Clarity call on CBH deductions

Along with grain producers, Australian Export Grains Innovation Centre (AEGIC) chief economist, Professor Ross Kingwell, recognised the need for more transparency around the reasons for deductions and suggested it wasn't clearly stated to growers what the justification was for there being different rates of shrinkage.

He also said there were areas of difference between jurisdictions as to what rate handlers charged dust at as well as different points in the supply chain in the different jurisdictions at which the dust cost was placed.

Apart from moving away from evidence-based policy, the lack of information also created a lot of confusion for growers delivering into the CBH system.

It could also be argued that there was no longer incentive for bulk handlers to make improvements in the handling of grain across the supply chain because it seemed that for some it had become a bit of a catch-all, where growers ended up paying for taint or spillage rather than dust.

Price deductions for shrinkage and dust are different for different crops and differ between bulk handlers.

CBH has no dust deduction on oats or field peas while all other crop species attract a dust charge of 0.25 per cent.

Field peas, oats, chickpeas, lupins and canola attract shrinkage charges of 1pc, 1pc, 0.75pc, 0.5pc and 0.5pc respectively.

During 2013/14 GrainCorp increased cereal and canola shrink from 0.6pc to 0.7pc and shrink in legumes, pulses and other grain increased from 0.8 to 1pc.

In general, the volume of grain delivered is deducted by a percentage for shrinkage.

"This is often done each time the grain changes hands despite inadequate measuring equipment," Professor Kingwell said.

"If a producer delivers to one bulk handler's up-country site, 0.5pc-0.7pc is deducted in shrinkage.

"If the same producer then delivers the same grain from that site to another bulk handler's port, additional shrinkage deductions may be incurred."

Professor Kingwell said there was a shrinkage range of 0.5pc-0.7pc for wheat throughout Australia.

He said the financial implications were that, at a wheat price of $320 a tonne FOB, the shrinkage cost varied from $1.50-$2.10/t throughout the country.

"The costs of shrinkage alone are equivalent to half of all end-point royalty (EPR) payments, yet the publicity and concern around these royalty payments completely dwarfs any media attention surrounding shrinkage payments," Professor Kingwell said.

"A further deduction on volume is made at ports for dust.

"This varies from 0.1pc-0.25pc."

He said the technical and financial rationale for the differences in deductions for shrinkage and dust between crop species and regions was not well documented.

York grower Leon Ryan said the issue had flown under the radar for growers and not everybody knew about it.

He said Viterra handled a lot less volume than CBH and by percentage of volume, the costs really started to add up.

"Shrinkage on wheat is 0.5pc which on a 16 million tonne crop is 80,000t of shrinkage," Mr Ryan said.

"It's a lot of grain and it would be worth about $24 million at $300/t."

He said rather than the funds potentially getting lost in the accounting of CBH, it was a great opportunity for the business to highlight them.

"Rather than saying the returns from dust and shrinkage form part of the business's reduced storage and handling fees, CBH should demonstrate exactly where the money goes because I'd hate to see it be re-badged as a loyalty when it's growers' grain in the first place," Mr Ryan said.

"I'm not assuming that's where it goes but there is a chance it could happen."

When asked whether he had a problem with how the percentages were set he said they needed to be placed on a sliding scale in case of a small production year.

"My guess is that 95pc of growers don't know or understand how shrinkage and dust deductions work," Mr Ryan said.

"It's good to see CBH making record profits but sometimes $15m-$20m of that is due to shrinkage."

He also said the common rebuttal dished out by CBH was that it had the lowest shrinkage and dust numbers within the Australian industry but Mr Ryan believed that didn't mean it couldn't be improved.

CBH defended its position by saying it was open about its rates and growers could find a copy of the shrinkage rates in the CBH Delivery and Warehousing Terms under section 6.7 on the co-operative's website.

"Shrinkage is used as a risk management mechanism to cover grain losses that may be a result of adverse weather, losses through transport or dust at port through the ship-loading process," CBH operations manager Brett Jeffrey said.

"CBH has some of the lowest shrink rates in the nation and we are always striving to make the system more efficient to save growers value throughout the supply chain but we need to be realistic about the risk involved in the physical task of storing, transporting and shipping large volumes of grain."

He also pointed to a series of weather events during the 2011/12 harvest which caused significant losses and said CBH was able to maintain supply and ensure growers and marketers were able to uphold contracts because of the way the business managed risk through shrink.

"We aren't trying to make a profit out of this activity but rather manage growers' risk," Mr Jeffrey said.

"The reason there are different rates for different grain is simply because they have different risk profiles."

p CBH Delivery and Warehousing Terms: www.cbh.com.au/our-business/operations/ services-for-growers.aspx