Australia’s media has chronicled a rash of problems with the country’s wheat export marketing system since it was deregulated July 1, 2008.Problems include difficulties getting grain to port and concerns about the quality of wheat leaving Australia. Consequently, many Australian farmers long for the good old days of the single desk system. Michael Schaefer isn’t one of them.”Monopolies are bad for everyone and single desks are worse,” said Schaefer, chair of the South Australia Farmers Federation grains committee.The SAFF has been a long-time philosophical opponent of the single desk system, which was introduced in 1939 with the creation of the Australian Wheat Board.The AWB’s export monopoly ended in large part because of the oil for food scandal, in which the organization paid kickbacks to Saddam Hussein’s government to sell wheat to Iraq.”Your (Canadian Wheat Board) hasn’t behaved as badly as ours did, with the oil for food program,” Schaefer said.”The problem is because they aren’t actually buying the grain, so it doesn’t matter what price they sell it at. There’s no pressure on them to perform…. The more people that compete for your grain, the better off that you are.”In Canada, where the future of the wheat board is hotly debated, there are supporters and critics of Schaefer’s perspective. But for Australian farmers, it’s no longer a debate of ideas. They’re now living with new and evolving arrangements for exporting wheat.
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End of an era
Critics and defenders of the single desk system have often compared the AWB to the CWB, yet liberalization of the Australian wheat market began more than two decades ago. In 1989, the Australian government removed AWB’s monopoly on the domestic grain market. Then in 1999, the government began privatizing the organization, transforming it into a publicly traded company with a new name, AWB Ltd.That change to its corporate entity was a turning point in AWB’s history because it initiated a power struggle that divided the organization, said Derek Clauson, a farmer near Bencubbin and former president of the Western Australia Farmers Association.”It became a publicly listed company with the majority of the board elected by growers,” he said.”But once it became publicly listed with non-grower shareholders, you then had a tug of war as to which way the profits in that entity went. And that’s what really started the demise of AWB and the single desk in Australia.”The open market that replaced the AWB’s export monopoly caused a multitude of businesses, from Australian startups to international grain giants like Cargill to enter the fray and they now compete to buy wheat from Australian farmers.Twenty-nine organizations are accredited to export bulk wheat from Australia, but most of them don’t own inland grain terminals or port facilities, which has contributed to logistical chaos.
Bulk handlers
Viterra, CBH Group and GrainCorp dominate Australia’s grain handling industry, but none of them compete head to head.Viterra has a monopoly in South Australia, GrainCorp controls the eastern half of the country and CBH Group dominates Western Australia. “It isn’t the deregulation of the wheat market that’s been the problem,” said Schaefer, who farms near Buckleboo northwest of Adelaide. “We’ve gone from a monopoly, AWB, to having three regional monopolies.”The monopoly in Schaefer’s region is held by Viterra, which bought ABB Grain in 2009.”They (Viterra) control the transport, effectively, to the port,” he said, because the company owns 90 percent of the up-country storage and all of the export terminals at ports in South Australia.SAFF complained for years about ABB’s powerful impact on farmers.”Control of the grains supply chain in South Australia has extracted revenue from growers to benefit a single company, ABB Grain Ltd. and its shareholders, by providing effectively uncontestable storage and handling services,” the federation wrote in a May 2009 submission to the Australian Competition and Consumer Commission.Added Schaefer: “A conservative estimate is that there’s $15 (per tonne) in the supply chain that’s not getting back to the grower.”Based on conversations with Viterra, he’s hopeful that the company will break with the past and try to develop an efficient transport system.However, he said international buyers have become reluctant to load grain from the terminal south of his farm at Port Lincoln because they can’t depend on wheat getting to the port on time. In a company statement, Viterra said it’s working hard to develop a healthy relationship with growers in the region, adding it’s not unusual in Australia’s grain industry for one company to dominate the marketplace.”Viterra does own the majority of the grain receival infrastructure in the state,” it said.”Having a single operator of the central storage system in South Australia is not a recent development. This has been the case in South Australia for decades … and this is a very similar situation to other grain growing states in Australia.”
Co-operative monopoly
Growers in Western Australia haven’t been as frustrated with their regional monopoly, CBH Group, mostly because producers own and direct the co-operative.”In Western Australia, we believe that grain handling costs to a grower are $15 to $30 a tonne cheaper through CBH Group than growers in the eastern states are paying to fully commercial bulk handlers,” said Clauson, who farms in the state’s wheat belt.CBH Group chief executive officer Andy Crane said there have been ‘teething problems’ in the transition to an open market. However, he said it has gone fairly smoothly given the scope and speed of change.CBH Group owns the vast majority of inland terminals in Western Australia, but there’s open competition for farmers’ wheat because all 29 grain exporters can post a price at the co-op’s 197 elevators, Crane said.There is a catch, however. Exporters who store their grain at CBH Group’s elevators must let the co-op transport the wheat to port via rail. “The grain (is) brought to port for them to meet their vessels as a consolidated task at a single transparent pricing mechanism … charged to the growers,” Crane said.Critics such as the Institute of Public Affairs in Australia say this has resulted in ships waiting in port because the co-op can’t efficiently move grain through the state’s aging and sprawling rail network. Further complicating matters, CBH Group and the other regional monopolies own the port terminals. There are rules that require the monopolies to provide reasonable access to other exporters, but they have little incentive to make life easy for their export competitors.Producer John Nicoletti said it’s ridiculous in Australia’s post-deregulation environment that there isn’t competition in transport and handling charges.”When my farmer friend delivers 500 tonnes of wheat, his cost is exactly the same when I deliver 100,000 tonnes. I don’t think that’s acceptable,” said Nicoletti, who grows 200,000 acres of crops, has 35 full-time employees and is the second largest wheat producer in the country. Nicoletti is attempting to convince other large growers to bypass the CBH Group, eventually forming their own company that would store, handle and export wheat. “If I can save myself $10 or $12 a tonne … it’s all about bottom line,” he said. “It’s not about saying I want to support the CBH system.”Nonetheless, Crane believes most farmers want to support a grower-owned co-op.”But we’ve been able to put forward a very good case that at least they have one organization which is theirs, doing both those tasks. Storing and handling the grain … and buying it from them and marketing it overseas.”
Problems of quality
Despite the irritant of monopolies, Australian growers have usually supplied the world with high-quality wheat. That stellar reputation is now in question. “Many buyers I talk to are unhappy with the general direction of Australian wheat quality,” Global Grain head Tim Dewan told Reuters News Agency.Clauson said the decline in quality is easily explained because exporters are seeking ways to cut corners.”This is clearly a function of competition, looking to blend wheat at the cheapest selling price … to be the most competitive into any marketplace.”The consequence to growers, should this trend continue, will be the loss of a profitable crop, said Mark Hoskinson, a producer in New South Wales. When the AWB had its monopoly, a program called Golden Rewards gave growers a premium for high protein, low moisture wheat. With the incentive gone and exporters in a race to the bottom, Hoskinson said, smaller farmers may have to raise livestock or try alternative crops if they want to make money.Crane said container sized shipments have been the primary source of quality complaints. “Yes there’s been some quality issues, but the industry will get together and we will resolve that very quickly.”While quality issues have been a surprise, so has the resilience of pool pricing in a country that disposed of its national pool system.
Pool boys
CBH Group and AWB exported 51 percent of Australia’s wheat in the 2009 crop year. Most growers who supplied wheat to those companies were paid through pricing pools. “You had these people who advocated that pools would disappear with deregulation. We’re seeing more and more competition in the concept of pooling and I think pooling is here to stay,” Clauson said. “Grain Corp, Viterra, they all offer pools, as does CBH.”Another emerging player in the grain pooling business is Emerald Group, which will manage eight percent of Australia’s grain crop this year.Mike Chaseling, deputy chair and one of the founders of Emerald Group in 2004, said pools remain popular with Australian farmers because of the simplicity of the system, payment flexibility and market averaging over time. However, it’s not a case of big growers doing their own thing and smaller producers going into pools.”We have a number of customers who are very large producers who participate in our pools, growers in the vicinity of 30,000 to 40,000 hectares (75,000 to 100,000 acres),” he said. “We prefer to think about growers in terms of attitude rather than scale, just the same way people have different attitudes to investing for retirement. “Some want to be in full control … others want to work with professional management so as they can concentrate on what they see as their core business.”Emerald Group’s growth and success since 2004 is likely connected to its willingness to work with wheat, canola, barley and lupin growers. The company has gone into business with several producer associations across Australia, forming subsidiary companies that funnel grain to Emerald Group and profits back to growers.”We believe producers have a desire to participate in the bounty of liberalization and one positive way to do this was to be in the business beyond the farmgate,” Chaseling said. “The partnerships are built around the pillars of mutual respect, trust, openness, service, competitiveness and a distinct lack of paternalism – a clear and unwanted feature of the Australian industry and its relationship with producers in the past.”
Looking ahead
Although there are no guarantees, Crane agreed that pricing pools would likely retain a fair share of the Australian wheat market.”For areas (like Western Australia) that produce large export surpluses that may not all be marketed immediately after harvest, I still think there will be demand from growers in export dependent states to use pools as part of their marketing mix,” he said. Pools may persist, but Crane doubts there will be 29 exporters of grain a few years down the road. On the farm, more producers are now relying on professional marketers and Crane expects that trend to continue.”What we’ve seen is a strong development of consultants … and I would see that maturing.”Some farmers may rely more on marketing experts to remain profitable, and Chaseling said wheat growers will likely join together to protect their interests.”We think the trend to growers banding together will continue, particularly as consolidation pushes companies further away from their supply base.”
