SYDNEY: Still rattled by the veto of a A$2.8 billion ($2.5 billion) takeover by Archer Daniel Midland, Australian grains handler GrainCorp is facing aggressive competition that could cut costs for farmers but hit earnings at the country's biggest listed agribusiness.
Lower costs could also help Australia, the world's second-biggest wheat exporter, fend off a challenge from lower cost producers such as the United States in its key Asian markets, including Indonesia, South Korea and Japan.
GrainCorp operates eastern Australia's biggest grain port, handling as much as 60 percent of the region's wheat, barley, canola, chickpea and sorghum crops, and has more than 280 inland grain handling sites.
Western Australian grain exporter CBH Group and commodity trader Glencore Xstrata are among backers of a new grains terminal in Newcastle on Australia's east coast due to open next month near GrainCorp's own terminal.
GrainCorp's storage and handling business is facing rivals such as Singapore-based Olam International and Emerald Grain, half-owned by Japan's Sumitomo Corp, as mainly state-based groups and new foreign players move into each other's territory after a period of industry consolidation.
"Given the decision regarding GrainCorp, I think there's an opportunity for organisations like ourselves to get into the grains sector," said Bob Dall'Alba, head of Olam Australia, which has also taken a stake in the Newcastle terminal.
Analysts say Australia needs to improve its agriculture infrastructure to meet its goal of feeding the swelling middle class in fast-growing Asian markets.
"Improving the efficiency of the entire supply chain is extremely important if Australian wheat is going to find a home at a profitable level for farmers," said Luke Mathews, commodities strategist at the Commonwealth Bank of Australia.
"We need investment all the way through from the farm gate to shipping capacity."
A tonne of Australian wheat sells for around A$300 ($270) but the cost of production is about $6 higher than in the United States, the world's largest wheat exporter, said Graydon Chong, senior grains analyst at Rabobank.
Although Australia enjoys a freight advantage into Asia, it risks lose its strong grip on the region.
"We have seen (U.S. stocks) displace Australian wheat into markets throughout the Middle East and North Africa, and there's the potential to take market share in Asia," said Chong.
CHALLENGERS MULTIPLY
The new Newcastle Agri Terminal is located just a short walk from the existing Carrington Port owned by GrainCorp, which is regrouping after the planned takeover by Archer Daniels Midland was rejected by the Australian government.
Widely expected to go through, the takeover would have put GrainCorp in the hands of one of the world's largest grain handlers, giving it the muscle to consolidate its role as eastern Australia's dominant grain handler.
Rejecting the bid last November, Treasurer Joe Hockey argued that the wheat industry had not become a fully competitive market since a national wheat marketing monopoly system was dissolved, making it a bad time to sell to a foreign company.
Many local commentators also saw politics at play, as the takeover was vehemently opposed by the rural-based National Party, the junior partner in the new coalition government.
GrainCorp's shares have since fallen 28 percent to a 22-month low, its then-CEO has left to run soft-drink bottler Coca-Cola Amatil and its regional grip is under challenge.
The Newcastle Agri Terminal will provide an alternative shipping route for Australia's east coast farmers, allowing CBH and Glencore Xstrata to offer genuine competition.
Rivals are also looking to build new storage faculties across the eastern seaboard, challenging revenues GrainCorp receives from farmers for using its up-country storage sites and potentially siphoning off users of its rail and port network.
"The new providers are coming in and building their own storage sites, which they hope will operate more efficiently ... and offer them the potential to move grain cheaper," said CBA's Mathews.
Small Melbourne-based grain handler Emerald, which is 50 percent owned by Japan's Sumitomo Corp, is building up-country silos, while CBH Group is assessing whether to build storage sites in the eastern states, industry sources said.
The challenge for GrainCorp would be to find funds to invest in its existing system or mothball ineffecient facilties, said a Sydney-based grains analyst.
GrainCorp said it was prepared for increased compeition.
"We operate in a very competitive marketplace," said Angus Trig, the company's Director, Government & Media Relations. "There is competition at each point of the supply chain ... We are used to competition."
The competiton meanwhile bodes well for the industry.
"We are going through growing pains, but competition should eventually ... improve port access," Emerald CEO John Murray said in a speech last year. "It may end up that we over-invest, but it's something that needs to occur for things to balance out."
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