TRADE: by Colin TeeseNews Weekly
Safeguarding our $800m wheat contracts
, April 19, 2003
The Australian Government has identified a cruel reality associated with the war in Iraq. It concerns the future of our wheat sales to that troubled nation. The big end of the wheat industry hasn't realised - if the views of some of the large growers are any indication - quite what is going on. It seems intent on convincing itself that nothing will change.
Despite the misplaced optimism of some industry leaders, after the war is over we are likely - very likely indeed - to lose a substantial part of our $800 million wheat trade with Iraq.
Our Trade Minister, Mr Vaille is obviously worried - and rightly so. But what can he do? Well he's talked tough. More than half of our wheat is supplied under a UN aid program. He insists that this must continue after the war - but will it? What if the big subsidised producers carrying large surpluses want some or all of that and are able to give the UN a better deal than us?
Mr Vaille has also said Australia would not tolerate US wheat subsidies being used to undercut our commercial sales. Fine. But what can he do to prevent it?
The Minister is, however, looking for another pressure point. He hasn't actually mentioned wheat but he has raised the question - as it were out of the blue - of food aid. He has said food aid must not be allowed to divert trade flows.
Nor should it. But the fact is food aid, almost by definition, distorts trade. Except in circumstances where food production is not subsidised. And that situation, to my certain knowledge, has not existed at any time in modern history. Moreover, we are unlikely to see a subsidy free world in agriculture in any realistic future time horizon.
And even the end of formal subsidies would not deliver trade related food aid. The more powerful food producing economies would always insist that their
aid package be used to purchase their own home grown product.
It could happen that all food aid moneys are pooled and the purchases of food aid are placed in the hands of some independent agency. But don't bank on that happening. Mr Vaille's stated dream of reaching some kind of agreement on food aid with the United States seems also unlikely to be realised.
A working agreement on food aid cannot be concluded bilaterally. To be of any use it would have to include all of the major wheat producers (all of whom subsidise their farmers), and that could only be done in the World Trade Organisation.
Such an outcome would, indeed, be an essential part of any useful agreement on agricultural subsidies. But as we all know, WTO negotiations on agriculture, at least for the moment, are not going anywhere.
The reality is that food aid has always been a convenient waste pipe through which subsidised surpluses of agricultural production may be passed. Most probably it will continue to be.
So what is going to change after the war in Iraq? We had that market before the war, why won't we keep it?
True, we did have the market, but look at the reasons behind that fact. At the time of the Gulf War, the United States was the biggest supplier of wheat to Iraq. Mostly, it was supplying around one million tonnes a year. All that came to an end in 1998 when Saddam Hussein effectively banned imports of US wheat.
Since then Australian sales have steadily risen. Last year we sold two-and-a-half million tones of wheat to Iraq worth around $800 million.Food aid
The turn around has already begun. According to a report in the Australian Financial Review
of April 5, the US has started shipping wheat to Iraq in the form of food aid. 600,000 tonnes, reportedly, has been released from its stockpile for that purpose: 200,000 tonnes has already been shipped. That's nearly 30 per cent of what we have been supplying commercially and through the UN aid program. So the situation is already serious, and will get worse.
Mr Vaille appears to be doing what he can. What the Government must now hope is that the US might hold back its subsidised exports out of gratitude for what we have done to help them in Iraq. That's unlikely on past experience. In any case, Australia has always argued that trade and politics should be kept separate.
What about the wheat industry's position? Generally it has been unhelpful to the Government. One influential grower was reported as saying there would not be a problem because Iraqi mills were set up to process Australian wheat. He wishes!
At a more informed level, the response has hardly been more realistic. A former Wheat Board Chairman, who is now consulting to the Board, reportedly, "doesn't think we will have trouble with the US" who won't want a fight over trade. How come, he might be asked, through all the years of our political support for the US, they have always been prepared to go after us on trade?
According to the same expert, it's the French, with their subsidised wheat we have to worry about. Who is this man trying to kid? The French? After the war in Iraq the US will be running the place. Does anyone seriously believe that they will allow French wheat to displace the US in the Iraqi market?
Despite all the misplaced optimism about the future, it seems unlikely that we will hold sales at anything like our previous position. The problem will be wheat from the USA and India, rather than the EU.
Nobody can yet estimate how much damage our exports will sustain. But if the situation is really serious, then we can expect an approach to the Government for help, based upon the problems created by subsidy for wheat growers in export markets.
That, indeed, would be interesting. Because the big end of the industry has been a strong defender of market economics and deregulation in the interests of competition. If those commercial interests come seriously under threat in an important market such as Iraq, we will soon see how firm their commitment is to going it alone without the advantage of a differential domestic wheat price and a fully fledged government backed selling agency.