A MERGER between AWB Limited and ABB Grain Ltd to create a $2 billion grain conglomerate has only a 50-50 chance of success.

A senior industry player close to the merger plans said the outcome of the discussions between the two companies was anything but certain.

But the merger move may prompt a new wave of rationalisation of the Australian grain industry, with international companies moving to protect their interests in Australia.

"If you shake the tree, you are never quite sure what's going to fall out," said the source, who did not wish to be named.

"A lot of issues are still to be sorted through and everyone (in the industry) has got to be re-assessing their position."

Other industry sources said AWB and ABB Grain could be combined into a powerful new grain company by the middle of next year if the merger plans went smoothly.

Merger talks have been under way since AWB won approval to revamp its share structure in September.

They come just months after discussions were believed to have been held between ABB Grain and CBH on a similar merger proposal.

Initial due diligence between AWB and ABB Grain is likely to be complete within two to three weeks.

Industry sources said several hurdles had to be cleared, including shareholder approval and an all-clear from the Australian Competition and Consumer Commission.

But they said the prospects for ACCC approval were good, with 20 companies now set to compete in the $3 billion wheat export market in the wake of deregulation in July.

ACCC must be satisfied there would be no "substantial lessening" of competition if the merger went ahead.

Sources also confirmed it was likely that current AWB managing director Gordon Davis would take the same role in a merged company, with ABB Grain's Michael Iwaniw due to retire at the end of this year.

But ABB Grain is likely to provide the chairman and its Adelaide base as the location of the new company's headquarters, they said.

One grain sector source said capital valuations of each company and debt financing issues were the key to discussions.

AWB said in a statement to the Australian Securities Exchange that if a merger progressed, it would be through a scheme of arrangement and subject to shareholder, court and regulatory approvals and other conditions agreed by the parties.

The $2 billion-plus merger would create Australia's largest wheat and barley exporter, boosting its competitive position against major local rivals, GrainCorp and Western Australia's CBH Group, and large multinational grain traders.

Both companies announced solid full-year profit results within the past two weeks.