hasn't read "Rats in the Grain"

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    1. Peter Batt

      Professor, School of Management at Curtin University

      In reply to Garry Baker

      Garry - many thanks for the comment. I am very aware of the past history here. Indeed, I think most MNC have a least one skelton in a cupboard, somewhere, and in retrospect, wish they had done things differently

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    2. Garry Baker

      researcher

      In reply to Peter Batt

      Thanks Peter, with ADM it's not as if they only have one skelton in the cupboard - They have many. Indeed, a long history of skullduggery. Right now(just a few months ago) they set aside $25m for court fines with regard to a past case. Though it's not as if it mirrors some of their bigger fines - where a settlement was reached under which ADM paid $400 million in 2005 to settle a class action antitrust suit.

      Perhaps have a read of a precis on some of their antics
      http://en.wikipedia.org/wiki/Archer_Daniels_Midland#Price_fixing

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  2. Peter Milner

    Engineer

    Well, this reads like an ADM 'hooray for everything'. Not one single negative aspect of the takeover, or possible negative?

    Foreign investment offers "superior technology, management". How is this a given? In the area of agriculture I would suggest that Australia has shown itself to be very capable of innovation.

    Anti-competitive behaviour from ADM not possible due to 70% of other exporters needing to use their port/loading facilities. ADM would never squeeze those other exporters via price or less equitable availability to their service?

    For a more substantiated reading of the topic the following is recommended:

    http://www.abc.net.au/radionational/programs/backgroundbriefing/2013-06-16/4751634#transcript

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  3. Ian Fraser

    Independent researcher

    "The benefits of foreign ownership, which are well documented, include access to capital, superior technology, superior management and marketing skills, as well as ...."

    Short term benefits which further reduce Australia developing the skills and knowhow we need to advance beyond the paddock and the quarry! And so now we want to trade off the paddock as well?

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  4. Dale Bloom

    Analyst

    Companies like ADM are the anthesis of innovation.

    The grain is grown by a large number of growers, then it gets funnelled through a small number of grain sellers, then it spreads out again to a large number of consumers.

    In the middle are a small number of grain sellers such as ADM who dictate to everyone, and often set their own rules.

    Not withstanding the fact that very few agribusinesses are left in Australia after most have been sold off.

    “Foreign investment” is a deceptive way of saying “foreign ownership”.

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  5. R. Ambrose Raven

    none

    Monopoly clearly matters. Note the contrast between the few real complaints against AWB as was with the worry in the U.S. that followed the 1999 takeover by Cargill Inc. (America’s largest private company), of the grain-trading operations of its primary rival (Continental Grain Inc.) - allowing control of 94% of the soybean and 53% of the corn market. Approval overrode the objections of attorneys-general of farm states, the U.S. Farmers Union, consumer and green groups, all of which charged that…

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  6. R. Ambrose Raven

    none

    Due to both complacency and ideology, food security in Australia is deteriorating. Ireland had food during the Potato Famine, yes, but the Irish could either not afford it or were not permitted to buy it. Market forces will NOT guarantee that food is available! But market forces WILL guarantee that what food is available is available only to those who can afford it.

    As with many other problems, the warning signs start amongst the disadvantaged and low income groups. Food insecurity arises…

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    1. Garry Baker

      researcher

      In reply to R. Ambrose Raven

      ""much more is said about Asian investment than about American or European investment, even though it is really just as foreign. """

      Agreed (mostly).. especially Americans, who can spend bundle here, and all of it goes under the radar. However, when if comes to Chinese companies in particular, most seem to be arms of the state itself. Indeed, businesses in name only - yet our Neanderthals up in Canberra persist in viewing them as free enterprise outfits - mainly because their parliamentary…

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  7. R. Ambrose Raven

    none

    “Need foreign capital”? Well, where it introduces new methods and equipment, certainly. But does any of it really do that.

    In truth, of course, the purported insufficiency of local capital is a fraud intended to stifle any movement to regulate foreign investment according to any reasonable cost-benefit test. It is an official ideological position to which reality - the actual level and, more importantly, use of domestic savings - is simply irrelevant. Such as Ross Gittins, Henry Ergas, and…

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  8. Michael Shand
    Michael Shand is a Friend of The Conversation.

    Software Tester

    Well if the Author thinks we welcomed Toll Roads in all our major cities then he is completely out of touch with the common person

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  9. R. Ambrose Raven

    none

    "Farmers know what they should be getting at the farm gate, minus the costs of storage ...." So they do, and they can see the fall in returns after flog-off! As one grower put it, “They might want to talk to a few growers over here that have gone down the listing track and are now suffering with charges having gone up 40-70%. Money spent on storages reduced by 70-80% and dividends going either overseas or to investor shareholders.”

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