PRIMARY INDUSTRY: by Patrick J. ByrneNews Weekly
Wheat industry win, but final outcome uncertain
, June 9, 2007
Wheat farmers have been given until March 1 next year to form a new single selling-desk system, or face possible deregulation of the wheat marketing system. Patrick J. Byrne reports.The Prime Minister John Howard has bowed to strong pressure from the big wheat industry groups and the National Party, agreeing to continue the single selling-desk for wheat.
Wheat-growers have been given until next March to establish a new single-desk marketing system completely separate from AWB Ltd. This may involve the demerger of AWB International - which has been the industry's single desk - from AWB Ltd, or it may involve the creation of an entirely new body.
The demerger option will require the consent of both A and B-class AWB shareholders. It will require 75 per cent of B-class shareholders to agree to the demerger.
Until then, the status quo will remain, with the AWB holding the national export wheat pool and the Federal Agriculture Minister, Peter McGauran, holding the power to issue export licences for another year.Power of veto
Then this power of veto will be handed to a revamped Wheat Export Authority, which will have the right to grant export licences to other players in "exceptional circumstances". This might occur if one seller is locked out of a particular market for some reason, or where the pool manager is "demonstrably" not looking after the interests of growers in a particular market.
Four main wheat industry groups backed the continuation of the single desk - AgForce, the Victorian Farmers Federation, the NSW Farmers Association and the WA Farmers Association.
About three-quarters of wheat-growers back the single desk, arguing that it is necessary in the absence of an international level playing-field. The destiny of the industry is now in the hands of the major wheat industry groups. The solution has been thrown back to wheat-growers, but is the Federal Government's decision just a stay of execution?
The Prime Minister has said that if the industry fails to establish the new single-desk marketing system by March, then all options will again be on the table, including deregulation of the industry. While a good majority of farmers back the single desk, a vocal minority are committed to deregulation of the industry and opposed to any new desk arrangement.
Also, the Federal Government has refused to assist in funding the capitalisation of the new body. Establishing the new body may cost hundreds of millions of dollars. Borrowing this money for commercial markets will prove costly.
A further problem is the separation of the power of veto, to be eventually held by the Wheat Export Authority (WEA), from the single desk. A national wheat-pool system registers and manages stocks of different types of wheat that are then blended to meet the orders of customers. This may involve holding small stocks of niche grains to be used in the blending process.
If a body like the WEA, separate from the single desk, issues licences to export such niche grains, it will create problems in managing the wheat pool. Managing varieties of wheat stocks is vital to satisfying commercial commitments years into the future.
Also, the effective management of this pooling system will be complicated by a further concession of the Government in the direction of deregulation. As part of the new arrangement, the Government has agreed to allow the export of bagged and containerised wheat without needing the consent of the WEA.
As pointed out in the last issue of News Weekly,
"A pool manager needs the single desk with the bulk veto power, i.e., the right to be a sole seller, to effectively and efficiently hedge the wheat price components on forward markets and to make shipping arrangements with certainty. In other words, the single selling-desk underwrites pool deliveries (because knowing the national pool volumes is vital for forward selling) and marketing risks.
"Veto power also provides certainty by allowing the national seller to enter into forward contracts with long-term customers, providing them with confidence that they will receive their wheat under the contracted conditions years ahead. Single-desk collective marketing reduces the costs and shares the burden of a stable wheat marketing system."
The AWB is currently providing $150 million plus in capital guarantee as hedging for the national wheat pool. The cost of establishing the new desk could range from $15 million to $200 million, depending on whether risk management functions are retained by the new single desk, or contracted out to professional risk-management firms.
While the single desk has been saved for the moment, the final outcome is far from certain.