Charlie & Fellow Agri-villers;
The following is a very insightful article is a look at the "Single Desk" transition folks Australia is proposing from the perspective of a wheat grower down under... (Malcolm Bartholomaeus
callum@capri.net.au).
I believe in particular the need to consider the "Capital Base" for a new "CWBII" is highlighted... at a much higher level than was indicated in our previous study.
Risk Management is not cheap... As the Bank of Montreal found out from the some $650M loss on natural gas trading this winter.
This article explains IMHO, what a single desk: should, could, and what it gets caught doing that is counter productive for grain growers/the national interest.
The Australian Experience is invaluble to our Canadian conversion... and the insights this experience gives us... give us practical, real life, information that is being earned the hard way!
One cannot help but draw on the CWB "Malt Barley" fiasco experience this year (Again & Again...) to confirm the real pain and economic cost the Command and Control problems "Single desk" systems in both Australia and Canada... subjecting AU & CA growers to.
THis is heavy reading... but for anyone who wants to understand the true costs of a "single desk"... it is truly revealing. Malcolm believes a national "single desk", properly managed; could provide a premium to growers... I think it would be fair to say.
Here is his in depth May 22/07 article on what is happening:
"New Wheat Marketing Arrangements
• AWB keep the single desk until March 2008
• In March 2008 a grower controlled entity will be
established if growers can agree on how to do it. It will
either be a new entity or based on a demerged AWBI.
• Legislation will be introduced to confer single desk
status to this new entity.
• Minister McGauran will keep the veto until June 08.
• From July 08 a revamped WEA will hold the veto.
That will allow the government to veto trades with
countries they don’t want wheat to be exported to (ie to
prevent a repeat of the Iraq problem). They can also
approve other exports under a public interest test, if the
single desk entity fails to develop new markets etc, or if
the entity is locked out of some markets.
• Container and bagged exports will be deregulated.
Apparently AWB will get full control of marketing the
2007/08 crop. However, the minister indicates that single
desk status will be conferred on the new grower entity after
March 2008. When exactly, because once it has the single
desk title, the old AWB can no longer export wheat.
Normally the 2007/08 pool would still have wheat to export
well into 2009. Very confusing.
Do we trust AWB with the 2007/08 wheat crop? Will they
use the opportunity to accumulate funds for a break fee?
Will they maximise returns to growers or try and maximise
their outperformance fees at grower risk? Will the costs of
running the pool continue to be higher than they should be?
Will AWB guarantee the lower base fee that they were able
to conjure up for the 2006/07 pool, and reduce the level of
outperformance fees they extract from the pool? Why are
new season pool estimates so low against all price
measures? AWB say that all pool estimates include hedging
results, so are they factoring in another round of hedging
losses already?
The system for the 2007/08 crop is now very much up in the
air. Right now I cannot see the way forward for the
2007/08 crop.
• Will AWB manage the 2007/08 pool up until it is
finalised some time in 2009, or will the new entity take
it over at some stage?
• Why would growers commit any wheat to AWB at
harvest knowing that either:
*They will not be the people running the pool after
March 2008, or
* After March 2008 the new entity will be able to
begin exporting.
• How can AWB begin managing currency and
commodity and physical forward sales for the 2007/08
crop if the management is to transfer in March or if
growers have the ability to hold wheat back to transfer
to the new entity in March?
• Will it be mandated that any wheat grown in 2007/08
that goes for export has to go via AWB and none to go
via the new entity?
• How will pool payments and loans be established
against such an up in the air system?
• How can we guarantee that funds from the 2007/08 pool
won’t be diverted to cover AWB break fees, or to
capitalise the new grower controlled entity?
• Will growers simply try and avoid the pooling system
against such uncertainty and sell for cash, swamping the
harvest cash market and driving prices far too low?
Probably the only way of getting some certainty on how the
2007/08 harvest can be managed would be for the new
grower controlled entity to actually be a demerged AWBI,
so that there is a relatively seamless transition in March
2008. That leaves us with the risk that the new entity will
simply operate in a very similar way to the current AWB
single desk model - something which I think would be a
mistake.
It would appear that Minister McGauran will be able to
issue licences on a limited basis for the next 12 months, as
per the current interim arrangements. Basically a poor form
of GLA for the 2007/08 crop, and any 2006/07 wheat still
being held out of reach of AWB by WACBH, ABB and
GrainCorp. It is likely that the only licences to be issued
will favour WACBH who want to sell wheat to their own
flour mills in Asia, or Wheat Australia if they can sell to
Iraq. That will simply hurt growers elsewhere in Australia,
with some lucky WA growers able to avoid the costs of
running AWB, and forcing up the per tonne costs for all
other growers because of the reduced tonnage that AWB
will get to handle.
From March 2008 onwards there is to be a new single desk
operated by a grower controlled company, which could rise
from the ashes of a demerged AWB/AWBI, or be a new
entity.
The real issues are:
1. How will the new grower owned entity operate? It
must operate on a fixed fee per tonne, ideally levied on
all wheat propduced, that does not vary year on year
save for periodic adjustments for inflation.
2. How will it be capitalised to underwrite grower
payments and hedging operations? All futures
transactions for currency and commodity must be
purely hedging and not speculative as is sometimes the
case at the moment. (My preference would be that the
entity does no hedging but not too many people could
get their heads around that concept).
3. Will the new entity perform all the functions in
managing a pool themselves, or will they outsource it,
possibly on a tender basis? Having a tender should
appealing, but it is simply a system where companies
compete for the market. It is not competition in the
market. It will not deliver the outcomes that growers
need (basically choice on things like risk management
etc.) If the tasks are kept in house others worry about
how costs will be kept down, and performance
maximised, in the absence of any competitive forces.
4. Who will be directors of a new entity? If we get
popularly elected growers on a state by state basis,
forget it. We must move to directors that are selected
on their merits, with ideally no prerequisite that they all
be growers. Directors should have to apply and also be
head hunted, and then their appointments ratified by
growers at the AGM so growers do still retain the
power to prevent an individual from becoming a
director.
5. How will the new entity deliver better returns than the
old single desk system and management that it will
replace? If the system is not changed it is highly likely
that returns to growers will not be improved,
particularly if any tasks are outsourced to other entities
that are operating as profit making corporations.
My preferred way forward is to reduce the activities of a
single desk to simply executing the sales, and leaving all
other tasks up to other companies offering growers services
in a completely competitive environment.
• This solves the problem of the high capital cost of
setting up a new entity
• It puts grower payment systems into a completely
competitive environment - lower costs for growers.
• It puts hedging the crop into the hands of other grain
companies who would run their hedging programs in
competition with each other, reducing costs, reducing
risks to growers, removing the need for growers to find
a capital base, and providing a competitive environment
for performance.
Most people could find flaws in that system because it was
not full deregulation, or it does not suit the current
operations of the grain companies or whatever. So, I
suspect we will end up with something that is much worse
than I was suggesting, which will require growers to find
hundreds of millions of dollars (again - remember the WIF
we all were forced to pay?) so that the entity can continue to
make grower payments and conduct hedging activities in the
tired old ways we should be moving away from.
In my view it will be a step backwards and will push the
Australian wheat industry into oblivion relative to our
overseas competitors in eastern Europe, Canada, the EU and
the US. It will simply intensify the need to move onto full
deregulation.
Proponents of the proposed new entity which would make
payments to growers, are adamant that we will not need a
capital base because the finance sector will lend against the
value of the grain. I think that is simply wrong. The
financial sector will not lend against a tonne of wheat where
the value of that wheat can fluctuate wildly over a matter of
a few weeks. They will only provide significant finance if
the price is being managed ie hedged, and to do that the
new entity will need a lot of capital to fund potential margin
calls of hundreds of millions of dollars, as we saw with
AWB last year.
Capitalising the New Single Desk The NSW Grain
Committee led by John Ridley continue to be out of touch
with reality and could derail the process of setting up a new
single desk. John argues that the new singe desk should
come from a demerged AWBI. He also says that AWB
should fund that split.
The scary thing is that he then says that the current system
was capitalised by $650 million collected from growers, and
that this funding (or some of it) should go with the
demerged AWBI!
Not on. All growers were given B Class shares in return for
that capital. AWB Ltd simply cannot give shareholder
funds away. A new grower owned entity starts with zero
capital, even if it is a demerged AWBI. If John wants the
$650 million then it has to come from growers. Where do
growers get the money? They either find it from their own
resources or they sell their AWB B Class shares to
effectively roll the original capital into the new entity.
It is a disaster waiting to happen if those leading the
industry insist that the new export entity has to be
capitalised to run grower payment systems and to be able to
hedge. If John is serious about needing a $650 million
capital base, then the cost to growers would be $21,666 per
grower over 30,000 wheat growers. If the capital
requirements are carved back to $200 million (just a fraction
of the hedging losses that AWB clocked up last year, so
potentially nowhere near enough), the cost per grower
would be $6,666.
Why should growers have to capitalise another single desk
system? We have already done it once. Are we going to
have to do it every 10 years?
Lets say AWB do provide the capital base. Most likely they
would do that in return for providing all the pool
management services as per the current system. Bingo,
nothing changes and we end up with a single desk system
that continues to no longer meet the needs of growers,
because it continues forward with the same basic structure
of the current single desk system.
AWB “Hedging” The activities of AWB under the
current single desk model are now frightening. Most
growers think that AWB are out there hedging wheat and
currency to protect growers against price falls, and to try
and maximise gains from any price increases over the life of
a pool.
More and more, AWB have become involved in trading
activities designed purely to beat the Wheat Industry
Benchmark (WIB) so as to maximise out performance fees for
AWB Ltd.
On the surface that would appear to also maximise returns
to growers, but it is a floored incentive scheme that has cost
growers dearly over the last two wheat pools, and brought
the current system to its knees because of the Iraq scandal.
AWB really only earns real profits from managing the pool
(apart from margins on services sold to the pool), if the pool
outperforms the WIB. Back in the Iraq Kickback days, the
inflated prices for sales to Iraq got them over the line easily.
That was why AWB were so focused on maximising the
tonnage into Iraq regardless of the means used. It is also
why they eventually got into trouble over that market and
lead us to where we are today.
Since Iraq there are very few markets where AWB secures a
premium over world prices for sales of physical grain. To
beat the WIB the focus has had to move to currency and
commodity price management. That has lead AWB to punt.
The problem is that when they win they keep some of the
gains, and give some to growers. When they lose, growers
get all the losses and AWB none. Basically growers carry
all the risks and only get part of the rewards.
The 2005/06 pool got caught when AWB maintained sold
futures positions on the assumption that wheat prices would
fall and deliver a return above the WIB. The problem is that
wheat futures rose. AWB incurred losses on their positions,
had large margin calls, with the pool not capturing any of
the price gains at all, and pool payments being delayed
because they needed the cash to cover margin calls.
Growers carried the full risk.
Another example explained to me several times by an AWB
director as to why AWB should retain their “hedging” tasks,
relates to a large sale of wheat to China a year or so ago.
The sale was kept secret for 6 months. The expectation was
that once it was widely known, US futures would rise, as
would world wheat prices because of the impact imports by
China has on the world wheat market.
So, during the quiet 6 months, AWB accumulated bought
futures positions. When the sale became known, futures
went up, AWB sold the futures, made a profit, outperformed
the WIB, and growers and AWB shared the gains.
The problem is that that is not hedging. It was speculative,
and would have hurt growers, but not AWB Ltd, if for some
reason wheat futures had fallen away.
Going into last harvest, last year’s pool had too much wheat
forward sold via futures. It may have started out as a hedge
(an aggressive one that growers should have been told
about) but, as growers found last year, those positions
needed to be exited very rapidly as yield potential fell.
AWB underestimated the drop in yield potential across
Australia, and was still in an over hedged position just a few
days out from harvest, hoping that the markets would fall, if
the newspaper accounts of the incident are correct.
If AWB are going to run the 2007/08 pool they must start
telling growers what they are doing. Last year growers
should have been told that AWB were in trouble with a high
level of sold futures, particularly growers who were out in
the same market selling swaps to hedge their own crops.
The old ways of secrecy are no longer acceptable, and if
AWB is being rewarded with another year of operations,
they simply must start behaving in a way that is helpful to
growers."
The following is a very insightful article is a look at the "Single Desk" transition folks Australia is proposing from the perspective of a wheat grower down under... (Malcolm Bartholomaeus
callum@capri.net.au).
I believe in particular the need to consider the "Capital Base" for a new "CWBII" is highlighted... at a much higher level than was indicated in our previous study.
Risk Management is not cheap... As the Bank of Montreal found out from the some $650M loss on natural gas trading this winter.
This article explains IMHO, what a single desk: should, could, and what it gets caught doing that is counter productive for grain growers/the national interest.
The Australian Experience is invaluble to our Canadian conversion... and the insights this experience gives us... give us practical, real life, information that is being earned the hard way!
One cannot help but draw on the CWB "Malt Barley" fiasco experience this year (Again & Again...) to confirm the real pain and economic cost the Command and Control problems "Single desk" systems in both Australia and Canada... subjecting AU & CA growers to.
THis is heavy reading... but for anyone who wants to understand the true costs of a "single desk"... it is truly revealing. Malcolm believes a national "single desk", properly managed; could provide a premium to growers... I think it would be fair to say.
Here is his in depth May 22/07 article on what is happening:
"New Wheat Marketing Arrangements
• AWB keep the single desk until March 2008
• In March 2008 a grower controlled entity will be
established if growers can agree on how to do it. It will
either be a new entity or based on a demerged AWBI.
• Legislation will be introduced to confer single desk
status to this new entity.
• Minister McGauran will keep the veto until June 08.
• From July 08 a revamped WEA will hold the veto.
That will allow the government to veto trades with
countries they don’t want wheat to be exported to (ie to
prevent a repeat of the Iraq problem). They can also
approve other exports under a public interest test, if the
single desk entity fails to develop new markets etc, or if
the entity is locked out of some markets.
• Container and bagged exports will be deregulated.
Apparently AWB will get full control of marketing the
2007/08 crop. However, the minister indicates that single
desk status will be conferred on the new grower entity after
March 2008. When exactly, because once it has the single
desk title, the old AWB can no longer export wheat.
Normally the 2007/08 pool would still have wheat to export
well into 2009. Very confusing.
Do we trust AWB with the 2007/08 wheat crop? Will they
use the opportunity to accumulate funds for a break fee?
Will they maximise returns to growers or try and maximise
their outperformance fees at grower risk? Will the costs of
running the pool continue to be higher than they should be?
Will AWB guarantee the lower base fee that they were able
to conjure up for the 2006/07 pool, and reduce the level of
outperformance fees they extract from the pool? Why are
new season pool estimates so low against all price
measures? AWB say that all pool estimates include hedging
results, so are they factoring in another round of hedging
losses already?
The system for the 2007/08 crop is now very much up in the
air. Right now I cannot see the way forward for the
2007/08 crop.
• Will AWB manage the 2007/08 pool up until it is
finalised some time in 2009, or will the new entity take
it over at some stage?
• Why would growers commit any wheat to AWB at
harvest knowing that either:
*They will not be the people running the pool after
March 2008, or
* After March 2008 the new entity will be able to
begin exporting.
• How can AWB begin managing currency and
commodity and physical forward sales for the 2007/08
crop if the management is to transfer in March or if
growers have the ability to hold wheat back to transfer
to the new entity in March?
• Will it be mandated that any wheat grown in 2007/08
that goes for export has to go via AWB and none to go
via the new entity?
• How will pool payments and loans be established
against such an up in the air system?
• How can we guarantee that funds from the 2007/08 pool
won’t be diverted to cover AWB break fees, or to
capitalise the new grower controlled entity?
• Will growers simply try and avoid the pooling system
against such uncertainty and sell for cash, swamping the
harvest cash market and driving prices far too low?
Probably the only way of getting some certainty on how the
2007/08 harvest can be managed would be for the new
grower controlled entity to actually be a demerged AWBI,
so that there is a relatively seamless transition in March
2008. That leaves us with the risk that the new entity will
simply operate in a very similar way to the current AWB
single desk model - something which I think would be a
mistake.
It would appear that Minister McGauran will be able to
issue licences on a limited basis for the next 12 months, as
per the current interim arrangements. Basically a poor form
of GLA for the 2007/08 crop, and any 2006/07 wheat still
being held out of reach of AWB by WACBH, ABB and
GrainCorp. It is likely that the only licences to be issued
will favour WACBH who want to sell wheat to their own
flour mills in Asia, or Wheat Australia if they can sell to
Iraq. That will simply hurt growers elsewhere in Australia,
with some lucky WA growers able to avoid the costs of
running AWB, and forcing up the per tonne costs for all
other growers because of the reduced tonnage that AWB
will get to handle.
From March 2008 onwards there is to be a new single desk
operated by a grower controlled company, which could rise
from the ashes of a demerged AWB/AWBI, or be a new
entity.
The real issues are:
1. How will the new grower owned entity operate? It
must operate on a fixed fee per tonne, ideally levied on
all wheat propduced, that does not vary year on year
save for periodic adjustments for inflation.
2. How will it be capitalised to underwrite grower
payments and hedging operations? All futures
transactions for currency and commodity must be
purely hedging and not speculative as is sometimes the
case at the moment. (My preference would be that the
entity does no hedging but not too many people could
get their heads around that concept).
3. Will the new entity perform all the functions in
managing a pool themselves, or will they outsource it,
possibly on a tender basis? Having a tender should
appealing, but it is simply a system where companies
compete for the market. It is not competition in the
market. It will not deliver the outcomes that growers
need (basically choice on things like risk management
etc.) If the tasks are kept in house others worry about
how costs will be kept down, and performance
maximised, in the absence of any competitive forces.
4. Who will be directors of a new entity? If we get
popularly elected growers on a state by state basis,
forget it. We must move to directors that are selected
on their merits, with ideally no prerequisite that they all
be growers. Directors should have to apply and also be
head hunted, and then their appointments ratified by
growers at the AGM so growers do still retain the
power to prevent an individual from becoming a
director.
5. How will the new entity deliver better returns than the
old single desk system and management that it will
replace? If the system is not changed it is highly likely
that returns to growers will not be improved,
particularly if any tasks are outsourced to other entities
that are operating as profit making corporations.
My preferred way forward is to reduce the activities of a
single desk to simply executing the sales, and leaving all
other tasks up to other companies offering growers services
in a completely competitive environment.
• This solves the problem of the high capital cost of
setting up a new entity
• It puts grower payment systems into a completely
competitive environment - lower costs for growers.
• It puts hedging the crop into the hands of other grain
companies who would run their hedging programs in
competition with each other, reducing costs, reducing
risks to growers, removing the need for growers to find
a capital base, and providing a competitive environment
for performance.
Most people could find flaws in that system because it was
not full deregulation, or it does not suit the current
operations of the grain companies or whatever. So, I
suspect we will end up with something that is much worse
than I was suggesting, which will require growers to find
hundreds of millions of dollars (again - remember the WIF
we all were forced to pay?) so that the entity can continue to
make grower payments and conduct hedging activities in the
tired old ways we should be moving away from.
In my view it will be a step backwards and will push the
Australian wheat industry into oblivion relative to our
overseas competitors in eastern Europe, Canada, the EU and
the US. It will simply intensify the need to move onto full
deregulation.
Proponents of the proposed new entity which would make
payments to growers, are adamant that we will not need a
capital base because the finance sector will lend against the
value of the grain. I think that is simply wrong. The
financial sector will not lend against a tonne of wheat where
the value of that wheat can fluctuate wildly over a matter of
a few weeks. They will only provide significant finance if
the price is being managed ie hedged, and to do that the
new entity will need a lot of capital to fund potential margin
calls of hundreds of millions of dollars, as we saw with
AWB last year.
Capitalising the New Single Desk The NSW Grain
Committee led by John Ridley continue to be out of touch
with reality and could derail the process of setting up a new
single desk. John argues that the new singe desk should
come from a demerged AWBI. He also says that AWB
should fund that split.
The scary thing is that he then says that the current system
was capitalised by $650 million collected from growers, and
that this funding (or some of it) should go with the
demerged AWBI!
Not on. All growers were given B Class shares in return for
that capital. AWB Ltd simply cannot give shareholder
funds away. A new grower owned entity starts with zero
capital, even if it is a demerged AWBI. If John wants the
$650 million then it has to come from growers. Where do
growers get the money? They either find it from their own
resources or they sell their AWB B Class shares to
effectively roll the original capital into the new entity.
It is a disaster waiting to happen if those leading the
industry insist that the new export entity has to be
capitalised to run grower payment systems and to be able to
hedge. If John is serious about needing a $650 million
capital base, then the cost to growers would be $21,666 per
grower over 30,000 wheat growers. If the capital
requirements are carved back to $200 million (just a fraction
of the hedging losses that AWB clocked up last year, so
potentially nowhere near enough), the cost per grower
would be $6,666.
Why should growers have to capitalise another single desk
system? We have already done it once. Are we going to
have to do it every 10 years?
Lets say AWB do provide the capital base. Most likely they
would do that in return for providing all the pool
management services as per the current system. Bingo,
nothing changes and we end up with a single desk system
that continues to no longer meet the needs of growers,
because it continues forward with the same basic structure
of the current single desk system.
AWB “Hedging” The activities of AWB under the
current single desk model are now frightening. Most
growers think that AWB are out there hedging wheat and
currency to protect growers against price falls, and to try
and maximise gains from any price increases over the life of
a pool.
More and more, AWB have become involved in trading
activities designed purely to beat the Wheat Industry
Benchmark (WIB) so as to maximise out performance fees for
AWB Ltd.
On the surface that would appear to also maximise returns
to growers, but it is a floored incentive scheme that has cost
growers dearly over the last two wheat pools, and brought
the current system to its knees because of the Iraq scandal.
AWB really only earns real profits from managing the pool
(apart from margins on services sold to the pool), if the pool
outperforms the WIB. Back in the Iraq Kickback days, the
inflated prices for sales to Iraq got them over the line easily.
That was why AWB were so focused on maximising the
tonnage into Iraq regardless of the means used. It is also
why they eventually got into trouble over that market and
lead us to where we are today.
Since Iraq there are very few markets where AWB secures a
premium over world prices for sales of physical grain. To
beat the WIB the focus has had to move to currency and
commodity price management. That has lead AWB to punt.
The problem is that when they win they keep some of the
gains, and give some to growers. When they lose, growers
get all the losses and AWB none. Basically growers carry
all the risks and only get part of the rewards.
The 2005/06 pool got caught when AWB maintained sold
futures positions on the assumption that wheat prices would
fall and deliver a return above the WIB. The problem is that
wheat futures rose. AWB incurred losses on their positions,
had large margin calls, with the pool not capturing any of
the price gains at all, and pool payments being delayed
because they needed the cash to cover margin calls.
Growers carried the full risk.
Another example explained to me several times by an AWB
director as to why AWB should retain their “hedging” tasks,
relates to a large sale of wheat to China a year or so ago.
The sale was kept secret for 6 months. The expectation was
that once it was widely known, US futures would rise, as
would world wheat prices because of the impact imports by
China has on the world wheat market.
So, during the quiet 6 months, AWB accumulated bought
futures positions. When the sale became known, futures
went up, AWB sold the futures, made a profit, outperformed
the WIB, and growers and AWB shared the gains.
The problem is that that is not hedging. It was speculative,
and would have hurt growers, but not AWB Ltd, if for some
reason wheat futures had fallen away.
Going into last harvest, last year’s pool had too much wheat
forward sold via futures. It may have started out as a hedge
(an aggressive one that growers should have been told
about) but, as growers found last year, those positions
needed to be exited very rapidly as yield potential fell.
AWB underestimated the drop in yield potential across
Australia, and was still in an over hedged position just a few
days out from harvest, hoping that the markets would fall, if
the newspaper accounts of the incident are correct.
If AWB are going to run the 2007/08 pool they must start
telling growers what they are doing. Last year growers
should have been told that AWB were in trouble with a high
level of sold futures, particularly growers who were out in
the same market selling swaps to hedge their own crops.
The old ways of secrecy are no longer acceptable, and if
AWB is being rewarded with another year of operations,
they simply must start behaving in a way that is helpful to
growers."
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