Co-opting the co-ops

To paraphrase Orwell, all grain exporters are equal but some are more equal than others

THE rest of the country might be embracing free market capitalism, but in agriculture the lure of socialism is never far from the surface. And for some reason it seems to appear more often on the Coalition side than Labor.

Take the latest kerfuffle over the move to further deregulate wheat export port access. Those who claim to welcome competition when the exporter is a profit-oriented business, especially if it’s a foreign multinational, recoil in horror when it is suggested the same competition rules should apply to a farmer-owned co-operative.

In 2009, when the wheat export single desk was abolished, exporters which also owned and operated wheat port terminal facilities were made subject to Australian Competition and Consumer Commission rules that required them to guarantee access to port facilities by their exporter competitors.

These compelled them not to discriminate or hinder access in the provision of port terminal services and to provide clear and transparent protocols for managing demand for access.

These rules are due to be removed on 1 October 2014, provided a mandatory industry code of conduct is prescribed under the Competition and Consumer Act. Access to port services will then be governed by the Code and general competition law. A regulation has been drafted to implement a Code, which is due to be signed off within the next few days.

Complete deregulation of port access is the logical endpoint of the process that began with abolition of the single desk. If every other commodity can be sold with no more than the Competition and Consumer Act to ensure the market operates properly, why not wheat?

But some argue the wheat export market is not yet sufficiently competitive to allow full deregulation.

While the absolute monopolies that applied in 2009 no longer exist, GrainCorp still handles 75 per cent of east coast grain (but less than 30pc of grain exports), Viterra handles approximately 80pc of South Australian produced grain and CBH handles 90–95pc of the grain produced in Western Australia. Both Viterra and CBH export around 45pc of the grain in their respective states.

The claim that a more competitive environment is needed before full deregulation can occur is at least logical, if debatable. What is not logical is the way in which the Code is intended to apply.

Despite the fact that it is now far from a monopoly, most of the argument over deregulation has revolved around GrainCorp. As I wrote a few weeks ago, its competitive environment is hotting up with a new Newcastle terminal, jointly owned by CBH, Olam and Glencore, now competing alongside GrainCorp’s terminal. Also at Newcastle, a storage facility operated by Louis Dreyfus, with elevation provided by Qube, has been established.

Further competition is set to emerge at Port Kembla, where Qube, Noble Group and Emerald Grain plan to build a 1.3 million tonne capacity grain terminal to rival GrainCorp's facility.

The same focus has never been applied to CBH in WA. While the international commodities group Bunge has a new facility at the port of Bunbury, from which it has begun exporting modest quantities of wheat, CBH continues to have virtual monopoly status.

And while you might think that WA would benefit from a more competitive environment than the east, that will not be allowed to occur. The Minister for Agriculture is to be given authority to exempt CBH from complying with the Code. In other words, the port operator with the greatest market power will have the most scope to squeeze out competitors.

The reason for this special treatment is that CBH is a farmer-owned co-operative. According to agrarian socialist dogma, that makes it untouchable. While it proudly insists it is profitable, it pays no dividends. Instead, it claims to recycle its profits into lower handling and storage costs for growers. To paraphrase Orwell, all grain exporters are equal but some are more equal than others.

The end result will be that GrainCorp progressively loses market share in the east, including to CBH, while CBH maintains its monopoly position in the west.

The Minister for Agriculture has justified this, saying: “In Western Australia they basically have a cooperative arrangement that runs a monopoly. In the Eastern States we have overseas-based entities that run regional monopolies. A co-operative based monopoly returns the best outcome for the growers; overseas-based regional monopolies don’t”.

And yet, the story being hawked around is that if CBH is obliged by the Code to give its competitors access to its ports on fair terms, those competitors will come to dominate the market. In other words, the authority of the government is being invoked to prevent grain growers from having the freedom to deal with the company’s evil multinational competitors.

In fact, there are plenty who argue CBH is evil. It certainly has form as a corporate bully. In April last year the Australian Competition Tribunal revoked the company’s permission to require WA growers and marketers who use its 'up-country' storage facilities to also use its transport services to deliver grain to port for export. For the first time since deregulation in 2008, growers and marketers became free to make their own arrangements for transporting grain to port for export.

To many WA grain growers, CBH is also a substantial financial tragedy. While it is notionally owned by wheat producers and worth around a billion dollars, their equity cannot be accessed for anything useful. In fact it is lost if they cease growing wheat or sell their property.

Hundreds of WA wheat producers with massive debts would dearly love to access their equity in CBH to get out of hock, but can’t even borrow against it. Any talk of floating the company on the stock exchange to allow its shares to be bought by those who want them and sold those who don’t is met with anguished cries about “grower control.”

If any area of the wheat export market requires protection from monopoly practices it is WA. And yet that is exactly where the government is proposing to facilitate such practices. It is ridiculous.

But there is hope. The regulation implementing the Code will be a disallowable instrument. Perhaps the Senate won’t be as enthusiastic about agrarian socialism as the Minister.

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READER COMMENTS

Just a Farmer
17/09/2014 8:02:30 AM

David, are you a member of the PGA?. They're the only group in WA with a very small wheat grower base that want the CBH gone.
seethelight
17/09/2014 9:45:35 AM

CBH's only business strategy is to hide behind statutory privileges,in this case exemption from Competition law that applies to every other legacy port terminal operator and thereby restrict competition for the purchase of grain in WA. CBH was forced to withdraw its latest shipping allocation plan as it was clearly designed to drive grain buyers from WA.THat WA federal politicians got their heads together with the Barnaby Joyce to grant CBH a privilege at the cost of lower prices for grain farmers,doesn't make it collectivism, its out right corruption and cronyism. The PGA have this one right
LC
17/09/2014 12:37:24 PM

You should know, hoegrass, that our price bids for wheat this year have been below global export bids. In other words, deregulation has not even been delivering Aussie growers market value. Don't look at a price this year and try to match it against 8 years ago. They are two different market periods, changing with all commodities like currency, iron ore, gold, etc. They go up and down all the time. What you need to know is how much of what is on offer, is coming to you and how much is being taken from you by middlemen like traders, brokers, service providers, processors, retailers, etc.
suzanne
17/09/2014 1:30:17 PM

David, you sound like the carpenter who wants to put new gold hinges on the door but does not see the nearby white ants about to take out the whole door.
mark2
17/09/2014 4:36:03 PM

i think you're right Philip. I also think our learned friend has ignored the real problem in the eastern states and that is the up country situation for growers. Most of the storage and handling is held by Graincorp and the rest by Cargill, which is precisely why the port access arrangements were put in place. The basic rule in economics is to keep as many rent seekers out of the loop as possible, Graincorp wants to remove the port access agreement to capitalise on its advantage. In the west ,growers , through CBH have that advantage and some want to throw it away.
Hyden
17/09/2014 5:36:17 PM

Seethelight, what's a "legacy Port Terminal Operator"? If you are WA grower shareholder of CBH, why would you want to drive down the value of your asset by giving it away to its competitors? After all it is clearly the best and most efficient in Australia, if not the western world. The vast majority of WA growers support it, and want it to be maintained. The PGA is far from the majority of WA growers is it. It is after all, the far right wing of the right wing political party in Australia.
Jock Munro
18/09/2014 5:21:46 AM

Having a wheat single desk with legislation meant that Australia and its growers marketed our wheat to best advantage and we were the best in the world. We now have merchants controlling our industry and our quality reputation has been trashed and our wheat is losing its relative value. If having a single desk is 'socialism' and merchant control is free market I will take socialism every time.
drowning in debt
18/09/2014 9:01:42 AM

eh Hyden . just wait cobba, only a matter of time before you and your mates follow bank foreclosed cockies like me to mandurah. land prices are going to tumble hard now grain prices are collapsing and debt compounding. the banks have no choice but to tighten your belt for you. if that doesnt get you hungry for your cbh equity then you deserve to eat debt cake like i was forced to. farmers ignorance is going to cost them dearly
NSW Farmer
18/09/2014 9:06:39 AM

i agree with jock. What we need is another income equalisation scheme like the single desk. we need similar prices to what they get in the west as without it in NSW you are going to see a wave of bank foreclosures with these terrible prices
Hyden
18/09/2014 2:04:11 PM

Drowning in debt, I have nothing but sympathy for you and the fact that you have lost your farm through burgeoning debt. I also agree with you that farmers' ignorance is going to cost them dearly. We may have a different view though on what part of farmers' thinking is ignorant. The real ignorance is individual farmers believing they can take on the international merchants alone; can not tell the difference between their friends & enemies; shoot the friendly messenger; are blind to the O/S Govt funded trader attacks on our farmers; and Aus Govt regulations blowing our costs sky high.
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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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