In November, the company will release its full-year results, after posting half-year results that showed how the increased amount of global grain stocks had impacted its bottom line. These results highlight the volatility that comes with the grains business, including lower carry-in despite higher receival volumes across its storage and logistics network, deferred grain export volumes and fixed take or pay rail costs impacting its earnings.
Despite this, the half-year results show GrainCorp’s strategy of diversification has supported the company’s underlying performance with all business units, with the exception of GrainCorp Oils reporting an increase in revenue on the 2015 half-year results.
Included in this diversification strategy, and to meet the demand of international customers, GrainCorp has expanded its origination footprint over the years to include Australia’s west coast and South Australia, as well as Europe and North America. This has allowed it to source multi-origin grain and also supply its own food processing assets located locally and abroad.
This may all sound familiar for those who follow the company, but when speaking with company CEO Mark Palmquist it was clear there is more history in the making for the company.
Reflecting on the company’s growth over 100 years, Palmquist explained the business had grown from a New South Wales grain handler to a global business because of market deregulation, Australia’s clean and green product reputation and closeness to Asia that combined to create an environment that supported the company’s expansion.
Premium customized products
With deregulation of the Australian wheat industry occurring in 2008, the grains industry should not expect to stand still if it is to unlock new opportunities and growth. Palmquist said the opportunities now and into the future will come from understanding in greater detail what the consumer wants and being able to offer a premium customized product.
Palmquist explained taking the path toward customization was more achievable than thinking Australia could be the breadbasket of Asia. Or as Palmquist put it, Australia should aspire to be Tiffany’s, not Wal-Mart.
“Australia can’t achieve the scale of production needed to meet the volumes demanded (of a Wal-Mart),” Palmquist said.
As consumers become wealthier their expectation for product quality will increase and they demand it look, smell and taste a particular way, he said. It is here the characteristics and production method influence the end product. For example, the wheat used in noodle production influences the way it smells and whether or not it forms a skin on the water when cooked and served.
It is in this product that GrainCorp is seeking to embed itself to create more opportunity for the grower and its food processing customers by facilitating the necessary standards and traceability that arise from selling a premium product.
Palmquist explained that part of this premium product offering is allowing customers to look across the entire supply chain to the paddock so they know where the grain was produced, what variety it is and even what inputs were used in production.
This deep understanding requires close connections across all stakeholders in the supply chain.
He said the opportunity for GrainCorp was in the company being able to draw on its relationships with growers and processors to create an integrated and traceable network that would allow a consumer to scan a product’s QR code and see where the grain was produced and who produced it.
Using malt barley as an example, Palmquist said maltsters who wanted to malt barley in a particular way need to be confident the raw ingredient they are using is the right variety to achieve the characteristics they are trying to create in the finished product.
Coupled with this opportunity is the need for growers to think of their grain not just as a commodity but a food ingredient, and there will be opportunities for GrainCorp to work hand-in-hand with growers to keep the integrity of the grain as it moves from farm gate to silo.
This level of traceability and customization will demand a different type of relationship with the grower, Palmquist said.
“It could be in the form of contracted acreage, where the grower must adhere not only to tonnage and grain quality specifications, but also the variety, paddock and type and amount of inputs they use,” Palmquist said.
He likened this adherence to requirements to organic grain that requires it meet strict criteria and segregation from non-organic grain in order to maintain its certification. The result, if these are maintained, will impact the grower’s bottom line as the premium paid for organic grower is much higher than non-organic.
Ensuring product segregation
This technology could also include the use of sensors that track grain as it moves from location to location and store this information so that it may be traced across the supply chain.
Palmquist said in addition to factoring in the physical movement of grain, the company will need to facilitate a standard of traceability that a consumer may touch and see.
While GrainCorp does not expect to get into the actual storytelling, it expects customers will increasingly demand the information and therefore will need to work with processors to allow them to achieve this. The challenge is the ability to create the scale and efficiencies needed to keep costs down without losing the customized service.
As on the grower side, Palmquist expects the company will need to work closely with customers to understand what is required of the finished product, including traits, smell and appearance so that it can deliver the product.
Included in this offering is construction of a pilot malt house or brewery so they may showcase to customers the qualities of grain and how they impact the finished product. This approach also will take traceability out of the lab or label so that customers can see their product and understand how it will perform during processing.
“We expect a more discerning customer that will require the market to shift away from the traditional idea of grade specifications and more toward attributes,” Palmquist said.
While these shifts in customer expectations will impact the industry as a whole, they will also provide the company with new challenges and opportunities for future growth.
On one hand, Palmquist said the company will continue to drive efficiencies in its operations and supply chain to ensure Australian grain remains competitive in the world market and will provide its global customers with multi-origin grain so it moves away from a reliance on eastern Australian grain.
“GrainCorp will continue to capitalize on its strengths and core competencies, which mean we are committed to the Australian grains industry,” he said. “We also want to look at diversifying our risk and looking for opportunities that add to our customers’ capacity.”
This diversification includes looking at expanding their origination footprint where opportunities arise but not into businesses that are off scope of the business’ storage and logistics, marketing and processing operations.
Included in this expansion, Palmquist said, the company could also look at grower relationships, supply chain infrastructure and further movement to expand its grain origination footprint or processing operations.
Addressing the challenges for the company and the industry more generally, Palmquist spoke of an increasing backlash against globalization, which is particularly difficult for international companies like GrainCorp.
Free trade into Asia was particularly important for the company as it opened it up to the opportunities that come out of the region’s growing affluence and middle class. In addition to the globalization backlash is shifting government regulation, which results in changing standards and requirements for food products.
Palmquist said these changing regulations have most recently been seen in China where constantly changing requirements for baby formula make it difficult to understand what the consumer wants.
While not making any announcements of new acquisitions, Palmquist instead painted a picture of a company that was keen to position itself as a nimble partner for its grower customers, end-user customers and create a supply chain and business that was both efficient, innovative and could meet the demand of a rapidly changing consumer base.
||| ADM's divestment move in July |||
ADM’s divestment move in July
In July, Archer Daniels Midland Co. made the unexpected decision to sell its almost 20% stake in GrainCorp with no apparent warning to the company or the market. The deal failed to find a bidder. Talking at a CEO forum at AGIC on July 27, GrainCorp CEO Mark Palmquist confirmed he hadn’t spoken with ADM and did not want to speculate on the sale or the reasoning behind it. In July, GrainCorp spokesperson Angus Trigg told World Grain the company remained committed to its strategy.
“GrainCorp’s performance is underpinned by growing demand for our products and strategic assets around the world,” Trigg said. “These strong fundamentals have not changed and are not affected by the speculation. We remain firmly focused on delivering our strategic projects to grow underlying earnings.”
GrainCorp did not provide further comment when approached by World Grain in October. ADM remains the company’s largest shareholder without any further moves to sell its stake as of October.