Single Desk keeps wheat growers in commodity poverty trap
By John Williams * 25/6/07
Reprinted with permission from the August 2007 edition of the Australian Farm Journal
Precede:
The continuation of mandatory pooling and government veto for Australian bulk export wheat, and single-desk selling into international commodity markets, have raised ethical issues for government and long-term challenges for farmers.
In this two-part review, marketing lecturer John Williams argues that mandatory export pooling and selling commodity through international government tenderers is not in the best long-term interests of Australian wheat growers.
Disadvantages of international government tenders
Many North African and Asian government organizations still issue import tenders for bulk wheat contracts based on the lowest commodity price. This buying method results in sellers queuing for commodity tender orders, price discounting, and generous credit provisions.
Single-desk selling merely facilitates this form of discount buying, and competes with other sellers either through freight advantages or in desperation to achieve quantity sales with minimum specification.
Bureaucratic corruption is likely to occur whenever governments restrict the competitive processes through market regulation, especially through the issue of tenders.
In supporting the single-desk ‘to counter internationally corrupt wheat markets', the Australian Government is actually supporting overseas tendering practices that encourage government corruption and compromise Australian Government officials.
Table. 1.
COUNTRY IMPORTING GOVERNMENT TENDERING AGENCY
Morocco
Office National Interprofessional des Cereales et des Legumineuses (ONCIL)
Tunisia
Office des Cereales
Egypt
General Authority for Supply Commodities (GASC)
Food Industries Holding Co.
Iraq
Iraq Grains Board
Iraqi State Company for Grain Processing
India
Food Corporation of India
State Trading Corporation of India(STC)
Government Trading Co.
MMTC Ltd
Pakistan
Federal Government pricing and various State Government departments
Japan
Ministry for Agriculture, Forestry and Fisheries (MAFF)
China
China National Cereals, Oils, and Foodstuffs import and Export Corporation (COFCO)
Jilin Grain Group
China Grains and Oils Group
Note: Jordan, Iran, Syria, and Turkey have generally been self-sufficient or net wheat exporters over the past 3 years. Except for Japan and China, much of East Asia has either partial deregulation or tenders issued by industry organizations.
Non-commercial premiums do not exist
Commercial premiums may be achieved through meeting consistent higher-grade or varietal specifications, shipping freight rate advantages, credit provisions, currency relativities, and services that include timing and guarantees. Advantages might accrue through quality assurance, alliances or partnerships, technology synergies, and marketing coordination. However, these are available to all commercial transactions, and not just to single-desk sellers.
There is no evidence of any non-commercial wheat price 'premiums' or higher National Pool receipts. For international buyers to pay a higher price in a commodity market is a total contradiction in terms (the buyers would soon be bankrupted by competitive pricing). Also, why should overseas end-users pay more when there is plentiful supply?
Any prices achieved or paid above the commercial market should be a clear signal to the appropriate authorities that corruption is occurring.
'Premiums' that were so widely touted as justification for the continuation of Australia's wheat single-desk were actually corruption payments (Cole Inquiry, 18-20th Jan. 2006).
Counter-trade disadvantages
Counter-trade (international payment or barter exchange that is not the preferred payment method for the seller) forms 60 per cent of global transactions.
Private food companies are far better in adapting to counter-trade than single-desk commodity sellers. If wheat can only be exchanged for biscuits, then a food company that was fully integrated into the food value chain could assist in developing that market.
If a company was forced to sell biscuits in order to then sell wheat or flour, then a fully integrated food company would be more likely to experience a successful outcome in these negotiations. However, the single-desk seller fails on all counts when dealing with counter-trade, and then is generally forced back onto the international government commodity discount tenders.
The single-desk seller may be best suited for commodity bartering, such as the Iraq Oil-for-Wheat program, which exchanged wheat for crude oil that then had to be on-sold to the World Bank.
However, this simple commodity bartering is open to corrupt practices (Cole Enquiry, 2006), compromises Australian Government Foreign Affairs and Trade officials (Cole Enquiry, 2006), and does not lead to long-term food value-chain integration.
Failure of overseas commodity capital investments to secure supply
International capital investments by single-desk sellers have failed to secure long-term major commodity supply relationships.
The previous Australian single-desk seller has a 30 per cent investment in the private Five Star Flour Mills in Egypt with the expressed Australian Government intention to 'achieve long term supply agreements from the Egyptian Government tendering system'.
It has failed to achieve these agreements because the Egyptian Government import tendering agencies preferred discounted spot purchases, especially from exporters who had a freight advantage over Australia, such as the E.U., Ukraine, Russia, and Kazakhstan.
Single-desks do not integrate with the international food value chain
With increasing international wheat market deregulation, there are thousands of small international end-users that were previously hidden by the facade of government monopoly purchasing agencies.
Previous small bakeries are increasing in size and many are developing close synergies with the retail chains. The traditional international food channels have therefore dramatically changed.
The huge developing Asian food value chain market opportunities are mostly being wasted because Australian food companies cannot integrate wheat (and sugar) into their food value supply chains.
Single-desk commodity selling is not marketing and is at the opposite end to food market integration and relationship marketing, there is a disincentive to produce what best fits in with the international food value-chain, and food market chain signals from end-users (marketing) are distorted by mandatory bulk pooling (selling).
Single-desk selling totally contradicts the food value chain initiatives such as the National Food Industry Strategy program of the Australian Government. This inter-departmental contradiction has led to a dysfunctional Australian Government approach to export food market development initiatives.
Varietal constraints
Australian climate, soils, and weather often preclude the production of suitable Asian end-user varietal specifications. Australia’s commercial wheat varietal premium advantage in Asia (estimated by G.R.D.C. to be $5-6/tonne in 2005 on only 3 million tonne) has been seriously eroded over the last 10 years in East Asia by newer varieties from the USA and Canada that are better aligned to Asian flour mill requirements.
The research and development of new Australian multi-purpose varieties requires huge investment by food chain specialists who are more likely to align possible varieties to international food market needs. Mandatory pooling and single-desk selling prevents food chain companies undertaking such a high risk investment and acts as a disincentive towards private motivation in appropriate varietal innovation.
Just-in-time deliveries and diseconomies of scale
Until 15 years ago, international importing governments stockpiled global wheat for years because domestic taxpayers and consumers paid for the purchase, storage, deterioration, and opportunity cost if prices subsequently fell. End-users were expected to buy a high government priced, cost inefficient, low quality, uniform commodity. This favoured the single-desk selling system.
This is now contrasted with just-in-time deliveries in more deregulated markets, which is pushing commodity storage back towards the first-stage merchant and grower-end of the supply chain. Single-desk sellers who rely on bulk uniform sales cannot meet many small just-in-time deliveries based on tight specifications to specific end-users. Container shipments of Australian wheat are expected to expand significantly now that the wheat container export market has been deregulated.
Whereas economies of scale did occur with single-desk sellers in the past, current bulk shipments into just-in-time deregulated markets create diseconomies of scale because end-users have neither the capacity nor the financial inclination to store inventory. There is no evidence of ‘quantity premiums’ (premium prices due to large quantities delivered), except when corrupt practices occur (otherwise, the end-users would go bankrupt).
No power in non-government commodity negotiations
Under past trade regulation, foreign policy intervention was often required to achieve trade-offs between governments to facilitate large commodity sales. Single-desk (monopoly) selling was an intricate tool in foreign policy. But with increasing international deregulated markets and shrinking government commodity dealing, the single-desk has become redundant.
Value to the food supply chain is the only real market power determinant. If this value is low, there is low negotiation power for sellers, and market power shifts to the buyer. This results in foreign governments wanting Australia to continue with single-desk selling.
The single-desk contradicts Australian trade liberalization efforts in World Trade Organisation negotiations. This has caused dysfunctionalism between Australian Government departments and compromises the integrity of Australian Government trade negotiators. Whenever the Australia Government contemplates the trade-off of the single-desk for overseas' trade concessions, the government is negotiating from a non-existing bargaining position due to Australian wheat growers being forced to remain in the commodity-poverty trap (falling real commodity prices and rising costs).
Problems with the government veto on exports
The power of government veto over Australian wheat exports assumes an intimate knowledge of the Asian food value chain, that picking winners and losers is an easy game, and that the past failures of the Australian Government in international wheat deals can be avoided.
The government veto criteria are extremely weak and based on vague sentiments relating to 'protection of the National Pool' (as if that was the best benchmark) or to 'only producer commodity organisations' (which excludes food marketing specialist companies). These vague veto criteria and objectives are most likely to result in cronyism and political favouritism, which contradicts other Australian Government initiatives to remove corrupt practices in overseas countries.
Audit inadequacies
The Wheat Marketing Act has been characterised by statutory appointee administrations based on political favouritism, without any annual transparent audits that are made public to growers, no monitoring of accounting practices, and non-existent good governance benchmarking.
There has never been any transparent public audit of the overseas tendering processes and payment mechanisms into the National Wheat Pool, and no cost audits back to the grower. Competitive pressures and supply chain audits are required to minimize corruption of this whole pricing and payment system.
Lack global tactical advantage
Under the just-in-time wheat delivery system, U.S. growers have learnt to withhold supplies on-farm and allow the U.S. fund managers to drive commodity prices. This tactic is not available to Australian growers under single-desk selling.
U.S. growers and merchants want the continuation of the Australian single export-desk because of the quantity and quality transparencies it provides. Commodity pooling and single-desk selling is akin to playing international poker with the local cards openly displayed on the gaming table. It is a bonanza to the U.S.A. because wheat can be hidden on-farm in the U.S.A., whereas in Australia, there is full disclosure with single-desk selling.
Problems with low quality wheat
The single-desk has been justified in the past because of the possibility of large down-gradings of wheat due to adverse weather conditions, and Australia being forced to sell low-grade wheat. This concern is exactly the reason to deregulate the Australian export market. Under domestic market deregulation, the Australian feed market has grown from 1 million tonne to over 5 million tonne per annum.
With export deregulation, export feed market specialists would ensure that feed wheat was marketed according to normal international commercial competitive conditions and prices. Under the existing export monopoly, the image of Australian wheat quality is seriously tainted whenever the single-desk is forced to sell downgraded wheat onto the international market. Buyers naturally become suspicious of blending by single-desk sellers under such circumstances.
Governments encourage too many global wheat growers
Producer subsidies by international governments cause global surpluses and lower prices, but they are not corrupt. If there are concerns with the 'playing field' not being 'level' (as if some equitableness was desirable to enforce the commodity poverty trap), then this should be a market signal to move away from the single-desk commodity selling method and to establish more integrated and diversified marketing in the food value-chain.
Cargill learnt their lesson fifty years ago and diversified most of its operations into non-agricultural industries that includes steel, chemicals, fertilisers, salt, processing plants, food and fibre. Their proprietary grain trading operations comprise only approximately one per cent of current global organizational activities. If commodity wheat selling is as profitable as some growers and politicians claim, then why have the previous major international grain companies completely diversified away from proprietary grain trading? This historical lesson has been completely lost by many Australian wheat farmers.
Take home message
Single-desk selling is the least qualified method to take advantage of opportunities in the rapidly expanding Asian food value chains. There is an urgent need to shift away from the unsophisticated and corrupted international commodity discount government tendering system and move towards food value chain integrated marketing. It is time to allow the global food supply specialists to integrate wheat (and sugar) into their value chains.
Resistance to change may give short-term satisfaction in exchange for longer-term pain for Australian wheat growers. The global food market has changed. Remaining in the rut of commodity selling is only enforcing the commodity poverty-trap, which is characterised by increasing numbers of global producers, rising costs, and falling real average prices. Sugar has already reached that poverty-trap level where average sugar prices are 10 per cent below costs of production. Wheat cannot be too far behind!
* John Williams has trained growers, merchants and end-users in commodity markets and hedging throughout Australia for the past ten years, lectures in commodity trading management and food marketing at both Monash and La Trobe Universities, currently completing a Doctorate by research in commodity marketing and price hedging at The Faculty of Land and Food Resources within The University of Melbourne, and is author of 'Agricultural Price Risk Management' published in 1999 by the Oxford University Press. E-mail: commtrad@bigpond.net.au
By John Williams * 25/6/07
Reprinted with permission from the August 2007 edition of the Australian Farm Journal
Precede:
The continuation of mandatory pooling and government veto for Australian bulk export wheat, and single-desk selling into international commodity markets, have raised ethical issues for government and long-term challenges for farmers.
In this two-part review, marketing lecturer John Williams argues that mandatory export pooling and selling commodity through international government tenderers is not in the best long-term interests of Australian wheat growers.
Disadvantages of international government tenders
Many North African and Asian government organizations still issue import tenders for bulk wheat contracts based on the lowest commodity price. This buying method results in sellers queuing for commodity tender orders, price discounting, and generous credit provisions.
Single-desk selling merely facilitates this form of discount buying, and competes with other sellers either through freight advantages or in desperation to achieve quantity sales with minimum specification.
Bureaucratic corruption is likely to occur whenever governments restrict the competitive processes through market regulation, especially through the issue of tenders.
In supporting the single-desk ‘to counter internationally corrupt wheat markets', the Australian Government is actually supporting overseas tendering practices that encourage government corruption and compromise Australian Government officials.
Table. 1.
COUNTRY IMPORTING GOVERNMENT TENDERING AGENCY
Morocco
Office National Interprofessional des Cereales et des Legumineuses (ONCIL)
Tunisia
Office des Cereales
Egypt
General Authority for Supply Commodities (GASC)
Food Industries Holding Co.
Iraq
Iraq Grains Board
Iraqi State Company for Grain Processing
India
Food Corporation of India
State Trading Corporation of India(STC)
Government Trading Co.
MMTC Ltd
Pakistan
Federal Government pricing and various State Government departments
Japan
Ministry for Agriculture, Forestry and Fisheries (MAFF)
China
China National Cereals, Oils, and Foodstuffs import and Export Corporation (COFCO)
Jilin Grain Group
China Grains and Oils Group
Note: Jordan, Iran, Syria, and Turkey have generally been self-sufficient or net wheat exporters over the past 3 years. Except for Japan and China, much of East Asia has either partial deregulation or tenders issued by industry organizations.
Non-commercial premiums do not exist
Commercial premiums may be achieved through meeting consistent higher-grade or varietal specifications, shipping freight rate advantages, credit provisions, currency relativities, and services that include timing and guarantees. Advantages might accrue through quality assurance, alliances or partnerships, technology synergies, and marketing coordination. However, these are available to all commercial transactions, and not just to single-desk sellers.
There is no evidence of any non-commercial wheat price 'premiums' or higher National Pool receipts. For international buyers to pay a higher price in a commodity market is a total contradiction in terms (the buyers would soon be bankrupted by competitive pricing). Also, why should overseas end-users pay more when there is plentiful supply?
Any prices achieved or paid above the commercial market should be a clear signal to the appropriate authorities that corruption is occurring.
'Premiums' that were so widely touted as justification for the continuation of Australia's wheat single-desk were actually corruption payments (Cole Inquiry, 18-20th Jan. 2006).
Counter-trade disadvantages
Counter-trade (international payment or barter exchange that is not the preferred payment method for the seller) forms 60 per cent of global transactions.
Private food companies are far better in adapting to counter-trade than single-desk commodity sellers. If wheat can only be exchanged for biscuits, then a food company that was fully integrated into the food value chain could assist in developing that market.
If a company was forced to sell biscuits in order to then sell wheat or flour, then a fully integrated food company would be more likely to experience a successful outcome in these negotiations. However, the single-desk seller fails on all counts when dealing with counter-trade, and then is generally forced back onto the international government commodity discount tenders.
The single-desk seller may be best suited for commodity bartering, such as the Iraq Oil-for-Wheat program, which exchanged wheat for crude oil that then had to be on-sold to the World Bank.
However, this simple commodity bartering is open to corrupt practices (Cole Enquiry, 2006), compromises Australian Government Foreign Affairs and Trade officials (Cole Enquiry, 2006), and does not lead to long-term food value-chain integration.
Failure of overseas commodity capital investments to secure supply
International capital investments by single-desk sellers have failed to secure long-term major commodity supply relationships.
The previous Australian single-desk seller has a 30 per cent investment in the private Five Star Flour Mills in Egypt with the expressed Australian Government intention to 'achieve long term supply agreements from the Egyptian Government tendering system'.
It has failed to achieve these agreements because the Egyptian Government import tendering agencies preferred discounted spot purchases, especially from exporters who had a freight advantage over Australia, such as the E.U., Ukraine, Russia, and Kazakhstan.
Single-desks do not integrate with the international food value chain
With increasing international wheat market deregulation, there are thousands of small international end-users that were previously hidden by the facade of government monopoly purchasing agencies.
Previous small bakeries are increasing in size and many are developing close synergies with the retail chains. The traditional international food channels have therefore dramatically changed.
The huge developing Asian food value chain market opportunities are mostly being wasted because Australian food companies cannot integrate wheat (and sugar) into their food value supply chains.
Single-desk commodity selling is not marketing and is at the opposite end to food market integration and relationship marketing, there is a disincentive to produce what best fits in with the international food value-chain, and food market chain signals from end-users (marketing) are distorted by mandatory bulk pooling (selling).
Single-desk selling totally contradicts the food value chain initiatives such as the National Food Industry Strategy program of the Australian Government. This inter-departmental contradiction has led to a dysfunctional Australian Government approach to export food market development initiatives.
Varietal constraints
Australian climate, soils, and weather often preclude the production of suitable Asian end-user varietal specifications. Australia’s commercial wheat varietal premium advantage in Asia (estimated by G.R.D.C. to be $5-6/tonne in 2005 on only 3 million tonne) has been seriously eroded over the last 10 years in East Asia by newer varieties from the USA and Canada that are better aligned to Asian flour mill requirements.
The research and development of new Australian multi-purpose varieties requires huge investment by food chain specialists who are more likely to align possible varieties to international food market needs. Mandatory pooling and single-desk selling prevents food chain companies undertaking such a high risk investment and acts as a disincentive towards private motivation in appropriate varietal innovation.
Just-in-time deliveries and diseconomies of scale
Until 15 years ago, international importing governments stockpiled global wheat for years because domestic taxpayers and consumers paid for the purchase, storage, deterioration, and opportunity cost if prices subsequently fell. End-users were expected to buy a high government priced, cost inefficient, low quality, uniform commodity. This favoured the single-desk selling system.
This is now contrasted with just-in-time deliveries in more deregulated markets, which is pushing commodity storage back towards the first-stage merchant and grower-end of the supply chain. Single-desk sellers who rely on bulk uniform sales cannot meet many small just-in-time deliveries based on tight specifications to specific end-users. Container shipments of Australian wheat are expected to expand significantly now that the wheat container export market has been deregulated.
Whereas economies of scale did occur with single-desk sellers in the past, current bulk shipments into just-in-time deregulated markets create diseconomies of scale because end-users have neither the capacity nor the financial inclination to store inventory. There is no evidence of ‘quantity premiums’ (premium prices due to large quantities delivered), except when corrupt practices occur (otherwise, the end-users would go bankrupt).
No power in non-government commodity negotiations
Under past trade regulation, foreign policy intervention was often required to achieve trade-offs between governments to facilitate large commodity sales. Single-desk (monopoly) selling was an intricate tool in foreign policy. But with increasing international deregulated markets and shrinking government commodity dealing, the single-desk has become redundant.
Value to the food supply chain is the only real market power determinant. If this value is low, there is low negotiation power for sellers, and market power shifts to the buyer. This results in foreign governments wanting Australia to continue with single-desk selling.
The single-desk contradicts Australian trade liberalization efforts in World Trade Organisation negotiations. This has caused dysfunctionalism between Australian Government departments and compromises the integrity of Australian Government trade negotiators. Whenever the Australia Government contemplates the trade-off of the single-desk for overseas' trade concessions, the government is negotiating from a non-existing bargaining position due to Australian wheat growers being forced to remain in the commodity-poverty trap (falling real commodity prices and rising costs).
Problems with the government veto on exports
The power of government veto over Australian wheat exports assumes an intimate knowledge of the Asian food value chain, that picking winners and losers is an easy game, and that the past failures of the Australian Government in international wheat deals can be avoided.
The government veto criteria are extremely weak and based on vague sentiments relating to 'protection of the National Pool' (as if that was the best benchmark) or to 'only producer commodity organisations' (which excludes food marketing specialist companies). These vague veto criteria and objectives are most likely to result in cronyism and political favouritism, which contradicts other Australian Government initiatives to remove corrupt practices in overseas countries.
Audit inadequacies
The Wheat Marketing Act has been characterised by statutory appointee administrations based on political favouritism, without any annual transparent audits that are made public to growers, no monitoring of accounting practices, and non-existent good governance benchmarking.
There has never been any transparent public audit of the overseas tendering processes and payment mechanisms into the National Wheat Pool, and no cost audits back to the grower. Competitive pressures and supply chain audits are required to minimize corruption of this whole pricing and payment system.
Lack global tactical advantage
Under the just-in-time wheat delivery system, U.S. growers have learnt to withhold supplies on-farm and allow the U.S. fund managers to drive commodity prices. This tactic is not available to Australian growers under single-desk selling.
U.S. growers and merchants want the continuation of the Australian single export-desk because of the quantity and quality transparencies it provides. Commodity pooling and single-desk selling is akin to playing international poker with the local cards openly displayed on the gaming table. It is a bonanza to the U.S.A. because wheat can be hidden on-farm in the U.S.A., whereas in Australia, there is full disclosure with single-desk selling.
Problems with low quality wheat
The single-desk has been justified in the past because of the possibility of large down-gradings of wheat due to adverse weather conditions, and Australia being forced to sell low-grade wheat. This concern is exactly the reason to deregulate the Australian export market. Under domestic market deregulation, the Australian feed market has grown from 1 million tonne to over 5 million tonne per annum.
With export deregulation, export feed market specialists would ensure that feed wheat was marketed according to normal international commercial competitive conditions and prices. Under the existing export monopoly, the image of Australian wheat quality is seriously tainted whenever the single-desk is forced to sell downgraded wheat onto the international market. Buyers naturally become suspicious of blending by single-desk sellers under such circumstances.
Governments encourage too many global wheat growers
Producer subsidies by international governments cause global surpluses and lower prices, but they are not corrupt. If there are concerns with the 'playing field' not being 'level' (as if some equitableness was desirable to enforce the commodity poverty trap), then this should be a market signal to move away from the single-desk commodity selling method and to establish more integrated and diversified marketing in the food value-chain.
Cargill learnt their lesson fifty years ago and diversified most of its operations into non-agricultural industries that includes steel, chemicals, fertilisers, salt, processing plants, food and fibre. Their proprietary grain trading operations comprise only approximately one per cent of current global organizational activities. If commodity wheat selling is as profitable as some growers and politicians claim, then why have the previous major international grain companies completely diversified away from proprietary grain trading? This historical lesson has been completely lost by many Australian wheat farmers.
Take home message
Single-desk selling is the least qualified method to take advantage of opportunities in the rapidly expanding Asian food value chains. There is an urgent need to shift away from the unsophisticated and corrupted international commodity discount government tendering system and move towards food value chain integrated marketing. It is time to allow the global food supply specialists to integrate wheat (and sugar) into their value chains.
Resistance to change may give short-term satisfaction in exchange for longer-term pain for Australian wheat growers. The global food market has changed. Remaining in the rut of commodity selling is only enforcing the commodity poverty-trap, which is characterised by increasing numbers of global producers, rising costs, and falling real average prices. Sugar has already reached that poverty-trap level where average sugar prices are 10 per cent below costs of production. Wheat cannot be too far behind!
* John Williams has trained growers, merchants and end-users in commodity markets and hedging throughout Australia for the past ten years, lectures in commodity trading management and food marketing at both Monash and La Trobe Universities, currently completing a Doctorate by research in commodity marketing and price hedging at The Faculty of Land and Food Resources within The University of Melbourne, and is author of 'Agricultural Price Risk Management' published in 1999 by the Oxford University Press. E-mail: commtrad@bigpond.net.au
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