The decision to end AWB's Brazil business, barring a regional trading representative looking for sales opportunities, marks a change in policy on international diversification, which AWB had previously eyed as a key strategy.
AWB will wind down its Brazilian business, ending a costly experiment in the South American market that is likely to cost the company between $55 and $65 million.
Managing director of AWB Gordon Davis blamed the losses on a combination of poor local management decisions, insufficient scrutiny and the high risk of doing business in South America and said the company would scale back the Brazilian operation, set up in February 2006.
It will continue with its successful Geneva trading house, but will also scale back its New Delhi office to a sales network.
The write-downs associated with the Brazilian failure, combined with losses in AWB's share in the Hi-Fert business and costs from litigation and restructure could mean the grains giant could post a loss this financial year, in spite of positive results elsewhere in the business.
Mr Davis said the Brazilian decision was based on an assessment that the current business model in Brazil cannot be operated in a manner which aligns with key strategic objectives of AWB.
One of the damning issues was foreign exchange losses which were only recently discovered by AWB head office.
In combination with reduced trading margins and increased volatility and risk in doing business in the South American market, where much business is conducted with cash up front, spelt doom for the Brazil office.
Mr Davis confirmed AWB had sacked staff from the Brazil office earlier in the year.
The main Brazil operations, a $US200 million investment, included trading soybeans, purchasing the crop from farmers up country, conducting its own transport to get the beans to the port and selling them to world traders. Corn, oilseeds and meal products were added two years ago.
The business has never really got off the ground – Mr Davis said it had posted losses in five out of the six half-year periods it operated in.
AWB Brazil lost $10 million last financial year and in the first half of this year its earnings were downgraded by $4 million after tax due to accounting errors. A further $22.3 million loss was also registered.
The marketing offices to now operate in Brazil and India will require minimal operating capital.
Along with India and Brazil, he said there would be possibly be representatives in Singapore, Tokyo and China.
“We’ve decided to focus on the two trading hubs, Australia and Geneva,” Mr Davis said.
“With all the risk, we’ve decided South America was just not a place for us.
“The credit issues in dealing in South America are well documented, the nature of the Brazilian market is that grain is secured by payment up front to deliver.
“The trading risk there is that if the market goes the wrong way, the sellers don’t deliver on their contracts.”
Mr Davis acknowledged there had been a mistake in allocating large amounts of capital to remote offices with little accountability.
“When the business was established, there were four layers of management between the board and Brazil, we’ve stripped out at least one layer and changed the accountability, but we’ve decided the best course is to wind the business up.”
However, he denied the current board and executive was failing to be accountable for business failures.
“In fairness, it is plain to see the company was set up in February 2006, before much of this executive was onboard, and they made the decision in good faith, deciding it was a good path for diversification.
“The new board has a clear set of priorities, we want simpler and lower risk income streams, and we believe leveraging our customer focus is the best way to do it. Brazil didn’t fit into this strategy.
“You look at other streams, such as Australian commodities, Landmark or regional infrastructure, which are going well, and you can see we’re heading in the right direction.”
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