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AWB Limited: Grain Industry Innovator, or Single Desk Dominator By Tracy Sayler Imagine going together with 45,000 wheat growers, investing $600 million over 10 years to buy an agency of the U.S. Department of Agriculture, then turning it into a for-profit corporation that sells grain-related goods and services domestically and overseas. That’s essentially what happened to the Australian Wheat Board, which for decades was the Southern Hemisphere’s version of the Canadian Wheat Board. On July 1, 1999, the AWB became AWB Limited, a grower-controlled, unlisted public company, among the 100 biggest companies in Australia. Despite its privatization, AWB Limited remains, by government law, the only entity in Australia allowed to buy and sell wheat for export. This is a distinct market advantage, given that about 80% of Australia’s wheat production must be exported, and the fact that coal, gold, meat, and iron ore are the only commodities to have more export importance in Australia than wheat. Proponents of AWB Limited say retention of its single-desk structure allows the new, innovative business to compete more ably in the global marketplace, and thus earn a better profit for Australian growers and shareholders. Critics, however, say that the fact that governmental law grants AWB Ltd. sole export authority still insulates it from true private competition. Created World War II Governing both export and domestic wheat sales, the AWB’s regulated market system continued for decades, with the farmgate price based on an average market basis. However, in the 1980s, the Australian government began to rethink its involvement in the wheat business. The reason is not because of the Uruguay Round of the General Agreement on Tariffs and Trade (now the World Trade Organization), according to Andrew McConville, former manager of government relations and corporate affairs for AWB Limited, and now the company’s southern region manager. Quite simply, the Australian government no longer wanted the financial exposure of underwriting the nation’s wheat crop, he says. The 1989 Wheat Marketing Act (WMA) significantly altered the direction of the Australian grain industry and the operation of the AWB. Essentially, it established a 10-year transition plan to privatize the AWB. The AWB’s monopoly on wheat sales to the domestic food market was removed by the WMA. This freed Australian wheat producers to sell to whomever they choose within Australia’s borders, a domestic market of about 5 million metric tons, or about 185 million bushels. It has maintained about 60% of the domestic wheat milling market, and 20% of the market for domestic feed wheat. The WMA also gave the AWB the right to market other grains and wheat of non-Australian origin both domestically and internationally, and to compete in the domestic feed grains market. The AWB now markets oats, sorghum, canola, cottonseed, oilseed meal, and triticale. It is also one of the major traders of the four major pulses grown in Australia: Field peas, chick peas, lupins, and faba beans. It also controls about 40% of the domestic feed grain market. A grain trading division of AWB was also established in 1989, and it’s been very active since. In fact, McConville points out that the AWB is the largest commodity hedger in the world at the commodity exchanges in Chicago, Kansas City, and Minneapolis. “We are a bigger wheat hedger than Cargill,” he says. “If we go into Chicago and hedge, we can potentially move the market.” AWB Ltd. hedges against currency fluctuations as well. “The lower the exchange rate we can lock in, the better the return to the growers,” says McConville. The WMA replaced the government’s guaranteed minimum payment to wheat producers, and empowered the AWB to make harvest and post-harvest payments to growers for pool wheat, and to decide the size and timing of these payments. Further, the AWB was given more flexibility to establish pools for separate grades and regions. As a result, the AWB now operates many pools over flexible time periods, by region, with premiums for protein and quality. This has improved the AWB’s ability to reflect market signals to wheat producers. A Wheat Industry Fund was also formed to underwrite the AWB’s investment debt, and cover commercial borrowing requirements. The fund, about $600 million Australian (about $400 million U.S.), served as the initial capital base of funding support for the AWB, as transitional control moved away from the government, and to producer investors. The WIF was funded by a mandatory 2% levy on the farm-gate sale of wheat in Australia. The levy was allocated to an account held by individual growers, giving the grower equity in the fund. The levy ended in 1999, when the Wheat Industry Fund was fully established. With a total of 68,500 shareholders (the majority of whom are growers: about 45,000 growers hold about 241 million shares), AWB Limited is now an independent company subject to Australian corporate law, and is responsible for underwriting all of its borrowing and operating expenses, and all commercial aspects of wheat marketing, including financing and wheat pools. McConville stresses that aside from protection of its single-desk status, AWB Ltd. has no government involvement at all in its operations. The company has two classes of shares. Class A shares are issued only to wheat growers, are non-transferable, do not earn dividends, and redeemed as holders leave the industry or fail to qualify as a wheat grower. Class A shareholders—growers—elect the majority of directors of AWB Limited. Class B shares can be held by the public as well as producers, are transferable, and earn dividends. Class B shares will eventually be traded on the Australian Stock Exchange, allowing producers to trade their shares and the company to raise further capital if needed. After only a full year in operation, AWB Limited announced a shareholder dividend of 22 cents per share in its first fiscal year that ended September 30, 2000. Major revenue contributors to the $53.1 million to be paid to shareholders were the financial services AWB Limited offers to growers, including financing and underwriting, grain trading, and other marketing and risk management products. AWB Limited is not immune from being sold to another corporation, but such a move could only occur if 75% of all Class A shareholders (wheat growers) voted for it.
Export advantages, producer benefits McConville points out that AWB Limited is the largest short-term credit source for producers in all of Australian agriculture, with an interest rate similar to other lending institutions. The company downsized from 440 employees to 350 after becoming a private company. Headquartered in Melbourne, the company has 22 regional offices across Australia and three overseas export sales offices in Cairo, Tokyo, and Hong Kong. AWB Ltd also has an office in the United States, which was moved from New York to Portland this fall for logistical reasons. “It’ll be much easier to watch the competition,” McConville says with a smile. The north coast of Australia is only about 300 miles from the islands of southeast Asia. That gives Australia a natural freight advantage selling to Asia, the world’s largest importing region. “We (AWB Limited) prevent that freight advantage from being negotiated away,” says McConville. “That would happen if there was more export competition in Australia.”
Temporary bunker storage areas with steel, earth or concrete walls are widely used in Australian grain-producing regions for overflow storage in years of high production. Typical capacity ranges from about 367,000 to 3.67 million bushels. The Asian region accounts for about 80% of Australian wheat exports, and the Middle East, the second-leading destination for Australian grain, about 10%. AWB Ltd. sells wheat to about 70 countries around the world, and as far north as Italy. On a five year average basis (1994-95 to 1998-99), the five largest individual destinations for Australian wheat have been Indonesia, Iran, Japan, Egypt and India. AWB Ltd. conducts about 30% of its export business using major international grain traders, including Cargill and Louis Dreyfus, acting as intermediaries. About 40% of AWB Ltd. export business is conducted with other single desk grain importing agencies, or sole wheat buyers for particular countries. McConville says AWB Ltd wants to move more toward selling wheat through private contractual agreements with other countries, rather than selling on the open market. This will help business with buyers that may be a sales risk, he says. Wheat harvesting in Australia begins each year about mid September in the state of Queensland. Roughly 5% of Australia’s annual wheat crop is harvested in October, 30% in November, 40% in December, and 20% in January. “That gives us an advantage of not being overwhelmed by supply, and managing quality. It also gives us an informational advantage for negotiating sales, being able to guarantee quality and supply up to a point,” says McConville. On the other hand, there is pressure on AWB Ltd. to begin aggressively exporting wheat immediately after harvest, since there is little on-farm grain storage capacity in Australia, and the fact that Argentina’s wheat crop is harvested in about the same time frame as Australia. Australia grows mostly hard white wheat for bread and the Asian noodle market, but also grows durum for pasta and some red wheat for feed. Quality control within the wheat industry begins at the point of production, with producers growing wheat varieties that are most suited to their region and which match end use requirements. AWB Ltd. is actively involved in the process leading to the release of new wheat varieties in Australia. This includes setting quality guidelines for wheat breeders, participating in the testing and selection process, and finally classifying new varieties for marketing purposes. AWB Ltd. conducts regular technical surveys in market countries to analyze the current and future quality requirements of overseas flour mills, bakeries and noodle industries. AWB Ltd focuses its marketing attention on six registered brand names of wheat, each with its own logo:
Australian Prime Hard – Australia’s top quality high protein milling wheat, segregated and sold at guaranteed minimum protein levels of 13% and 14%. Flour milled from Prime Hard wheat is used to produce high protein noodles and breads. Australian Hard – White wheat segregated at a minimum protein level of 11.5%, for a wide range of breads and some Chinese noodles. Australian Premium White – A versatile grade suitable for a wide range of products, with a guaranteed minimum protein level of 10%. Australian Standard White – A basic, multi-purpose wheat with medium to low protein representing excellent value for straight milling or blending purposes. Australian Soft Wheat – A soft-grained wheat with a guaranteed maximum protein level of 9.5% for a wide range of confectionery, baked, and snack food products. Australian Durum – Semolina for pasta. No. 1 grade durum has a minimum protein of 13%, and No.2 a minimum protein of 11.5%, and No.3, a minimum 10% protein. “Branding is a very important part of our business. It helps buyers connect with product characteristics. Millers can choose a particular brand, and calibrate their equipment by it,” says McConville. AWB Ltd also segregates its wheat for the production of specific types of Asian noodles. Wheat that doesn’t meet one of the major grades but is still acceptable for blending is categorized as Australian General Purpose. PH5 is a classification for Prime Hard varieties segregated at 13% minimum protein, but with high screenings averaging 9%-12%, mostly small wheat kernels. Flour quality (with reduced extraction) is practically the same as that of the Prime Hard at equivalent protein content, but at less cost. Australian Feed is wheat that is best suited to meet animal feed industry needs. AWB Ltd has been able to improve the quality profile of the annual crop by emphasizing the production of recommended varieties. Five years ago, 60% of Australian wheat fell into the Australian Standard White class of wheat. Now, 38% of Australian wheat is ASW, with 30% Australian Premium White. At harvest, Australian producers can receive non-recourse loans (similar to USDA market loans, although the loans are underwritten by AWB Ltd., not the government) on 80% of the value of their wheat. Producers are charged an underwriting fee and pay interest on the loan. About 90% of producers who deliver to the national pool take this loan option. Local grain terminals offer producers several choices when delivering wheat: AWB export pool, AWB export cash, AWB domestic pool, and AWB domestic cash or the private trade. Under pooling, returns for the same class of wheat are pooled over time and over markets. The AWB has the option to close pools during a season, particularly if prices decline sharply and are likely to put at risk the returns of those who have already delivered to the pools. In that case, a new pool with a lower price expectation is immediately opened so that growers always have a delivery option. The pool also offers forward contracts prior to planting. Contracts are multi-grade and may be for a fixed or minimum price, allowing growers to take advantage of price increases if they occur. This fall, AWB Ltd. introduced a new payment and binning system for wheat marketed through the AWB National Pool, called “Golden Rewards.” The program more accurately rewards producers for the quality of wheat delivered with a greater emphasis on pool payments based on varieties grown, and incremental premiums and discounts on protein content and screening levels. Not only will it improve pricing accuracy and market signals for Australia’s grain growers, but it will also improve product control and delivery of quality wheat to Australian wheat buyers, according to Joanne O’Connell, the company’s corporate communication advisor. The new payment program relies on growers accurately identifying and declaring wheat varieties being delivered. Random testing of wheat varieties will operate to ensure varietal integrity is maintained for AWB market grades, and penalties will apply for false declaration. “Golden Rewards is one of the biggest changes in the life of the AWB,” says Kevin Holt, a regional representative of AWB Ltd. based in Victoria. Some day, he foresees the possibility of an even more precise matrix of grain premiums paid on delivery, based on factors such as moisture, falling numbers (sprout damage), and kernel appearance. AWB structure under review The NCP review of AWB Limited has been extensive, with input received by various segments of Australia’s domestic grain industry, countries that import wheat from Australia, and countries that compete with Australia for wheat exports. While Australia appears to have tried to move toward a wheat export system that is more open and transparent with the formation of AWB Ltd., the U.S. government commented that it still finds Australia’s retention of a single desk as part of this structure contradictory (U.S. Wheat Associates, the U.S. wheat export promotion organization, supports that position as well). Further, the U.S. government position pointed out that U.S farmers both produce and market grain, whereas Australian farmers hand over the marketing task to AWB Ltd. The U.S. government also expressed skepticism on whether the Australian government will truly devoid itself from AWB Ltd., should it encounter financial difficulties. U.S. grain company comments echoed points made by the U.S. government, but at the same time, were willing to concede that the Australian wheat marketing system has a lot of strong points as well, such as varietal management, strategic selling, good customer service and guaranteed supply of high-quality wheat, that should not be discarded in any proposed change. Further, U.S. grain company leaders said that AWB Ltd. marketing activities have minimal effect on a stable northeast Asian market, and that government regulation of the wheat industry has more of an effect on the domestic market, as not only does competition result in cost-savings up to export position (fob), there are always alternative suppliers on the world market. Still, the U.S. grain companies also commented that removal of Australia’s single desk would give Australian producers much more choice in marketing their grain with minimal cross subsidy from efficient to inefficient growers, in contrast to compulsory pooling. U.S. grain company officials also commented that although high quality wheat will always attract a high price, there is a high degree of skepticism as to whether the Australian single desk system is able to generate price premiums, particularly into optional origin bulk markets. The NCP Committee that is reviewing AWB Ltd. also met with the Canadian Wheat Board and grain companies that do business in Canada. Not surprisingly, the CWB expressed support for its single-desk system; that it can capture a price premium in markets while at the same time reducing costs, for similar reasons as those advanced by AWB Ltd. (for example, coordination of the freight network resulting in lower costs). There is still majority support amongst growers for the CWB, officials said, but this is highly dependent on farmers’ ages with younger producers tending to be less supportive of the single desk.. Unlike Australia, it was noted that less than half of Canadian wheat exports are directly handled by the CWB, and that the high quality of Canadian wheat is due to the government’s regulatory framework. Among the comments from grain companies: The number of central grain buying agencies in the world is declining and so the power of a single desk agency to extract price premiums is also greatly reduced. Further, that with agencies like CWB and AWB Ltd, access to key data is limited and hence it is difficult to assess whether there are in fact benefits in having a single desk. Both South Korean and Japanese millers and wheat importers expressed support for the AWB Ltd. single desk, citing praise for Australia’s ability to provide consistent, high quality wheat with desired attributes and good technical support at a price similar to other suppliers. South Korean officials did note that the single desk status of AWB Ltd. is a cause for concern in the context of the World Trade Organization, as a single desk limits the number of suppliers and hence increases the price to buyers. The Japanese market has a single desk importing system, in its Japan Food Agency (JFA). However, Japanese officials pointed out that there is a difference between importing single desk arrangements and exporting single desk arrangements, as exporting nations have significant power over importing nations. AWB Ltd. itself outlines a host of reasons why its single-desk status should be retained, including cost efficiencies in wheat freight, storage and handling, and the ability to take wheat from being a commodity to a branded, differentiated food product, which assists in obtaining a premium for Australian wheat, both in dollar terms and via market access. Strong integration in the marketing chain, also allows AWB Ltd. to provide quality control and guarantee overseas customers with a consistent product year in and year out. The single desk affords a superior negotiating position to capture access to a wider range of overseas markets, AWB Ltd. maintains, and a national approach can also be taken to research and development as well as marketing and brand promotion, improving Australia’s reputation for producing a high quality product. “If we had to compete on sheer volume only, we wouldn’t be in the game,” says McCon-ville. He is unapologetic about the single desk of AWB Ltd, and the fact that while the company discloses what it pays producers, it does not disclose its export transactions. “Does your local car dealer publicize the final price at which he sells his vehicles? (The single desk) is our competitive advantage. The AWB was deemed legal by GATT (WTO) even before the changes, when it was underwritten by the Australian government. It isn’t any more. We’re playing by the rules, and there’s a lot more pressing matters facing the WTO than AWB, such as the policies of the European Union and the U.S.,” says McCon-ville. AWB Ltd chairman Trevor Flugge, said in a statement earlier this year that an independent economic analysis conducted by a leading Melbourne economist (and commissioned by AWB Ltd) concludes that a single desk for exports enables AWB Ltd to achieve a price premium for Australian wheat growers of $141 million (about $80 million U.S.) annually, or $8.72 per ton (about $6 U.S.) The price premium was established by comparing over 2,300 sales contracts against prices paid by customers for white wheat out of the Pacific Northwest of the United States, the most directly comparable source of competition for Australian wheat. “The single desk does not only deliver a price premium, it also gives Australian growers some control over a very uneven international playing field distorted by foreign government subsidies and import regimes,” said Flugge. He points out that it has allowed Australia’s exports of wheat to increase from 13 million tons (about 478 mill. bu.) to 18 million tons (660 mill. bu.) over the last five years in a static world wheat trade of around 91-100 million tons (3.3-3.6 bill. bu.) Single desk safe for now • The single desk should be retained at least until 2004, when AWB Ltd. is scheduled to undergo under review. Two key considerations in the continuation of the single desk beyond 2004 would be the demonstrated level of single desk price premiums earned, and the level of supply chain cost savings, particularly in the areas of marketing, transport, and grains handling, achieved by AWB Limited on behalf of Australian wheat growers over the next three years. • Annual licences should be granted to approved exporters for the export in bulk of durum wheat, and durum wheat growers should be allowed a three-year trial period to sell their crop for export directly to buyers other than the AWB Ltd. • The export of all wheat in containers and bags should be further deregulated for a trial period, until the end of 2004. • The Australian government might wish to take future trade negotiations under the WTO into account in the timing of any reform of the single desk export rights of AWB Ltd. (Indeed, the new structure of the AWB has not affected its status as a state trading enterprise (STE), and it continues to be subject to the disciplines on STEs contained in the 1994 GATT agreement). Conditions put on retention of the single desk would make it unworkable, and put price premiums to Australian wheat growers at risk, said AWB Ltd chairman Trevor Flugge, in a prepared statement following release of the draft recommendations. “The report completely ignored the impact of foreign government programs which distort the world wheat market through their massive subsidies,” Flugge said, adding that a trial policy period can be difficult to reverse, and will only benefit international export competitors. “Once you have started down the slippery slope of deregulation, there’s no way back,” Flugge said. The entire draft report of the AWB Ltd review can be found on the Internet, at www.affa.gov.au/wma.html. Updates on the review and Australia’s single desk wheat export system may also be found on the AWB Ltd website, www.awb. com.au. The Committee’s final report is to be released by December 31, 2000 |
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Andrew McConville (left), southern region manager of AWB Limited, and Kevin Holt,
a regional representative of AWB Limited, based in Victoria, check the condition of a wheat crop in New South Wales. Excessive moisture has caused quality problems this year in some areas of the Australian wheat
belt.
