AWB Limited

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AWB Limited (ASX: AWB) is the Australian former-monopoly, company that oversees the exports of grain, particularly wheat.

The AWB was a government body known as the Australian Wheat Board until 1 July 1999, when the AWB was transformed into a private company, owned by wheat growers. On 22 January 2001, AWB was floated on the Australian Stock Exchange. The AWB was the "single desk" for the sale of Australian wheat. However on 22 December, the Howard government issued permits for two other companies to start exporting wheat; Wheat Australia to export 300,000 tonnes to Iraq, and CBH to export 500,000 tonnes to Indonesia^[1]. AWB has been the subject of controversy recently, amid revelations that the company paid kickbacks to former Iraqi leader Saddam Hussein. These revelations and the subsequent Cole Inquiry called by the Australian Government may result in criminal charges being brought against many current and former executives of AWB and could lead to permanent changes to, or the ending of, AWB's export monopoly. On 29 January 2007 the first non-AWB wheat shipment since 1939 left Western Australia for Indonesia.

AWB exports “into more than 50 countries, with Australian wheat exports worth up to $5 billion per year” (AWB 2006). It is given a near-monopoly by the Government, where it is the largest seller of wheat that is permitted to negotiate with overseas buyers and make export sales. AWB has veto power over any other prospective exporter of wheat, which effectively eliminates competition. However, the Wheat Export Authority, on average, allows around 4% of total wheat exports to be exported by others, but this is not allowed to be in bulk, only bags and containers.^{[citation needed]}

The principle of the single desk is to prevent Australian farmers from being played off against each other by large corporate customers/grains traders. AWB represents all Australian wheat on the world market, hoping to achieve a higher/more stable average sales price for all farmers than would be achieved if they were each competing to sell their own wheat to the same small number of large customers/grains traders. As part of this, all wheat of a given grade is pooled, and farmers are paid in several stages according to the proportion of the pool that has been sold, rather than being paid in full only when their particular shipment of grain is sold. The continued status of AWB's export monopoly has been the subject of heated debate between wheat growers and politicians in recent years in Australia, with strong arguments both in favour of preserving and abolishing AWB's monopoly on wheat exports.

1 History of the Board
2 Corporate structure
3 Arguments for the single-desk
4 Arguments against the single-desk
5 Oil for food scandal
6 References
7 External links

[edit] History of the Board

The AWB was founded in the late 1930s, to regulate the wheat market after the excesses of the Great Depression. The single desk dates to this period.

The Canadian Wheat Board was initially modelled on the Australian Wheat Board.

Since privatisation, AWB has grown to incorporate a number of subsidiaries to diversify its income away from its monopoloy on wheat exports. Its subsidiary businesses include GrainFlow to manage collection of grain from farmers to ports, companies to ship the grain overseas to customers, and Landmark rural services.

[edit] Corporate structure

AWB Limited is a holding company owning a number of subsidiaries. Its shareholding is divided into two classes: class A and class B. Ownership of class A shares is restricted to currently active wheat growers; they are non-transferrable, and must be ceded upon the cessation of wheat-growing operations. Class B shares are freely traded on the Australian Stock Exchange, with the proviso that no one individual or entity may control more than 10% of all class B shares. The company's constitution provides for 7 directors elected by class A shareholders, two directors elected by class B shareholders, with a further two directors to be appointed by the directors elected by class A shareholders. Thus, the class A shareholders are ensured control of the company.

AWB Limited has a number of subsidiaries. Some of these subsidiaries exist due to legislative requirements relating to the operation of the single desk; others exist for the purpose of controlling credit risk. As of early 2006, they are:

AWB Limited - the holding company
AWB (International) Limited - the corporation authorised by federal legislation to export wheat under the monopoly
AWB (Australia) Limited - domestic wheat trading and export of non-wheat grains
AWB Services Limited - provides services (e.g. financial services, IT services, asset management) to the rest of the AWB group
AWB Harvest Finance Limited, AWB Commercial Funding Limited, and AWB Riskassist Limited - provide finance and financial risk management for wheat export transactions
AWB GrainFlow Pty Ltd - provides bulk grain handling and transport facilities
Landmark (comprised Landmark Operations Limited and Landmark (Qld) Limited) provides finance, insurance, real estate, commodities trading, farming equipment sales, etc. to Australian farmers (including other agricultural sectors such as wool and livestock)
Johnstone River Transport Pty Ltd - provides transport services in Qld, specialising in sugar cane, limestone and fertiliser

[edit] Arguments for the single-desk

Farmers have been largely supportive of the single desk system, with opinion polls consistently showing over 80% support. Most small-scale farmers support the AWB. The single desk system is controlled by growers (as class A shares vote in 9 of the 11 directors of the board) and has an integrated management and marketing system. A large percentage of the profits made by the operations of AWB Limited go to wheat growers. Throughout the world, governments offer substantial subsidies to their wheat growers, and this causes a distorted trade situation.^{[citation needed]} Wheat growers in the United States receive an average 32% of their income from subsidies; the figure for the European Union is 39%. Wheat growers overseas receive subsidies to the tune of $170 per tonne. The single desk unites Australian farmers and gives the AWB considerable weight in the tough international market, by negotiating as one bloc collectively.

One of the greatest factors is that having only one Australian company in the international market ensures that there is no competition amongst other Australian growers. Since Australian wheat growers are not competing amongst themselves to export their wheat, lowering each other’s prices; which in turn decreases the income of Australian wheat growers exporting overseas.

“Australia produces about 3 per cent of the world's wheat but has 15 per cent of global wheat trade” (The Age 2006). The single desk system gives AWB has greater bargaining power as, together, it is very large and can negotiate collectively for the benefit of its members. The large volume of exports handled by the AWB gives Australian wheat growers an advantage as it has the scale to compete directly with global grain giants, which together, have a 73% market share (AWB 2006). These include Cargill, Union Elevator, ADM, and ConAgra. The size of the national pool also means that the Australian wheat industry has the ability to secure reductions to its transport and storage costs within Australia, another result of its increased bargaining power.

AWB was able to reduce its supply chain costs by $5.41 per tonne (equivalent of $86 million) between 1999 and 2005 by developing the GrainFlow system, a network of 22 storage centres on the east coast and South Australia. The single desk gives Australian farmers an average “premium of $13 per tonne” (Vaile 2006) and it is estimated that the single desk brings back to the wheat industry an extra $200 million a year.

The AWB offers financial security to wheat growers by being the buyer of last resort, meaning that they buy any wheat that is of an acceptable quality, so that all 36,000 wheat growers have the certainty of an income and access to the export market. It also acts as financier of last resort and is obliged to provide a payment option for all pool deliveries. It also manages wheat pools on behalf of growers and has the benefit of operations on a large scale and decades of experience.

AWB Ltd, by its Constitution, is obliged to ensure that wheat producers receive the highest possible returns for their wheat. This obligation is unique amongst companies around the world and is the reason for being of the company.

The Australian Commonwealth Government has been supportive of the AWB and the single-desk system. Former Minister for Trade Mark Vaile said: “We will stand by the single desk, because it benefits Australian wheat growers. It is not an export subsidy, it does not distort trade.” Also, he said that “there may come a day when we no longer need a single desk for Australian wheat growers”, but only when world trade barriers in agriculture, such as subsidies and tariffs are broken down.

[edit] Arguments against the single-desk

Those who are against the concept of a single-desk marketing Australia’s wheat include some of the larger grain growers, most other Australian grain distributors and marketers, and foreign wheat companies. In recent months, some smaller growers also are having doubts about AWB, in light of the Iraq oil-for-food scandal.

It is usually smaller wheat growers that favour the single-desk policy. However, larger producers are confident that they can market their wheat well and gain higher prices for it for export, and favour deregulation.^{[citation needed]}

With the single desk, farmers have to take what they get; individual farmers cannot go outside the structure to find buyers that the single desk does not deal with. There is no freedom to choose to whom they will sell their wheat. In addition, they cannot negotiate their own price for their produce. For example it was revealed recently that AWB had negotiated a price of approximately $250 per tonne of wheat for Australian growers at a time when the international price has risen to more than $300 a tonne as a result of lower supply. This means that Australian farmers are forced to export their wheat at significantly lower than market prices.^{[citation needed]}

As a monopoly, the AWB (and its branch AWBI) have total power in controlling what deals farmers get if they want to sell overseas. The AWB charges about $300 million a year to run the single desk, which is a very substantial amount when figures from the Minister for Trade show the estimated benefit is only $200 million per year.^{[citation needed]}

The AWB has been accused of providing kickbacks to the order of $290 million to Saddam Hussein in Iraq as part of the oil-for-food programme, and in the process, violating UN sanctions. This alleged deception is being invested by the Cole Inquiry, ordered by the Australian Government. In February 2006, managing director Andrew Lindberg resigned after outrage from the press and from growers. This whole scandal has left a black mark on AWB’s reputation throughout the world and puts into question how reliable it is and how well suited it is to represent and market nearly all of Australia’s wheat overseas. In addition, it is being sued for $1 billion compensation by farmers in North America for alleged “bribery and other corrupt activities to corner grain markets” (NEWS.com.au 2006). The scandal has resulted in Iraq refusing to purchase wheat from AWB and the loss of a substantial overseas market for Australian wheat growers.

This event had an impact on Australian wheat growers. Chris Kellock, spokesman for Eastern Wheat Growers said: “Growers had a lot of trust in AWB. They had a lot of comfort in the system and the system has failed them,” (Australian Broadcasting Corporation 2006). When the system that has worked so long fails, the question must be asked whether all wheat growers who want access to the export market should be forced to go through AWB. Laurie Black, a wheat grower said: “Any monopoly becomes power drunk and they make the rules and it's like the power of veto of export. If they hadn't have had that power of veto and had allowed some exports of grain, which I think were appropriate to occur, then we wouldn't be in as big a mess as we are today,” (Australian Broadcasting Corporation 2006).

As a result of this scandal, AWB has been blacklisted in many countries, including in Iraq (however, a compromise has since been reached where “another entity Wheat Australia would continue to export wheat” (Australian Broadcasting Corporation 2006). As Australian wheat is discredited by the organisation that presents its face and image, Australian growers suffer as other countries avoid AWB wheat.

Foreign multinationals, like Cargill, want deregulation of the single-desk system so they can gain further access to the world market in a more competitive environment. In a similar way, the Australian Grains Exporters Association, a group of seven international grain traders that operate in Australia, would like to see the end of the single-desk system so that they may have more business opportunities in exporting grain out of Australia, and have the opportunity of making money from it. They propose a system where the Government licenses exporters to bulk-export, based on their experience and skills. This would result in many competitors in the Australian wheat export market. In addition, Australia-based domestic traders such as GrainCorp and ABB Grain would have increased opportunities if deregulation were to occur.

A key criticism of the single-desk AWB system is that it strangles competition. Farmers are not given a choice amongst several marketers that offer it the best price. Instead it can only go through AWB, with a set price.

In addition, the lack of competition can lead to inefficiency, high costs, lack of innovation and substandard management. Competition can be a way to make the industry more efficient and cost-effective. “The structure of single desk marketing takes away the “live or die” incentive to reduce costs,” (Sims 2006). As there is no competitor, AWB does not suffer many, if any, ill effects if it does not try its best to reduce costs. In addition, competition “forc[es] standards of quality and service to rise” {Sims 2006) as competitors try to offer better services to outbid one another. Also, “[c]ompetition leads to openness and transparency” (Sims 2006).

[edit] Oil for food scandal

Previously a low profile organisation, the AWB made headlines in late 2005 when it was alleged that it had knowingly paid kickbacks to the Iraq Government, defrauding the UN and violating sanctions. At the insistence of the Iraq government of dictator Saddam Hussein, the AWB agreed to pay 'transportation fees' of around $AUD 290 million. At the same time, the price per ton paid from the UN Oil-for-Food program was raised by an amount slightly above the 'transportation fees'.

The government-sanctioned Cole Inquiry into the company's role in the scandal has been completed and was tabled by Attorney General Philip Ruddock on the 27th of November 2006.^[2] Australia's government has distanced itself from the payments to Saddam Hussein's regime, given Australia's contribution to military action against Hussein in the 2003 invasion of Iraq. Andrew Lindberg resigned as managing director on 9 February 2006 and from the board of directors on 22 February 2006 under intense public and media pressure [3] [4].

The Oil-for-Food program UN resolution 986 was passed on 1995-04-14 and the program ran from late 1996 until 2003-03-20.

On 11 July 2006, North American and Canadian farmers are claiming $1 billion in damages from AWB at Washington DC, alleging the Australian wheat exporter used bribery and other corrupt activities to corner grain markets. The growers are also claiming that AWB used the same techniques to secure grain sales in other markets in Asia and other countries in the Middle East.[5]