No Ticket, No Start---No More!

Who Reaps the Benefits?---A Chronicle of the Wheat Debate

David Hawker

    'It must be remembered that there is nothing more difficult to plan, nor more dangerous to manage than the creation of a new system. For the initiator has the enmity of all who would profit by the preservation of the old institutions and merely lukewarm defenders in those who would gain by the new ones.'
    --- Machiavelli.


Introduction

Over the past two years debate has been raging within the wheat industry about the future of statutory wheat marketing which has wide ranging implications for not just the industry itself, but all related sectors of the Australian economy.

The debate has been at times bitter and divisive, with those who are comfortable with the status quo 'fighting tooth and nail' to preserve the old institutions. It has had wide spread coverage in the rural press but to date, has aroused little serious interest amongst the city media.

It challenges the very foundations of monopoly grower controlled marketing within Australia and at the same time has focused attention on many of the inefficiencies in the distribution system that have grown up around that monopoly.

It is significant that a Labor Government at the Federal level has led the push to reform the system and to introduce many of the efficiencies that come with a freer marketing system. It challenges the very foundations of agricultural politics in significant parts of rural Australia and is reminiscent of the debate that surrounded wool marketing in the late 60s and early 70s and dairy marketing in the early 80s. With major economic powers such as the United States and the Common Market seriously destabilising the world wheat market through massive subsidies, this debate has focused attention on the need for the Australian wheat marketing system to be extremely efficient.

The Federal Coalition is torn between loyalty to what some perceive as the views of traditional supporters and the knowledge that the Government's proposed changes to the domestic wheat marketing arrangements not only make economic sense but also will help Coalition policies in other areas such as Labor market deregulation.


History of Government Intervention in the Wheat Industry

Government involvement in the wheat industry began in the first years of white settlement. In the late 1700s, grain production, storage and marketing was socialised under a system of 'public farming'.

However, by 1793 the system had failed so the Governor of New South Wales allowed private settlement agriculture to produce grain, but the Governor remained the sole buyer.

A ''lack market' in grain soon developed and by 1825 the government marketing scheme was abandoned. Throughout the 1800s, particularly in the latter part, government involvement was directed mainly at granting land and providing railways. The effect was to develop a wheat farming community which was undercapitalised and dependent on government for its land and transport services. By now the wheat industry was already a captive of politicians, so new opportunities were emerging for people we now call agri-politicians.

The Commonwealth Government first became involved in wheat marketing when it compulsorily acquired the crop during WWI as a temporary war-time measure. During the 1920s, the war-time pools were replaced with some voluntary and some compulsory State pools (depending on the state), but growers consistently received higher returns from private traders so the pools faded away.

With the advent of the Second World War, compulsory wheat pooling and acquisition by the Government was introduced under emergency war-time powers. The experience of growers and flour millers with a stable and predictable price and the opportunities which intervention created for industry 'leaders' and their counterparts in politics led to the concepts of 'price stabilisation' and 'orderly markets' forming the basis of legislation for wheat marketing which began in 1948. 'Price stabilisation' and 'orderly marketing' have remained the pillars of all subsequent wheat marketing schemes.

Since World War II there have been eight wheat marketing plans. All plans have shared some common features such as granting the Australian Wheat Board sole receival and marketing powers for virtually all wheat grown in Australia; discriminatory pricing of wheat sold domestically; pooling of sales revenue and marketing costs; and, assistance provisions which transfer some (if not all) of the risk of adverse (downwards) price movements to the Government. Currently Australia exports 80% of its wheat crop out of a total production of around 14 Million tonnes.

The existing (1984) Wheat Marketing Act brought about several significant changes. Grower representation on the Wheat Board was cut from two grower members per wheat growing state to one. Government underwriting was set at 95% of the average of the lowest two of the previous three years crops and the projected price for the current crop. Significantly the domestic feed wheat market (which amounts to one third of the whole domestic market) was effectively deregulated which has led to growers exercising a freedom of choice. Enterprising growers soon found they could in fact get a better price for their feed wheat than the AWB was offering. One grower has documented this advantage to be worth $17 per tonne to him. Buyers found benefits too.


State Monopolies

Like all other wheat marketing Acts, because of Section 92 of the Constitution the current Act required complementary legislation from the States to allow the Wheat Board to acquire all of the wheat crop apart from the feed wheat.

This has always been one of the weaknesses of the wheat marketing monopoly.

It has allowed the States to demand in return for the complementary legislation the right to have sole receivership and in effect the right to, in most cases, restrict the transport of wheat to the State Rail Authority. As with the two previous marketing Acts, this one was subject to review by the IAC prior to its renewal, In its review the IAC suggested freeing up of the domestic and export feed wheat market. Not surprisingly this led to vehement condemnation by wheat grower representatives.

It is pertinent at this point to note that in two academic studies of Australian wheat policies, (one published in The American Journal of Agricultural Economics in November 1982, the other in The Australian Journal of Agricultural Economics in April 1985) both supported the case for freer marketing.

1986 was a significant year for the wheat industry. The 1985-86 export crop earned a record $3 billion revenue but by 1987-88 this had fallen by over 40%, even though the decline in the volume of wheat exported was considerably less than this. 1985/86 also saw some of the worst industrial disputes in the grain handling system, particularly in New South Wales where it was estimated that $200 million of export revenue was lost through prolonged disputes by the Grain Handling Authority (GHA). So bad was the fiddling of the system by the GHA workers that employees on a base rate of $25,000 per year could earn three times that and yet work less than 30 hours a week.


Royal Commission

It was in response to this and a history of high cost and poor performance that the Federal Government with the co-operation of the States, set up a Royal Commission into Grain, Storage, Handling and Transport, chaired by Mr J C McColl.

The McColl Royal Commission held hearings in every wheat growing State and took submissions from all interested parties. It was notable that the Grains Council of Australia (GAA), one of the major commodity councils of the National Farmers Federation (NFF), found itself in considerable difficulty in making a submission. In the end it had to call on both the intellectual and financial resources of the NFF to put forward that submission.

It was obvious from the start that the Royal Commission was going to have some very significant findings. Equally significant were the arguments that were pout forward at the time by the various grain grower organisations in the states. Typical was the submission from the Western Australia's Farmers Federation which said:

    'The system for moving grain from farm to ultimate market destination must be the most cost efficient system available from both a grower and the grain industries viewpoint. In assessing the efficiency, all the cost incurred must be considered both as individual costs making up the total cost and the interaction effect arising from the effect the provision and cost that one service may have on another. An efficient system must also ensure that quality and delivery parameters as defined by the market, are met to ensure maximum returns to growers.'

It is fascinating to contrast these submissions with the subsequent reactions in some of the states, particularly Western Australia and South Australia where the grower organisations, having argued in their submissions the need for deregulation in the storage, handling and transport area, were to find that the co-operative handling authority in each state set about organising grower resistance when it saw its monopoly threatened. Such was the intensity of the campaign by these bulk handling authorities at the grower organisations in these states suffered a humiliating backdown and were forced to change their official position toward the monopoly of the bulk handling authorities. The findings of the Royal Commission delivered in early 1988, represented a watershed.

McColl found that savings of around $10 per tonne could be achieved by improving the storage and handling of grain which meant savings of around $150 million, or some 30 percent, were attainable by the industry. Not surprisingly some of the bulk handling authorities and state rail authorities began burning the 'midnight oil' to try and discredit the figures produced by McColl. Despite the opposition in some States, the findings of the McColl Royal Commission gained widespread support. Although cautiously touching on it, McColl found that in order to gain the support of the Australian Wheat Board (AWB) for his recommendations, he had to add the disclaimer that the savings he had outlined could be achieved without changes to the marketing system, although they would require the marketing boards to act in a competitive manner. Furthermore he hastened to add that marketing was outside his terms of reference.

While this may be true technically, clearly, the dynamics of freeing up a monopoly system are going to be severely impaired if the major player is to continue to maintain a virtual total monopoly.


IAC Recommendation

In April 1988, the IAC brought down its recommendations which proposed significant freeing up of the marketing system for wheat. The GCA as the peak commodity grower organisation condemned the report as it had previously argued that not only should the AWB continue to have its monopoly but indeed the permit marketing of domestic feed wheat sales should be curtailed.


Irony

It seemed ironic that the GCA's submission to the Royal Commission had favoured the removal of Government monopoly controls and a freeing up of regulations applying to those activities at the very same time it was opposing removal of any regulations in the marketing of wheat and advocating a tightening of controls.

The position of the AWB is very interesting. The Chairman, Mr Clinton Condon, a wheat grower from Queensland, said to the National Agricultural Outlook Conference in January 1988, in relation to the domestic market:

    'We have not been able to compete properly. The Board must be able to fit in with the system and compete one for one with all who wish to be involved with the domestic market.'

Condon called for those involved in the industry to take their 'heads out of the sand and look at ways of improving efficiency'. He also went on to say:

    'It is necessary to focus on the commercialisation of the Board and I think we should be prepared to look straight at the question of further deregulation or total deregulation of domestic marketing.'

Although Condon was anticipating some opposition to his comments and, straight after delivering the address he flew to the United States, he could not have fully anticipated the strength of the reaction. So annoyed was the GCA that it summoned him back to Australia so that he had to cut short his visit to the United States and come back and explain himself.

Clearly he faced a dilemma and in an address to the New South Wales Farmers' Association in July 1988 he appeared to follow the GCA's line and tried to disclaim his earlier comments.

Shortly after the delivery of the IAC's final report, the Government announced that it intended to respond positively to many of the IAC's recommendations. Not surprisingly, the GCA reacted very strongly against this.


Coalition Reaction

In early July, the Coalition Shadow Cabinet discussed the matter and released a statement through the National Party Shadow Minister, which supported the McColl Royal Commission recommendations but did not offer clear direction on the question of domestic market deregulation. At the same time the Liberal Party's Federal Rural Committee, through its Chairman, David Hawker, issued a statement which said in part:

    'There are strong arguments in favour of allowing the Australian Wheat Board to compete commercially on the domestic market, trade in other grains and retain complete control over all wheat exports.'

    'The AWB should be more commercialised and strengthened... board membership should reflect the necessary range of expertise.... competition and strengthening of the AWB could be the most effective way of encouraging the introduction of cost saving methods recommended by the McColl Royal Commission into Grains, Storing and Handling Transport.'

The statement noted that partial deregulation of the domestic feed wheat market had already offered the opportunity of higher prices to growers. This brought a hysterical response from the GCA suggesting that the Liberal Party was, among other things, trying to split the Coalition. This lead the GCA to embark on a highly emotional campaign to muster grower opposition to the Government's proposals. A number of grower meetings were held around Australia. Following the initial strong response, numbers at meetings soon dwindled.

The GCA then switched its attack to Elders IXL, accusing it of a conspiracy to undermine the Australian Wheat Board. The GCA also attacked ACIL Australia Pty.. Ltd. as being part of the conspiracy as ACIL had been commissioned by a number of growers who were keen to see competition within the market to produce a pamphlet entitled, 'The Right To Choose'.

This pamphlet had been prepared by Ian Wearing of ACIL who had for seven years been the Executive Director of the GCA. Wearing had been sacked earlier because of his views on the question of competition in the wheat market.


Union Enters Debate

It was at this time a new player entered the debate namely the Australian Railways Union. In the re-election platform of 'The Militant Ticket' the Australian Railways Union strongly endorsed regulation in the wheat industry. Branch Secretary and prominent Victorian Socialist Left ALP member, Joseph Sibberas, in seeking re-election, boasted of how his union had leant on Ministers of the Cain Labor Government in Victoria to maintain the virtual monopoly for transport of wheat by rail.

In August the Federal Coalition Shadow Cabinet met in Brisbane and again discussed wheat marketing. Following that meeting the Shadow Minister issued a statement saying the Coalition was disposed towards supporting the IAC recommendations on the domestic market. So violent was the reaction to this announcement among its supporters that National Party Members broke with their Coalition partners and accused the Liberals of forcing them to accept their position. None-the-less, Inside Canberra observed:

    'It was a notable victory for Mr. Howard particularly as the Nationals had already declared publicly themselves against the Kerin plan. Thus to succeed Mr. Howard had to get the Nationals to face a humiliating backdown. It must be the first time a Liberal leader has imposed a rural policy on the Nationals.'


NFF Position

While the NFF continued to maintain a stony wall of silence on the issue, it was becoming well known in Canberra circles that the GCA was causing considerable embarrassment. The NFF has earned a reputation for promoting the well-being of farmers through open competitive markets, yet here was a member of its own 'family' trying to defend inefficient monopolies.

During this period Andrew Robb left his position as Executive Director of the NFF and joined the staff of the Liberal Party. Both organisations have benefited greatly from his influence.

Meanwhile former NFF President, Ian McLachlan, entered the wheat marketing debate and attacked the GCA for taking an illogical approach to grain marketing.

The AWB then cautiously re-entered the debate and sent the Deputy General Manager to address a meeting in Moree in September. In his address Mr. Storey carefully outlined what would happen if the domestic market was deregulated. Whilst his address carried a disclaimer, it was quite clear that the AWB by now had decided that it would have to gear up for competition on the domestic market and the sooner it started its planning the better. In outlining what the Board intended doing he won the clear confidence of growers at that meeting.

Another irony in the debate is that while the GCA has been fighting its rear-guard battle to maintain the regulation of the wheat industry, it has, at the same time, been developing an electronic marketing system for other grains. When asked whether this system could also be used for wheat, the GCA had to admit to its embarrassment that the answer was 'Yes'.

In other words while the GCA was fighting for the AWB's monopoly on the domestic wheat market, at the same time it was promoting the benefits of competitive markets through the National Grain Exchange.

While the wheat debate draws towards a close there are still many loose ends that will have to be tied up if the wheat industry is to get the best marketing system possible. Clearly, inexperience of many of the current grain industry leaders has highlighted the lack of real leadership. If the industry is to move forward and reach anything like its real potential, it will need to find leadership of a calibre that has so far eluded it.


Response of State Governments

With the exception of New South Wales, the response of State Governments to the McColl Royal Commission has been disappointing. However, New South Wales is boasting that over the next two years it will provide a fascinating case study of the deregulation theory being put into practice. It will:

  • Complete transport deregulation by commissioning road receival facilities at both its export ports at Newcastle and Port Kembla.
  • Commercialise and privatise its grain handling authority.
  • Deregulate the GHA's monopoly storage of AWB wheat.
  • Commercialise the State's Rail Authority's legislation and remove its common carrier obligations.

Sadly, the Victorian Government has moved the other way and recently removed the right of an independent operator to receive grain and cart it by road to Portland.

The State Government has forced this grain back onto the rail system making it travel 60 percent further than it would have, had it gone direct by road.


The Paradox

The question that must be asked through all this is how can farmers who have established a reputation as being fiercely independent and proud people, allow themselves to become so subservient to a self-serving monopoly system that has not been in their best interests, or indeed in the best interests of the wider community throughout country Australia.

On the one hand farmers through the NFF have been highly critical of the inefficiencies that have been allowed to grow up through the monopolies in the railways, in Telecom, in our ports, in our coastal shipping and yet there seems to be the contradictory attitude towards a grower-controlled monopoly. There are many answers for this, some which may not be obvious but I will try and offer some explanation.

Prior to 1948 there were numerous cases where grain merchants did indeed take advantage of farmers. The advantage in those days that the grain merchants could better utilise was access to better market information.

Obviously that is no longer the case. It is not unusual today to find a farmer with a home computer getting access to the Chicago Grain Futures Market anytime he so wishes.

This simple explanation probably demonstrates how supporters of the statutory marketing could win the day. Clearly it was partly fear, partly suspicion and as the stories of farmers unfairly dealt with by grain merchants spread through the bush telegraph, the rumours grew into the stature of the lore.

It is not uncharitable to say that those who wanted to set up the monopoly marketing had fine ideals. However, as the system evolved it has become increasingly clear that those who have followed have not always held such high ideals.

Today it would not be unfair to say those who are most strongly opposing the change are those who have a vested interest in the status quo. Clearly many farmer leaders have seen the opportunity of being placed on a board of a statutory authority as just reward for their efforts in representing their members. The weakness of the system has been that over the years the boards and the farmer organisations have been in a most incestuous position.

Likewise, it would not be unfair to say that many an idealist upon reaching the top of the farmer representative tree has found himself compromised by the lure of a well-paid position on one of these boards if he continues to support the status quo.

Furthermore, as this grower leader has earned wide respect within the industry in his climb up the tree it is not unreasonable to suggest that respect continues even though his motives become somewhat blurred. It is not surprising therefore that growers have not been offered truly independent advice about the performance of the various statutory bodies related to the wheat marketing system when it comes to suggesting ways and means of improvement.

These views have been very effectively reinforced by various organisations publicity operations. As one farmer put it:

    'Every month I get a newsletter from my farmers' organisation telling me what a great system we have. Every two months I get a letter from my bulk handling authority telling me what a terrific job it does, every three months I get a newsletter from the wheat board telling me how marvellous it is and every six months I get a letter from my State rail authority telling me how efficient its operation is.'

Is it surprising that farmers find it difficult to believe otherwise and now accept the status quo as an 'act of faith'. The other major force that has kept wheat marketing under such tight control is the influence of the then Country Party.

Over many decades some have said that the Country Party used influence over Statutory Grower Boards as a valuable political tool to both gain power and to disperse favours. (e.g. The Australian Wheat Industry: Its Economics and Politics, Tom Connors, Gill Publications, Armidale, NSW, 1972). But I prefer to let the readers form their own judgement on this matter.

In more general terms, farmers are noted in many western countries for being far more politically aware and astute than most other groups in society.

Couple this with the cyclical nature of farm commodity prices and it is not surprising to find considerable protection from adverse market forces has been introduced in some countries, such as the US and Japan, not to mention the Common Market.

In Australia's case with the majority of farm commodities exported, subsidies or import protection are generally unrealistic (with a couple of exceptions). It is not unreasonable to suggest that governments would find it attractive to interpose a grower-controlled statutory marketing body between the government and agitated farmers at a time of poor prices. What easier way to deflect criticism than to say you have your own representatives controlling your market!


Wider Implications

The Business Council in its bulletin of October, 1988 points out there are potential annual savings of at least $500m from national road transport deregulation in Australia. Of these savings the grain industry would receive more than 25 per cent. Furthermore, freeing up transport could place greater pressure on port charges, thereby assisting sectors other than the grain industry.

Out of this the implications for deregulation of the labour market are substantial. While marketing monopolies shield transport and handling monopolies, the chance for real progress is severely curtailed.

It is also a chance for the Coalition Parties to demonstrate their commitment to stated policy. The ability to hold the line on an application of our principles, despite sectional interest opposition, will do much to establish credibility in the wider electorate.

Recent press comments indicate that this point has not been lost amongst commentators, For example:

    'The opposition Parties have talked a great deal about the need for deregulation in the Australian economy and would be open to the charge of hypocrisy if they failed to support concrete moves to achieve this end.'
    (Canberra Times: 16 February, 1989)

Regrettably, many of the key antagonists to proposed deregulation of a minor, albeit significant, part of the wheat market are forsaking not only their own constituents, but also the opportunity to show real leadership in times of such need.


Conclusion

The current moves to deregulate part of a major statutory marketing board represent one of the most significant developments in agriculture of recent times.

Not only will farmers have more freedom to choose and the opportunity of higher returns

but also the more competitive climate will encourage increased efficiency in a range of service industries. Much of that increased efficiency will flow from pressure to reform entrenched inefficient work practices.

We cannot expect the union movement to reform their ways when they are acting rationally in a feather-bedded environment. Quite simply the market is giving all the wrong signals.

The environment must be changed to one which encourages innovation and rewards performance. This starts by removing barriers to entry and letting those who are prepared to offer a service, have a go.

Why HR Nicholls?

More...