Single-desk selling system intact in Australian reform
October 01, 1998
by Teresa Acklin
Grower ownership and control of the Australian Wheat Board, Australia's single-desk seller of export wheat, and the diminution of direct government participation in the grain business are the primary aims of reforms under way in the Australian grain sector. At the same time, when the reform process is completed on July 1, 1999, Australian Wheat Board Ltd., the recently constituted successor to the A.W.B., is expected to retain by law the single-desk selling system under which the board has monopolized the export of Australian wheat for nearly 60 years.
The retention of the single-desk system, which has broad support among Australian wheat growers, would mean that private grain companies still would be prevented from participating directly and independently in the export of wheat once the federal government itself cedes most of its statutory controls over the wheat board on July 1, 1999. It also would mean that the wheat board would retain its capacity for discretionary pricing in world markets, to the chagrin of the United States.
The current reform effort began nearly 10 years ago, with the implementation of the Wheat Marketing Act of 1989. Until the passage of that act, the wheat board's monopoly over the domestic and export marketing of Australian wheat had been reauthorized routinely every five years. The only significant abridgment of this authority before 1989 was made in the Wheat Marketing Act of 1984, under which producers could request permits allowing them to sell feed wheat independently.
With the 1989 law, which reflected a worldwide trend toward privatization of state-owned or supported entities, the wheat board's monopoly over the domestic marketing of wheat ended. Private grain companies were free to compete with the A.W.B. in purchasing wheat directly from growers for subsequent sale to domestic flour mills and other domestic wheat processors. While the domestic market was deregulated, the wheat board's monopoly over export wheat marketing was preserved.
The Wheat Industry Fund was authorized under the act, funded principally by a levy on each tonne of wheat sold, to generate a capital base for financing the A.W.B.'s marketing activities. And the A.W.B. was directed to maximize net returns to producers by minimizing storage, handling and transport costs wherever possible, enabling the board to designate as agents of the board entities other than the state bulk handling authorities. The board was given the right to trade in other grains in addition to wheat.
The 1989 act also established a fixed government guarantee on A.W.B. borrowings in relation to pool wheat for advance payments, payments in lieu of final payments and operational expenses associated with sales. This set limits on the government's responsibility to come to the aid of the A.W.B. in the event that the board did not have sufficient money to pay back its loans.
The act pointed to the eventual end of government guarantees, which was expected to take place on July 1, 1999. At that time, the reformed wheat board, A.W.B. Ltd., will become solely responsible for its own financial operations, including borrowing the money required to provide payments to growers before revenues from sales of wheat during a particular marketing year have been garnered. These payments underpin the wheat pooling system.
Under the Australian wheat marketing system, pools are established by the A.W.B. each marketing year for the various grades of export wheat. The pooling system enables growers to share equitably in the cost of marketing the export wheat from each pool and in the revenues derived from its sale. Growers deliver wheat to authorized agents of the wheat board and receive an initial payment, or harvest payment, for the wheat within a designated period. The harvest payment is a predetermined percentage of the grower's aggregated estimated net pool return. The harvest payment and subsequent adjustments currently are guaranteed by the federal government. Any surplus funds held once a pool has been closed are distributed to the growers.
COMMERCIAL MODEL SOUGHT.
After the implementation of the 1989 act, the grain industry, the A.W.B. and the government began to prepare for the ending of the government guarantee and the establishment of a more commercially structured wheat board.
In 1989, the Grains Council of Australia, the nation's largest organization of grain growers that under current law advises the A.W.B. on its programs and policies, initiated its Grains 2000 project. A central feature of the project was the determination that the wheat board's structure would have to be changed to enable it to operate as a fully commercial enterprise. The council in 1991 convened a Grains 2000 Conference that confirmed this goal.
In 1992, it was agreed that the Wheat Industry Fund should be expanded until it accumulated a financial base of A$550 million to A$600 million ($341 million to $372 million). This would enable it to fund the reformed wheat board's operations and take over from the federal government as guarantor of the wheat board's borrowings after July 1, 1999.
In 1993, the grain industry established the National Grain Marketing Strategic Planning Unit. The working group included representatives from grain growers, merchants and processors, as well as government and A.W.B. officials. The purpose was to recommend a structure and mode of operation for a reformed wheat board.
In 1996, the G.C.A. defined five key requirements for the restructuring of the A.W.B. First, the industry wanted the single-desk selling of export wheat to be maintained. Second, it confirmed that an adequate capital base had to be built to ensure that the reformed board would be a strong commercial entity with the ability to borrow and maintain existing levels of harvest payments.
Third, the growers said the board must be able to reflect market signals, provide commercial flexibility and maximize returns to growers. Fourth, the growers asserted they wanted to control or own the A.W.B. and have access to their equity in the board. And fifth, the growers said the industry should have self-determination with regard to future structural arrangements.
Also in that year, the industry working group, after extensive debate, developed and recommended what it called the Grower Corporate Model for restructuring the wheat board and a two-stage plan to effect it. The model incorporated the basic proposals of the G.C.A.
Based on this model, the federal government on June 26, 1997, introduced the Wheat Marketing Amendment Act of 1997.
The act initiated the first of the two-stage process outimed by the working group and called for the retention of the single-desk selling system for export wheat. It also called for the establishment of three wholly owned subsidiaries of the A.W.B. to which the board's wheat marketing and financing functions were to be transferred.
A.W.B. LTD. LAUNCHED.
Under the act, on June 1, 1998, Australian Wheat Board Ltd. was established and took over the operations of the Australian Wheat Board. The move marked the beginning of a one-year transition that will prepare Australian wheat growers to take control of the grain marketing board.
The newly constituted A.W.B. Ltd. has two subsidiaries: A.W.B. (International) Ltd. and A.W.B. (Australia) Ltd. The latter is responsible for domestic wheat and other grain trading and the export of non-statutory grains. In addition, the subsidiary will manage other domestic commercial ventures undertaken by the A.W.B. Ltd.
A.W.B. (International) Ltd. is responsible for managing the wheat export pools and will be chiefly concerned with maximizing pool returns.
The parent company, A.W.B. Ltd., is responsible for all funding and the provision of shared businesses and corporate services. This company will act as borrower for the A.W.B. Group and will on-lend to the subsidiaries, particularly to the pools subsidiary, in order to fund advance payments to growers.
The second stage of the Grower Corporate Model involves the privatization of A.W.B. Ltd. under a two-tier share-holding program. This part of the plan currently is being debated in Parliament, which is considering the implementing legislation, the Wheat Marketing Legislation Amendment Bill of 1998.
Under that legislation, on July 1, 1999, the date that the government guarantees are withdrawn, Australian wheat growers would be issued non-tradable A-class shares in the A.W.B. Ltd. These shares would be issued only to growers and would give them the power to elect a majority of the board of directors of the Australian Wheat Board Ltd.
B-class shares would be issued to growers in their capacity as Wheat Industry Fund equity holders, with the number of shares issued proportional to each grower's equity in the fund. In other words, large wheat producers would receive more shares than small producers.
These shareholders would be able to initially elect two and ultimately four directors of the envisioned 11-member board of directors. B-class shares would be tradable and would be listed on the Australian Stock Exchange, perhaps as early as 2000.
Elections for the board of directors will be conducted in stages, with the first election scheduled for October, pending passage of the legislation. That election would select the first three members of the board.
The Wheat Marketing Legislation Amendment Bill also would create a Wheat Export Authority, an entity separate from A.W.B. Ltd. and its subsidiaries, which would oversee the operations of A.W.B. (International). In fact, in the W.E.A. would reside the statutory authority to control wheat exports. But the W.E.A. would confer this authority to A.W.B. (International) for the duration of the act's tenure.
The W.E.A. would comprise three members, a chairman, a member nominated by the G.C.A. and a member selected from government. The W.E.A. members would be appointed by the Minister of Primary Industries and Energy for three-year terms.
There have been two points of contention in the current debate over the Wheat Marketing Legislation Amendment Bill. First, the bill contains a sunset clause. This would end authorization of the single-desk for export wheat on July 1, 2004. If the single desk is to be retained after that date, reauthorizing legislation would have to be passed. The G.C.A. has demanded that the sunset clause be deleted, making the single desk permanent.
The other dispute revolves around how growers will be taxed when their equity in the W.I.F. is transformed into B-class shares in A.W.B. Ltd.
No matter how these two problems are resolved, it was clear that the retention of single desk for export wheat would remain a principal feature of the final act.
FUTURE CHALLENGES TO SINGLE DESK.
There seemed to be only one internal challenge that could affect the future of the export wheat monopoly. A.W.B. Ltd.'s single desk for export wheat will be subject to review under the federal government's National Competition Policy sometime in 1999 or 2000.
The N.C.P. was established to review all government policies that were perceived to restrict competition. A.W.B. Ltd. would be required to prove that the benefits of the single desk are significant and are distributed widely enough that its continued existence was in Australia's national interest.
It was pointed out that other marketing authorities, the single desks for New South Wales rice and Queensland sugar, already have successfully defended their monopolies.
The most important external challenge to the single desk likely will come from the United States during negotiations for a new international trade agreement under the World Trade Organization. The United States has made limiting the powers of state trading enterprises a key goal in the next round of world trade talks.
Jay Sjerven is a senior editor of World Grain's sister publication, Milling & Baking News.