Agrarian socialism's sticky end?

Fear of foreigners, particularly big multinationals, is never far from the surface in rural Aus ...

THE sugar industry is notorious for attaching itself to the public teat. Concentrated in several marginal seats along the Queensland coast, it has a long history of extracting taxpayer subsidies when prices are down, coercing governments into mandatory use of ethanol in fuel, and blocking imports of both sugar and ethanol.

Most famously, a decade ago it received hundreds of millions of taxpayer dollars to help it restructure in the face of low prices. Prices bounced back soon after the scheme commenced and, apart from the impact of abolition of the single desk in 2006, not a lot of restructuring occurred. They kept the money though.

A major controversy has now erupted as a result of the decision by the sugar processing company Wilmar to sell all its sugar direct to international customers rather than via the grower-owned marketing organisation, Queensland Sugar Limited (QSL), beginning in 2017. This has prompted another processor, Thai-owned MSF Sugar, to suggest it may follow suit. True to form, there are numerous calls for regulators and governments to intervene. A horde of politicians, including the Queensland Minister for Agriculture, is taking a close interest.

Wilmar is a Singapore-based agribusiness firm involved in palm oil, edible oils, specialty fats, oleochemicals, biodiesel, fertiliser and grain processing, as well as sugar. It operates in over 50 countries with 450 manufacturing plants and a workforce of 90,000 people. Its business model is based on integration from origination to processing, branding and distribution, based on lower cost due to economies of scale and integration. A relative newcomer to sugar, it is now among the top ten global raw sugar producers as well as the largest raw sugar producer and refiner.

MSF Sugar, based in North Queensland, is Australia’s third largest producer of raw sugar and part of Mitr Phol, the largest sugar producer in Asia and one of the world's largest sugar producers.

A legacy of the single desk, QSL manages most of Australia’s raw sugar exports through a system of pools. Typical throughput is 3.5 million tonnes of raw sugar with annual revenue of $1.5 billion. It employs about 160 people.

What QSL offers sugar processors is economies of scale through pooling. These include logistics, quality management, funding and managing price risk, which Wilmar and MSF obviously consider they also have. For growers, QSL offers a range of price and risk options for selling their sugar along with market transparency to help choose between these options.

What QSL and its supporters are arguing is that if Wilmar proceeds with its plan, growers will lose these options for marketing their sugar. In many areas Wilmar is the only processor, which means producers will have to accept its offers. What they want is to retain the ability to sell via QSL.

Wilmar says its system is transparent and that growers will lose nothing in comparison with QSL. Indeed, it proposes to offer pooling and pricing options which it says will deliver better outcomes for growers, and suggests the QSL approach is no longer needed.

Given Wilmar’s international networks, it is quite improbable it will generate lower prices than QSL. Sugar is an international commodity actively traded all around the world, and the prices received by Australian producers are all driven by the same international market. For producers who like to play the market in the hope of catching the top price, the only question will be whether they have all the information needed. This is a matter of transparency rather than who is doing the marketing.

The key to understanding opposition to Wilmar’s plan can be found in the fact that QSL is an Australian cooperative while Wilmar is foreign-owned multinational company. Fear of foreigners, particularly big multinationals, is never far from the surface in rural Australia. In conjunction with the ever present assumption that everyone is out to rip farmers off, it is a formula for conspiracy theories and high anxiety.

Such concerns are being stoked by QSL, which is probably fighting for its very existence, with its arguments stoking lingering agrarian socialist sentiments surrounding the fate of profits.

In the end, this is a matter for the market to sort out. If Wilmar turns out to offer inferior service or prices to QSL, the market will deal with it by attracting new competitors. If growers think they need greater control over their marketing, they will either compel Wilmar to cooperate or find a way to avoid using it. If it turns out Wilmar is pointing the way of the future, QSL will be gone within five years and the industry will have finally restructured.

Whatever the outcome, governments and regulators need to keep their noses out of it.

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David Leyonhjelm

David Leyonhjelm

has worked in agribusiness for 30 years and is a Senator for NSW representing the Liberal Democrats.
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READER COMMENTS

wtf
7/07/2014 5:09:43 AM

it just wouldn't be an article about foreign investment if it did not contain a reference to a racial slur about regional Australians by an urban based writer would it david?
wtf
7/07/2014 5:22:56 AM

The slur aside lets look at the real issue. I have been looking at your Austrian gods of economics and it seems to me there is a pitfall. Whilst I agree with the concept of reserve banking (and not fractional) I fail to see how they cover govt backed investment. Mostly saying the role of govt is to butt out (something I agree with too), but nowhere did I see reference to state backed investment. I'm guessing Mises et al were not living in a world dominated by a communist govt with reserve currency status. this indicates to me a shortfall on their thinking regarding the freemarket
JL
7/07/2014 5:35:20 AM

David, firstly, Get your facts straight before you mouth off. QSL is owned by Millers and growers, not just growers. You seem to be hell bent on bagging all agriculture. Get out of the room and get a real job.
PT
7/07/2014 5:52:15 AM

Keep calm Jock.
Azshah
7/07/2014 6:18:03 AM

Market forces are a great equalizer when allowed to exist. But Wilmar is not proposing to allow growers to have a choice - all sugar would be put through Wilmar's trading sub-entity. Cane growers want the choice - and then, as you say, if Wilmar performs, market forces would prevail. What is wrong with this picture is that a corporate entity is trying to change the rules for how they operate in the Australian market. The question becomes: can an entity come in and dictate to the government that existing competition and trade maxims don't apply to them, or is there room for fine tuning of regs?
John Newton
7/07/2014 6:49:32 AM

Agrarian socialism? Nothing compared to the good old US of A. American corn farmers get $84.4 billion dollars a year.
Deregul8
7/07/2014 8:21:21 AM

With sugar prices in the doldrums and growers blessed with choice as to crops they can grow in some of Australia's most precious agricultural soils, the sugar single desk is history. Cross subsidisation leads to misery for all in the end. Long live Austrian economics. It is the only hope to avoid serfdom back in the gulags. Farmers haven't noticed they are few in number and a disassociated urban majority will vote their 'super' profits back into land nationalisation in a heartbeat, just as in mining. Sadly the most vocal on these threads fail to see the future which is fast approaching.
Dunart
7/07/2014 8:36:16 AM

What about all the urban socialism this country has, the cost of which is passed onto a world market income farmer. Happy for the free market when I sell, as long as I buy on the same free market, NO GOVT restrictions that only benefit the urban sector. He seems to have forgotten that the regulated labour market is a urban subsidy, paid for by farmers, just for a start!
Jock Munro
7/07/2014 9:16:53 AM

David, deregulation and the transfer of the wheat crop to multinationals by Rudd and the Liberals, has our customers telling us that our wheat is cheaper,inconsistent in quality and they have no one to talk to-if what we had with the single desk is socialism I will take that every time over allowing the big end of town to take control.
seethelight
7/07/2014 9:22:38 AM

WTF, Mises had nothing to say about govt backed business investment? Only if you don't count thousands of insights in over 20 books and hundreds of papers and an entire lifetime dedicated to explaining it. Here it is in a nutshell; govt investment doesn't work. Every day experience demonstrates that it doesn't work. It is why QSL needs monopoly protection to compete. Mises greatest insight was that it can't even work in theory because the govt doesn't have the means, even with the best intentions, to allocate resources to their highest value use.The means are free market prices.
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Agribuzz with David LeyonhjelmCommentary, news and analysis with agribusiness consultant David Leyonhjelm. Email David at reclaimfreedom@gmail.com

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