GrainCorp may have been a major player in the Australian grain business for over 90 years, but it was its acquisition in November last year of United Malt Holdings (UMH) which caught the world’s attention. At a costly stroke — the purchase price was A$757 million ($670 million) — the deal transformed GrainCorp into an international agribusiness with a diverse earnings base.
Prior to the purchase, GrainCorp already boasted 20 million tonnes of storage and 13 million tonnes of annual grain shipping capacity through its seven bulk grain port elevators and vast grain storage network in Australia. The company was also a sizeable trader and had diversified successfully into valueadded activities such as supplying premixes and flour to bakeries and the food sector through Allied Mills, its 60% owned joint venture with Cargill Australia. But the UMH deal added major assets in Europe and North America to GrainCorp’s extensive Australian portfolio, catapulting the company into being one of the world’s top five commercial malt producers and instantly decoupling financial performance from dependence on domestic weather systems and harvests.
The company is adamant the purchase is a good fit and denies that the resignation of Chief Executive Officer (CEO) Mark Irwin in January, after he had driven through the acquisition, was in any way linked to the deal.
Irwin was replaced on an interim basis by Ian Wilton, the former chief financial officer at ConAgra Malt, the company that evolved into UMH.
The basic rationale behind the purchase of UMH, explains David Ginns, manager of corporate affairs and investor relations, is that the UMH purchase will add value across the company. "We now have a less volatile earnings base," he told World Grain. "Earnings from storage and handling fluctuate depending on the harvest, but now our returns to shareholders will be more stable. Offshore earnings also provide a reduction in exposure to fluctuations in the value of the Australian dollar."
DIVERSIFICATION PAYS OFF
Forward predictions for FY2010 based on the previous half-yearly figures of each business division suggest that some 66% of GrainCorp’s revenue will still be generated in Australia, but with significant contributions now coming from the U.K., the U.S. and Canada. More importantly, the deal transforms the earnings outlook. Grain-Corp anticipates that around 43% of Ebitda will now be derived from malt production, which will not be significantly dependent on Australian weather conditions. Storage and logistics will account for 23% of Ebitda, port operations for 17%, trading for 15%, and its milling business 2%.
The UMH acquisitions will retain their individual brand identities but have been grouped for financial purposes in the company’s GrainCorp Malt business unit. "GrainCorp Malt provides vertical and geographic diversification, reducing revenue reliance on Australia and offering a platform for further international growth and increasing our exposure to downstream processing revenue to offer earnings stability," Wilton said.
He said the acquisition of Barrett Burston Malting (BBM), formerly UMH’s Australian subsidiary, enables GrainCorp to integrate BBM’s barley requirements to current grain trading activities and simultaneously bolster demand across its storage and handling network.
Overseas, assets in North America now include Canada Malting Company, that country’s largest. In the U.S., GrainCorp has taken over Great Western Malting, a market leader, while in the U.K. Bairds Malt Limited is a major malt producer of some 150-year standing with firm supply contracts with domestic brewers and the Scottish distilling industry.
Improved forward earnings projections follow a satisfying FY2009. GrainCorp revenue in FY2009 climbed to A$1.73 billion, up from A$1.534 billion a year earlier, while Ebitda reached A$165 million compared to A$51 million in FY 2008. The financial improvement saw the company move back into the black, reporting a net profit of A$63 million in FY2009 compared to a net loss a year earlier of some A$20 million.
"Our year last year was very good, and this is reflected in our numbers," Wilton said. He cited a recovery in grain production, increased grain receivals, favorable seasonal conditions, and an increase in bulk wheat and sorghum exports. "Basically, after two terrible years, we had a better harvest. We saw a major return on productivity in the northern half of New South Wales from sorghum, but there was a recovery in grain production across the board."
Looking back to FY2009, Don Taylor, GrainCorp chairman, said that while the outlook now is optimistic, the company came under fire for its gearing levels. This prompted the company to turn to the market to raise some A$200 million through share issues, which strengthened its balance sheet and reduced debt.
"Going to the market when we did was not risk free," said Taylor. "We raised funding at a time when we did not know just how strongly our results this year would be. Factors unknown to us at the time including one million tonnes of additional winter crop receivals post harvest, something that had never occurred previously resulted in the company upgrading its results on two occasions."
ADAPTING TO EXPORT CHANGES
Another factor in GrainCorp’s improved long-term outlook came from an external change. The removal in July 2008 of the bulk wheat export monopoly in Australia granted to AWB International under the Customs (Prohibited Exports) Act 1957 created a number of challenges and opportunities for exporters and growers. Reduced rail capacity and multiple exporters created uncertainty initially. But the industry, not least GrainCorp, has adapted remarkably quickly to uncharted territory.
"It quickly became apparent that growers were comfortable marketing their wheat to a range of export buyers, as they have been doing domestically over the past 20 years," Taylor said. "In the first season following the removal of the bulk wheat export monopoly, Grain-Corp went from zero bulk export tonnes to just over 1.3 million tonnes.
"This represented similar wheat market share to the previous non-drought impacted year, so the only change was that we were free to sell export wheat to more than just AWB under the monopoly regime."
Removal of the monopoly has also been a benefit to the industry as a whole, he said. "There is more competition and the industry is operating in a much more commercial manner," he insists. "Growers have reacted rationally by exercising more of their market power and storing more grain on farm or in warehousing in the bulk system. Customers are now able to buy wheat from many more suppliers so they have more choice. Growers are able to sell to more buyers so they have more choice. And we have a range of customers to which we supply logistics services, including port elevation."
Notwithstanding the de-monopolization of Australia’s wheat export market, the world wheat supply and demand balance is a concern. The International Grains Council’s latest analysis estimates that global wheat production in 2009-10 will total 674 million tonnes. This followed the 2008-09 estimated crop of 686 million tonnes, which was up from just 609 million tonnes the year before. So, after two of the largest crops on record in consecutive years, stocks were at a record level of 197 million tonnes as World Grain went to press, and the international wheat trade was expected to contract this year. "We’re entering the year with almost 200 million tonnes in storage worldwide, which dampens prices," Ginns said. "We’d like to see stocks come down and see a closer balance between supply and demand, which would lead to an upward trend to grain prices."
POISED FOR GM CHANGES
GrainCorp would also like to see the removal of genetically modified (GM) production bans, which managers believe is stifling grower productivity and, therefore, Australia’s competitiveness in international grain markets.
Although regulators have recently eased up GM restrictions on canola production in some parts of Australia — GM canola is more profitable than non-GM canola, which encourages its rotation with wheat planting which boosts productivity per hectare — the battle to allow wider GM crop plantings is a long way from won. One of the arguments put forward by opponents of GM focuses on the difficulties of segregation. Ginns said this has not proven a problematic with canola.
"GM canola is in its second season in New South Wales, and it is now allowed in Western Australia," he said. "Grain-Corp has been able to successfully segregate more than 50,000 tonnes of GM canola this year from receivals of more than 300,000 tonnes of conventional canola.
"We have been able to meet the requirements of the trade, oil processors and meet industry standards. In doing so, we have created the foundation for the possible segregation of other GM crops should they be released in Australia. The market can have confidence that the bulk handling system has the capability to segregate should this be required.
"But apart from canola, there is really nothing else on the horizon which we might be allowed to plant. There is work being done on moisture stress-tolerance cereals, which could cope better with limited rainfall than current varieties, so we’ll see how far that goes," Ginns said. "But at GrainCorp, we really can’t see why growers here are not allowed to use this technology like our competitors abroad. We’re a big proponent of using more GM crops."
Looking ahead, he said it is too early to tell how the 2009-10 crop will perform, but he believes the Australian grains industry faces the same challenges now that it has always faced. "Obviously there are climatic conditions affecting supply," he explained. "The East of Australia has been blighted by drought over the last five years, and at the moment the Australian dollar is too strong, which doesn’t help the competitiveness of Australian grain exports.
"Our recent expansion will help protect us from the worst of these fluctuations."
Michael King, a freelance journalist and editor, has been writing about shipping, transport and commodities for more than a decade. Currently based in Indonesia, he can be reached at