The Growers Report 2006 FOR AUSTRALIAN WHEAT GROWERS
Performance monitoring of AWB (International) Limited under the Wheat Marketing Act 1989 um Addend
www.wea.gov.au Chairman’s Letter
To the Australian Wheat Grower Matters still to be determined by AWB(I) include the new Services Agreement between AWB(I) and AWBL and the This Addendum to the Growers Report 2006 has been proposed demerger of AWBL and AWB(I). These have produced to keep growers up-to-date about the findings been postponed until after the Australian Government of the Cole Commission of Inquiry, a number of matters has finalised its consideration of the export wheat specifically requested by the Minister for Agriculture, marketing arrangements. Fisheries and Forestry and other recent developments. Earlier in 2007, the Minister asked for the WEA’s advice as One of Commissioner Cole’s recommendations was that to the efficiency and investment needs of the Australian the functions of the body charged with controlling and wheat supply chain. The WEA has affirmed its view that: monitoring the monopoly wheat exporter should include • Successful exporting requires an efficient supply monitoring and ensuring that proper standards of chain that is cost-competitive, as well as requiring commercial conduct are adhered to. The Wheat Export cooperation between the parties involved. The lack Authority’s (WEA) view is that under existing legislation of cooperation in the Australian wheat industry has this is not currently a role for the WEA. Ensuring that there fostered under-investment in supply chain are proper standards of commercial conduct is properly infrastructure, particularly at the interface of the a matter for the directors of AWB International (AWB(I)) storage and transport systems. and AWB Limited (AWBL). It is not for the WEA to shadow those directors’ responsibilities. • AWBL’s market power appears to be unable to significantly influence the storage and handling On a number of occasions I have said that the legislation rates charged by bulk handling companies, governing the role and responsibilities of the WEA should although AWB(I) has been able to negotiate lower be clearer than it is. These changes should include: rail freight rates. • the principle purpose of the Wheat Marketing Act The Minister also asked for the WEA’s views on the 1989, to provide clear objectives; and relative performance of AWB(I) and other Australian • the Government oversight body (presently the WEA) exporters of wheat in bags and containers. The WEA to have greater capacity to investigate and as can report that its analysis of the majority of Australian necessary audit the performance of the manager sales for the period January 2004 to December 2005 of the Single Desk. confirmed earlier analysis that non-AWB(I) exporters One part of the Government’s response to the Cole to certain markets achieved premia for most grades. Inquiry has been a temporary transfer until 30 June 2007 This leads to the conclusion that the majority of of the bulk export veto from AWB(I) to the Minister for non-AWB(I) sales did not undermine the National Agriculture, Fisheries and Forestry. To date the Minister Pool during the period tested. has approved two bulk wheat applications from 77 I commend this Addendum report to you. applications, with two decisions still pending. As a condition of granting the consents, the Minister Yours sincerely required Co-operative Bulk Handling Ltd (CBH) and M.A. (Tim) Besley, Wheat Australia to pay the National Pool AUD 4 per WEA Chairman tonne for wheat exported in bulk. This fee ensures that growers who delivered to the National Pool were not disadvantaged by the issuing of bulk consents to non-AWB(I) exporters. AWBL and AWB(I)’s response to the Cole Inquiry has included minor changes to Board Membership and significant management changes which are detailed in this Addendum. Since the appointment of the new AWBL Managing Director, Mr Gordon Davis, the WEA has seen a general improvement in communication and information exchanges between the WEA and AWB(I).
2 Key Findings
• The balance of grain supply and demand in eastern Australia is resulting in less exportable grain due to increased domestic consumption. > (details page 4) • In years when wheat yields are low, the price in eastern Australia diverges from ‘export parity’ and moves towards ‘import parity’ as the domestic market requires increased grain and feed supplies. > (details page 4) • Drought affected 2006-07 AWB(I) National Pool indicator prices have been in line with world wheat prices, except during October 2006 when international prices spiked to reflect the reduced Australian crop. > (details page 5) While many parts of Australia were affected by drought in 2006, some farmers in Western Australia still managed to produce reasonable crops. • The time and speed with which AWB(I) unwound its hedged positions for the drought affected 2006-07 • A reduction in the base fee paid to AWBL from National Pool will determine the effect on the final AUD 65.1 million to AUD 39.5 million has resulted in price paid to growers. fewer services provided by AWBL to AWB(I). > (details page 6) > (details page 17) • In low production years, Western Australian and • The WEA welcomes the move by AWB(I) to pay an South Australian growers bear most, if not all, of OPI only above the Hurdle Rate. the total higher per tonne costs of the National Pool. > (details page 18) > (details page 7) • The lack of cooperation in the Australian wheat • WEA analysis indicates that the 2005-06 National industry has fostered under-investment in supply Pool should have risen by AUD 13-14 per tonne. chain rail infrastructure. > (details pages 7-8) > (details pages 19-21) • The Tigris transaction raises a number of specific • Non-AWB(I) bags and container exporters often concerns regarding the authority that AWB(I) provides compete to supply the same customer, yet pricing to AWBL through the Services Agreement, and the analysis indicates that their price is superior to AWB(I). way that the National Pool is managed. > (details page 22) > (details page 13) • There is not always a direct line of sight between a • The majority of wheat allocated to Iraq during 2006 particular grower contract and a particular export was re-allocated to meet Australian domestic demand wheat shipment. at prices up to AUD 80 per tonne higher than > (details page 23) proposed Iraq sales. > (details page 14)
Table of Contents
Current Issues 4 Monitoring AWB(I) 17 The Cole Inquiry 9 Supply Chain 19
Tigris 12 Bags and Container Exports 22 Responses in the aftermath of the Cole Inquiry 15
ADDENDUM TO THE GROWERS REPORT 2006 3 Current Issues
The Australian domestic situation significant economic shift whereby, instead of growing grain and exporting the raw material, grain has been In the first quarter of 2006 a large Australian wheat crop converted to value-added products (such as beef) and was expected due to good seasonal conditions. As the then either exported or sold domestically. year progressed, conditions varied with differences in The balance of grain supply and demand in eastern crop expectations between the east and west coasts. Australia is tilting towards less potential for export grain. Prior to late August, although crop forecasts were falling, An apparent change in weather patterns means currently widespread rains could have recovered crop yields. there is greater volatility in supply from year to year. August 2006 was the driest August in recorded history In years when wheat yields are low, the price in eastern Australia-wide. This marked a turning point for the wheat Australia diverges from ‘export parity’ and moves crop. Widespread high temperatures in September towards ‘import parity’ as the domestic market requires decimated the wheat crop to the point where growers increased grain and feed supplies. were cutting crops for hay or letting stock graze crops. These factors all influence the domestic market on the Australia-wide, it proved very difficult to judge the east coast and are presently holding grain prices above remaining crop and the potential yield. In hindsight, export parity. it is apparent that forecasters and grain traders Figure 1 shows the correlation between world stocks to overestimated the size of the Australian crop, with use ratio and the price of Chicago wheat futures and independent reports in July indicating 18-20 million Australian wheat grade ASW in USD per tonne. As can tonnes falling to 10 million tonnes in late October. be seen, price rises and falls are counter cyclical to the Strong cattle feedlot growth over the past five years, as world stocks to use ratio. The Australian ASW price has reflected by the Grains Research and Development kept pace with the Chicago futures and in fact shows Corporation (GRDC) 2020 report, has seen an increased good correlation. demand for feed grains in Australia. In addition, During October and early November 2006, the domestic forecasting just how much grain will be used by livestock east coast prices were AUD 350 per tonne delivered, producers maintaining stock during the drought is difficult compared to AUD 240 to AUD 248 per tonne on the and depends on the length and severity of the drought. west coast. The cost of transporting grain from Western Eastern Australia feed grain consumption has grown at Australia to the east coast is approximately AUD 80 to 17% per annum from 2000 to 2005. This has been a AUD 100 per tonne ship or rail and AUD 140 per tonne
Figure 1: World stocks to use ratio compared to Chicago futures and Australian ASW prices (USD per tonne)
Ratio USD per tonne 0.40 240
0.35 200
0.30 160
0.25 120
0.20 80
0.15 40 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 ■ World stocks to Use (Left-hand Scale) — ASW — CBOT Dec (Right-hand Scale)
Source: WEA analysis
4 Current Issues
road. Therefore, the premium available on the east coast In October international prices spiked to reflect the for supplying the domestic market with wheat from the reduced Australian crop. In the eastern states, domestic west coast, needs to take into account the cost of prices increased faster than international prices transport and handling. (see Figures 2 and 3).
AWB(I) is in a different situation from the grower. The size The Australian grower’s price of the National Pool makes AWB the largest user of the risk management US futures market in the world. The hedged position employed by the grower can be used for whatever Growers use a variety of ways to manage their individual percentage of the crop the grower feels appropriate. price risk. The methods used are dependent on the AWB(I), on the other hand, is limited by the liquidity knowledge of the grower and their attitude to risk. required to hedge a significant proportion of the Methods include forward contracts (fixed grade or forecast National Pool size. multi-grade), futures, options, swaps, deferred price contracts, basis contracts and delivering to various pools. During 2006, the season did not progress as expected and growers had the ability to assess their situation on The net result is growers can hedge price risk using a daily basis and change their strategy accordingly. sophisticated derivative products now readily available AWB(I) does not have this level of information about from all banks and then sell the grain to domestic buyers production in such a timely manner. or deliver to the National Pool. In effect, the growers can run their own marketing pool with the added benefit of Compiling the National Pool crop situation is a laborious watching the crop and adjusting the price management task and naturally lags the actual position as monitored as required at different stages of the cropping cycle after by the grower. As a result the National Pool had a hedge determining potential yield or a minimum crop estimate. position which is most likely out of kilter with its potential size. If this was the case, the only way to remedy this is to trade out of (unwind) all or most of the hedged AWB(I)’s performance in 2006-07 positions. In this situation, substantial losses cannot be AWB(I) National Pool indicator prices have been in line avoided with the net result not known until closure of with world wheat prices, except during October 2006. that National Pool.
Figure 2: 2006-07 National Pool Indicator price compared to selected world wheat cash prices (USD per tonne)
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120 -06 -07 -06 -07 -06 -06 n n n n n n 7-Jul-06 5-Ja 2-Feb-07 3-Feb-06 6-Ja 9-Ju 1-Sep-06 3-Mar-06 4-Aug-06 21-Jul-06 13-Oct-06 27-Oct-06 19-Ja 20-Ja 17-Feb-06 28-Apr-06 14-Apr-06 23-Ju 08-Dec-06 22-Dec-06 15-Sep-06 29-Sep-06 31-Mar-06 10-Nov-06 24-Nov-06 17-Mar-06 18-Aug-06 26-May-06 12-May-06 — French – Rouen Higher grade FCW1 — No. 2 WW PNW — 2005-06 AWB National Pool — 2006-07 AWB National Pool — CBOT continuous futures 2-mth forward Source: WEA analysis
ADDENDUM TO THE GROWERS REPORT 2006 5 Current Issues
Figure 3: 2006-07 National Pool indicator prices compared to State domestic prices (AUD)
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160 -07 -06 -06 n n n 7-Jul-06 9-Ju 8-Dec-06 1-Sep-06 4-Aug-06 21-Jul-06 27-Oct-06 13-Oct-06 19-Ja 23-Ju 22-Dec-06 15-Sep-06 29-Sep-06 10-Nov-06 24-Nov-06 18-Aug-06 — AWBL Multi-V Newcastle Cash — AWB(I) Newcastle Pool — AWBL Multi-V Adelaide Cash — AWB(I) Adelaide Pool — AWBL Multi-V Fremantle Cash — AWB(I) Fremantle Pool Note: Pool prices adjusted to be equivalent to cash price by deducting for up-country costs, port costs, finance and underwriting Source: WEA analysis
Expected world grain ending stocks for the 2006 did so to a lesser extent. Prior to this October spike in the production year were predicted to be at 25-year lows market, all cash prices showed good correlation to the resulting in 10-year highs on the Chicago wheat futures pool price in each state (with deductions for up-country market. It is expected that AWB(I) increased its hedged costs, port costs, finance and underwriting to allow position substantially at this stage. comparison of the pool to the cash price).
Figure 2 (on the previous page) is a comparison of the This analysis is on the Australian grade APW, with 2006-07 and 2005-06 National Pools and selected world AWB(I) pool prices in different states compared to the cash wheat prices (grades used in the Wheat Industry AWBL Multi-Variety (Multi-V) daily cash price for the Benchmark (WIB)). The world cash price had risen same state. The National Pool prices are adjusted to be markedly in the period January to December 2006 equivalent to cash price by deducting for up-country (in USD terms). The 2006-07 National Pool indicator costs, port costs, finance and underwriting. price shows correlation with world cash prices, in fact The AWBL Multi-V daily cash price is their forward increasing over the Chicago Board of Trade (CBOT) contract price and is usually an indicator of the overall wheat futures. The 2005-06 National Pool is well below cash market. Prices by other market participants may CBOT wheat futures and No. 2 Winter Wheat Pacific vary above or below this price. North-West (WWPNW). The drought affected 2006-07 pool appears to be benefiting to the detriment of the The time and speed with which AWB(I) unwound its 2005-06 pool (this will be considered in detail in the hedged positions determines the effect on the final next section, ‘Interaction of National Pools and the price paid to growers. This will not be known for almost effect of drought’). 18 months, until some time in August to October 2008, when the WEA receives the audited National Pool Figure 3 shows the 2006-07 AWB(I) National Pool performance report from AWB(I). The WEA will then make indicator price against domestic market cash prices for its own assessment of the National Pool performance. three states (SA, NSW, WA). This analysis shows that cash prices for wheat delivered to Newcastle and The essence of the situation is not that AWB(I) Adelaide were affected by the domestic market. While mismanaged the hedging of the National Pool. The Fremantle cash prices did rise in mid-October 2006 they issue is more that the world situation and the size of the
6 Current Issues
Australian crop changed. To accurately manage price Figure 4 shows the 2001-02 and 2002-03 National Pool risk with volatile markets and weather, requires crop estimated returns compared to rolling two-month CBOT information at levels at which it is difficult to accurately wheat futures. Note the increase in the 2001-02 National assess at a national centralised level. Pool price between July and October 2002.
The majority of Australian growers support the National Figure 5 (on the following page) shows the 2005-06 and Pool in high production years. However, in low production 2006-07 pool estimate through 2006 compared to rolling years eastern Australia is a net wheat importer and sells two-month Chicago wheat futures and the Australian all its grain into the domestic market, often at prices Stock Exchange (ASX) January 2007 Milling Wheat higher than export parity. contract. Note there is no increase in the 2005-06 National Pool price between July and October 2006. Western Australian and South Australian growers have a very small domestic market and almost exclusively sell It is generally understood that a proportion of the to the National Pool. In this drought situation they bear previous year’s pool, ie. 2001-02 and 2005-06, would be most, if not all of the total higher per tonne costs of the unsold with a greater price being achieved by selling this National Pool. pooled grain into the rising domestic market. (AWB(I) has made this position clear to the WEA when it provided It should also be noted that the volatility in prices and analysis on sales of wheat originally allocated for the crop outcomes is testing the ability of the National Pool Iraq market in 2006 but sold on the domestic market in to outperform individual grower’s independent price risk the last quarter of 2006). As a comparison, the 2001-02 strategies. The timeliness of crop yield information and National Pool for the period July to August 2002 ability to modify price risk management favours micro- increased in value by AUD 17 per tonne or 7.11% of management over macro-management in such a year. the July value. The 2002-03 pool for the same period increased by AUD 77 per tonne or 35% of its July value. Interaction of National Pools and the This is compared to the 2005-06 National Pool that has effect of drought not increased significantly in value since July 2006, yet the 2006-07 National Pool Estimated Pool Returns (EPR) The drought affected National Pool years for 2002-03 and has increased in value by AUD 29 per tonne or 13.24% 2006-07 are similar in that grain prices rallied strongly of the July value. in eastern Australia and internationally during August, September and October. Both the 2002-03 and 2006-07 One should have expected the 2005-06 National Pool to National Pools were affected by drought. have risen, by a similar amount as the 2001-02 National
Figure 4: 2001-02 and 2002-03 National Pool price compared to CBOT Wheat Futures (AUD per tonne)
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160 -03 -03 -02 -02 n n n n 5-Jul-02 4-Oct-02 4-Feb-03 6-Ja 9-Sep-02 1-Aug-02 19-Jul-02 1-May-02 17-Oct-02 31-Oct-02 17-Ja 17-Feb-03 10-Ju 21-Ju 13-Dec-02 23-Sep-02 15-Nov-02 28-Nov-02 14-Aug-02 27-Aug-02 14-May-02 28-May-02 — CBOT — AWB National Pool 2001-02 — AWB National Pool 2002-03 Source: WEA analysis
ADDENDUM TO THE GROWERS REPORT 2006 7 Current Issues
Figure 5: 2005-06 and 2006-07 National Pool price compared to CBOT and Australian East Coast Wheat Futures (AUD per tonne)
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160 -07 -07 -06 -06 n n n n 4-Jul-06 8-Feb-07 7-Ju 1-Dec-06 5-Sep-06 7-Nov-06 28-Jul-06 17-Jul-06 1-May-06 12-Oct-06 25-Oct-06 25-Ja 12-Ja 21-Feb-07 21-Ju 14-Dec-06 29-Dec-06 18-Sep-06 29-Sep-06 20-Nov-06 10-Aug-06 23-Aug-06 25-May-06 12-May-06 — AWB National Pool 2005-06 — AWB National Pool 2006-07 — CBOT — ASX Milling Wheat Source: WEA analysis
Pool. If this rationale is used, the 2005-06 National Pool The amount that can be attributed to Iraq is listed in should have increased by AUD 13 per tonne. This can be Figure 6. confirmed by using the rise in the CBOT wheat futures for the period July to October in 2002 where it increased by Figure 6: Demurrage and despatch for Iraq AUD Export Sales Tonnes AUD 32.8% in value (AUD). The 2001-02 National Pool price Item (million) (million) per tonne increased by AUD 17 or only 25% of the CBOT increase. 2003-04 Demurrage –43.31 Using this same rationale, the 2005-06 National Pool Despatch 28.80 should have risen 25% of the 2006-07 CBOT rise of Sub-total –14.51 1.34 –10.87 AUD 56 (ie. AUD 14 per tonne). 2004-05 Demurrage –29.64 Despatch 13.08 Demurrage Sub-total –16.56 1.67 –9.90 Total –31.07 2.91 –10.33
In the WEA’s Growers Report 2005, the WEA indicated Note: Totals have been rounded and do not equal sum of the parts that: Source: AWB(I) data “Approximately AUD 10.7m of net despatch/ The WEA makes an observation that if AWB(I) had not demurrage costs incurred in 2003-04 was a direct moved to delivering the wheat on a Cost Insurance and result of shipping to Iraq…” Freight (CIF) basis the National Pool would not have And further: incurred demurrage or despatch payments. These sales “It is also expected that additional demurrage costs will should have returned an extra AUD 10.33 per tonne be incurred in the 2004-05 Pool as a direct result of the delivered to Iraq for the 2003-04 and 2004-05 dispute over claimed iron filing contaminations in Iraq.” National Pools. In the WEA’s Growers Report 2006, the WEA indicated A portion of these demurrage payments would have that: been absorbed by an increased sales price as a result “During 2004-05 AWB(I) had a net cost of AUD 14.076 of the change in contract terms. However, the net effect million balancing demurrage costs and despatch was increased costs to the National Pool. savings.”
8 The Cole Inquiry
The Cole Inquiry, formally the ‘Inquiry into certain Abuse of the OFF Programme Australian companies in relation to the UN Oil-for-Food Programme’ was a Commission of Inquiry established There were a series of transactions entered into by by the Australian Government in November 2005. Its AWBL and AWB(I) that constituted a possible breach purpose was to investigate: of the United Nations sanctions and subsequent abuse of the OFF Programme. The series of transactions “whether decisions, actions, conduct or payments by are summarised into 11 steps shown in Figure 83 Australian companies mentioned in the Volcker Inquiry (on page 11). into the United Nations Oil-for-Food (OFF) Programme breached any Federal, State or Territory law.”1 From this series of transactions and the findings of the Cole Inquiry, it is now clear that the inland trucking and On 24 November 2006 the Inquiry Commissioner, service fee paid to Alia, via Ronly (a global trading Terence Cole QC, provided a five volume report to the company that was paid by AWB(I) to make the payments Australian Government.2 The report provided a forensic to Alia), by AWBL was not for trucking services assessment of AWBL’s dealings in Iraq and numerous rendered but were instead a payment of monies to the findings and recommendations. Iraqi regime and a subsequent possible breach of United Nations sanctions. What happened? The factual circumstances identified However, AWB(I) made the point to the WEA that: “the Oil-for-Food Commission of Inquiry was not a by the Cole Inquiry judicial inquiry and was not conducted according The WEA has prepared a timeline of events related to to judicial rules of evidence.” Iraq and the OFF Programme. See Figure 7 (on the Indeed, Commissioner Cole, in his report, pointed out following page). that he was not required to make findings of breach of the law. The Commissioner said: Key Inquiry findings and “…my function is to indicate circumstances where it recommendations might be appropriate for authorities to consider whether criminal or civil proceedings should be The Cole Inquiry essentially found that AWBL and some commenced. I found such circumstances to exist.”4 officers of AWBL: • abused the OFF Programme and misled the United This matter is subject to further consideration by the Nations in relation to certain sales of wheat to Iraq Government. On 20 December 2006, the Attorney- over the 1999–2003 period; General, Mr Philip Ruddock, announced the establishment of a Task Force recommended by • inflated the price of wheat to recover the so-called Commissioner Cole. The Task Force includes officers Tigris debt; and from the Australian Federal Police and Australian • entered into an agreement to pay an additional Securities and Investments Commission and deals USD 2.01 per tonne to Iraq via the inland with possible criminal behaviour identified by transportation fee mechanism as compensation Commissioner Cole. for iron filings contamination. Consistent with Commissioner Cole’s recommendation, the Task Force will consider possible prosecutions for breaches of the law, in consultation with the 1 Inquiry into certain Australian companies in relation to the UN Commonwealth and Victorian Directors of Public Oil-for-Food Programme. 2005. Terms of Reference, available from Prosecutions. http://www.ag.gov.au/agd/www/UNOilForFoodInquiry.nsf/Page/ RWPC89DEC8DAC097623CA25710E00000E93 2 The report is available from: http://www.offi.gov.au/agd/WWW/unoilforfoodinquiry.nsf/Page/ Report 3 The arrangements shown in Figure 8 reflect the most common arrangements, although slightly alternative payment arrangements were in place at various times. 4 See 1st paragraph, page xi, Volume 1 of the Cole Report.
ADDENDUM TO THE GROWERS REPORT 2006 9 The Cole Inquiry
Figure 7: Timeline of Iraq and Oil-for-Food events
June January September November December 1990 1995 1995 1996 1999 2000 2000 2000 2000 UN imposes UN Security BHP Petroleum Iraq commences Iraq, through Iraq UN receives BHPP assigns IGB advises AWB Arthur Andersen sanctions on Iraq Council adopts (BHPP) makes purchasing Grains Board complaint from Tigris rights of an increase in Report to AWB Resolution 986 donation of significant (IGB) introduces Canada re AWB from the 1996 fees by adding an outlines red flag which establishes USD 5 million of quantities of condition of tender contracts shipment of after sales service areas related to the Oil-for-Food wheat purchased wheat under OFF – sales of wheat to 22,000 tonnes of fee of 10% integrity risks (OFF) programme from AWB to Iraq be CIF free in truck wheat to Iraq within the to ‘all governorates International Iraq’ Marketing Group AWB put in place of AWB first contracts (July and October) that were inflated to provide trucking fee
July December 20 March September 21 November 21 April 2 July 27 July 11 August 2002 2002 2003 2003 2003 2004 2004 2004 2004 Iron filings USD 2.017 per Invasion of Iraq Report by US OFF ceases UN establishes WEA’s request to WEA and AWB(I) WEA visits AWB(I) contamination tonne added to Defence Contract Independent AWB(I) to examine Board-to-Board offices to view claim by IGB. the inland Audit Agency Inquiry Committee Iraqi contracts meeting to discuss Iraqi contracts IGB seeks transportation identify overpricing (IIC) chaired by (through WEA’s status of WEA’s compensation of fees to cover iron in AWB contract Paul Volcker, to Information request for copies USD 2.017 million filing settlement investigate the Requirement of Iraq contracts. from AWB(I) AWB contracts administration Schedule) WEA agrees to entered into with and management visit AWB(I) offices prices inflated to of the OFF to view the recover Tigris debt Programme contracts
15 October 10 December February September 27 October 10 November 12 December 16 January 6 February 2004 2004 2005 2005 2005 2005 2005 2006 2006 WEA submits its AWB(I) pay Tigris Protocol between AWB briefs IIC releases Australian Cole Inquiry: Cole Inquiry: First amendment 2004 Performance an amount of AWB and IIC Minister for final report Government Directions Hearing Public hearings to expand the Monitoring Report USD 7,087,202.24 signed following Foreign Affairs and (Volcker Report). appoints Terence commence Terms of to the Minister 2004 November- Trade regarding UN Secretary Cole QC to Reference of the December concerns about General, Kofi conduct inquiry Cole Inquiry discussions on proposed findings Annan, issues into OFF AWB’s level of by the Volcker statement on OFF programme and cooperation Committee programme abuse involvement of Australian companies
10 March 17 March 22 June 21 September 24 November 5 December 20 December 12 January 29 March 2006 2006 2006 2006 2006 2006 2006 2007 2007 Second Third amendment Fourth amendment Fifth amendment Cole Inquiry Australian Attorney General Australian Wheat Export amendment to the Terms of to the Terms of to the Terms of reports to the Government announces Government Marketing to the Terms of Reference of the Reference of the Reference of Australian transfers bulk establishment establishes Wheat Consultation Reference of the Cole Inquiry: Cole Inquiry: the Cole Inquiry: Government veto to the Minister of task force Export Marketing Committee Cole Inquiry: Clarification on Date for providing Date for for Agriculture, recommended Consultation reported to Date for providing powers to report extended providing report Fisheries and by Cole Inquiry Committee Australian report extended investigate from 30 June 06 to extended from Forestry on Government from 31 March 06 companies’ 29 September 06 29 September 06 temporary basis to 30 June 06 internal activities – to 24 November 06 (until 30 June not specifically 2007) related to the Volcker Report
Note: Information derived from the Cole Inquiry and other sources did not differentiate between AWB (International) or AWB Limited Source: WEA analysis
10 The Cole Inquiry
Figure 8: Oil-for-Food Programme transaction with inland transportation fees paid to Alia
1 Iraq Grains Board (IGB) negotiates sale of wheat with AWB Ltd. IGB insists that all wheat Oil Companies 8 9 to now be delivered to ‘all governorates Iraq’; and that AWB Ltd pay Alia set amounts (USD 12, then up to USD 51 per tonne). The 7 10% after sales service fee5 was then added. 2 The Department of Foreign Affairs and Trade also views contracts and processes shipping United Nations letters of approval. The United Nations approves wheat contracts. 3 Ronly or its nominee company Tse Yu Hong 2 Metal Limited was paid by AWB(I) and was used to make payments to Alia. Ronly retains a commission of USD 0.20 per tonne. Department of 4 Remainder of the service fee paid by Ronly Foreign Affairs to Alia. and Trade 5 Alia pays IGB (through the Iraqi State Company for Water and Transport). 2 6 IGB directs funds to the Iraqi regime. 7 United Nations approves sale of Iraq oil to 3 10 United Nations Ronly AWB Ltd oil companies. Escrow account 8 Iraqi regime provides oil companies with oil. 9 Proceeds from sale of oil paid into UN 4 escrow account. 10 After delivery AWB Ltd paid for wheat from 1 Alia the UN escrow account. 11 AWB Ltd sells wheat to IGB at prices inflated to include inland transport fees and after 5 sales service fee.
11 Iraq Grains Board
6 Physical flows of grain/oil Payments Iraqi regime Agreements/undertakings
Source: WEA analysis
5 In April and May 2000 the IGB approached AWB to provide after sales service. As a result of this on 1 November 2000 the IGB advised AWB that the price of a contract for the sale of wheat which had already been agreed including the transport fee, was to have a 10% ‘handling fee’ added. The handling fee was to be included in the transportation fee. Note: Information derived from the Cole Inquiry and other sources did not differentiate between AWB (International) or AWB Limited.
ADDENDUM TO THE GROWERS REPORT 2006 11 Tigris
Recovery of the Tigris debt Figure 9 summarises the series of transactions entered into by AWBL and AWB(I) that involved recovery of the “In 1995 BHP Petroleum (BHPP) agreed to make a Tigris debt and payment of compensation for iron filings humanitarian donation of a USD 5 million shipload of contamination. These transactions appear to be a breach wheat to Iraq with the hope of later obtaining oil rights. of the United Nations’ sanctions and subsequent abuse Iraq was not told the shipment, delivered in 1996, was of the OFF Programme. The series of transactions is a donation. Mr Davidson Kelly of the Tigris Petroleum summarised in Figure 9 into 11 steps. Corporation Limited (Tigris) and Mr Stott of AWBL represented to Iraq that the shipment was paid for by a loan by BHPP to Iraq of USD 5 million. In September 2000 BHPP assigned to Tigris any rights it had flowing from the 1996 shipment, subject to Tigris paying to it 25% of any recovery. Throughout 2001 and 2002 AWB assisted Tigris in obtaining Iraq’s agreement to repay the loan.” 6
Figure 9: Sale of wheat to Iraq with recovery of Tigris debt and payment of compensation for iron filings contamination
1 BHPP buys USD 5 million in wheat from AWB Ltd. Iraqi regime Oil Companies 2 BHPP provides the wheat to the IGB as a gift in 7 8 the hope of getting some later oil rights. (For qualification see section – Recovery of the Tigris debt.) 5 3 BHPP assigns the wheat debt to Tigris. 4 Tigris helps AWB Ltd with iron filings contamination and, in return, AWB Ltd agrees to United Nations collect the BHPP debt (now USD 8.375 million including interest). 5 The Department of Foreign Affairs and Trade also 5 views contracts and processes shipping letters of approval. The United Nations approves wheat Department of contracts. Tigris Foreign Affairs 6 AWB Ltd sells wheat to Iraq Grains Board at prices and Trade inflated to include the Tigris debt (contracts numbered A1670 and A1680). 4 3 5 7 Sale of oil by the Iraqi regime to international oil 11 companies. 8 Proceeds from sale of oil paid into UN escrow United Nations BHPP AWB Ltd account. Escrow account 1 9 9 AWB Ltd receives payment from the UN escrow account. 2 10 6 10 AWB Ltd pays AWB(I) USD 787,798 commission accounted for using journal entries. AWB (International) Iraq Grains Board Ltd 11 AWB Ltd pays remainder of the BHPP debt to Tigris USD 7,087,202.
Physical flows of grain/oil Payments Agreements/undertakings
Source: WEA analysis
6 Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme 2006, November, Prologue, Volume 1, p. xlviii.
12 Tigris
Ongoing concerns about the • Was the subsequent authorisation of the transfer of Tigris transaction funds from the National Pool to Tigris validly made? A number of concerns exist in this respect: The WEA questions why AWBL and AWB(I) entered 1. The General Manager of the National Pool was into an agreement to recover the Tigris debt given the aware that the payment appeared to be a breach National Pool had already been paid for the wheat of UN sanctions,8 but nevertheless authorised the provided to Iraq on behalf of BHPP. payment. The Tigris transaction raises a number of specific 2. Consistent with AWB(I)’s Constitution, to authorise concerns regarding the authority that AWB(I) provides the payment from the National Pool to Tigris the to AWBL through the Services Agreement, and the way General Manager of the National Pool had to be that the National Pool is managed. In particular: satisfied that approving the completion of the • Did AWBL act outside its authority in inflating the transaction “maximises the net pool return to contracts? growers … by securing … markets for wheat”.9 The first concern is whether AWBL was acting within Commissioner Cole demonstrated clearly that “the its powers in entering into an agreement that did not recovery of the debt for Tigris … had nothing to do relate to the sale of National Pool wheat (as the sale with ‘securing’ the Iraqi wheat market”.10 had already been concluded from the National Pool’s Notwithstanding the legal status of the Tigris transaction, perspective). In this respect, Commissioner Cole an additional concern relates to the rationale for carrying explicitly noted that: forward a proportion of the Tigris commission earned “AWB has not produced minutes of the Executive by AWB(I) into the 2005-06 National Pool. The WEA Leadership Group (ELG), or any other management first raised this concern in its Growers Report 2006. group, formally approving or authorising the use of Specifically, why has AWB(I) carried forward USD the new contracts as a conduit for the 441,973 of the total commission received by AWB(I) 7 Tigris debt recovery.” into the 2005-06 National Pool when the Tigris funds The WEA considers that AWBL acted outside its were collected from transactions occurring in the authority in pursuing the recovery of the Tigris debt 2001-02 and 2002-03 National Pools? through the inflation of the price of wheat. That is, AWB(I)’s recent response is that the payments have AWB(I) did not authorise the inflation of the wheat been delayed until any legal uncertainty about the sales price to recover the payment. Tigris payment is resolved.
The WEA considers that AWBL acted outside its authority in pursuing the recovery of the Tigris debt through the inflation of the price of wheat. That is, 7 Paragraph 27.287. Report of the Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme. Volume 3: Sales, allegations and inquiries. AWB(I) did not authorise the inflation 8 Paragraph 27.387. Report of the Inquiry into certain Australian of the wheat sales price to recover the companies in relation to the UN Oil-for-Food Programme. Volume 3: Sales, allegations and inquiries. payment. Commissioner Cole clearly 9 Paragraph 27.401. Report of the Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme. demonstrated that “the recovery of the Volume 3: Sales, allegations and inquiries. 10 Paragraph 27.401. Report of the Inquiry into certain Australian debt for Tigris … had nothing to do companies in relation to the UN Oil-for-Food Programme. Volume 3: Sales, allegations and inquiries. with ‘securing’ the Iraqi wheat market”.
ADDENDUM TO THE GROWERS REPORT 2006 13 Tigris
AWBL traded short-term benefits Figure 10 shows that AWBL’s payment of AUD 300 million for longer-term costs to Iraq, through Alia in the short-term did help protect and secure sales of wheat to Iraq. In terms of the payment of transportation fees to Alia and the recovery of the Tigris debt, it is clear that AWBL Management of the Iraq trade in 2006 and specifically AWB(I) benefited to the tune of: A medium to long-term consequence of actions by • a 36% increase in market share in Iraq between AWBL identified during the Cole Inquiry was that AWBL 1999-00 and 2004-05 when compared with the and AWB(I) forfeited wheat trade to Iraq. 11 previous 1996-97 to 1998-99 period (see Figure 10), At the beginning of 2006, AWB(I) had allocated a and significant volume of wheat to Iraq. However during the • USD 787,798 commission collected as a result of the Cole Inquiry, the Iraq Grains Board (IGB) refused to recovery of the Tigris debt. purchase wheat from AWB(I).12 As a result, in March 2006 Wheat Australia Pty Ltd was set up by ABB Grain Ltd, GrainCorp Ltd and CBH to facilitate sales of Figure 10: Annual market share in Iraq Australian wheat to Iraq. Wheat Australia bought Percent 100 361,699 tonnes from the National Pool which they sold and shipped to Iraq in August 2006. 90 AWB(I) has informed the WEA that the balance of the
80 wheat allocated for sale to Iraq during 2006 was subsequently re-allocated to meet the Australian 70 domestic demand. The domestic market was trading at up to AUD 80 per tonne higher than proposed 60 sales to Iraq. 50
40
30
20
10
0 96-97 97-98 98-99 99-01 00-01 01-02 02-03 03-04 04-05 05-06
■ Australia ■ United States ■ Other
Source: WEA analysis
11 From the National Pool’s perspective, the net benefit/cost of A medium to long-term consequence of these sales into Iraq is calculated by determining whether the same wheat could have been sold into different markets at a actions by AWBL identified during the higher price (ie. generating a net benefit) or a lower price (ie. generating a net cost). The WEA has not attempted this Cole Inquiry was that AWBL and AWB(I) as any estimate would be purely speculative. 12 It needs to be acknowledged that this loss of market share to forfeited wheat trade to Iraq. During the the United States also reflects a number of other factors such as the lifting of sanctions by the United States and the Cole Inquiry, the Iraq Grains Board predominance of United States military and administrative personnel in post-war Iraq. refused to purchase wheat from AWB(I).
14 Responses in the aftermath of the Cole Inquiry
The Australian Government’s response The Minister has directed the WEA to monitor and report to the Cole Inquiry to him quarterly on the non-AWB(I) bulk consents. On 5 December 2006, the Prime Minister announced The WEA’s performance that, as a temporary measure until 30 June 2007, the bulk export veto would move from AWB(I) to the Minister Commissioner Cole concluded that the WEA was unable for Agriculture, Fisheries and Forestry. The Wheat to properly monitor the performance of commercial Marketing Act 1989 (the Act) was amended accordingly conduct by AWB(I) and AWBL in relation to sales to Iraq. empowering the Minister to direct the WEA to approve The WEA did not scrutinise AWB(I)’s (and AWBL’s) or reject bulk export applications from non-AWB(I) export performance and operations in relation to exporters. AWB(I) still retains its authority to export all possible breaches of the OFF Program due to the National Pool wheat without the need for WEA’s consent. existing limitations of WEA’s role as expressed in the In response to the temporary measures announced for Act. Evidence of AWB(I) and AWBL’s manipulation of bulk wheat exports the following events have taken the OFF Program was not identified until the matter was place (in chronological order): examined by the Cole Inquiry using its extensive powers. • Potential bulk exporters were given until close of As a result, the Cole Inquiry recommended that: business Friday 15 December 2006 to submit their “there be a review of the powers, functions and 13 bulk export applications to the WEA. responsibilities of the body charged with controlling • The WEA received 46 applications to export more and monitoring any Australian monopoly wheat than five million tonnes of wheat to 22 countries. exporter. A strong and vigorous monitor is required • Upon receipt the WEA acknowledged each to ensure that proper standards of commercial application in writing and requested consultation conduct are adhered to.”15 14 comments from AWB(I) under the Act. The WEA strongly supports this recommendation. • The WEA researched, analysed and considered the end users, buyers, AWB(I)’s market strategies, AWB(I) Industry consultations customer strategies, shipping data, exporter trading history, grades/quality profile in the market, end use On 12 January 2007, the Government announced the of wheat and any other relevant information in order appointment of the Wheat Export Marketing Consultation to process each application. Committee to consult widely with the grains industry, • The WEA made recommendations regarding each particularly growers, about their wheat export marketing application under the WEA Export Consent Guidelines needs. The Committee provided its report to Government and provided this advice to the Minister. on 29 March 2007. • On 22 December 2006, the Minister directed the WEA to consent to two bulk applications. They were for AWBL’s response to the Cole Inquiry 300,000 tonnes of wheat to Iraq by Wheat Australia AWBL has announced a series of actions aimed at Pty Ltd and for 500,000 tonnes of wheat to Indonesia improving corporate governance and accountability, by Agracorp Pty Ltd (subsidiary of CBH Ltd). The fostering cultural change and improving company other 44 applications were rejected by the Minister. performance. Key actions include: • During January and February 2007 the WEA received • limited structural separation of AWB(I) from AWBL another 31 applications. Three were cancelled by (effective 1 October 2006); the respective applicants, 26 were rejected by the • key staff transferred to and employed by AWB(I); Minister and two are currently under consideration. • minor changes to Board membership; 13 Submitted bulk export applications required supporting documentation reflecting public interest. • AWB(I) establishing committees to set policy and 14 AWB(I) were provided with destination country, tonnage, strategic direction; and grades, shipping method (bulk) and shipping period. • a proposed de-merger of AWBL and AWB(I). 15 Inquiry into certain Australian companies in relation to the UN Oil-for-Food Programme, November, Prologue, Volume 1, Recommendation 5.
ADDENDUM TO THE GROWERS REPORT 2006 15 Responses in the aftermath of the Cole Inquiry
Since the appointment of the new AWBL Managing Proposal to demerge AWB(I) and AWBL Director, Mr Gordon Davis, the WEA has seen a general In November 2006 the AWBL Board of Directors improvement in communication and information announced that it would seek shareholder approval to exchanges between the WEA and AWB(I). split AWBL into two separate companies. AWBL further indicated that a demerger may be pursued only after Matters announced prior to completion the Australian Government has finalised the export of the Cole Inquiry wheat marketing arrangements. In February 2006, AWBL announced two reviews of its operations. Firstly, KPMG was appointed to review current Under the demerger proposal, AWB(I) would become governance internal reporting structures and practices a wholly grower-owned company and manager of the across the company. Secondly, PricewaterhouseCoopers Single Desk retaining its constitutional responsibility to was appointed to conduct a special review of the maximise returns to growers. AWBL would become a design and operation of internal controls around wheat purely commercial agribusiness company. export sales. The proposed roles and responsibilities of the two The WEA will continue to follow these reviews and organisations are detailed in Figure 11. provide greater detail when the AWB(I) Board provides Figure 11: Proposed post demerger roles and responsibilities the reports to the WEA. AWBL responsibilities AWB(I) (holder of the National Pool) to the National Pool In July 2006, AWBL announced some limited structural separation would take place between AWBL and • Managing the sole export licence and bulk veto • Pool operations AWB(I) in order to strengthen corporate governance • Providing the buyer of last resort facility • Treasury and accountability. • Managing integrated services contracts • Price risk management • Reporting on Single Desk performance • Sales execution and The functional separation of AWB(I) from AWBL took marketing place in October 2006. AWBL agreed to fund the • Informing and representing industry • Supply chain – chartering implementation costs of the functional separation. • Supporting industry development • Support services
Details of these costs were provided to the WEA on the Source: AWB(I) proviso that the information is not made public due to market sensitivity. However, the WEA understands A key element of the proposed demerger is improved the costs were accrued by AWBL as part of the contestability of services provided to the National Pool. restructuring provisions during 2005-06, with no Contestability of service provision is essential to ensure additional cost or charge to the National Pool. that wheat handling, transport and marketing is efficient and returns to growers are maximised. Although the 2004 Wheat Marketing Review recommended this separation, AWBL and AWB(I) The proposed demerger will not, in itself, ensure have, until now, indicated that there was no benefit in improved returns to growers. Returns to growers will separation. It should be noted, that a resolution was put be shaped primarily by the terms of the Service forward at AWBL’s 2005 Annual General Meeting to Agreement(s) that AWB(I) negotiates with AWBL or replace the two AWBL Board members sitting on the other service providers. AWB(I) Board with two independent directors, however AWBL pointed out in a media release of 29 November it did not receive 75% approval and was not passed. 2006 that 90% of services provided are contestable A new Service Agreement was to have been negotiated under current arrangements. However, the WEA in late 2006 and early 2007 with the commencement to believes the current level of integration between the be backdated to 1 October 2006. AWBL and AWB(I) two companies and the scope of the bundled Services informed the WEA that the new Services Agreement Agreement creates questions about the extent to which will reflect corporate changes which increase the level services provided to the National Pool are contestable. of separation. AWBL have since indicated that the new Services Agreement is on hold until the Australian Government has finalised its consideration of the arrangements in Australia for export wheat marketing.
16 Monitoring AWB(I)
Remuneration paid by the • International sales and marketing services (including National Pool to AWBL trading); • Credit services; On 3 November 2006, AWBL announced the base fee • Technical services; for managing the National Pool would be reduced by 40% to AUD 39.5 million for the drought affected • Supply chain services; 2006-07 Pool. • Operations and business process services; According to AWBL this change is a result of “the new • Stakeholder relations services (public affairs); business model to accommodate swings in seasonal • Marketing services; conditions such as the current drought”16 and will • Human resource services; provide benefits to growers via: • Legal services; • improved National Pool equities; • Property and related services; and • lower administration costs in the current and future • Information technology services. years; The extent to which the reduction in the base fee is • greater transparency of cost structures within AWB; beneficial to growers is difficult to assess because: and • AWB(I) benefits in terms of the National Pool having • a simpler operating model. to pay out less to AWBL to service a significantly The WEA highlights that a reduction in the base fee smaller National Pool due to the drought; but on the payment to AWBL by AUD 25.6 million is a result of other hand, fewer services being provided by AWBL to AWB(I). • the National Pool’s return could be adversely affected Some of these reduced services are a result of: as a result of the significant reduction in the services • the transfer and direct employment of staff from provided by AWB Services to AWB(I). AWBL to AWB(I); and Given the remuneration arrangement only allows AWBL • an overall reduction in service level provision provided to be rewarded (in terms of profit) if it out-performs the by AWBL. WIB, the WEA considers that it is unlikely that AWBL The services provided by AWBL to AWB(I) that have would reduce services in a manner that would reduce been reduced for the 2006-07 pool year due to the out-performance of the National Pool. structural separation comprise: • Service contract management and corporate risk services; and • Company secretary and governance services.17 The reduction in the base fee has resulted in the following cutback in services provided by AWBL On 3 November 2006, AWBL announced to AWB(I) for the 2006-07 pool year: • National pool management services; the base fee paid by AWB(I) to AWBL for • Grain marketing services; managing the National Pool would be reduced by 40% to AUD 39.5 million for the drought affected 2006-07 Pool. The Managing Director of AWBL, 16 AWBL. 2006, ‘AWB reduces drought pool costs for wheat farmers’, Media Release — 3 November 2006. Accessed from Mr Gordon Davis, has indicated that http://www.awb.com.au/aboutawb/media/mediareleases/ AWBReducesDroughtPoolCostsForWheatFarmers.htm the lower administration costs of 17 The reduction in the base fee includes a cost shift of AUD 4 million whereby AWB(I) now has other costs (eg. staff managing the National Pool would be and operating costs) that were previously picked up by the base fee. sustained in future years.
ADDENDUM TO THE GROWERS REPORT 2006 17 Monitoring AWB(I)
The Out-performance Incentive Additional cost reductions (OPI) payment The Managing Director of AWBL, Mr Gordon Davis, has The OPI is designed only to be paid if AWBL achieves indicated that the lower administration costs of managing a pool return that out-performs both the WIB and the the National Pool would be sustained in future years. Hurdle Rate. The announced changes to the OPI for In particular, Mr Davis has stated that “the management the drought affected 2006-07 National Pool are: team at AWBL is developing plans to identify further cost savings required to meet the new administrative • An increase in the hurdle rate from USD 5 per tonne cost agreed with AWB(I)”.19 to USD 7.50 per tonne; • The elimination of tier one OPI — part of the previous The WEA understands that AWB(I) and AWBL are remuneration model;18 and presently reviewing the nature and scope of industry good functions20 currently being provided and the • The capping of tier two OPI at AUD 2 per tonne or methodology used to estimate the cost of providing AUD 8 million, whichever is lower. these functions. AWBL performs the following services The increase in the Hurdle Rate from USD 5.00 per that it classifies as industry good functions: tonne to USD 7.50 per tonne reflects the higher freight • industry strategic planning and execution; advantage experienced by AWBL. This is, in part, a • setting wheat receival standards; result of an increasing proportion of the drought affected 2005-06 National Pool being sold domestically relative • classifying wheat; to non drought affected pools. • crop shaping; The WEA welcomes this change as it considers that • producing the Australian wheat crop report; removing the tier one OPI ensures that the remuneration • providing technical market support; model rewards AWBL only if it out-performs the Hurdle • promoting the broader Australian wheat industry; and Rate. • undertaking policy and regulatory advocacy. The WEA considers that the provision of these industry good functions is in the interest of all growers and in maximising export performance for growers who deliver to the National Pool.
18 The first tier was set between the WIB and the USD 5.00 per tonne hurdle rate and capped at 0.375 % of National Pool value. 19 AWBL. 2006, ‘AWB reduces drought pool costs for wheat farmers’, Media Release — 3 November 2006. Accessed from: http://www.awb.com.au/aboutawb/media/mediareleases/ AWBReducesDroughtPoolCostsForWheatFarmers.htm 20 Those functions that provide a benefit to the wheat industry as a whole.
18 Supply Chain
On 16 January 2007, the Minister for Agriculture, Export terminals and the up-country storage and Fisheries and Forestry asked for further analysis and handling facilities are owned by integrated entities such advice from the WEA concerning: as GrainCorp, ABB, AWBL and CBH. Each of these • AWB(I)’s claim of the need for ongoing investment entities often work across the supply chain and control by bulk handling companies; and the supply chain via their grain trading and marketing role. Alliances and other collaborative arrangements • the benefits AWBL’s management of the supply chain have developed between some of these entities. brings to growers, other than through the use of its buyer power. The WEA’s analysis of available information suggests To address the issues raised by the Minister, the WEA: that there are no systemic capacity constraints in bulk handling facilities (or, indeed, across the other elements • examined reports from various industry sources of the wheat supply chain). (eg. GRDC, GrainCorp, AWBL, WA Department of Planning and Infrastructure, Single Vision, etc) relating This storage capacity exists despite the consolidation to the supply chain for export wheat and in particular of storage in fewer receival centres across most states. action agendas relating to transport infrastructure; and This has shifted some road freight cost to the grower • consulted with a cross-section of supply chain who incurs increased cartage rates from farm to receival providers to canvass their views on issues raised by centre because of the increased distance. At least in part the Minister. in the eastern states, the closure of bulk handling storage sites has been offset by an increase in on-farm storage. After examining the reports and as a result of the consultations, the WEA suggests there is a need for Despite the lack of a capacity constraint, there may be additional investment by bulk handling companies a rationale for further bulk handling and storage (BHCs). investment.
Improved efficiency along the supply chain is an important factor in supporting Australia’s wheat export performance with benefits for all of the industry stakeholders. This photo shows CBH Group loading its first shipment of bulk wheat in 2007 at Esperance, under the temporary bulk wheat export arrangements.
ADDENDUM TO THE GROWERS REPORT 2006 19 Supply Chain
There may be benefits for growers if investments are Furthermore, AWB(I) suggests that the problem of made that stimulate competition between receival sites. under-investment by bulk handling corporations is The WEA has previously noted that when competing overstated and has said: wheat supply chain facilities exist, costs to growers are “In the eastern states the BHCs also already have lower than in a monopoly environment. While such new incentives to invest through: investment provides lower prices, it is likely that many • Market share — Given AWB’s site to sea process sites cannot support two or more storage facilities is transparent and rail operators pricing is reflective (ie. they may be natural monopolies). of efficiency of sites, then BHCs have an incentive (at their sites that are located close to competitors) Supply chain inefficiencies to improve their out-loading capability to generate lower freight rates and thus capture additional There is a case for additional investment at bulk National Pool tonnes. handling facilities to address inefficiencies at modal • Rail Operations — GrainCorp has recently been interfaces. Intermodal transport refers to the seamless a rail operator with AWB being the major customer. movement of freight from one origin to destinations This direct entry into rail operations afforded across more than one mode. GrainCorp every opportunity to extract benefits The main intermodal inefficiencies include: for themselves through being fully vertically • slow grain loading at handling and storage sites; integrated along the supply chain.” • dead time as a result of the non-24 hour operations As well: of ports and up-country receival sites; “AWB considers the major issue is more the long • loading trains at less than capacity; and term lack of recurring investment in the supply • sub-optimal planning and co-ordination between the chain, especially in the transport (below rail) sector. various parties involved in the wheat supply chain. This below rail issue stems from 20 years of under-investment in the rural rail network by state The non-24 hour operation of ports and up-country governments and is not related to contracted rail receival sites is contributing to significant inefficiencies rates between AWB and rail operators.” in the supply chain. This is because trains are often delayed from unloading at the port because the port Certainly, there has been under-investment in certain is closed when the train arrives or trains are delayed parts of the supply chain; it is widely accepted that in loading as a result of having to wait for up-country many rail lines (particularly regional rail branch lines) receival sites to open. Savings in the order of AUD 3.00 require considerable upgrading and maintenance, 21 per tonne and upwards could be made from introducing but it is uneconomic to do so. full 24 hour operations along the supply chain. A consistent message to the WEA is that AWBL’s However, AWB(I) has said to the WEA that: gate-keeper role in the supply chain has prevented investors from capturing any value from increased “AWB considers that the modal interface is not the investment. For example: source of the major inefficiency in the supply chain. The modal interface issue, whilst annoying is an issue • investors in improved grain handling/storage are not of hours of operation only. This is easily rectified by able to capture the financial benefits. Increased costs incentive payments to BHCs to work longer hours. of investment have meant the same or higher costs for This has been a standard arrangement between bulk handlers (as compared to AWB(I)), but with the AWB and BHCs when the additional cost is justified.” benefit of the investment being captured by AWB(I) in lower rail costs associated with faster handling; and • lower rail costs have been negotiated by AWB(I)/ AWBL for growers’ benefit in the short to medium term however this benefit has been at the expense of the rail companies capturing any benefit from investment over the medium to long-run. In many cases, the 21 As an example, see Paul Hamersley 2007, Western Australia’s Grain Freight Network Review, Department for Planning and prices negotiated have not been cost and risk Infrastructure, Perth. reflective, thereby providing the wrong incentives.
20 Supply Chain
Under-investment has also occurred partly as a result of This suggests that AWBL’s role as the traditional the nature of the industry. The provision of supply chain gate-keeper in supply chain negotiations is expected services has traditionally been governed by short-term to reduce in influence, with a subsequent increase in contractual relationships, while investment in supply rail rates negotiated. Whether or not this will result in chain infrastructure requires medium to long-term increased rail investment is difficult to determine. commitments. The information advantages available to AWBL as In conclusion, there are good reasons to believe that gate-keeper have made it hard for industry to cooperate additional investment in handling and storage would be in solving coordination problems. The recent demise beneficial for growers. The WEA reiterates, however, of ExGL23 (a joint venture between GrainCorp and that the issue of the grain supply chain is complex, AWBL) further highlights the traditional lack of sustained and improvements will require the cooperation of all cooperation between AWBL and the supply chain parties, and consideration of a range of operational, providers. regulatory and funding issues. In the WEA’s Growers Report 2006, the WEA concluded that “AWB(I) appears unable to use its market power to Benefits of AWBL’s management of significantly influence country storage and handling the supply chain costs,” but it should be noted that where AWBL owns a competing site, it does appear that AWBL has AWB(I)’s exclusive rights to market export wheat constrained the fees charged by non-AWBL handling involves taking up-country ownership. It is this feature and storage companies. AWBL’s gate-keeper role in of up-country ownership — a gate-keeper role in terms the wheat supply chain has, however enabled the of supply chain negotiations — which AWBL argues National Pool to negotiate significantly lower rail rates provides it with the ability to manage the flows of wheat than otherwise would have been the case over the through the supply chain more efficiently than otherwise. past five to seven years. In general, the benefits (such as an enhanced ability to capture blending premia) from managing the supply chain may include the ability to take a system-wide view of wheat availability once received into the National Pool. At this stage the WEA has not been able to determine the value of these increased abilities. As previously noted by the WEA, AWB(I) has claimed that an important benefit of the Single Desk is the power it provides AWB(I) to negotiate more favourable handling and storage rates with bulk handling companies. AWBL’s gate-keeper role in the wheat In NSW it is expected that the rail rates previously supply chain has enabled the National negotiated by AWBL with Pacific National will significantly Pool to negotiate significantly lower rail increase once the current contracts have expired.22 It is understood that the lower rates previously negotiated rates than otherwise would have been with the NSW rail monopoly which has since been the case over the past five to seven bought by Pacific National were extremely low and years. However, AWBL’s influence is were a result of the NSW Government wanting to have a long-term contract with AWBL upon its privatisation. expected to reduce with a subsequent increase in rail rates negotiated. For example, rail rates previously negotiated
22 Single Vision Grains Australia 2007, Transport Infrastructure by AWBL in NSW with Pacific National Issues Paper Three: Policy Responses for the Australian Grains Industry, January, Melbourne, p. 12. will significantly increase once the 23 See Hemphill, P. 2007, ‘Sun sets on logistics arrangements’, Weekly Times, 28 February, p. 99. current contracts have expired.
ADDENDUM TO THE GROWERS REPORT 2006 21 Bags and Container Exports
The WEA’s approach to testing benefits bias (ie. the contract information voluntarily provided to to growers from non-AWB(I) bags and the WEA may not be representative of all contracts). container exports The more robust analysis of AWB(I) and non-AWB(I) container and bag sales shows that: Price comparison — non-AWB(I) to • in the largest bags and container market for AWB(I) exports non-AWB(I) exports, Vietnam, non-AWB(I) exporters As reported in the Growers Report 2006 the WEA out-performed AWB(I) pricing for the period tested; approached all non-AWB(I) exporters to obtain details of • in comparison to non-AWB(I) exporters, AWB(I) their export sales between January 2004 and December achieved higher prices for its bags and containers 2005. The data obtained was compared to AWB(I) data in five instances: for the same period. The analysis showed that for the – AH and APH in Thailand; 16 countries in question evidence exists that non-AWB(I) – APH in the United Kingdom (UK); and exporters gained better prices for container and bag – AH and APW in Myanmar — the result for Myanmar exports than AWB(I) in some of those countries. needs to be treated as an exception as AWB(I) has informed the WEA that it is not willing to take on For this Addendum the analysis of AWB(I) and non- the full credit risk in Myanmar and does not object AWB(I) container and bag sales was repeated for the to AWB(I) customers purchasing additional same period with additional non-AWB(I) prices and requirements from container traders. contracts. The increased sample size (Figure 12) provides the WEA with additional confidence that the Given that the volume of non-AWB(I) sales of AH in results presented below are accurate. The WEA does Thailand is minimal (3,587 tonnes during the last year acknowledge, however, that there is a risk of selection for these two wheat grades) and the volume of AWB(I) sales of APH to the UK during the same period is minimal Figure 12: Non-AWB(I) price information obtained by the WEA for the period (987 tonnes), the only substantive price advantage January 2004 to December 2005 2006 Growers achieved by AWB(I) when selling Australian wheat in Report Addendum bags and containers is for APH and APW in Myanmar. Number of consents used in the analysis as a percentage of all consents shipped 43.20% 52.60% The consistently higher prices for non-AWB(I) exporters Number of contracts provided as a (subject to the unique market circumstances for 11.15% 14.98% percentage of all consents shipped Myanmar noted above) suggest that non-AWB(I) Percentage of total non-AWB(I) tonnes exports are not undermining the National Pool. shipped under the consents used in the 43.68% 78.74% analysis It is important to note that these results showing superior prices for non-AWB(I) exporters are obtained from a regulated environment where the WEA has already screened out those exports that could have had an impact on the National Pool. This is reflected in Figure 13, note the lower number of consents issued in comparison to the applications received. The lower number of consents that ship reflects competition by non-AWB(I) exporters to supply to the same customer, yet price analysis indicates that this price is superior to AWB(I).
Figure 13: WEA Non-AWB(I) bag and container export statistics No. of No. of No. of applications consents consents received issued shipped against 794 689 287 Tonnes Approved 2,118,685 While bag and container exports make up a small proportion of Australia’s wheat exports, they can play a key role in developing Tonnes Shipped 474,285 new markets. Note: Non-AWB(I) bags and container exports are less than 5% of total wheat exports.
22 Bags and Container Exports
Intermodal issues, such as limited operating hours and cooperation along the supply chain can have a negative impact on exports.
Prices paid to growers • from growers, where the exporter purchases the grain When analysing the prices paid to growers as a result of but does not have a buyer at the time to sell it to — in the prices received from international sales contracts, it effect, the exporter is taking a position on the market; needs to be understood there is not always a direct line • from the trade, on farm — a grower’s grain can be of sight between a particular grower contract and a sold a number of times on specification before it is particular export wheat shipment. This occurs because picked up and delivered to a container packing plant; grain stored off-farm is generally commingled and • from the trade, in storage (bulk storage and handling exporters buy from a range of suppliers and allocate provider); these purchases into a variety of sales, both domestic • Delivered Container Terminal — there is considerable and export. grain traded this way ready to export; and The purchase price from the grower may reflect the • AWB(I) domestic tenders. market on the day and it is possible that the particular Some exporters also run pools, where wheat may find export deal is not finalised on that day. In reality, there its way to domestic users, be exported in containers or is generally a complete disconnect between the sold to AWB(I). sale/purchase because of the allocation and logistics processes that go into a particular shipment. In summary it is difficult to compare prices paid to growers as a result of particular international sales Non-AWB(I) exporters can purchase wheat in a variety contracts. This statement applies equally to AWB(I) of ways including: and non-AWB(I) sales. • from growers, in a back-to-back deal — in this case the exporter completes both sale and purchase on the same day (ie. so the margin is locked in and there is little risk of default);
ADDENDUM TO THE GROWERS REPORT 2006 23 Please take a moment and visit the WEA website for the latest wheat export information, www.wea.gov.au including our new Fact Sheet series, Annual Report for 2005–06 and our Corporate Plan (2005–07). Join our email list © This publication is copyright. Apart from any use as You can also join our free email information service via our web site or contacting permitted under the Copyright Act 1968, no part may our office. be reproduced by any process without permission. Joining our list will give you first access to our monthly electronic newsletter, WEAt News and other important information on wheat marketing issues. ISSN: 1449-177X
Text and Editing: Contacting the WEA: Wheat Export Authority The WEA is interested to hear from its stakeholders, including growers, exporters and agricultural consultants. Photos courtesy of: CBH Group Wheat Export Authority Australian Government Department of Suite 2, Royal Life Saving House Telephone: (02) 6202 3400 Agriculture, Fisheries and Forestry 26-28 Napier Close Facsimile: (02) 6202 3499 DEAKIN ACT 2600 Email: [email protected] Printing: National Capital Printing, Canberra WEA Board Members Published: Mr Tim Besley, Chairman (02) 6202 3400 March 2007 Mr David Bedbrook, Independent Member (08) 9388 1377 Mrs Barbara Clark, Grains Council of Australia (GCA) nominee (02) 6754 7152 Mr Leith Cooper, GCA nominee (08) 8665 4023 Mr David Mortimer, Government Member (02) 6272 5781 WEA Annual Report and Financial Statements Full financial statements for 2005–06 are now available in the WEA’s 2005–06 Annual Report. The report was tabled in Parliament on 28 February 2007 and is now online at www.wea.gov.au. If you would like a hard copy please contact us. um Addend