GrainCorp's ADM defence ignores weather It was fighting talk from GrainCorp, the Australian grain trader, in its defence against an unsolicited A$2.7bn takeover bid from rival Archer Daniels Midland of the US: record profits, a strategic update full of "game changers," and the promise of significantly higher earnings by 2016. Yet, its claims ignore one crucial factor - the weather and its impact on Australia's grain and oilseeds crop. GrainCorp argues that the offer from ADM of A$11.75 a share "materially undervalues" the company. That is true if you look at the annual results that the Sydney-listed trader has just published. But taking a medium-term perspective reveals a flaw. The variability of the weather in Australia - with periodic droughts that savage the wheat crop - is so large that industry executives and bankers say the country's grain handlers deserve to trade at a discount to those with operations centred in North America and western Europe. The weather - and thus the size of the crop - is three times more variable in Australia than in Canada and the US, the two regions that have seen recent agribusiness transactions, with Glencore buying Toronto-listed Viterra for $6.1bn and Marubeni of Japan spending $5.3bn to purchase Gavilon of the US. Ross Kingwell, of the University of Western Australia, argues in a recent article in the Farm Policy Journal that "Australia consistently has experienced greater wheat revenue variance than the other nations, but especially more so over the last decade." The variability is important because GrainCorp's profits depend, at least in part, in moving as much grains and oilseeds as possible through its vast network of silos, elevators and port facilities. Industry executives believe that the profits of GrainCorp are at a cyclical high as it cashes in from good weather and a record crop. Next year, earnings are likely to drop due to lower volumes. The company, nonetheless, is investing in new areas less exposed to the weather vagaries, such as malting barley, in an effort to smooth its profitability. The eastern side of Australia is expected to harvest in the 2012-13 season a relatively good crop of about 18m tonnes of wheat, barley, sorghum and canola, down 12.6 per cent from a record of 20.6m tonnes the previous season. But the region has seen crops as low as 7m tonnes in 2006-07; 6.8m tonnes in 2002-03, and 4.2m tonnes in 1994-95 due to bad weather. Australia is particularly exposed to the El Niño weather phenomenon, a recurring climatic event in the Pacific region. The large harvest swings mean that GrainCorp's profitability, from time to time, would suffer big drops. Hence the valuation discount that almost everyone in the grain trading industry applies to Australian agribusiness assets.