The Australian Treasurer's rejection of the $3.4 billion take-over bid for grain handler GrainCorp by American firm Archer Daniels Midlands (ADM) has set a number of confusing and conflicting arguments running.
It looks like a narrow issue dominated by domestic politics, but raises wider national and international issues.
In grain handling, owning the key storage and port facilities creates a natural monopoly. The scale of operation puts this in the same category as water or electricity infrastructure, where it might be possible to have effective competition for part of the supply chain, but there will be network bottlenecks which are inevitably controlled by a single monopoly operator.
None of this makes for tidy market-based economics.
The usual answers are either regulation to ensure that the owner of these network bottlenecks makes them available to everyone, or government ownership. In this case, the Australian Consumer Competition Authority judged that there was enough regulation in place to enforce open access and thus made no objection to this bid on competitive grounds. This is, after all, just replacing a domestic natural monopolist with a foreign one.
There was, however, a wider issue of structural change that is harder to judge. International commodity trade is shifting into the hands of a small group of large global companies which exercise considerable market power. They are often sharp-elbow traders, ready to withhold supply and fix prices in their favour if they can. In minerals, Glencorp illustrates these issues.
New Zealand's Fonterra demonstrates the positive aspects of this trend: a farmer-based cooperative that has achieved sufficient scale through effective marketing (especially to the burgeoning China market) to turn New Zealand's comparative advantage in growing grass into an important force in the global milk trade, to the benefit not only of New Zealand's milk producers but the nation at large. If there are pricing opportunities, they at least flow back to the nation.
Until five years ago, Australia had some similar elements in its favour in grain marketing.
This was achieved through the 'single desk' arrangements which coordinated overseas grain sales. This gave scale to develop new markets in Asia and the Middle East, but ultimately presented intractable governance issues. As this centralisation was dismantled, regional natural monopolies tended to fall into the hands of foreigners. For example Glencore, well known in minerals, took control of the regional network in South Australia. GrainCorp handles 90% of eastern Australia's bulk grain exports and owns seven of the eight bulk export grain elevators.
Given the complexity, it's not surprising that the Foreign Investment Review Board (which advises the Treasurer on these decisions) could not reach a unanimous recommendation. ADM will be one of five large global players in this market, and its scale might have helped foster new markets in Asia, where Australia's geography gives some natural advantage. It offered additional infrastructure investment in an industry which has demonstrated an unwillingness to upgrade facilities. It offered assurances that others would have access to its facilities, and offered some price reassurance to growers.
The Treasurer specifically rejected the option of approving the transaction subject to conditions (which might have addressed the natural monopoly issues). He mentioned that the industry was still in transition after the 'single desk' era, although he might also have had in mind his government's undertaking to reduce 'red tape' regulation — an objective which would conflict with detailed conditions. He held open the possibility that the issue could be revisited and explicitly allowed ADM to increase its ownership of GrainCorp to 24.9%.
It's unlikely that this consolidation story is finished.
Australia might regret that it has not been able to create a national champion, like Fonterra, in an industry where our comparative advantage would seem to be favourable. But this opportunity may now have passed, with the large international commodity traders having established strong ownership positions in domestic distribution.
Even more than usual, this debate was dominated by vested interests and narrow ideologies. Farmer-based interests swapped arguments with those whose thinking has never got past an enchantment with the 'magic of the market'. The government, which might have steered this politically-laden debate in a more useful direction, was constrained by its adjudicatory role. Also, the government was not able to treat this in an 'arm's length' fashion because of the power of its rural-based minor coalition partner.
The Treasurer quoted the public's unease with foreign investment as one factor in his decision. Incorporating the public view into decisions is part of the politician's job, but in this case the public at large was given little guidance.
The Business Council of Australia said that the decision 'risks undermining the federal government's statement that Australia is open for business'. This seems overstated as this is the new government's first rejection out of more than 130 approvals (and only the third in the past decade).
We are learning that fashioning a set of rules to set the operational environment for the market is a complex task, and that in foreign investment, neat solutions don't exist. There are more vexed cases ahead.