Monday, May 23, 2011

The Spanish Inquisition

The Spanish are arriving down here in the Riverina. Not in an Armada mind you, but in an A380 with a wad full of cash, first class if you don't mind.

They are after our rice - rice that has been grown here for many years.  Ebro Foods, a large multinational company of Spanish origin are offering a large sum, $610 million in fact, to buy out Australian rice marketer Sunrice whollus bollus, everything from the marketing to the rice mills and storage sheds. About the only aspect they won't own is the ground the rice is grown in; but who knows, maybe in time they will.

For you see, the rice industry has just seen off 10 years of drought. Sunrice is heavily in debt, to the tune of around $300Million, and how they have managed to keep going for the last 10 years is beyond me - I would probably have walked away well before now.  But those who have stuck with the industry - the growers, the board and the A and B class shareholders have landed a potential windfall.
But is this offer good news for rice growers, the rice industry and the Riverina?  The state of NSW and by extension, the nation?   Judging by all the comments I have heard and read, nobody really knows.

The Cash Offer

On face value, an offer of $50,000 for those growers with  A-class shares and $5.025 for B class shares appears to be good coin, but dig a little deeper and you know what, it might not be.  Basically this offer allows Ebro to take control of the Australian rice industry, lock, stock and smoking barrel until at least 2016.   In drought times a white knight such as this can be the saviour, but in good times and in the long term?  What if Ebro invokes the everpresent get out clause, and decides not to purchase Australian rice?

The Industry

The rice industry in Australia is controlled by SunRice or RiceGrowers Ltd to be more correct.  Formerly a cooperative founded in the 1950's it is now a grower-shareholder owned company that purchases, mills, and markets Australian grown rice and valued added rice products to the world.  But they are in debt, not just a small debt, but a big debt.

Don't forget that rice is a hugely valued global commodity, it feeds most of Asia, the Middle East and large parts of Africa.  In western countries it is becoming more widely consumed, it is in fact quite a versatile little grain.

Single Desk Policy

Sunrice has control of Australian rice exports through the single desk policy instituted by the Rice Marketing Board under the NSW Marketing of Primary Products Act 1983.  If Ebro takes over Sunrice, it will then have control of the export of Australian rice: a sticky situation if another player wishes to enter the export market.  Do I see a time that the single desk policy might hinder the Australian Industry: yes, in about 5 years I reckon, just when another drought starts to take hold, water availability is down and Ebro doesn't want or need a small tonnage of Australian rice.  There goes what's left of the industry.

The Farmer

Opinion seems to be divided down here, some farmers are supporting the sell-off of the rice assets, some are dead against it, and some are just not sure, and perhaps won't make their mind up until voting time.  Other people are suggesting a kind of capital raising for Sunrice by forgoing $25 per tonne.  A downside of this is that not all growers are in favour of handing over more money to Sunrice.

I sure as hell wouldn't blame the farmer that has done it tough during the drought cutting their losses and accepting the offer - I certainly would strongly consider the offer if I was in their position.

What are the experts saying

There has been a report prepared by Australian valuation experts Lonergan Edwards into the value of Sunrice, and they have recommended shareholders take the offer.

The board of Sunrice are recommending the sale, in the absence of a better offer. Reading between the lines, it seems as though they are at a bit of a loss at what to do next if the sale fails - raise more capital from somewhere, retire debt, all the usual ideas.  In fact they have tried capital raising before, and it fell flat.  Again I don't blame them for recommending the sale.

What if the sale goes through

Ebro have given undertakings to continue the operation of Sunrice in largely the same form as it is now, with R&D, marketing and exports, at least in the short-term. The price for rice will be tied to the Californian market, which perhaps is fair enough as rice is a global commodity.  I really can't comment on this aspect any further as rice pricing is way out of my league.

But long term, are Ebro going to keep the R&D and marketing here in regional Australia?  Or will that slowly drift off-shore, like a large Antartic iceberg?  Only to melt away into the big global sea of rice..

Do farmers have choices?

They certainly do: they can choose to go with the Ebro offer or decline it.  If the sale goes through, they can still grow rice as they have done. It will still be Australian rice.  Farmers can choose to sell their rice on the Australian market, although this may be difficult as all the mills and storage sheds will be owned by Ebro..

Trying to predict the outcome of the sale is like trying to pick the winner of the Melbourne Cup, in some years you might take home the bacon, but in other years you have done your dough.  Trying to predict the future of the Australian rice industry, with or without Ebro is like trying to predict climate change: you know it will have an effect, but you can't quite put a finger on it. 

In fact, the future of the rice industry in these parts is indeed tied closely to climate change which nobody, Sunrice or Ebro included has any control over.  A few good years and the industry is back on it's feet. If the drought recommences, well we all know about that - no water, and no crop.

But growers and shareholders, if you take the money now and the industry does collapse, should you then be expecting government hand outs over and above entitlements under the Murray-Darling Basin Plan?  If you take the money now, should you be asking for more later?  Many people, myself included will take a dim view of that.

The rice industry is indeed in a pickle.

The bigger picture

The Riverina needs active farming communities, and the associated research and development agencies, agricultural bodies and the like.  If we lose the rice industry once and for all, in time we face losing these intrinsically valuable organisations in our community.  It is more then just jobs: it is a diversity of people, of experience, of knowledge that will be lost to our community.

So to sell or to keep?

Patriotism, grower pride and a desire to keep control in Australian hands and fear of the unknown might provide the answer, or a large well funded foreign company with cash, access to and some would say control of foreign markets might be the punters bet.  But one thing is for sure, the rice industry will no longer be the same.  Think clearly growers and shareholders, and consider what is best for the industry long term.

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