Opponents of further changes to wheat marketing and export need only look to the evolution of the telecommunications industry to see the benefits of deregulation.
Opponents of further changes to wheat marketing and export need only look to the evolution of the telecommunications industry to see the benefits of deregulation.
THE current and noisy debate on the merits or otherwise of scrapping Wheat Export Australia has brought together some unlikely bedfellows among those supporting the push for greater deregulation, and served as a rallying call for those in favour of the status quo or a return to a ‘single desk’ marketing arrangement.
The federal government’s Wheat Export Marketing Amendment Bill 2012 comes as a response to a review of WEA and the Wheat Export Accreditation Scheme 2008 by the Productivity Commission, which recommended such regulatory bodies be abolished.
This recommendation is strongly supported locally by many farmers, Cooperative Bulk Handling, the Pastoralists and Graziers Association and the WA Farmers Federation. Opposition has been led by organisations such as Grain Producers Australia, a number of east coast farmers’ organisations, and maybe surprisingly to some, the federal National Party.
Liberals in Western Australia’s parliament appear strongly in support of the local farmer groups, while their federal counterparts seem to have abandoned their general free-trade philosophy to avoid an argument with their coalition partners.
The position of Tony Crook, the lone state National in federal parliament appears to be emerging as central to the outcome.
Mr Crook was a member of the house standing committee that reported on June 18. In general, the committee made a number of recommendations relating to implementing what could be termed “ongoing industry good services” but importantly recommended that, “the house pass the Wheat Export Marketing Amendment Bill 2012”.
This week he publicly affirmed his support for that position.
To put this whole debate in some context, up until 2008 wheat exports were handled under what was termed the ‘single desk’, whereby all wheat handling and exports were handled by one body, the Australian Wheat Board.
This single desk was dismantled in favour of the WEA and the accreditation scheme in 2008, partially deregulating wheat exports. There had already been deregulation of the domestic wheat market.
The major impact of the 2008 deregulation was the introduction of WEA, whereby the accreditation of bulk wheat exporters – and the regulation by which such exporters gained access to the existing bulk ports and the grain – was introduced.
This latter point is particularly important given the monopoly that organisations such as CBH had, and still retain, over grain receival, storage and carriage, and port infrastructure in each state.
As a precaution against unconscionable monopolistic conduct within the wheat supply chain, the government and industry participants rely on the continued overseeing role played by the ACCC.
This is particularly the case for the future, whereby ACCC has a role in regulating access to ports controlled by companies associated with wheat exporters.
Since its formation, WEA has accredited 26 exporters, with 19 or 20 active in the market. Included in this list is CBH Grain, which acts independently of CBH and is in competition with the other exporters for market share. CBH Grain must act independently of CBH notwithstanding it is a company associated with the monopoly owner of the wheat-handling facilities. To facilitate this, and give exporters an equal opportunity in the export phase, port spaces or slots at wheat handling facilities are sold in a form of auction, with wheat exporters able to acquire port slots in a market environment.
Accredited and active wheat exporters include Glencore, AWB, Bunge Agribusiness, Cargills, Louis Dreyfus, Viterra, and Graincorp, as well as CBH Grain.
Wheat exports in WA account for about 95 per cent of local wheat production, whereas domestic and export production are more evenly split in other states. To illustrate the weighting of wheat exports, WA and South Australia account for 65 per cent of the funds raised by WEA as a levy on exports (WA 35 per cent/SA 30 per cent).
One of the main reasons WA has a greater export percentage is its proximity to Asia, and particularly Indonesia, where the state provides a growing food and feed market. The whole supply chain in WA, therefore, has been particularly geared to export, and to extract the greatest benefits from export deregulation.
Conversely, local producers see this as evidence of WA producers subsidising eastern states producers under the previous single desk system.
As a result of this emphasis on export, the WA wheat producers and export participants have been the most vocal in the move to retain existing benefits of deregulation, and to support further deregulation through the abolition of WEA and its associated accreditation scheme.
While there appears to be no reliable statistics on the split, wheat export sales are split between cash contract sales and pools. Both sales methodologies are supported by any number of the grain exporters with no operator having any monopoly on any aspect of wheat export.
Within each methodology there are variations on a theme, between forward sale risk taking, and the historical pool methodology, taking advantage where possible of price variations. Due to the vagaries of seasonal variation due to weather, frost etc, forward selling will invariably only be a relatively small percentage of production. With the advent of contracts beyond one season, some of this risk is spread, and hence a greater amount may be forward sold.
With CBH offering what might be termed ‘virtual storage’, producers are able to deliver differing wheat varieties and quality at different delivery points, and sell to grain exporters for delivery at the ports.
CBH is able to handle delivery expectations within this producer-export market specification. It is feasible within this system for producers to track their own produce through to export on their own account within CBH.
While many farmers and producers were severely burnt in the first years of deregulation due to seasonal factors – and maybe inexperience in the opportunities deregulation provided – marketing of wheat ‘derivatives’ is becoming more common, and farmers are now more active in swaps and options to take advantage of price movements.
A media release by the grain producers’ lobby group on August 31 may encapsulate what stands behind much of the resistance given to further deregulation.
To quote GPA: “The broad impact of relaxing specialist oversight of the wheat market must be robustly discussed and well understood before charging down the road to further deregulation in a market heavily biased in favour of incumbent monopolistic bulk handling companies borne out of massive public investment in a statutory environment that still stifles competition.”
Deregulation of the telecommunications industry some years ago had many similar parallels, with just a single carrier throughout Australia.
Not without its difficulties, the nation has moved beyond this and deregulated this industry, again not without considerable support and oversight by the ACCC to assist in the gestation period post deregulation.
Should the grain export industry be any different? If it is given a chance through this deregulation process, investment into the supply chain is likely, and the monopoly position will be diluted. This investment will only eventuate where legislative certainty is provided to the deregulation process.
If the naysayers predominate because of the perceived monopoly, then no investment will be made into the supply chain under the present regulatory environment, and the monopoly will be a certainty to continue.
They will ensure the continuation of the very circumstance about which they are most concerned and critical.
Tony Crook may well make a name for himself after announcing this week he would follow his own recommendation and support this legislation, and in doing so show the kind of leadership the federal Liberal Party seems unwilling or unable to provide.
• Geoff Brayshaw is an accountant and currently a non-executive director at FMG.
