| | The views represented herein are those of the authors, Colin A. Carter and R. M. A. Loyns, and we are responsible for the full contents of the report. Alberta Agriculture, Food and Rural Development provided financial and information resources to complete this work.
Historically, the Australian Wheat Board (AWB) and Canadian Wheat Board (CWB) have been viewed as like agencies, due to similar characteristics such as price pooling, cost pooling, export sales monopolies, and government underwriting of initial producer prices. During the past decade, the characteristics of the AWB and CWB have begun to diverge, and AWB reforms are ahead of those in Canada.
Wheat is the dominant grain in Australia with average production of around 15 mmt and exports of 12 mmt. However, averages are sometimes deceiving -Australia’s exports have ranged from 6 to 16 mmt in the last decade. Barley production is around 5 mmt, with about one-half exported. Barley production is concentrated in South Australia and Victoria with a two-state Australian Barley Board (ABB). Malting barley is vested in the ABB, but malt can be exported by private traders.
The main bone of contention in the Australian grain policy debate is the future of the export monopoly, or single-desk, granted to the AWB. The drift of Australian politics is probably in the direction of abandonment of the single-desk. In effect, with recent agreement by the national and state governments on a "National Competition Policy" following the Hilmer Report of 1993, the burden of proof is now on the organized wheat industry to argue that the export monopoly of the AWB is in the public interest rather than the previous situation, whereby critics of the AWB had to convince government that the export monopoly was harmful. Since it will be difficult for supporters of the single desk to establish a positive case for the status quo, the days of the export monopoly may well be numbered.
Australian grain marketing deregulation
The process of reform was accelerated by a public inquiry into the wheat industry in 1977 conducted by the Industries Assistance Commission (IAC) (see IAC,1988). The IAC, now the Industry Commission (IC), is the Government agency responsible for reviewing assistance arrangements. The need to account publicly for previous policies helped break down resistance to change in the wheat industry, because it revealed that there were serious divisions of opinion within the wheatgrowers’ own ranks. Transparency and independent review procedures are powerful forces for reform.
The IAC inquiry of 1977 was a turning point for the wheat industry. When policy for the wheat industry was determined by purely political processes involving only government and the organized wheat industry, there was an inbuilt bias towards the status quo because dissident views within the grain industry could not be expressed. Nor did this closed shop in the wheat industry reflect wider community interest in having an efficient wheat industry. The 1977 inquiry resulted in major changes with respect to the financing of the scheme, payment of growers and pricing on the domestic market.
In Australia, continued pressure for reform came from outside of the AWB during the early 1980s, and this ultimately resulted in a deregulation process (Watson, 1984). The 1989 Wheat Marketing Act in Australia began the official process of deregulation. There were three important features of this legislation: 1) the domestic market was deregulated; 2) the Wheat Industry Fund (WIF) was introduced; and 3) the AWB was allowed to trade other grains. Other reforms included a change in the Guaranteed Minimum Price (GMP) scheme from a guaranteed price floor per tonne, to a government underwriting on AWB borrowings. The government also changed the AWB’s explicit objective to that of maximization of producer (farmgate) returns, as opposed to f.o.b. values. A subsequent legislative amendment in 1992 allowed the AWB to participate in value-added activities, and extended underwriting of AWB borrowing until 1999.
Domestic market deregulation was introduced in Australia in the late 1980s to allow for competitive pressures and provide an alternative for growers and end- users in the domestic distribution and pricing of wheat. The WIF was established because the AWB argued the elimination of the GMP and the placing of a time limit on underwriting of AWB borrowing, meant that the AWB had to establish a capital base. Under the WIF, a 2 percent (minimum) mandatory levy was established on farm-gate prices. The proceeds are to be used ultimately in making investments to develop a capital base to fund trading activities and finance AWB purchases of wheat.
Most of the initiative for changes in wheat legislation has come from the federal government. The goal of economic efficiency has never been prominent in the limited economic agendas of state governments. Even more significantly, the rigid wheat marketing system tied producers to state-owned railway systems and handling and storage systems which were either state-owned or farmer cooperatives under the aegis of government. Maintenance of the status quo in grain marketing was an important objective for the states in defense of their revenues from deficit-ridden railways and ports.
Australian wheat pricing policies drove a wedge between world prices and domestic prices. This had significant effects on resource allocation and income distribution within the grain industry, and the economic relationship of the grain industry to the rest of the economy (Longworth and Knopke, 1983).
Later changes
The IAC next reported on the wheat industry in 1983. The report recommended deregulation of the domestic market, reduction in cost pooling and provision of more information to assess the performance of the AWB. Few changes were made in the 1984 legislation. The IAC was dubious about the case for AWB involvement in futures trading when farmers’ returns were being pooled. Futures trading was permitted in the 1984 legislation.
Pressures for reform intensified in the mid-1980s with a sharp decline in prices associated with the change of U.S. policy. A controversy developed over the efficiency of Australian ports and internal handling and storage arrangements. A Royal Commission on Grain Storage, Handling and Transport was established in 1986 which found that greater competition could reduce marketing costs (Royal Commission on Grain Storage, Handling and Transport, 1988). The Royal Commission, supported by a strong program of research and consultation with industry, was a further example of the influence of public exposure on the break-down of entrenched arrangements. The Royal Commission and a further IAC report (1988) were most influential in the far-reaching changes in wheat marketing that occurred in 1989.
The method of underwriting was changed in 1989 to provide a Government guarantee to AWB borrowings to finance payments to wheatgrowers at harvest, rather than a supported price. This was largely in response to the substantial payments that were made by the Commonwealth under the eighth (1984) scheme, after the world market had collapsed in the mid-1980s. The domestic market was deregulated, but the AWB maintained its monopoly on the export market. The Wheat Marketing Act (1989) also removed the sunset provision, which under previous Acts had been five years. The AWB was permitted to trade in grains other than wheat on the domestic and international markets.
Representation on the AWB was changed so that it no longer has a majority of grower members. Board members are now selected on the basis of their commercial expertise, including grower members. However, the tradition of grower domination of the board was broken, a considerable blow to the ethos of orderly marketing and grower control that was so influential in the past. Even so, the sunset provisions of Australian wheat marketing with five-year schemes had always allowed for some flexibility and diversity of opinion in appointments to the AWB. The 1989 Act was amended in 1992. Apart from the encouragement given to value adding, the amendments included extension until mid-1999 of Government underwriting of AWB borrowings to finance payments to growers at harvest.
The pros and cons of single desk selling in wheat has been debated quite vigorously in Australia. The IAC reviewed the AWB every five years and consistently doubted the ability of the AWB to extract higher prices in world wheat markets than would otherwise be obtainable. The following quote from the Industries Assistance Commission (1988) illustrates their skepticism of the net benefits of single desk-selling:
Some wheat markets may provide a premium to Australia, not because of the sole export controller status of the AWB, but rather because they admit only limited quantities of Australian wheat. The Japanese market is widely recognized as such a market which traditionally pays relatively high prices for limited quantities of wheat imported from a variety of sources. Thus, this premium would be available irrespective of the number of sellers of Australian wheat.
Nevertheless, it cannot be denied that, in some circumstances, the AWB may be able to extract price premiums for some (generally smaller) markets by restricting competitive access to them. Although the Commission considers that this ability is limited, it acknowledges that competition from multiple sellers of Australian wheat could result in some erosion of such premiums. However, to some extent, traders may also be able to specialise in servicing certain market niches and extract premiums.
Even if some existing price premium were eroded by allowing competing exporters of Australian wheat, this would not necessarily imply a decrease in growers’ returns. Additional competition between sellers could result in a decrease in marketing costs and an increased overall demand for Australian wheat, both of which could enhance growers’ returns. More importantly, any potential decrease in premium income needs to be considered in relation to the potential gains that could result from allowing growers and users additional choice and flexibility in marketing wheat and to the impetus which liberalised marketing arrangements could provide in achieving reforms and associated cost savings in grain storage, handling and transport. (IAC, 1988, p. 118).
After these IAC inquiries, the next major study was that of Booz, Allen and Hamilton (BAH,1995). They conducted a cost-benefit analysis of the single desk selling of Australian wheat and their findings are somewhat lukewarm towards the AWB. The net benefit of the AWB was found to average only $2 per mt.
Barley
At the same time as the BAH study on wheat, the Australian Grains Council commissioned the Boston Consulting Group (1995) to study the merits of a single-desk for malting barley. Their report is dismissive of the case for a national single desk on both economic and political grounds. This is somewhat ironic given that the Australia’s share of world trade (excluding intra-European Union trade) in malting barley, which varies between 30 and 45 per cent, is so much greater than its share of the wheat trade. The basic argument against the single desk is the technical complexity of the malting barley market with the need for close relationships between growers, maltsters and brewers to ensure consistency of product in an increasingly differentiated market for beer. The consequent agronomic pressures on the barley industry favor contract-style relationships between growers and their customers rather than the averaging and anonymity of pooling and statutory marketing.
They recommended deregulation rather than maintenance of the status quo where the ABB operates in South Australia and Victoria, Grainco markets Queensland-grown barley, the Grain Pool operates in Western Australia, and New South Wales barley is marketed by the New South Wales Grains Board. While malting grade barley is vested in the boards, private firms are free to trade in malt processed from barley purchased from the boards, or through permits issued by the boards for direct purchase from growers. However, existing arrangements are disadvantageous to farmers because local maltsters are given favored treatment by the boards. Not surprisingly, local maltsters are enthusiastic supporters of the status quo.
Marketing options for farmers in Australia
Now that the domestic grain markets are deregulated, there are more ways that wheat and other grains can be sold. The AWB offers many more options for selling wheat than previously. Pricing options include a range of pools for wheat and other grains. More pools have been created for export sales. Where pools do not have sufficient grain to cover expected sales, the AWB can purchase grain for cash. However, the main pricing method is still pooling of receipts over time and over markets for given grades of wheat. Pools may be readily opened and closed in response to movements on the world market to protect the interests of earlier contributors to the pool.
The AWB now offers forward contracts for a fixed price or minimum price, requiring active involvement in overseas futures markets. Specific deductions are made to individual grower’s returns for freight and handling, port costs and for any other costs which can be reasonably allocated to individual growers.
In the process of its retreat, the AWB has assumed many of the characteristics of private grain traders in the services it offers to its suppliers and customers. It is no doubt true that much of the old conservatism and regulation-induced slackness has also disappeared from the AWB. However, there is a paradox for statutory authorities which attempt to mimic the behavior of commercial firms. In effect, the political rationale for their existence is being undermined. Once pooling is partial and quasi-voluntary, the question naturally arises as to why the AWB should be the only organization permitted to operate pools? If the AWB is using hedging tools in managing particular options offered to growers, why would not more growers prefer to perform the same risk management functions on their own account? Ultimately, some growers may wish to sell their own wheat on export markets.
Australian farmers are used to dealing with private firms when purchasing farm inputs and trading in other commodities - including many grains in an increasingly diversified cropping system. Deregulation of the domestic market and the greater flexibility in the operations of the AWB have increased the commercial orientation of graingrowers. How long will wheat remain a special case with respect to the single desk?
Conclusions
The major conclusions of this section are:
- It is most unlikely that the export monopoly of the AWB will survive the pressures arising from the National Competition Policy.
- The onus of proof has shifted to supporters of the single desk, who do not have convincing arguments to support their case.
- Recent economic analysis conducted in Australia concluded that the benefits of the single desk are limited.
- Once pooling becomes voluntary, the question naturally arises as to why the Wheat Board should be the only organization permitted to operate pools.
- Finally, in considering the necessary conditions for achieving change in entrenched agricultural marketing arrangements, Australian experience is that public inquiry processes are a powerful means of encouraging change.
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