GrainCorp chief insists malt demerger is best for all

GrainCorp-MaltCo split leaves farmers better off says CEO

Agribusiness
GrainCorp chief executive officer, Mark Palmquist.

GrainCorp chief executive officer, Mark Palmquist.

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Some farmers are unsure, but GrainCorp says it has received positive feedback on plans to spin off its malt business.

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GrainCorp boss, Mark Palmquist, has sprung to the defence of plans to split off the company's valuable global malt division, insisting the grain infrastructure business will be better off.

And so, too, would the big east coast grain player's farmer customers.

The chief executive officer, who will soon move camps to run MaltCo as a stand alone entity, probably from the US, said the slimmed down grain logistics, marketing and oilseed processing business would be more effective and better focused on its core business and customer needs.

While many farmers have been perplexed and doubtful about the decision to break away from the malt business, unravelling GrainCorp's 10-year income diversification agenda, Mr Palmquist said direct feedback received from growers and shareholders supported the new strategy.

We, absolutely, would not be doing this demerger if we did not think we'd be setting GrainCorp up to take some big strides into the future - Mark Palmquist, GrainCorp

Responding to the unease expressed by key grower groups last week after the company tipped a potential $90m full-year loss, he said farmers he had heard from also backed GrainCorp's groundbreaking 10-year crop insurance-style derivatives deal guaranteeing an income stream in drought years.

"We, absolutely, would not be doing this demerger if we did not think we'd be setting GrainCorp up to take some big strides into the future," he said.

Significant cost savings and management efficiencies would result from GrainCorp no longer juggling the expensive, management-heavy responsibilities of the big overseas malt processing network.

It tipped costs would initially be trimmed by about $10 million a year, doubling to $20m when its oilseed and grain operations were fully integrated and new rail freight contracts kick in.

At the same time it would pay about $10m a year to White Rock Insurance, part of London-base Aon, in a deal which promises up to $80m in compensation if the east coast winter crop yields less than 15.3m tonnes.

If only ...

"If we'd had that product in place already, we'd have received $80m after last season's harvest," Mr Palmquist said.

The current big dry across NSW and Queensland made it quite likely GrainCorp would receive a considerable payment in the first year of its derivatives contract after the 2019-20 harvest.

Alternatively, however, if a good season pushes the NSW, Victorian and Queensland cereal, canola and pulse harvest result above 19.3m tonnes, GrainCorp will pay up to $70m more to White Rock.

Growers uncertain

Mr Palmquist's comments follow GrainGrowers chairman, Brett Hosking, observing some cynicism about the malt demerger plan, and NSW and Queensland grain leaders expressing uncertainty about how the company's various new strategies could help farmers.

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This year's rush of GrainCorp business restructure initiatives, including asset sales, have been prompted, in part, by unhappy investor attention on its expensive asset base, plus concerns about the drought-stressed grain business diluting malt's valuable contribution to overall profits.

Mr Palmquist said the new guaranteed grain derivative earnings deal enabled company to plan its infrastructure and customer needs with more confidence, knowing it would have cash flow to work with in dry years.

Investors were also relieved.

"The weather's impact on our earnings has always given shareholders concern - they can now factor in this risk management strategy when looking at GrainCorp as an investment," he said.

Last financial year the malt division generated $170m, and in a typical earnings cycle generates almost half GrainCorp's total income.

However, in the first half of 2018-19 its earnings could not save the drought-whacked agribusiness' total profit sliding to a $59m loss.

Risk management goal

The company has reasoned for an annual "insurance" investment costing much less than the vast sums of capital it has tied up in malt facilities, GrainCorp would meet the same income risk management goals it set out to achieve back in 2009 when it bought United Malt Holdings for $750m and started its growth in the global malt game.

The company's investment in malt activities has, however, provoked some criticism from growers wanting more attention on the grain network in the bush.

People in the country are going through a discovery process associated with this change and they obviously want good support, but we are not getting a negative perception from the feedback we've received - Mark Palmquist

Rejecting suggestions GrainCorp was losing touch with farmer sentiment and its grain network priorities, Mr Palmquist noted the company spent $165m on its grain business in the past three years.

Consolidating its marketing and storage and logistics business had also delivered more nimble, responsive management decisions which benefited customers, including farmers.

Supportive survey feedback 

Professional net promoter score surveys with farmers showed a 15-point improvement, positively reflecting how the business was perceived, its responsiveness to customer needs and its ability to communicate its objectives.

The company was still keen to talk with peak farmer groups if required to offer more detail about its malt demerger and crop derivatives deal.

"People in the country are going through a discovery process associated with this change and they obviously want good support, but we are not getting a negative perception from the feedback we've received," he said.

Graham Bradley

Graham Bradley

He was disappointed, too, with suggestions he and chairman, Graham Bradley, were "jumping ship", abandoning their interest in the grain business.

International skills needed

GrainCorp's "farmer" directors Dan Manglesdorf and Don McGauchie, and the rest of the board, strongly recommended the new MaltCo company had a chairman and CEO with international experience.

"As a new company on the ASX, with its international operations, it was considered very important to get MaltCo starting on the right foot," he said.

"The whole process was very methodically and well thought through."

In the meantime, until MaltCo was officially floated as an independent business, he and Mr Bradley were "still very much focused on GrainCorp" and making the most of its capabilities.

"We want it to be very strong and in a good position after the demerger."

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The story GrainCorp chief insists malt demerger is best for all first appeared on Farm Online.

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