Some thoughts on the AWB monopoly

Although I’ve worked on agricultural economics for nearly thirty years, I’ve never given much thought to “single desk selling”, the policy under which Australia nominates a single source (formerly a government agency and now a quasi-private business) to supply exports of commodities such as wheat and sugar. The scandal engulfing AWB (the former Australian Wheat Board, now privatised) has naturally raised the issue of whether this export monopoly should continue. On reflection, I think it should not.

There are a couple of reasons why we might favour an export monopoly. The first is the classic idea of exploiting Australian monopoly power to generate higher returns. There are a few problems with this. First, our monopoly power in the world wheat market is very limited, even allowing for the fact that wheat is not a homogeneous commodity. Second, in the absence of restrictions on the aggregate supply of wheat, this implies diverting additional wheat to the domestic market, depressing prices there. While that’s a benefit to consumers, it means that the net gain to wheatgrowers from the operation of the AWB will be pretty modest. Finally, it doesn’t appear to me that AWB acts in the way required. Far from that of a tightfisted monopolist, the AWB culture comes across as that of hotshot sales types, eager to do whatever is necessary to bring home a deal.

The second case for an export monopoly is that of countervailing power. Here the idea is that the buying side of the market is dominated by big players who will, if left unchecked, divide and conquer Australian wheatgrowers. In a situation where Australian growers were bargaining individually with monopsony buyers, the establishment of a publicly-supported export supplier might be a good idea. But, given that such a supplier exists, it’s hard to see why it needs to retain monopoly rights. If, as claimed, it gets better prices for wheatgrowers than they can get for themselves, or through other exporters, why would they switch?

As far as wheat is concerned, the question is, I think, academic. AWB’s reputation has been so badly shredded that any deal they make from now on will be open to attack by foreign competitors, unless it is at such a discount as to make it clear that it could not possibly incorporate a bribe. This is already happening in Iraq, (though the Americans had grabbed the market for themselves in any case). So if want to keep the single-desk policy, we’ll have to establish a completely new enterprise to work it.

40 thoughts on “Some thoughts on the AWB monopoly

  1. John I think you will find that the vast majority of farmers support the single wheat desk, how they run the company may be another matter.

    Farmers enmasse previously voted to remove the AWB from govt control and the subsequent corporatisation of the AWB means that the responsibility lies with the farmer shareholder base and its board and it is the shareholders who will need to proactive to protect their business.

  2. Rog, I’m sure you’re right about farmer support, though there is certainly a substantial (or at least noisy) minority opposed to the idea.

    The fact that most farmers support single-desk selling is certainly relevant in determining public policy. If the arguments are evenly balanced, there’s no harm to the rest of the community, and no cross-subsidy between groups of farmers, then it makes sense to let farmers decide as a group what to do.

  3. As I understand it, the Australian domestic wheat market is a “free” market, or at least is not subject to monopoly control.

    My questions are:

    1. Do Australian wheat farmers achieve bigger margins in the domestic market than by trading through the AWB? Or vice versa?

    2. If marginal differences are insignificant, why bother:

    a. to have an export monopoly?
    b. to complain about the distorting impact of the AWB on market prices?

    3. If marginal differences are significant:

    a. who are the winners, and why?
    b. who are the losers, and why?

  4. And on a lighter note, it seems that from the perspective of the US, John Howard, Alexander Downer, and the AWB have come to represent the Axis of Weevils.

  5. If the arguments are evenly balanced, there’s no harm to the rest of the community, and no cross-subsidy between groups of farmers, then it makes sense to let farmers decide as a group what to do.

    Should they have to decide as a group. What if a small minority wish to decide as individuals?

  6. Katz, the Aust market is not free, that is the AWB has power to veto contracts made by other companies.

    If this power was removed the market would be more free.

  7. John, historically most minorities are noisy, at the end of the day the vote was substantial.

    What AWB may have to face is loss of veto (loss of monopoly) over other companies activities.

  8. I think the idea of wheat farmers forming a collective to increase their bargaining power on world markets is a fine idea, but the idea of receiving an monopoly licence on somewhat arbitrary grounds (we’re agrarian socialists and we don’t believe in this free market mumbo-jumbo) is absurd.

  9. Yea, its the *legislated* monopoly that’s offensive. There may well be a natural monopoly here to achieve economies of scale in marketing (remember wheat is not an homogenous commodity so brand reputation matters, as we’re about to find out) and handling, and to face down monopsonies. And it’s better such a natural monopoly is run to maximise returns to growers rather than to stockholders.

    But if the monopoly’s natural then no-one has anything either to gain or lose from individual producers trying to bypass it.

  10. I did a review of Wheat industry back in 2002 so the info is a bit out of date.

    The domestic market is effectively free and anyone can buy and sell. The problem is that the market is still mainly comprised of the big boys CBH (WA), AusGrain (SA) and GrainCrop (NSW, Vic and now QLD) as the infrastructure costs to become an active grain trader are significant (storage facilities, grain treatment etc). Although the big boys aren’t solely based in each state (i.e. Ausgrain has faculties in VIC to take advantage of the growers reaction to GrainCrop absorbing VicGrain.

    There are a number of smaller traders who producers can sell to but it’s the tonnage they can deal with (often these smaller companies are leasing storage from the big boys) but a lot of these have been bought up by the larger companies. The ‘QLD Country Life’ and other rural papers provide the price differences available by competing companies.

    Prices paid for wheat are dependent upon 3 main variables: moisture, protein and screenings. A smart producer knows what his crop will turn out like so their ability to buy in grain and blend it with their crop allows them to take advantage of price signals. So for domestic producers who have the capacity the ability to buy grain has been lucrative as it’s a question of scale. A producer who can make a couple of extra dollars per tonne on a few thousand tonnes improves their revenue stream significantly.

    While the ability to store grain on farm and sell it at a latter stage to take advantage of price signals also can provide a good source of revenue but there is far more risk involved. So for an individual the freeing up of the domestic market has provided opportunities.

    The export market is open but you can only send a container of wheat if you aren’t the AWB. The container market increased from 0.03% of total exports in 95-95 to 0.17% in 98-99 so it’s effectively a monopoly by the AWB.

    As John pointed out wheat is not a homogenous product. There are however, significant market traits Australian grain (esp to the middle east) that are highly advantageous. The wheat to those markets is the ‘white’ grain variety that provides better flour extraction rates than ‘red’ grain (US and Canada) that is low in moisture and high in protein that makes it ideal bread grain. This grain can command a price premium.

    The positive thing about a single selling desk for international buyers is that they know that they are getting the grain they ordered that meets their market specifications (grain treatment techniques, and the ‘nil tolerance of pests’ is effectively guaranteed or they know the penalty the AWB will pay will be guaranteed. If you remember the sheep floating around the Arabian waters looking for a market the ability to deal with established protocols and principals is preferred by some countries.

    The export issue simply becomes would private companies be able to receive this price premium (and pass it back to the producer) while competing for that market. The general ‘feeling’ by the producers is that they wouldn’t get the price premium paid on their grain that they currently receive under the ‘golden rewards’ program (about $5/t). As the price paid on the world market would fall due to increased competition.

  11. So I take it you accept the standard optimal tariff argument but question the extent of market power and the offsetting losses to producers in local consumer markets.

    Canada has state bodies like AWB that transfer the surplus to growers so I am puzzled how the surplus gets transferred to growers here given that the AWB has private shareholders. Ideally the monopoly rights could be sold off in a competitive auction and the proceeds net of costs given to buyers. But I am sure this did not happen here.

    Maybe a reader can recall the history. But if the AWB makes a surplus it should accrue to the growers shouldn’t it as in the Canadian system.

  12. Don’t worry, be happy relaxed and comfortable…

    It turns out the Howard government is accountable after all. To the American Senate.
    Elsewhere: John Quiggin examines the arguments for and against the AWB’s monopoly, and Tim Dunlop has a good post on the politics.

    ……

  13. The link below sets out the return policy.

    site

    Not too sure if I disagree of agree I just know what some people feel about the AWB as there marketing arm.

  14. I posted on this in an earlier thread, noting (in summary) that there is not much prospect of Australia gaining monopoly rents given our wheat is a small fraction of the total amount of wheat traded in the world annually in a highly competitive market There is an edge in some markets that derives from the quality and reliability of the Australian product, but that’s due primarily to the efforts of the wheatgrowers, not the AWB. Two issues here: a) the quality of the wheat drives any premium, not the monopoly status; but also b) reliability of supply is important. In a big market (as with some middle east countries) a capacity to supply large quantities of wheat year in, year out, does favour a bigger conglomerate over any individual grower. That is not an argument for keeping the monopoly though – it could be achieved equally by keeping on the AWB as a big seller who passed on the reliability premium to its suppliers and its shareholders.

    On the other hand, there are niches for highly specialised wheats where individual growers can compete very effectively – and given that going through the AWB from now on is likely to depress rather than boost the price, these specialised wheatgrowers stand to lose from the monopoly. That monopoly, incidentally, is maintained by the Australian Wheat Export Authority, which statutorily has on its board two members nominated by the Grains Council of Australia. see http://www.wea.gov.au/aboutwea/govern/overviewbm.html. This means the whole AWB monopoly arrangement is still dominated by the same agro-politics that applied before the AWB went private.

    The arguments on whether we need the “single desk” policy tend to become rather emotive. Many Australian wheatgrowers either remember or have been told that in pre-AWB days big unscrupulous international buyers conned unwary farmers. There may have been collusion among the big traders to drive down prices, which would have had the same effect as a monopsony; there may also have been some exploitation of information gaps between internationally savvy grain companies and Australian farmers. I think there is less likelihood of either today, but it’s not an argument to be totally ruled out.

  15. One very encouraging aspect to arise out of the AWB scandal is the depth of respect exhibited by the Howard government for the principle of responsible government.

    I’m enormously impressed at the speed with which the Australian executive responded to the concerns of the United States legislature.

    And those American concerns weren’t even aroused by lies that Howard himself told, merely those repeated by the Australian ambassador to Washington falsely denying any AWB involvement in kickbacks to Saddam.

  16. derrida derider Says:

    But if the monopoly’s natural then no-one has anything either to gain or lose from individual producers trying to bypass it.

    Um, who was arguing that there was a natural monopoly? Nobody, as far as I can tell.

    Yea, its the *legislated* monopoly that’s offensive.

    You appear to be arguing that natural monopoly without government intervention = good, and any other kind of monopoly = bad. I don’t get this at all, for a couple of reasons.

    1) Presumably, you wouldn’t call it “offensive” for, say, the NSW Roads and Traffic Authority having a legislated monopoly over the power to issue drivers licences. At best, you could call it out-dated and unnecessary by drawing a parallel with, say, building inspections or car registration inspections, which have been delegated to the private sector. But there’s still a monopoly power to issue the inspectors licences given to some authority or other.

    2) Part IV of the Trade Practices Act prohibits a range anti-competitive behaviour. However, sections 88-95 of part VII allow the ACCC to authorise things that would otherwise contravene part IV, provided that a public interest test is satisfied. This allows for the effective creation of monopolies, by legislation. Is this offensive?

  17. People against Live Exports (logo)

    Desperate cover-up in Iraqi “blood money� saga

    The Australian Wheat Board (AWB) is desperately working to cover up its connections to the controversial live export trade, according to investigations by an animal welfare group. People against Live Exports (PALE) have uncovered evidence that while the AWB was knowingly diverting millions to Saddam Hussein’s regime under Iraq’s Oil-for-food scheme, it was also secretly raising cash from interests in the live Animal export trade.

    PALE founder Wendy Lewthwaite said the scandal was the best kept secret of the Cole inquiry into the AWB.

    “The public line is that the Australian Wheat Board sells wheat. They are very keen to keep it quiet that they have also been raising blood money through their connections to the cruel live export trade,� Ms Lewthwaite said.

    “I uncovered evidence in 2003 that the AWB had purchased interests in livestock company Landmark a short time after the Cormo Express debacle took place. The profits from this venture likely forms a proportion of the money sent to Iraq.�

    Ms Lewthwaite said the AWB and the Cole inquiry had gone out of their way to keep information about AWB’s connections to Landmark a secret.

    “The public has a right to know the facts about this case,� Ms Lewthwaite said.

    “There is a strong public interest in Live Exports and the AWB involvement in live exports is of direct relevance to the current inquiry. It is both immoral and duplicitous for this information to be concealed.�

    Ms Lewthwaite said PALE was calling on the government to ensure the Cole inquiry process was transparent and that uncomfortable details about the AWB’s business dealings were not swept under the carpet.

    Millions of live sheep, cattle, goats, and other animals endure journeys for up to 3 months from the farm gate to their overseas destinations and eventual very cruel slaughter .Miss Lewthwaite has held meetings with Muslim Leaders of Australia, Malaysian Government officials who advice they do not acquire animals alive for religious purposes and that it is clearly driven by the Government and the department of Trade and Trades.

    For further information please contact Wendy Lewthwaite at:

    tel: +617 5539 2369

    Mob: 0432 8650 29

    info@livexports.com

    PALE

    33 Sweetgum Street

    Ashmore 4214 Qld. Australia

  18. Gosh, Wendy, are you what is termed a “troll”? The AWB equity in Landmark was perhaps not a discussion topic among those who sip latte for a living. However it is/was no secret.

    I note there is no mention of a Connection between Ray White real estate and Landmark.. Hmmm…… Wendy……

    Live animal export may not be much fun for the animals if the ship sinks, but spinning a Chitty Chitty Bang Bang style tale of henchmen locking children up in cellars (or sheep on boats) & terrorising them does nothing for our perception of your commonsense.

    AWB is in strife for charging the UN oil for food paymaster extra for wheat, then giving that money (albeit suspiciously) to a Jordanian Truckie.

    AWB exports wheat, it does NOT hire ships, fill them with sheep and conduct texas chainsaw massacres below decks, in the manner of a large scale clandestine S&M club.

    The live export of sheep from Australia to arab lands (while we are on it) is not something which is devised by our government. Australia does not have fat-tailed sheep. Our sheep are more or less a last resort. Even at the height of the latte set & rock stars bleating about “famine” in Ethiopia in the 1980’s, Ethiopia was getting double the price for live exported sheep into Saudi Arabia than was Australia, because Ethiopia (which resembles the Darling Downs of Queensland) runs fat tailed sheep.

    (possible PETA trolling, must-buy-lamb-for-dinner) *slurp*

  19. I think there might be a very good reason for Thawleys visit that has not been explored yet.

    The so-called FTA was enabled in Parliament on 13 August 2004 and rubber stamped by the anonymous GG on the 16th. Sometime in October a powerful US committee examining bribes to Saddam Hussein wants to investigate loud and fishy comments and news about AWB and Thawley is sent to smooth things over.

    Now Thawley appears to have been Howard’s Foreign affairs advisor for some years before he went to Washington so would have been privy to everything about our trade issues to report to Howard.

    The FTA did not come into force until January 1 2005. Imagine the fallout if the US and the already angry wheat growers had discovered a little matter of $300 million bucks to Saddam.

    It makes little difference that other companies did the same thing the truth is the AWB and Thawley learnt their lessons well from Howard and the kids overboard scandal – deny, deny and deny again.

    This whole thing is a disgrace and the entire transcipts are available every night on the web. I suggest people read them.

  20. SATP, I like lamb even more than I like lattes.

    I suspect the sheep in the live export trade actually enjoy the adventure of an ocean cruise prior to being butchered.

    I reckon Ms Lewthwaite and the other members of her organisation are simply envious.

    I may be a Lefty, but I am a blue singlet wearin’, beer swillin’, red meat eatin’, huntin’, fishin’ type of Lefty. Buuurp. 😉

  21. The AWB scandal raises major governance issues and has prompted people to revisit the desirability of the single desk szelling arrangement for wheat exports

    Except that don’t we often have a situation where we are szelling to a single desk purchaser?

  22. Oh, for Heaven’s sake! The whole Iraq thing has been and is rife with corruption. Don’t forget the Halliburton profiteering and the disappearance of the entire Iraqui defence fund during the interim “government”. The only reason the AWB is being dragged up is because Americans want to manage and profit from the export of Australian wheat, and the AWB is an obstacle. I predict that AWB will now be broken up and sold to foreign interests. I further predict that nothing at all will happen over BHP and Tigris Oil. Those guys have friends in the right places.

  23. I further predict that nothing at all will happen over BHP and Tigris Oil.

    Looks like the inquiry’s to be expanded to look into that.

  24. What about the other point of view of the single desk.

    Is a war-torn or developing country which needs a lot of food quickly and consistently, better off a) buying through exhaustive and more complicated tender processes created by the sudden entry of a much larger number of higly competitive suppliers or b) negotiating with a few highly competitive sellers from foreign countries that produce the commodity in bulk? What does the UN think is the best commercial solution to feeding a country’s people when undertaking its sanctions?

    I know we are talking here about the economic issue of monopolies here but I also wonder at the procedural consequences of the AWB operations in places like Iraq and how its presence might assist or hinder an unstable or weak regime’s efforts to get food to people. Had AWB continued to act nobly and honestly, would such a single desk be better (easier and more effective) in general for recipient countries to get grain and get it fast?

  25. For mine I reckon we should have a government run single deck (back to the future) overseen by a Federal ICAC

    Mind you I won’t get it.

    Costello and the other weasels will make sure our national interest is ditched because the Nats won’t walk out of the Coalition on this.

  26. Having any govt run a business is the best way to ruin it – conflict between commercial and political interests.

    Why should govt run any export business, let alone wheat.

  27. Stuff the corrupt AWB.
    In western australia we still have the potato board,and the worst potatoes in australia.
    When I was a child in NZ in 1960 my dad battled the egg board.
    And this regime calls the labor party socialist?

  28. >Having any govt run a business is the best way to ruin it – conflict between commercial and political interests.

    >Why should govt run any export business, let alone wheat.

    Thr AWB has been a private company since 1999.

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