May 26th 2007


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Articles from this issue:

COVER STORY: CANBERRA OBSERVED: Kevin Rudd still in front

EDITORIAL: East Timor: end of the Fretilin era?

HOUSING: Soaring house prices give illusion of wealth

LABOR PARTY: Sir Rod Eddington, Labor's business guru

PRIMARY INDUSTRY: Vital issues in wheat single-desk decision

OPINION: Family First takes on Howard's workplace laws

DRUGS CONFERENCE: Reality check needed on illicit drugs

SCHOOLS: Choice would be eroded by centralisation

INTELLIGENCE CORNER: Shssh - don't mention the war!

WORLD HEALTH ORGANIZATION: Politics could worsen global health pandemic

QUARANTINE: Drought used as excuse to relax quarantine standards

STRAWS IN THE WIND: No kangaroo meat - thank you very much / Tony Blair - a class act / Vladimir the Cruel / Turkey - between a rock and a hard place

UNITED STATES: US Supreme Court bans partial-birth abortion

WORLD AFFAIRS: Islam: the questions which must be answered

States more accountable than Canberra (letter)

Problems facing Brisbane-to-Melbourne rail-link (letter)

News Weekly informative, timely (letter)

The media and freedom of speech (letter)

CINEMA: A luminous film of great beauty

BOOKS: WHAT'S LEFT? How Liberals Lost Their Way, by Nick Cohen

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PRIMARY INDUSTRY:
Vital issues in wheat single-desk decision


by Patrick J. Byrne

News Weekly, May 26, 2007
As farmers struggle to recover from the drought, wheat-growers need stability and certainty, something the wheat single selling-desk provides. Patrick J. Byrne reports.

If the Federal Government wants to either remove the single selling-desk for export wheat from AWB or abolish the desk, it will have to also protect the commercial interests of Australian farmers.

The Government is yet to make up its mind if it is going to keep the single desk for export wheat or effectively do away with it and allow multiple sellers onto the world market. Either option raises serious issues.

The wheat industry has operated with a national wheat pool and a single selling-desk, for many years. A national pool manager, in order to maximise returns to growers, must also hold the single desk and what is referred to as exercising the power of veto over non-supportive sales by any bulk exporters.

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 desk underwrites pool deliveries (because knowing the national pool volume 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.

Currently, the AWB single desk provides $150 million plus in capital guarantee as hedging for the pool.

If the single desk were to be replaced with multiple sellers of Australian wheat, the competing sellers will cherry-pick the volume, qualities and markets. Wheat-growers in the national pool will suffer as pool-price hedging will not be optimised, opportunities for price uplift and defence missed, and the ensuing loss of discipline will allow Australian wheat to compete against Australian wheat. Australian sellers would be bidding down each other, and the price of wheat to Australian farmers.

This would undermine the $150 million plus in capital guarantee that the AWB single desk provides as hedging for the pool. There would be no certainty over volume in the national pool, begging the question: who would take on the job of hedging the pool deliveries and providing forward payments to wheat-growers?

Would the Federal Government take on the task of underwriting the pool? What if the multiple sellers were forced to do the underwriting and required to borrow around $150 million to provide hedging for pools that take four years to build and sell off? At commercial rates, the process would prove cost-prohibitive.

Alternatively, the Federal Government could take the single desk away from AWB and give it to another body, such as the Wheat Export Authority. In this event, the Government would have to ensure that AWB transfers capital and assets to a new national pool, in order to satisfy pool delivery minimum requirements.

But would separating the single desk and pool management actually work for anyone but politicians? It certainly would not work for growers.

This option would require considerable compensation to AWB as it would involve the legislative removal of a sizeable slice of the commercial operations of a publicly-listed company, and would not provide the single desk with the line of sight on capital and sales execution risk.

Volatility

Would our major banks be as supportive of wheat-growers if their farm business risk is exposed to the full volatility and corruption of the subsidised (and highly political) world wheat market?

As farmers struggle to recover from the drought, wheat-growers need stability and certainty, something the single desk provides.

- Patrick J. Byrne




























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