Nov. 28 (Bloomberg) -- AWB Ltd., Australia’s former monopoly wheat exporter, and ABB Grain Ltd. are in talks to create the nation’s biggest grain shipper as industry deregulation attracts global trading companies.

The talks are continuing and may not lead to an agreement, Melbourne-based AWB said today in a statement. Adelaide-based ABB Grain, Australia’s biggest barley exporter, confirmed the talks. Their shares surged, giving a combined market value of A$2.5 billion ($1.6 billion).

A government decision in July to allow multiple wheat shippers, including overseas traders such as Marubeni Corp., has increased pressure on Australian exporters to merge. Agricultural companies worldwide are seeking acquisitions on optimism the global financial crisis won’t derail surging food demand.

“Australian agricultural companies need to consolidate to gain further geographic diversity,” ABN Amro Morgans Ltd. analyst Belinda Moore said today in a report to clients. “It would also allow them to become a more powerful force in a competitive global market place.”

AWB shares rose 6.9 percent to A$3.41 at the 4:10 p.m. close of trade in Sydney on the Australian stock exchange. ABB Grain rose by a record 16 percent to A$7.56.

Consider Mergers

Australia, the world’s sixth-largest wheat exporter, introduced new grain export laws after AWB lost the monopoly over the payment of kickbacks to Iraq to win sales. Louis Dreyfus & Cie SA and Glencore International AG are among 20 companies that won accreditation to export bulk wheat.

GrainCorp Ltd., eastern Australia’s largest grain handler, failed this year in its takeover attempt for Ridley Corp., Australia’s largest stockfeed manufacturer, after equities plunged. ABB Grain would consider mergers, Chief Executive Officer Michael Iwaniw said Nov. 25 after reporting profit rose more than six-fold.

“Through ABB’s grain receival, storage, transport, and processing businesses, the merged entity would have a strong market position and meaningful operational diversity,” Standard & Poor’s Ratings Services said in a statement. Any merger may strengthen the credit quality of AWB and is expected to improve the scale and diversity of its agribusiness activities, it said.

A worldwide credit crisis is crimping access to debt and raising the cost of borrowing after financial companies booked more than $969 billion in writedowns and credit-market losses since last year. AWB, which owns the Landmark rural merchandise unit with 400 stores across the nation, reported this month that interest payments in the year ended Sept. 30 rose 99 percent.

Cost of Capital

“The sector needs to consolidate,” said John Lawlor, senior research analyst at Ord Minnett Ltd., an affiliate of JPMorgan Chase & Co. “The cost of capital for them has gone up considerably over the last 24 months, particularly for their marketing divisions.”

Wheat futures for March delivery on the Chicago Board of Trade rose 0.9 percent to $5.5875 a bushel in after-hours electronic trading at 5:06 p.m. in Sydney. Prices have plunged 59 percent from a February record. Barley futures in Winnipeg are down 46 percent from their July peak of C$281 ($227) a ton.

AWB owns a lending business to farmers, 22 grain depots, a 50 percent stake in the Melbourne Port Terminal and units in India, Brazil and Switzerland. ABB Grain owns Joe White Maltings, which controls about 9 percent of the global market for the beer-making ingredient. It has 113 depots, a 50 percent stake in Australian Bulk Alliance and operations in the Ukraine and New Zealand.

‘Deregulated Market’

“In a deregulated market, AWB wants the infrastructure -- ports and storage and handling assets,” ABN Amro Morgan’s Moore said. “ABB wants the distribution, Landmark, given it is the ‘face to the grower.’”

Cargill Inc., the second-largest U.S. beef processor, said yesterday that it’s looking for acquisitions after the collapse in raw material and share prices cut valuations. Jim Rogers, chairman of Rogers Holdings, said this week he’s been buying commodities, focusing on agriculture, as the “fundamentals have not been impaired.”

Deutsche Bank AG is advising AWB and Goldman Sachs JBWere Pty is advising ABB Grain, the Australian Financial Review reported today in its Street Talk column, without saying where it got the information.

To contact the reporter on this story: Madelene Pearson in Melbourne on mpearson1@bloomberg.net

Last Updated: November 28, 2008 01:23 EST