0 AWB LIMITED ABN 99 081 890 459 Telephone 03 9209 2000 380 LaTrobe Street, Melbourne, V~ctor~a3000, Australla Facslrnlle 03 9670 2782 AWB GPO Box 4562, Melbourne, V~ctoria3001, Australla www.awb.corn.au 05 June 2007 Mike Woods Commissioner Productivlty Commission Regulatory Burdens -Primary Sector PO Box 80 Belconnen ACT 2616 Dear Mr Woods AWB welcomes the opportunity to support the annual Product~v~tyCommission revlew of regulatory burdens on business in the primary sector. This review is a timely consideration of wider compliance burdens in the wheat industry, particularly in the grains industry supply chain. AWB belleves that these considerauons w~llcomplement the Austral~anGovernment's recent consultat~ons on wheat marketing and also ass~stthe scheduled 2010 Nat~onalCompet~tion Pol~cy revlew of wheat marketmg arrangements. To asslst the Productivlty Comm~ss~on,AWB has provided a copy of the ITS Global report prepared by Alan Oxley, on the impact of international trade reforms and regulatory changes on Australia's wheat marketmg arrangements. The key conclusions of the ITS Global Report are that: Further changes to Single Desk arrangements for marketing Australian wheat overseas are warranted, but they should be gradual and linked to the global trade reform timetable and structural adjustment within the domestic grains industry, to ensure wheat growers are globally competitive and financially viable. Change for change's sake is l~kelyto be counter-productive and rap~dchange of the Single Desk arrangements would mcur h~ghunintended costs for wheat growers, especially those 12,500 small to medlum wheat growers m the eastern wheat belt of Western Austral~an,the Eyre Peninsula of South Australia and western New South Wales, who rely on collective markeung to sell then crop. Deregulation of the current Single Desk arrangements will not produce a contestable market for the sale of Australian wheat unless regional monopolies in grain handling and storage in Western Australia, South Australia and New South Wales are comprehensively over-hauled as part of a structural adjustment process. The Single Desk should be maintained under current arrangements long enough to give wheat growers time to adjust and the grains industry time to establish alternative marketing arrangements. The National Pool should therefore be allowed to manage through the current harvest (2006-2007) and the next harvest (2007-2008) and sell all the Pool wheat on international markets through the normal 18 month cycle (until 2010). This would avoid undue fmancial uncertainty and stress during the current drought and maintain critical high value markets in Asia and the Middle East, which would be targeted opportunistically by international competitors such as Cargill (which is a shareholder in Grain Corp), Archer Daniels, Louis Dreyfus, and Bunge. AWB has also included a copy of the Western Australian Chamber of Commerce and Industry (CCIWA) Report "Implications of Wheat Marketing Deregulation". The CCIWA report serves as a case study of grain industry supply chain and marketing issues in Western Australia, which was chosen because it is the major wheat exporting State. However the issues raised by the report arise in all States where grain is produced and exported. The key regulatory findings of the report are: On the basis of the Competition and Infrastructure Reform Agreemerlt signed by COAG in February 2006 as part of the New National Reform Agenda, it is imperative that the port facilities controlled by bulk handlers are reviewed by the WA Government to determine whether regulation is warranted in order to promote competition in the wheat industry. In Western Australia, the ERA exists to promote competition and fair market conduct, and prevent the abuse of monopoly or market power. If it is deemed that the main bulk handling company is abusing its market power in relation to its storage and handling infrastructure, the WA Treasurer could refer this issue to the ERA to be investigated. Such a referral would be consistent with the WA Gover~nnent'sobligations under the New National Reform Agenda. Seeking to have the infrastructure owned by bulk handlers declared an essential service for the purposes of Part IIIA of the TPA represents a legal avenue for access, if it is deemed that access cannot be obtained on "reasonable" terms and conditions at "fair" prices. The ITS Global and the CCIWA reports provide the Productivity Commission's Annual Review of Regulatory Burdens on Business with independent analysis of regulatory issues confronting the Australian grains industry. These reports highlight the need for a whole of industry approach to measured reform that alleviates the regulatory burden on wheat growers at all levels of government. AWB is committed to the development of more efficient wheat marketing arrangements and to the removal of regulatory and compliance burdens in the grains industry. We will continue to work with all parties to find a way forward, and to ensure that Australia has the best possible wheat marketing arrangements and regulatory environment for growers and the industry. Yours sincerely, Robert Hadler General Manager, Corporate Affairs AWB Limited Sustaining Australia’s wheat export markets p1 of 87 Sustaining Australia’s wheat export markets Report for AWB by ITS Global November 2006 ITS Global 1 Sustaining Australia’s wheat export markets p2 of 87 ITS GLOBAL International Trade Strategies Pty Ltd, trading as ITS Global Level 26, 35 Collins Street, Melbourne, 3000 Tel: (61) 3 9654 8323 Fax: (61) 3 9654 4922 http://www.itsglobal.net Commercial-in-confidence. The views expressed in this publication are those of its authors. The consultant takes no liability for commercial decisions taken on the basis of information in this report. The information is accurate to the best of the consultant’s knowledge, however the consultant advises that no decision with commercial implications which depends upon government law or regulation or executive discretion should be taken by any person or entity without that party’s having secured direct advice from the government agency concerned in writing. ITS Global 2 Sustaining Australia’s wheat export markets p3 of 87 Table of contents Executive Summary 4 Introduction 8 Part 1. Wheat Marketing: Structure and Key Impacts 10 Part 2. The Competitive Environment for Australian Wheat Growers 14 Part 3. Exploring Changes to the Marketing System 24 Reference list 28 Abbreviations 36 Appendices Appendix I. Single Desk: History, Structure, Value Components 39 Appendix II. The Competitive Environment for Australian Wheat Growers 55 Appendix III. Scenarios for Changing Wheat Marketing Assessed 62 Appendix IV. Australia’s Role in Global Wheat Markets 69 Appendix V. Traditional Threats to Australia’s Wheat Growers 76 Appendix VI. Emerging Volatility in Wheat Markets 79 ITS Global 3 Sustaining Australia’s wheat export markets p4 of 87 Executive Summary Key findings The Single Desk arrangement carries very significant implications for the position of Australian grains in world markets and the welfare of Australian growers. ITS Global has concluded that any action to deregulate the Single Desk should be guided by the following: Further changes to Single Desk arrangements for marketing Australian wheat overseas are warranted, but they should be gradual and linked to the global trade reform timetable and structural adjustment within the domestic grains industry, to ensure wheat growers are globally competitive and financially viable. Change for change’s sake is likely to be counter-productive and rapid change of the Single Desk arrangements would incur high unintended costs for wheat growers, especially those 12,500 small to medium wheat growers in the eastern wheat belt of Western Australian, the Eyre Peninsula of South Australia and western New South Wales, who rely on collective marketing to sell their crop. Deregulation of the current Single Desk arrangements will not produce a contestable market for the sale of Australian wheat unless regional monopolies in grain handling and storage in Western Australia, South Australia and New South Wales are comprehensively over-hauled as part of a structural adjustment process. The Single Desk should be maintained under current arrangements long enough to give wheat growers time to adjust and the grains industry time to establish alternative marketing arrangements. The National Pool should therefore be allowed to manage through the current harvest (2006-2007) and the next harvest (2007-2008) and sell all the Pool wheat on international markets through the normal 18 month cycle (until 2010). This would avoid undue financial uncertainty and stress during the current drought and maintain critical high value markets in Asia and the Middle East, which would be targeted opportunistically by international competitors such as Cargill (which is a shareholder in Grain Corp), Archer Daniels, Louis Dreyfus, and Bunge. ITS Global 4 Sustaining Australia’s wheat export markets p5 of 87 The production of wheat is a vital part of Australian agriculture and the Australian economy. It generates 0.72 percent of Australia’s GDP and provides employment to around 30,000 wheat growers, as well as harvest contractors, transport operators, storage handlers, marketers and millers. The multiplier effect is considerable, particularly in rural and regional communities. Australian wheat producers rely heavily on export markets, with an average of 75 percent of production, by volume, heading overseas each year.1 Australia is one of the world’s largest wheat exporters, accounting for over 15 percent of global wheat exports. Important export markets are located predominantly in developing countries in Asia and Middle East/Africa, with valuable markets in some developed countries, such as Japan. These are very difficult markets in which to trade. They are highly distorted by the wealthiest governments in the world economy. They are also highly competitive and volatile, subject to political and economic insecurity, the vagaries of weather, the impact of new technologies and year-by-year fluctuations in production.