Current Issues with Single Desk Arrangements for Wheat and Barley

Malcolm Bartholomaeus RDA  M Ec, MBA  MAICD [1]

Callum Downs Commodity News, PO Box 54,  South Australia Ph (08) 88422781   Fax (08) 88423078Email  callum@capri.net.ai

 

Introduction

"The evolution in the wheat market has brought us to a point where growers are getting better value out of the single desk system of exporting wheat than ever before."

That was my closing comment at the 2004 ABARE National Outlook Conference.    I was not saying that the single desk system is the best system for organising wheat exports, or that AWB Ltd are doing a good job of managing the single desk, or that it could not be improved.  I was simply pointing out that the suite of products we now have to go alongside the wheat single desk, and its associated pool, make the system work as well as it has ever worked.

Wheat

For single desk systems to work we have to have pools which deliver the benefits evenly to all growers.   However, that tends to distort price signals, and prevents a viable cash market from operating.  Growers are tied into receiving the same return as all other growers, regardless of whether the price delivered suits their business or not.   Growers who do not like the delayed payments associated with pools tend to have to take a discounted price if they participate in the wheat cash market (Table 1).   

Table 1: Average Harvest Prices (mid November to Mid December) Compared with Pool Deliveries, APW10 Pt Adelaide

Year	Average	AWB Pool	Harvest
	Mid Nov - Mid Dec	ESR1	Versus Pool
1994/95	$187.00	$187.00	$0.00
1995/96	$211.17	$236.60	-$25.43
1996/97	$146.24	$185.52	-$39.28
1997/98	$166.31	$176.55	-$10.24
1998/99	$154.88	$168.05	-$13.17
1999/00	$141.99	$160.44	-$18.45
2000/01	$166.04	$199.80	-$33.76
2001/02	$201.64	$219.54	-$17.90
2002/03	$261.21	$210.20	$51.01
2003/04	$179.11	$185.93	-$6.82
Average			-$11.40

Source: Callum Downs Commodity News

¹AWB APW10 pool Estimated Silo Return equivalent to Harvest Loan return after allowing for all finance costs, Pt Adelaide

Another issue is that pools and the single desk also do not protect growers from price falls from one season to the next (Figure 1). 

Figure 1: Relationship between AWB APW10 Net Pool Returns and Expiring December Futures (A$/t)

 

 

 

 

 

 

 

 

 

 

Source: Callum Downs Commodity News

Basically, if global prices collapse between one harvest and the next, so too do pool returns.  If growers want to undertake their own price risk management, fixed - price forward sales have generally been offered at large discounts.  Again the system disadvantages those who step outside the single desk pooling system (Table 2).

Table 2: Average March/April Forward Prices Compared to Final Pool Returns, APW10 Pt Adelaide

Year	Average Forward	AWB Pool ESR2	Forward Versus
	Price March/April1		Pool
1994/95	$124.13	$187.00	-$62.87
1995/96	$155.91	$236.60	-$80.69
1996/97	$209.24	$185.52	$23.72
1997/98	$162.53	$176.55	-$14.02
1998/99	$171.65	$168.05	$3.60
1999/00	$160.24	$160.44	-$0.20
2000/01	$159.30	$199.80	-$40.50
2001/02	$199.24	$219.54	-$20.30
2002/03	$188.87	$210.20	-$21.33
2003/04	$172.99	$185.93	-$12.94
Average			-$22.55

Source:  Callum Downs Commodity News

¹AWB multigrade or multivariety Daily Indicator Price Pt Adelaide

²AWB APW10 pool ESR equivalent to Harvest Loan return after allowing for all finance costs, Pt Adelaide

So, why is the wheat pool system working so much better at the moment?  Basically we can participate in the forward market using bank wheat swaps rather than fixed price forward contracts.  Bank swaps allow us to lock in the underlying export based price early in the season, without committing to deliver tonnage to anyone and without locking in any discount to true export value at the time of forward selling.   Growers can also still deliver to the AWB pool at harvest time, avoiding the discount inherent in harvest cash price in years that are not drought years.  In drought years, the wheat can still be delivered into the cash market, reaping the rewards from domestic premiums in those years.

In Figure 2, the potential returns from forward pricing during March/April using bank swaps, are compared with final pool returns without hedging.

Figure 2: AWB APW10 Net Pool Returns With and Without Wheat Swaps

Source:  Callum Downs Commodity News

Before the current batch of forward pricing tools based on wheat swaps or basis contracts, the discounted forward prices presented a problem.  It was either costing growers who forward sold, or prevented growers from forward selling when they should.   At times I have asked whether the benefits of the single desk have been more than squandered by the impact on farm businesses of a flawed forward pricing system.   That is now behind us, but only for those growers prepared to use bank wheat swaps or basis contracts for forward selling.

The range of pool finance products now available gives growers maximum flexibility in terms of cashflow, finance costs and taxation treatment.  No longer are all wheatgrowers treated in the same way via one national pool with one payment option.  We now have a very powerful system where growers can tailor cashflow and taxation flows to their own needs, with advance pools or flexible lines of credit being the two pool payment options of most use.

In summary, wheatgrowers in Australia are now able to:

• Forward price without penalty;
• Sell for cash into niche markets, or during droughts when domestic prices out strip export values;
• Manipulate taxation liabilities, and
• Tailor cashflow from pool deliveries to match cashflow needs and minimise interest costs

At the same time the pool does still provide very good price risk management in the period after delivery.

So where to from here for the wheat single desk?     Intuitively the system should provide benefits.   It allows the Australian crop to be segregated on both quality and variety.  This differentiated product can then be moved into quite specific markets.  We should be attracting a premium in some markets because of this.   It also allows AWB to hedge currency and commodity prices in the post-harvest period in particular, which is an added benefit given that the whole crop cannot be exported at our harvest time.   In fact, we can measure that AWB add between $30 and $50/t to pool returns from their commodity and currency hedging activities[2].   There should be benefits from the single desk, and understandably growers reluctant to forego those benefits.

However, AWB Ltd also benefit from the single desk.  Their business model revolves around pool management fees and finance products built on financing pool deliveries, and is very much underpinned by retention of the single desk.   In this regard, the interests of both growers and AWB are aligned.  It is no coincidence that AWB fights so hard for retention of the single desk.  It is not just for growers.

On the downside though, the current system is monopolised by AWB with very little contestability for services.    They also determine the rules. For example, which varieties are allocated to which grade.  They use this to try and send production signals to growers, but in doing so can prevent varieties that actually deliver benefits to growers from being widely adopted.  They also set the spreads between grains and the premiums and discounts for moisture, screenings and protein, all of which send price signals to growers.

The system also continues to provide opportunities for grain traders to benefit from buying wheat too cheaply early in the year and benefit from delivering it to the AWB pool or trading it into the domestic market at a price much closer to true value at or after harvest.    The single desk system should not allow this to happen.

Growers collectively are very dependent on AWB and the systems they employ to make the right decisions regarding manipulating the national crop and the price signals they send to growers.   In the meantime, many of the severe restrictions placed on farm businesses by the national pooling system have been broken down, firstly with deregulation of the domestic market in 1989.   More recently, with the advent of products like banks swaps for forward selling, different ways of financing pool payments and the introduction of Golden Rewards to further reward growers for what they actually deliver into the National Pool, have added considerably to grower choices in price risk management and marketing of their grain.

Barley

The issues with single desk marketing for barley are similar to those for wheat.     The system is sustained by a pooling system, which delivers an average price to growers. 

As with wheat, pool returns tend to outperform cash prices offered at harvest, particularly for feed barley, where the average shortfall is around $7 per tonne (Table 2).   However, we also tend to see cash prices ease during harvest, so that the late part of the crop enters the system when cash prices tend to be at a larger discount to final pool estimates (Figure 3).

Table 3: Feed Barley Cash Price Versus Final Pool, Returns Pt Adelaide

	Cash Price	Pool Estimate	Cash
	Nov 24th	12 Mths Later	Shortfall/Premium
1994	$152.00	$157.75	-$5.75
1995	$175.00	$183.45	-$8.45
1996	$124.00	$140.42	-$16.42
1997	$156.00	$163.00	-$7.00
1998	$90.00	$97.50	-$7.50
1999	$120.00	$137.45	-$17.45
2000	$154.00	$159.60	-$5.60
2001	$174.00	$178.05	-$4.05
2002	$228.50	$240.50	-$12.00
2003	$164.00	$152.10	$11.90
Average	$153.75	$160.98	-$7.23

Source:  Callum Downs Commodity News

Figure 3

Source:  Callum Downs Commodity News

The outcome is a little different for malting barley, where harvest cash prices are closer to final pool returns, and where in the last few season harvest cash prices have been quite favourable relative to pool returns.  In fact, with malting barley, harvest cash prices also tend to outperform forward prices as well.   However, as with feed barley, prices tend to fall during harvest, so that the late part of the crop tends to be offered with cash prices below final pool returns.

Table 4: Malt Barley Cash Price Versus Final Pool, Returns Pt Adelaide

	Cash Price	Pool Estimate	Cash
	Nov 24th	12 Mths Later	Shortfall/Premium
1994	$183.00	$203.70	-$20.70
1995	$200.00	$228.45	-$28.45
1996	$182.00	$188.42	-$6.42
1997	$190.00	$193.00	-$3.00
1998	$148.00	$134.40	$13.60
1999	$171.00	$186.95	-$15.95
2000	$215.00	$212.60	$2.40
2001	$229.00	$211.35	$17.65
2002	$360.50	$323.00	$37.50
2003	$179.00	$174.10	$4.90
Average	$205.75	$205.60	$0.15

Source:  Callum Downs Commodity News

Figure 4

An issue which tends to distort the decision making at harvest, is ABB’s track record of lifting pool estimates after the harvest period.   This has been the result in six  out of the last ten years.   However, in three years returns have been lowered.   It becomes very hard to pick how good the cash prices at harvest really are against a somewhat unpredictable final pool returns  (Figure 4).

However, up to and including 2000, ABB had been able to lift their pool returns by an average of $7 per tonne above harvest levels.  It has only been in the last three years, one being the 2002 drought, that this has been reversed (Table 5).

Table 5: Changes in ABB Malting Barley Pool Estimates

 

Table 6: Changes in ABB Feed Barley Pool Estimates

	Harvest	Estimate	Change over
	Estimate	12 Mths Later	12 Mths
1994	$150.46	$157.75	$7.29
1995	$172.45	$183.45	$11.00
1996	$120.39	$140.42	$20.03
1997	$143.46	$163.00	$19.54
1998	$96.45	$97.50	$1.05
1999	$140.95	$137.45	-$3.50
2000	$152.60	$159.60	$7.00
2001	$178.05	$178.05	$0.00
2002	$251.00	$240.50	-$10.50
2003	$166.10	$152.10	-$14.00
Average			$3.79

The big difference with wheat is that we do have a deregulated market in Victoria.   Not surprisingly, farmers in Victoria have not gone broke, with cash prices at harvest tending to outperform ABB pool returns more consistently than South Australian prices, although the Victorians are helped by a much larger domestic market.

It is possible that the deregulated market is beginning to make it harder for ABB to forecast its pool estimates at harvest, with the last three years tending to see pool estimates fall over the next 12 months, compared to the average $7 per tonne lift prior to then.

The real issue surrounding the barley single desk is the inability for growers to protect themselves against a year on year drop in barley prices.  The same futures based tools available to wheat growers are not available to barley growers.    There is no mechanism to ensure that true market values are offered for barley in the forward market other than via a free market.   Then we would hope to see prices being set fairly, much as we get with canola, but then again that may be difficult because of the lack of a suitable futures contract in any of the world’s major futures markets.

The free market in Victoria has helped.  No longer can cash prices for feed barley or malting barley be set too low in the Adelaide division relative to Victorian prices.  However, the influence of the Victorian market does get watered down as we move north and west of Adelaide.   As well, South Australian prices have to trade slightly lower than Victoria prices for the price signals to be set up that allow feed barley to move from South Australia into Victoria.  Also, because of limitations on exporting South Australian barley, but not on exporting Victorian barley, we can still see large price differentials at the border during harvest.

Another problem with the single desk being retained in South Australia for feed barley, is its incompatability with a free market in Victoria, and the interaction between exports and domestic use in the Victorian market.

Studies by ABARE and others point to a growing demand for feed-grains in the eastern states, with some regions already at the point of needing to regularly import grain from other producing areas.  Overall, in Victoria we do not always have an exportable surplus of feed barley.   In many years, after the malt barley is segregated, there is a net shortfall of feed barley in Victoria.  Grain has to be attracted into Victoria from South Australia and NSW.  Increasingly NSW grain is being attracted north, not south, for domestic end-users.  In these years, every tonne of grain exported out through Victoria has to be replaced with grain from South Australia.

This has the effect of bringing SA barley in to replace Victorian barley going out, and increases the cost of barley to the domestic endusers.

If exports were allowed out of SA exporters would export direct from SA, where the surpluses are, and not from Victoria.  Less grain would need to move from SA into Victoria, and prices for domestic endusers would be lower.

The single desk in South Australia is incompatible with the growing demand for feed grains in Victoria.   There will be increasing pressure to do away with the single desk in South Australia simply for economic efficiency in Australia’s domestic grain markets.

Summary

Many of the severe restrictions placed on farm businesses by the national pooling system for wheat have been broken down. The first step was deregulation of the domestic market in 1989. More recently the advent of products like ‘bank swaps’ for forward selling, different ways of financing pool payments and the introduction of ‘golden rewards’ to further reward growers for what they actually deliver into the national pool have added to grower choice in wheat marketing.

For barley, the changes are lagging those of wheat, with no third party access to ABB pools, and distortions being created in the cash market by the pooling system.  We are also seeing the domestic market being distorted in Victoria because of exports of feed barley when often there is not an exportable surplus.   The single desk on barley will come under increasing pressure from a range of parties, because the system is no longer as compatible with current business.