AWB's Cosy Deal Cuts Returns to Growers - Desk has run its race

Professor Paul Kerin*

Melbourne Business School, The University of Melbourne

*Published with permission of the author (this article was printed in the Weekly Times 6/9/06 )


We all agree that Australia's wheat export marketing arrangements should maximize net returns to growers. Unfortunately, opinions vary on how to achieve this goal. Many growers, their parents and grandparents have long supported the single desk My parents and grandparents certainly did. But times have well and truly changed. The rise of global competition eliminated Australia's ability to extract price premiums long ago.

The economic case agains the single desk is simple: it produces no benefits only substantial costs.

Under the ruling pooling system, growers receive a net return, which depends not only on export prices, but on uncontested deductions for supply-chain services and the substantid commissions paid to AWB for marketing activities. In a free market, pooling would remain available, but growers would also be able to sell wheat for cash. The prices buyers pay growers would depend on export prices and contestable costs and margins incurred after growers sell their wheat.

Unfortunately, the single desk does not generate price premiums. Australia is a pricetaker in world wheat markets. AWB has only 16 per cent of the world market and faces enormous competition. In any one year, at least 15 other nations make up the other 84 per cent of the market. And many more companies than nations sell wheat internationally.

Worse still, the single desk has been judged a detriment to growers, and produces poor returns through lower prices.

The review committee that conducted the 2000 national competition policy review of theWheat Marketing Act (1989) confirmed that it "was not presented with, nor could it find clear credible and unambiguous evidence that, on balance, the current arrangements for the export marketing of wheat are of net benefit to Australian wheatgrowers or the conununity". But the committee did receive"convincing evidence that the restritions have an inhibiting effect on innovation in marketing, identification of new marketing opportunities and ongoing development ot existing markets".

Now that AWB's reputation is totally shot, the argument that competition would raise buying prices and improve returns is even more compelling. Growers are forced to sell their export wheat through a single organisation, AWB, which can use the huge power of its legislated monopoly to pay lower net returns to growers.

Yes, the single desk can reduce net returns to growers.

Moving to a free market would improve growers' net returns by creating competition in the procurement of wheat from farmers - as well as through the flow-through of higher selling prices and lower costs from more competitive services.

As things stand, the lack of competition and an incredible lack of transparency have given AWB little incentive to minimise its costs or those of gownstream providers. If costs can be passed back to growers, why bother to minimise the costs of marketing and supply chain services? Commissions and out-performance payments for its own services are really the result of bargaining between AWB board members and 'independent' AWB(I) board members. There is no competitive test to judge the appropriateness of the result, hardly called an objective, independent excercise.

AWB has every incentive to strike cosy deals with favoured downstream partners to the disadvantage of growers.

The AWB does not even bother to tender for services that account for substantial costs, is a major red flag.

Inefficiency is pervasive.

In contrast, the pressure of competition would force marketing companies to work hard to get the lowest costs throughout the supply chain.

Many reports have highlighted the substantial benefits to be gained by eliminating or restructuring the single desk. Accenture estimated annual supply chain savings of at least $150 million; ACIL-Tasman, savings of $11.70 a tonne in WA; Allen Consulling, $56 million to $223 million; the Centre for International Economics, $120 million to $360 million; and Kronos, at least $9.33 a tonne.

So why do opinions vary so widely? In part, it is because growers have been told many untruths. Former Grains Council president Keith Perrett claims that each time a credible study is completed on the single desk, the results show that wheat producers are gaining. Nothing could be further from the truth. AWB will tell you that the single desk is wonderful. It has hundreds of millions of dollars in market capitalisation riding on it.

In handing a monopoly to a corporation, the Federal Government has given it a huge incentive to tell porkies.

The arguements raised against a free export market are simply recycled versions of those trotted out before domestic deregulatioin in 1989. Many claimed the sky would fall if deregulation proceeded. It did not. Would anyone seriously want to return to a regulated domestic market?

Individual growers should determine - in a free, competitive market - how many exporters there are and who they are.