Foreign Countries' Policies and Programs

EU wheat exports (excluding flour) have fallen by 40 percent in 6

years, despite rising production, as CAP reforms begun in 1993 have reallocated domestic supplies. Those reforms resulted in lower prices that helped displace non-grain feeds in animal rations.

Lower use of non-grain feeds even as overall feed demand was rising has resulted in a huge (30 MMT) expansion of grain for feed use since 1992, much of it wheat. Such strong demand growth has absorbed an increasing share of domestic production and left diminishing quantities available for export.

Next year’s Agenda 2000 reforms will again pressure domestic grain prices, which could further boost grain use and limit exportable supplies. And with 35-40 MMT of imported non-grain feedstuffs, there is still considerable room for further growth in the 120 MMT compound feed industry. Recognizing that past use trends may not continue in future years, it still may be reasonable to assume that at least some of the EU’s future wheat production will be used in the domestic feed sector, and not exported.

In November 1999 the next round of World Trade Organization (WTO) negotiations will begin. During this round there will be a greater focus on agricultural trade issues. More specifically, the issue of a country’s maintenance of a single desk authority for commodity exports will be up for discussion. On July1, 1999, as a result of Australia’s National Competition Study, the Australian Wheat Board (AWB), which oversees an A$7 billion Australian grain production, storage, handling, transport and marketing system was privatized. The Australian Wheat Board is now officially the Australian Wheat Board Ltd.. This new structure focuses on the five key grower objectives i.e. the retention of the single desk; grower control; a capital base to provide an acceptable level of harvest payments to growers to ensure a strong commercial entity which is acceptable to financial markets; a commercial structure which maximizes pool returns and reflects market signals; and industry self determination.

The Australian Wheat Board continues to be Australia’s major national and international grain marketing organization. During the course of this year, in response to the National Competition Study, the AWB began a process to transform itself from a statutory authority to a grower owned and controlled organization. The AWB is now restructured to have a parent company with two subsidiaries. AWB Limited, the parent company will be responsible for all funding of shared business and corporate services. AWB (Australia) Limited will be responsible for domestic wheat and other grain trading as well as the export of other grains. AWB (International) Limited will be responsible for the wheat export pools. They will operate under company law but will retain its monopoly over wheat exports, and maintains that its main objective is to maximize the net returns to Australian wheat growers who sell pool return wheat to the AWB. In addition, they are also allowed to undertake activities such as trading in wheat grown in other countries, processing, storing, handling and transportation contracts.

The industry has moved away from being largely state based and statutory, with a single player dominating each link in the chain, to a nationally privately owned, vertically integrated system. These developments have ramifications for the competitiveness of grain exports and could play a major role in the fight to retain the single desk export structure.

Whatever the outcome of that struggle, the grain industry of the future will be vastly different from the highly structured and controlled system of the past.

The grain storage, handling, transport and marketing systems have undergone significant change in the last decade. The catalysts for change were the Royal Commission into grain storage and handling in the late 1980's, the deregulation of the domestic wheat market in 1989, and rail system reform in the 1990's.

The centralized grain storage and handling system in Australia developed over a period of about 50 years. In the early days a large number of sites were developed close to rail systems in grain growing areas. Many small receival sites were established to accommodate the difficulties faced by growers in transporting grain over long distances. The existence of Commonwealth and State marketing and Bulk Handling Acts traditionally guaranteed the exclusive operation of a single Bulk Handling Company (BHC) in each State. As monopolistic operators, many were not subject to the rigors of a competitive market for most of their history.

Currently the BHC's are either private companies or are grower owned co-operatives. While the BHC's provide a large infrastructure base, the capacity to maintain and update this base is a key issue for the industry, especially the replacement of ageing sites and equipment. The Grains Council of Australia (GCA) claims that the present system lacks the flexibility to copewith new demands stemming from the growing sophistication of grain end users and their demands.

Deregulation of the domestic wheat market has had the effect of increasing competitive pressures faced by the Bulk Handling Authorities (BHC's). This has been most pronounced in the eastern states where the domestic market is much larger. The BHC's have expanded beyond their traditional core business areas in an attempt to remain competitive.

BHC's have, and will continue to, enter other geographic storage and handling markets and will be involved in mergers or joint ventures with marketers, other BHC's or suppliers of other products or services.

Currently there are nine organizations involved in the grain system: The Australian Wheat Board (which became AWB Limited on July 1, 1999) which operates nationally, Grainco in Queensland, GrainCorp in NSW, The NSW Grains Board in NSW, VicGrain in Victoria, The Australian Barley Board (which operates in Victoria and South Australia and became ABB Grain on July 1, 1999), SA Cooperative Bulk Handling in South Australia, WA Bulk Handling and the WA Grain Pool in Western Australia.

Many of the above organizations have developed strategic alliances or have taken a shareholding in one or more of the other organizations. As these organizations become more commercial they must deal with the competing interests of operating profitably and returning a dividend to shareholders while keeping costs at a minimum for grain growers.

GrainCorp has been one of the most active organizations in restructuring to take advantage of the deregulated domestic storage, handling and marketing grains industry. GrainCorp has spent more than A$140 million in recent years improving facilities in NSW. GrainCorp which started off as a grain handler has diversified into grain marketing and fertilizer sales and has taken a 25 percent stake in VicGrain and is reported to be examining further joint ventures with VicGrain and Pivot (a fertilizer company).

GrainCorp has also announced a joint venture with Cargill Inc. This agreement involves the development of new storage and handling facilities worth $8 million at two strategic sites in southern NSW - Red Bend near Forbes and Henty. Cargill has announced that these sites will be operated by GrainCorp and receive grain on behalf of Cargill. This is significant as it is one of the first investments by a private grain trader in receival facilities. Most grain storage facilities in Australia are in the hands of the five main State-based handling companies which are shedding their statutory origins and moving into each other's territories, as well as vertically into marketing.

GrainCorp is also planning to build a A$7 million grain storage and handling complex at Goondiwindi in southern Queensland.

Recently, South Australian Co-operative Bulk Handling (SACBH) announced it would move into marketing from July 1, 1999 and may form an alliance with AWB Limited, rather than the Australian Barley Board (which operates in South Australia and Victoria).

In June 1999, Grainco announced that it had signed a deal with SACBH to construct and design two A$5 million grain storage and handling facilities at The Rock and Coolamon in southern NSW. These facilities are expected to be operational this season.

Grainco expects that the first stage of it's A$40 million Port Melbourne import/export terminal, being constructed in conjunction with AWB, to be completed by December 1999.

The AWB recently announced that Western Australian Co-operative Bulk Handling (CBH Ltd) has been awarded the contract for the design and construction of AWB's A$9.5 million grain handling and storage facility at Dimboola in the Wimmera district of Victoria.

The Competition Principles Agreement (CPA) sets out the process for conducting reviews of legislation under the National Competition Policy (NCP). The guiding principles of NCP reviews is that legislation should not restrict competition unless it can be demonstrated that the benefits to the community outweigh the costs and that the objectives of the legislation can only be achieved by restricting competition. Current reviews are due to be completed in 1999.

The Grains Council of Australia (GCA) believes that the retention of single desk marketing arrangements will be of substantial benefit to grain growers and the grains industry generally.

With AWB Limited's single desk due to be reviewed under NCP in 1999 the GCA has indicated that the Dimboola project could be affected by this review. As the project is a greenfields site, and since the AWB is a new competitor into the storage market it could be regarded as pro-competitive. However, if the AWB uses the power of the single desk unfairly to advantage the complex then it would be regarded as anti-competitive.

Both Vicgrain and CBH Ltd have indicated that they will do their best to end the AWB's monopoly on wheat exports if they perceive that the AWB is seriously attempting to add to the current grain handling network . These organizations believe that the current grain handling system is already overcapitalized. They are quoted as stating that they will move into AWB markets i.e. the domestic wheat market, if the AWB moves into theirs.

AWB Ltd has monopoly rights on the export of wheat. ABB has monopoly rights on the export of barley from South Australia and Victoria. The Grain Pool of WA has vesting rights over both barley and canola in Western Australia. The New South Wales Grains Board has vesting rights over barley in that state. Grainco has the export monopoly on barley from Queensland.

Once the current round of rationalization is complete most of the current players will have restructured, formed alliances or merged. While efficiencies will be gained by replacing some outdated facilities, the industry faces the risk of overcapitalizing and duplicating existing infrastructure. Some industry analysts state that it will be far more efficient to establish joint ventures or mergers that will result in larger and more cost efficient facilities in strategic areas.

The major players have the difficult job of trying to ensure that future alliances are not seen to be anti-competitive, provide adequate returns to shareholders and growers, and keep costs to growers to a minimum. An aggressive AWB Ltd push into the grain handling and storage market could seriously erode community support for their fight to maintain the single desk.

From reporting prepared by the Office of Agricultural Affairs, American Embassy, Canberra. For further information, please contact Debbie Seidband at (202) 720-4204.

China’s gain policy is shifting again, this time– perhaps– towards relying more on market forces. Changes in China’s grain management system will result in lower government procurement prices to farmers for grains and the elimination of price supports for low quality grains (spring wheat, early rice, and high moisture corn). They will also permit some users to buy grain directly from farmers rather than going through grain bureaus. The government will also increase price differentials between different kinds of grain to reflect differences in demand and grain quality. There have been a series of meetings and reports, some published, on the subject since early May. Most recently, Vice Minister Wang Chunzheng of the State Development and Planning Commission (SDPC) issued a report detailing these actions.

One of the more significant changes last year was the barring of private traders from buying grain directly from farmers. Apparently, under this year's reforms the government is stepping back slightly from this attempt to tighten its control over trade. It is widely understood that last year's reforms did not deal aggressively enough with the issue of farmers producing too much low quality grain.

The aims of this second round of reforms include reducing government stockpiles of poor quality grain for which there is little demand and saving the government money. It is estimated that the government has already spent RMB200 billion (US$24.2 billion) to procure grains and finance the grain bureau bureaucracy since the implementation of last years reforms began. Savings from just halting production and government procurement of low quality grains could be as much as RMB35 billion ($4.23 billion), not counting savings on storage costs.

In recent year's the Government has had a two-tiered pricing structure for grains. Farmers received a higher "quota" price for a specified amount of their grain each year. Farmers were then theoretically able to sell the rest of their crop at or above a fixed price known as the "protected" price. Below are the Government's protected prices for the past three years for grains. Actual prices paid varied by location and grain variety. However the trend for the past two years has been downward, with the largest change occurring in rice prices.

Protected Prices
Year	Wheat	Corn	Rice
(Renmingi per Mt)
1996	1502	1195	1546
1997	1429	1176	1424
1998	1288	1031	1238

This year some provinces are replacing the old two-tiered price system with a single procurement price. This price, in theory, will be paid for any amount of grain that farmers wish to sell as long as the grain meets set quality standards, however some provinces are setting lower production targets for this year. This year's procurement prices will be lower than either last year's fixed quota prices or protected prices in some areas. However, in all but two provinces the reduction is reportedly negligible.

The Grain Bureau in May held an auction at which it sold 186,000 MT of wheat, from a total of 500,000 MT of wheat which it offered for sale. The wheat was reportedly imported in 1996, mostly from Canada with small amounts from the United States and Australia. The average price of the wheat sold was reportedly just over RMB1900/MT ($230/MT). The majority of the wheat was bought by companies in one of the 20 provinces where the wheat was stored. The auction was significant in that the central government was taking direct responsibility for negotiating wheat prices with end users rather than going through local grain bureau units, suggesting a model for the future. If this form of marketing were to be adopted on a wide scale, local grain bureaus would become mere agents responsible for the storage and transportation of wheat after it is imported.

From a report prepared by the Office of Agricultural Affairs, American Embassy, Beijing. For further information, please contact Rick O’Meara at (202) 720-4933.