Australian Grain Marketing: Achieving Lower Costs

FOREWORD

Our papers are written to contribute independent analysis to the debate about public policy.  The papers use economic, political, and legal principles to analyse private and government activity.  Most subjects chosen need Government attention.  Grain marketing is one of these.

The plight of rural Australia is generally known to be grim.  The behaviour of the EEC and the United States in international commodity markets is blamed a great deal for this, and if the season turns bad that is blamed too.

Most unfortunately for farmers, less is said about the areas in which there is more opportunity to actually improve their situation.

Many grain farmers are in financial difficulty despite efficient growing.  Some of their difficulty is caused by bad luck:  virtually all rural commodities are experiencing the lowest international prices in real terms this century.  Some is caused by serious and unremedied government errors:  the costs associated with tariffs and high interest rates originate with governments.  Grain-growing is a low-cost industry with minimal protection from international competition.  There is ample evidence that it is relatively efficient until the grain passes the farmers' front gates.

But a great part of the crippling costs many farmers are facing is self-inflicted.

This paper shows that nearly half the price the customer pays for Australian wheat is represented by costs incurred beyond the farmers' gates but not necessarily beyond their control.  A small proportional change in these costs would make a very great difference to the amount the farm family has left to live on after production costs are paid.  In many cases it would make the difference between loss and profit.

If a small part of the analytical effort that goes to identifying the best methods of cultivation and harvest were devoted to the equally-important handling and selling of the harvested grain, farmers could face the future with more confidence.

This paper shows that with a more economically rational system substantial savings will accrue to farmers.  But first they must abandon some sacred cows.

Richard J. Wood
August 1991

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INTRODUCTION

This book discusses the benefits to grain-growers of introducing more competition past the farm gate and how to achieve these benefits.

The Australian grain-grower buys services for handling, transporting, storing and marketing grain from Statutory monopolies.  Economic theory and available evidence demonstrate that these services would cost less if competition were introduced.  A large-scale sell-off or dismantling of the existing system is not required or advocated.  Removing restrictions which prevent others from offering these services would produce the benefits.  The grain-grower needs to have more options available when deciding how to market his grain.

The Australian grain-growing industry is a significant sector of the economy.  In 1984-85 the gross value of grain production was $4.7 billion, two-thirds being wheat.  Grain represented 30% of rural output and 2.3% of Gross National Product.  About 70% of grain production is exported, contributing 13% of Australia's exports in 1984-85.

Improvements in the industry's performance would benefit the whole community and not just grain-growers.

The world grain market is very competitive and prices are determined by international supply and demand.  Australia's wheat exports represent 15% of world trade and only 3% of world production.  A small market share limits Australia's ability to influence prices:  Australia is essentially a price-taker.

Currently, grain is in oversupply in the world and prices are depressed.  Unless there are unexpected, large-scale crop failures, this situation is likely to continue for a number of years. ⁽¹⁾  Reductions in off-farm costs will be crucial to the economic survival of many Australian grain-growers over the next few years.

The Bureau of Agricultural Economics (BAE) has estimated that in 1985-86 the average Australian grain farm will have a cash surplus of only $18,000.  This is one-third of the level three years earlier and a very small return on the $790,000 which the average grain-farmer has invested in the farm. ⁽²⁾

Beyond the farm gate, marketing costs for wheat are nearly $1 billion or around one-third the gross value of the crop. ⁽³⁾  Allowing competition within the grain-marketing system will provide immediate cost reductions of at least $10 per tonne, and for many farmers considerably more.  On wheat alone, this saving would increase cash surplus in 1985-86 by $6,000 or 30% for the average farm.  Savings would also be achieved on grains other than wheat which most farms also produce.  In the longer term (4 to 10 years) savings of $20 per tonne and more (in 1986 dollars) are quite realistic.

The size of readily-available cost savings and the current economic circumstances of the industry are helping to focus the minds of Australia's grain-growers on the need for more competition in their marketing system.  This paper has been prepared as a contribution to that focussing process.

Chapter 1 describes the key features of the grain-marketing system:  transport, handling, storage, pricing and selling.

In Chapter 2, economic theory relating to monopolies and pooling of returns and costs is presented and expected effects set out.

The extent to which these effects are actually occurring in the grain-marketing system is examined in Chapter 3, using qualitative and quantitative argument and evidence.

Despite clearly demonstrable costs and inefficiencies the current system continues successfully to resist significant change and the reasons for this are presented in Chapter 4.

Chapter 5 outlines changes to the marketing system which would reduce costs to farmers and how these changes can be achieved, and Chapter 6 is a general summary.

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CHAPTER 1:  AN OVERVIEW OF
THE AUSTRALIAN GRAIN INDUSTRY

Wheat is Australia's major grain.  In 1984-85 it represented 70% by value of all grain production and 73% of grain exports.  The next most important grain is barley representing 17% of production and exports.

The major grain-producing States are New South Wales and Western Australia.  In most seasons these produce well over half the national wheat crop, though Victoria, South Australia and Queensland are also important grain producers.

Statutory monopolies feature in the marketing system of all grains, but wheat is the only grain with statutory arrangements operating on a national basis.  Therefore, and because it is the dominant grain, this paper concentrates on the wheat industry and its marketing system.  Many of the other grains use parts of this marketing system, however, and the theory and arguments demonstrating cost savings through competition apply to all grains.

THE WHEAT-GROWING INDUSTRY

Key trends in the Australian wheat-growing industry are illustrated in Figure 1.

FIGURE 1:  AUSTRALIAN WHEAT PRODUCING INDUSTRY -- KEY TRENDS.

Source:  BAE Data

The salient points are:

• the growth in the industry as measured by value and volume of production;
• the economic significance of exports to the industry, highlighting its need to be internationally competitive;
• the fall over recent years in the proportion of cash receipts per farm represented by cash surplus, indicating how costs have been rising faster than returns;  and
• the growth in production per farm reflecting mainly increases in average farm size since average yields have changed little over the period.

The farmer grows, harvests and delivers -- usually to a point close by the farm -- wheat into the marketing system.  There are nearly 45,000 wheat-growing farms in Australia, which also produce most of the other grains.

Each farm is an independent commercial entity.  Commercial success depends on good management resulting in continuous improvements in productivity.  However, there are limits on the influence the farmer can have over his own economic situation because returns also depend on the efficiency of the marketing system.  As a general rule, the farmer receives at the farm gate about half the price the export customer pays.

The various components of the customer price of export wheat are presented in Table 1 for an illustrative sale of wheat from New South Wales to Egypt.  The return at the farm gate is only some 55% of the price paid by the customer.  The variable costs of production on the farm represent 44% of this farm gate return.  From a selling price of $211.40 per tonne the farmer eventually receives just over $65 per tonne or 31% of the selling price to cover wages and fixed costs and provide a return to the farmer's labour and capital.

TABLE 1:  COMPONENTS OF THE EXPORT PRICE OF WHEAT:  AN
ILLUSTRATIVE EXAMPLE FOR A SALE FROM NEW SOUTH WALES TO EGYPT

Item		$ per tonne	% of Customer Price
Price c & f Egypt (customer price)		211.40	100
Less Sea freight f.o.b. New South Wales port	23.00	188.40	89
Less AWB Administration Less Interest Costs (a) Net Pool Contribution	2.00 20.00	166.40	79
Less Storage and Handling Less Rail freight (b) Less Wharfage Less Research Levy Less Ceres House Levy Return at Farm Gate	16.70 24.80 1.66 0.35 0.10	116.79	55
Less Variable Costs of Production (c) Less Seed Less Fertiliser Less Spray Less Plant Repairs Less Fuel Less Insurance Return to Fixed Costs, Capital and Labour	6.00 16.00 11.40 7.80 9.00 1.10	65.49	31

Source:  AWB pers. comm. and ACIL Australia Pty Ltd

^(a) Gross interest.  There would be some offset in interest earned on funds invested.
^(b) State average.  Would vary depending on farm location.
^(c) Assuming a yield of 2t/ha and all plant owned by farmer.

Table 1 shows that relatively small increases in off-farm costs would quickly erode the return available to the farmer -- who clearly stands at the end of the queue.  Conversely, small savings off-farm could boost farmer returns considerably.

For the farmer to be better off the savings first need to be achieved and a competitive structure needs to exist so they are passed on.

MARKETING MONOPOLIES

In the Australian grain industry there is a major difference in organisational structure and economic performance before and after the farm gate.  In contrast to the competitive structure of the farm sector, the marketing system is highly institutionalised, monopolised and controlled.  For more than fifty years Australia's grain-growers have led a schizophrenic existence apparently believing that competition was appropriate up to the farm gate, but that collective action, backed by the compulsion of law and exclusion of competition, best served their interests from that point on.

Since the Second World War, statutory marketing arrangements in the wheat industry have operated under a series of "five-year plans".  Each plan was the result of negotiations between the Australian Wheatgrowers' Federation (AWF) and the Commonwealth Government.  Consultation with the States occurred via the Australian Agricultural Council which comprises the Commonwealth and State Ministers for primary industry.

The 1984-85 wheat season was the start of the latest five-year wheat plan, or scheme as it is now commonly referred to.  Unless otherwise stated, the arrangements discussed in this paper are those operating under the current scheme.

When the farmer delivers wheat into the marketing system it becomes the property of the Australian Wheat Board (AWB).  The AWB is a Commonwealth Statutory body.  It is the sole exporter of wheat and also exercises considerable control over the domestic market.  Essentially, wheat must be delivered to the AWB.  In each grain-growing State there is a Bulk Handling Authority (BHA).  These are creatures of State legislation and each is the sole provider of handling and storage services to the AWB.

Most grain is moved to the point of export by State railways.  There are direct and indirect restrictions imposed at the State level on moving grain by road.  At the ports, State Port and Harbour Authorities and/or the Bulk Handling Authorities control port facilities.  Bulk carriers deliver the grain to overseas customers.  The provision of this service is very competitive although Australia's shipping monopoly -- the Australian National Line -- and the maritime unions would like to change that.

The nature and role of the statutory monopolies in the marketing system are described briefly in the following sections. ⁽⁴⁾

THE SELLING MONOPOLY

The Commonwealth has the constitutional power to control exports.  Legislation based on this power creates the AWB, defines its functions and provides it with necessary authority.  Only the AWB can export wheat although it does use private grain traders to help with some sales.  However, these traders are not able to deal directly with wheat growers for the purpose of executing an export sate.

Since the establishment, wheat-growers have held a substantial majority of the positions on the Board of the AWB.  As part of the negotiations for the 1984-89 wheat-marketing scheme the Commonwealth Government decided to change the structure of the AWB.  The objective was to enhance the Board's ability to manage increasingly complex and diverse marketing and financial arrangements.

The key changes proposed by the Government were to reduce the number of wheat-grower members on the Board and increase the number with special expertise.  Wheatgrowers were still to have a majority on the Board and the Chairman would continue to be a wheat-grower.

Negotiations between the Government and the AWF proceeded for more than twelve months before a compromise was achieved.  The wheat-growers finally accepted a reduction in the number of grower members from ten to five plus the continuation of a grower Chairman.  The Government had proposed four members (in a Board with eleven members) with special expertise.  As part of the compromise the Government agreed that one of these four would also have to be a wheat-grower.  The agreement was announced as a formulation that would "ensure that there was a clear grower majority while meeting government policy in respect of maximising special expertise on the Board". ⁽⁵⁾

The saga of the AWB reconstitution is an excellent example of agripolitics at work in wheat marketing.  The Government proposal was to reduce the overall size of the Board, increase the expertise available and leave the wheat-growers with a majority and the Chair.  The only plausible reason why wheat-growers could have objected to these changes was their desire to continue to be able to provide ten of their number with highly-prized Board positions.  They apparently ranked this objective ahead of changes designed to reduce the costs and enhance the commercial performance of the AWB.

The AWB exercises control over the domestic market by virtue of complementary State legislation which requires delivery to the AWB and confers State pricing powers in respect of wheat to the Commonwealth for exercise by the AWB.  Over recent years the pricing of wheat on the domestic market has become more market-related although the AWB retains control over all sales.

For the purposes of pricing and controlling sales on the domestic market, the legislation refers to three end-uses:  human consumption, stockfeed and industrial use.  Domestic sales average slightly more than two million tonnes per year of 12 to 15% of production.  Human consumption accounts for around one half of domestic sales of wheat.

Wheat for human consumption is sold to millers for manufacture into flour.  Wheat sold for stockfeed is used predominantly by the intensive livestock industries, although it is an important feed for sheep and cattle during droughts.  Wheat sold for industrial purposes is used almost exclusively in the manufacture of starch and gluten from flour.

Different marketing and pricing methods apply to each of the three major end-uses on the domestic market.

The price of wheat sold for human consumption is set on a quarterly basis by averaging the export price being asked for the forward quarter and the price received for the quarter immediately past and adding a margin to cover the costs of servicing the domestic market.

Costs of servicing the domestic market include the cost of funding the storage of wheat throughout the year and interest forgone by growers under the terms of payment provided to flour millers.  There are also benefits to users arising from assured supply, information provided on crop quality and the ability to purchase from silos selected by the buyer.

In early 1986 the margin incorporated in the domestic price to cover costs of servicing the market was $16 per tonne.  The AWF contends that in addition to covering costs, the margin should also capture for growers the benefits to users noted above.  If this were done the AWF estimates that the justifiable margin over export parity would be of the order of $30 per tonne. ⁽⁶⁾

At its July 1985 meeting, the Australian Agricultural Council was unable to decide what the margin should be, so left it at $16 per tonne and referred the matter to the BAE for advice.  The BAE has been asked to devise a formula for setting the margin to reflect costs of supply and benefits to buyers.  A perfect formula should produce the same answer as that produced by an unregulated market, raising the obvious question:  why not let the market determine the margin?

The price of wheat sold on the domestic market for industrial purposes is posted daily by the AWB based on export price quotations.  The AWB prices stockfeed wheat on the domestic market according to what the market will bear.  It needs to consider returns available in alternative markets and prices of alternative stockfeed grains.

The AWB and complementary State legislation allow wheat to be traded "outside" the system in certain circumstances.  The AWB maintains control over such sales by the use of permits which make the sale (or movement) of wheat legal.

A permit is required if a wheat-grower wishes to take wheat to a miller for gristing with the object of having the produce of the gristing returned to the farm for use on the farm,

A permit can be obtained by a wheat-grower allowing direct sale to a buyer for human consumption or industrial purposes.  This is known as a grower-to-buyer sale.  However, the AWB must be provided with full details of the sale and the wheat-grower must meet certain costs of the statutory selling system even though the wheat is traded outside that system and its provisions and facilities.  Under a grower-to-buyer sale the grower can observe a difference as high as $40 per tonne or more depending on the selling price, between what the buyer pays and what he receives.  For some growers this is an irresistible temptation to opt out of the system and trade illegally.

This economic incentive to "opt out" was a key reason for the introduction of new permit trading conditions for stockfeed wheat in the 1984-89 marketing scheme.  The new provisions do not apply to non-stockfeed sales which are still subject to grower-to-buyer permit conditions.

The permit system for stockfeed sales is aimed at reducing the handling, transport and marketing costs of these sales while maintaining them under AWB control.  Stockfeed wheat can now be sold in a "controlled free market".  Market forces determine the price and the sale is completely outside the statutory marketing arrangements with the exception of the need to obtain a permit and pay a fee.  Of course, the "market forces" which determine the price of stockfeed wheat when traded under permit are influenced by the regulated export market and various regulations designed to protect State rail monopolies and bulk handling authorities.

The AWB is the sole exporter of wheat.  It is responsible for finding buyers and negotiating prices with the general objective of maximising the return to the grower.  The AWB makes limited uses of private traders but they are not allowed to pursue a commercially independent role on the export market.

How well the AWB does its job on the export market is very difficult to judge.  There are no other major wheat exporters in Australia for comparison.  Details of individual sales and major long-term contracts are not made public because the AWB considers the information to be commercially confidential.  The BAE has undertaken extensive research into grain marketing but has only been able to conclude that "it is generally assumed that the AWB sells the wheat for the best possible price" ⁽⁷⁾ [emphasis added].

THE HANDLING AND STORAGE MONOPOLY

Each State has a Bulk Handling Authority (BHA) which legislation specifies as the AWB's sole authorised receiver of wheat.  These authorities also handle other grains but not as part of the wheat statutory arrangements.  In Queensland, New South Wales and Victoria the BHAs are government authorities and in South Australia and Western Australia they are grower co-operatives.  This distinction is academic since the co-operatives are established by Acts of Parliament -- and are therefore statutory, with compulsory membership.

The boards of directors of all BHAs have grain-growers in the majority.  In South Australia and Western Australia all directors are growers.

The BHA in each State owns and operates an extensive system of country silos located in all grain-growing areas, mostly on railway lines.  The average distance between farm and BHA country silo is 17km.  The average distance from country silo to export terminal is 360km.  These distances vary between States and averages for each State are presented in Table 2.

TABLE 2:  TRANSPORTATION OF GRAIN IN AUSTRALIA:  AVERAGE DISTANCE:  BY STATE

Movement	NSW km	Vic km	Qld km	S.A. km	W.A. km	Aust. km
Farm to silo	15	8	48	13	21	17
Silo to export terminal	500	330	380	150	270	360

Source:  BAE

In some States, the BHAs' inland facilities include larger sub-terminals where grain is accumulated before transport to seaport terminals which are also operated by the BHAs.

A grower receives payment for wheat only after it has been delivered.  Farmers have an incentive to deliver at harvest and consequently the statutory grain handling and storage system has developed (at least in theory), to allow receival of a year's production at harvest, usually a period of up to two months in any State.  This grain is stored and shipped during the rest of the year.

The handling, storage and rail transport systems have developed within each State as if that State were a separate nation.  Each State monopoly strives to maximise its throughput in a professed attempt to minimise its costs.  In eastern Australia very little attention is given to least-cost movements of grain on an interstate basis.

The charge for the services provided by the BHAs is deducted by the AWB from the grower's return.  Until 1978 costs in all States were averaged and every wheat-grower paid the same charge.  Since 1978 charges for handling and storage have been set and collected on a State basis.

As part of the current wheat-marketing scheme the AWB has a separate but virtually identical Storage and Handling Agreement with each BHA.  This Agreement specifies what services are to be provided and corresponding charges.  Unlike earlier Agreements, the current Agreement contains penalty provisions if services, e.g. loading rates at ports, fall below agreed standards.  The storage cost of carryover grain (i.e. grain kept in the system until the next selling season) will be met by individual BHAs where the carryover was due to their poor performance.  However, the largest component of the cost of carryover is interest on the funds represented by the unsold wheat.  This cost will continue to be averaged across all wheat-growers regardless of the source of the carryover.

THE TRANSPORT MONOPOLY

The grower is responsible for transporting his wheat to the local BHA silo.  The AWB arranges transport -- usually rail -- from the silo to the seaboard terminal and deducts the cost of that particular distance from the grower's payment.  This cost is deducted irrespective of whether the wheat is delivered to the seaboard terminal or not.  The data on average distances transported in Table 2.1 indicate the relative importance of the two transport stages.

In each State road transport of grain is restricted to varying degrees and by a range of means.  These restrictions are an integral element of the policy of each State government that aims to maximise the amount of grain produced within a State which is handled by the BHA, transported by the railway and loaded at the State owned port.

Some wheat is taken directly to seaboard terminals by road.  Factors determining the extent to which this happens in any region are the availability of a rail service, State regulations controlling road transport, availability and capacity of road receival facilities at seaboard terminals and haulage distance.

Distance is the main determinant of rail freight rates, but the rate-setting is a political process and is affected by non-economic considerations.  Relationships between rail freight rates and railway costs and profitability are not known because the information is not publically available.

In several States in recent years contracts for rail haulage of grain at "concessional" rates have been negotiated between grower organisations, the State rail authority and the BHA.  The agreements have usually provided for a specified annual rate of increase in rail freight charges in return for a guaranteed share of the grain transport business.

It is questionable how effective these negotiated concessions are, given the monopoly position of the railways, their political control and the non-disclosure of essential information on costs and productivity.  In Victoria the country railways (V-Line) and the Victorian Farmers' and Graziers' Association negotiated a rate increase for 1985-86 which was subsequently overruled and actually substantially increased by the Ministry without further negotiation.

The seaports are an important and often overlooked component of the transport monopoly.  Virtually no grain leaves Australia via privately owned port facilities.  Major port facilities and their associated services are owned and operated by statutory authorities in all States.  States also exercise control over the siting and construction of new facilities, which maintains the monopoly.

PAYMENT AND POOLING

Pooling of gross returns and off-farm costs is a central element of wheat-marketing arrangements.

Wheat is graded into classes for the purpose of marketing and pricing.  Within classes, returns obtained by the AWB are pooled.  The Board has the ability to pay premiums and make dockages according to differences in the market value of the wheat within a grade.

Pooling results in growers being paid an average return from the sale of wheat in different markets at different points of time and across broad quality ranges.  Except in the case of stockfeed wheat traded under permit no grower gets the actual market price obtained for his wheat unless by a coincidence of which he would be unaware.

The Commonwealth Government underwrites the price of wheat.  The underwritten price -- called the guaranteed minimum price (GMP) -- is calculated as 95% of a three-year average of market returns for the particular Australian Standard White class of wheat after deduction of handling, freight, storage costs (including interest) and AWB administration.  Guaranteed Minimum Prices for the other classes of wheat (Prime Hard, Hard, General Purpose and Feed) are set as differentials relative to the ASW GMP based on expected market returns for each class for the current season only.

Price underwriting is a policy to protect the wheat-grower from a sudden fall in the market price.  It does not protect the grower from a gradual decline in price.  The design of the mechanism for calculating the GMP ensures that a government payout to support the price would only be necessary in exceptional circumstances.  The 1985-86 season is the seventh consecutive year of underwriting and a government payout has never been made.

The calculation of the GMP requires an estimate of the expected price in the current season.  To reduce the risk of estimation error, a preliminary GMP is estimated and announced early in the season and, on delivery of wheat, the grower receives an interim advance payment of 90% of the preliminary GMP.  Later in the season, usually after the harvest is complete, the GMP for the season is announced and growers receive a further payment.  Eventually they receive a final payment reflecting the average value of all sales by the AWB of that grade in that season.

The AWB has discretion to vary these payment arrangements in two broad areas.  One is the ability to offer a cash out option before the final return of a pool has been determined and paid.  This increases the Board's flexibility to meet individual payment requirements of growers.  The other payment discretion is the ability to alter payment according to time of delivery.  There is a mechanism involving prescribed dates within zones within States and set in relation to peak flows at harvest.  Deferred delivery to the BHA system outside the peak load period and as determined by the prescribed dates makes the grower eligible for an interest payment on his advance payment.

The deferred delivery scheme provides an incentive to the grower to store on-farm and thus reduce the peak load problems of the handling and transport system.  However, the scheme offers only limited flexibility.  The prescribed dates confine the payment of interest to a discrete period of three months commencing two weeks after the prescribed date.  If a grower delivers after this discrete period no deferred delivery interest payment is made even though the wheat may have been stored for a considerably longer period.

The deferred delivery option is only available if the individual State agrees to implement its provisions.  In the 1985-86 season it will be available to growers in all mainland States except Queensland.  In contrast, Queensland has introduced penalties for late deliveries.

AWB costs are pooled across all wheat.  Approximately 90% of these costs is interest on the borrowings necessitated by the payment system.  Wheat for export is priced on an f.o.b. basis and the Board does have to vary its selling price depending on the location and performance of the port of loading.  This variability is pooled so that the port of export does not influence the return to the grower.  Most other AWB costs vary depending on the nature of the sale but pooling prevents this variation flowing to individual growers.

BHA costs are pooled on a State basis.  Legislation underpins AWB pooling of returns but not pooling of BHA costs;  these are pooled as a matter of practice.  BHAs do not make information on costs of operating individual silos or terminals publically available.  It is certain, however, that these vary considerably depending on the type of storage, age, and location.  The grower is unaware of these variations because costs are pooled, and the demands the grower makes through the political system do not reflect a proper appreciation of the costs.

The rail freight charge to the individual grower does vary depending on the location of the silo the grower delivers to.  Information on railway costs and profitability is not available publically.  However, it is certain that some parts of the rail system transporting grain have much higher costs than others.  Rail charges do not reflect this and, consequently, neither do the growers' delivery decisions or net returns.

It is AWF policy that growers be paid the value their wheat achieves in the market place.  It is unclear from the policy whether this applies to gross or net returns.  Logically it should apply to net returns.  In either case there is an inherent contradiction between this policy and support of pooling.  Pooling ensures the AWF policy is not achieved.

WHEAT VARIETIES

Variety and growing location determine wheat quality and market value.  Wheats of differing value need to be handled separately throughout the marketing chain.  Under the current marketing scheme there are controls on what wheat varieties can be grown and where.

If a grower wants the monopoly marketing system to accept his wheat it must be of an approved variety.  Every State has a Wheat Advisory Committee established upon the State marketing legislation.  Those Committees recommend which varieties should be made available to growers and where they should and should not be grown.  The AWB is represented on every Committee because it is required to make decisions about the marketability of varieties.  The BHAs are also involved insofar as they decide their ability to segregate wheat of different quality within the handling system.

Because these Committees operate on a State basis there is potential for inconsistency in approach and decision.  For example, "a variety may be recommended for growing by the Victorian Committee but, for an adjacent paddock on the other side of the border, the same variety may not be recommended by the South Australian Committee". ⁽⁸⁾  This farce is probably not appreciated by a grower who owns both paddocks.

This highly institutionalised procedure has bureaucrats making commercial decisions.  The grower can exercise only limited choice when deciding which varieties provide a yield, quality and price relationship likely to maximise his returns.

Under the current wheat-marketing arrangements the AWB now has the legislative power to determine which wheat varieties enter particular marketing grades.  This has at least increased the importance attached to marketability in making varietal release decisions.

The Australian Wheatgrowers' Federation has been critical of the current system of varietal release.  Grower participants at the 1981 Grains Industry Conference were critical of the "bureaucratic controls over the release of new wheat varieties, with the obsession for western-style bread-making quality, and with the lack of concern for yield and overall profitability of wheat-growing." ⁽⁹⁾

The need for change is receiving some recognition.  In February 1986 the Standing Committee on Agriculture initiated a joint government-industry study into production of alternative wheat varieties.  The study will analyse market opportunities and price levels and the costs of providing additional storage and handling facilities to cope with more grades of wheat.  Technical issues involved in receiving and segregating different varieties and potential profitability for farmers compared with existing wheats and other grades are also to be examined.

The study is addressing the correct issues.  Less regulation over production and marketing and more competition in the system is an alternative method likely to give more accurate answers.

AN HISTORICAL PERSPECTIVE

Wheat marketing history in Australia can be divided into three distinct periods.  The first spans the period from before World War I until 1948 when the key features of the current arrangements were put in place.  The second period from 1948 to 1979 saw six five-year Wheat Stabilisation Plans with only minor changes to their provisions.  The third period -- which brings us to today -- has seen modest but symbolically important changes to the arrangements, making them slightly more market-oriented.

The most crucial of these periods was the first.  During this period grain-growers:

• looked for, and in their view found, scapegoats (the merchants) for the difficult times being experienced -- they confused symptoms with causes;
• pushed compulsory pooling as a convenient means of distributing assistance and achieving pricing and income objectives;  and
• became used to the comfort of the statutory "blanket" provided by wartime controls over selling and prices

These three strands, together with oratory and a lack of knowledge, eventually combined to put a majority of growers in favour of peacetime statutory arrangements in 1948.

Studies of the industry during this period make it obvious that bringing the majority viewpoint around to supporting full scale statutory marketing was a long, hard and acrimonious fight. ⁽¹⁰⁾  This is ironic given that grain-growers are repeating the process to obtain majority support for unravelling the arrangements.  It illustrates how change is usually initially advocated by minorities with the majority being sluggish to follow.

Growers did have experiences which should have created doubts about statutory arrangements.  One historian commenting on statutory arrangements during World War I said, "The experience of the war also showed that as bureaucracies the [State] Wheat Boards were not impressive.  If pooling was to continue the administration, particularly in the eyes of the farmers, would have to be improved.  Many growers became irate at the delays in payment, and in New South Wales and South Australia rumours of corruption affected both pools' reputations". ⁽¹¹⁾

The period 1948-79 was one of benign stability for industry politics and marketing policy.  However, two sets of problems characterised the period. ⁽¹²⁾  They were the confusion of objectives pursued as part of wheat stabilisation policy and the inadequacy of the mechanisms used to implement the policy.

These problems materialised via the Government guaranteed price for wheat:  it was based on local costs of production.  These, and consequently the guaranteed price, rose faster during the 1960's than world prices.  A rising guaranteed price encouraged production when the market price was signalling a need for the reverse.  This was increasing the Government's potential liability under the guaranteed price scheme.

Political pragmatism, aided by ideas and research, resulted in the nexus between the guaranteed price and costs starting to break in the Fifth Stabilisation Plan commencing in 1968-69.  The first hint of market reality in domestic wheat pricing also emerged in 1969 when the AWB was given the discretion to sell wheat in Australia for purposes other than human consumption at prices below those set for human consumption but above the guaranteed price.

The seventh wheat stabilisation scheme commenced with the 1979-80 season, the start of the third and final period in this potted history.  It followed a major inquiry by the Industries Assistance Commission. ⁽¹³⁾  This was the first independent public examination of statutory wheat-marketing arrangements since their introduction.

When introduced, the seventh scheme was described as a "significant improvement, in economic terms, on its predecessors.  Both the export price stabilisation elements and the domestic pricing arrangements are much more closely geared to market forces". ⁽¹⁴⁾  The eighth and current scheme which commenced with the 1984-85 season has continued marginally this deregulatory and market-orientated trend.

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CHAPTER 2:  MONOPOLIES AND
POOLING:  ECONOMIC EFFECTS

The provision of marketing services by monopolies and the pooling of returns and costs are key causes of high costs in grain marketing.  A case supporting this proposition requires an examination of the economic effects expected from such arrangements and of why they occur.  Expected effects can then be compared with reality and changes proposed.

In this chapter the expected effects and why they occur are discussed.

MONOPOLIES

Monopoly -- the concentration of supply in the hands of one entity -- is generally regarded as undesirable and there are sound economic reasons for this.

In what follows, the determinants and effects of private-sector monopolies are discussed first, followed by public-sector monopolies insofar as they differ.

PRIVATE SECTOR MONOPOLY:  MECHANISMS AND CONSEQUENCES

There is nothing intrinsically immoral about monopolists.

They operate rationally;  that is, they expand production to the point where the sustainable market price ensures maximum profits.

However, for the consumer, monopolies tend to have undesirable results.

The equilibrium price for the monopolist's output is higher than is the case with competition, and output is generally lower.  By restricting output, welfare generally, as measured by "consumer surplus", is reduced absolutely, and part of the remainder is appropriated by the monopolist as monopoly rents or profits.

At a given point in "time" (static) and at the level of the individual firm (microeconomic) monopoly has adverse effects on prices (too high), output (too low) and welfare and distribution (reduced consumer surplus and monopoly rents).

Adverse effects do not stop there.  They compound over time (dynamic).  The monopolist, quite reasonably, responds to the environment.  Without competitors the incentive to adapt, to innovate and to improve product quality will be severely blunted.

Over time, productivity will be impaired, compounding the adverse effects noted earlier.

Monopolies are rarely dynamic, adaptable enterprises.  If there is no competition, why should they bother to change?

At the whole-industry or economy level (macroeconomic), the abovementioned features of monopoly are further compounded.

Economic interdependence ensures that monopoly effects cannot be quarantined to the products directly involved.  They are transmitted right through the production, distribution and consumption systems.  For example, monopoly arrangements bearing upon off-farm costs must adversely affect grain-growers.

Economic interdependence ensures that monopoly of supply at the microeconomic level translates into high inflation, more sluggish growth, lower employment, and a less dynamic macroeconomic performance.  In the end, all in the community suffer as competitiveness is undermined by high costs, and living standards fall or fail to grow as fast as would otherwise be possible.

None of this analysis is controversial.  Anti-monopoly policies of various types are available and used by most governments.

Monopolistic or collusive practices in the private sector are condemned as being against the public interest.  Indeed, such activities are regarded as evil by many who fail to appreciate that the cause is the operating environment and not the monopolists.  Moralising is often selective:  some monopolies (e.g. of labour supply) are more acceptable to many than others (e.g. of product supply) even though both have similar effects.

CAUSES OF MONOPOLY

Monopoly situations can result from inherent market features, or be imposed by government policies.

Inherent monopolies might arise when a market is so small in relation to the most efficient available technology that only one producer is needed to supply the market efficiently.  Such markets must usually be isolated from similar markets elsewhere to ensure that barriers to inter-market trade (e.g. high transport costs) prevent supply from producers elsewhere.

Imposed monopolies arise from government policies introduced for a variety of reasons.  Legislation prescribing that the supply of a particular good or service can only be handled by a particular supplier is an obvious example.  Such legislation may apply within Australia, or it may seek to discriminate between domestic and overseas suppliers.

Whatever the reason, monopoly exists because of barriers to entry into the process of supply.  Barriers to entry whether technical, geographical or government-imposed are properly regarded as the villains of the piece.  It is those barriers and not the monopolist that are responsible for impaired economic performance.

PUBLIC SECTOR MONOPOLY:  DOES IT DIFFER?

Public-sector monopolies are producers operating within the public-sector and protected by legislative or regulatory barriers to entry.  They are numerous in Australia.  Australia Post and Telecom are among the best-known in the community.  The railways, the BHAs and the AWB are probably the best-known to grain-growers.  For such organisations, the operative barriers to entry are the direct responsibility of governments.

Are these monopolies likely to perform better from a consumer-general economy perspective than private-sector monopolies?  The answer is usually no (setting aside obviously exceptional and non-market matters such as defence).

It is necessary to consider how efficient and competitive public sector provision of the goods and services in question will be.  That judgement will ultimately depend upon assessments about how rational individuals employed by the public sector will behave.

It is generally accepted that altruistic, workaholic, efficiency-obsessed employees are the exception rather than the rule.  In that sense people making public-sector institutions work are no different from their private sector counterparts.  In both cases performance depends upon the structure of incentives and penalties.

What incentives or penalties exist in a public-sector monopoly?  Profit maximisation is generally not the objective of such an institution.  Indeed, it would probably be regarded as against the general interest.  It would also raise questions about the rationale for preventing private sector entry.

It might be argued that a duality of profit maximisation and cost minimisation is an objective of such entities.  It is generally true that the legislation and regulations applying to such organisations give lip-service to the need for cost-effective delivery of services, etc.  However, competitive pressures which in the private sector would force cost minimisation to be practised are largely absent.  Moreover the sanctions of the private market, such as declining market share, dismissal for poor performance and closure if unprofitable, are at best blunted and at worst non-existent.

The discipline of the demand side of the market is often very weak as well.  In many cases, the services provided by public (that is, Government) monopolies are said to be "essential" services.  Such services typically can make their income gains from price increases, and do not need to adapt to demand.  Since their clients cannot survive without them, the demand is rigid or "inelastic".  The demand is often made inelastic by government regulations.  For example, restricting road transport makes demand for rail transport more inelastic.  The same economic logic applies in the case of BHAs.  The combination of weak incentives to minimise costs, and price-inelastic demand for the services provided, constitutes a potent recipe for maximising price and revenues by the public monopoly:

• pressures to contain costs are feeble:  rational employees therefore feel little need to avoid inefficient practices and to improve operating procedures.  The net effect is overmanning, inefficient work practices, over-capitalisation and escalating costs.
• usually, higher costs can easily be passed on in price increases;  inelastic demand means the services still have to be used by the "captive" clients, and the government can make more revenue in the process.  This encourages more inefficiency and cost increases later.

Costs in a public monopoly tend to shift upwards, which then forces prices upwards to offset revenue loss.  This is instead of, or as well as, the monopoly profit of a private-sector monopoly.  However, the result is much the same for the community:  price is raised, and demand is lowered.  Consumer surplus is reduced, and a public monopoly rent (that part of consumer surplus appropriated by the portion of the price absorbed by inefficient operation) also appears.

In short -- and especially where there is no evidence of major market failure -- there is no reason to believe public-sector monopolies will do better than private-sector monopolies.

ELIMINATING MONOPOLIES

Removing the effects of monopolies must focus on the monopolist's environment, not the monopolist.  The latter is only the messenger;  the former constitutes the cause of the problem.

The policy prescription is to break down the barriers to entry by potential suppliers.  The market for the supply of goods or services must be made contestable.  That constitutes an effective attack upon the causes of the problem.

In some cases, technologically-induced monopolies will be difficult to overcome without resort to measures directed specifically at prices and quantities.  Barriers to entry due to distance might also be difficult to overcome, although policy could at least minimise those by avoiding international and interstate protective barriers such as tariffs.

The barriers to entry easiest to eliminate are the imposed ones.  In the grain marketing system virtually all the barriers are imposed by Governments and their institutions.  Government policy decisions can be, and are, reversed.  If legislation has produced results that are manifestly inconsistent with its stated objectives, it can be repealed.  Prima facie, the barriers to entry, and thereby to better economic performance, that are made by governments are the easiest barriers to remove.

Many farmers who appreciate the value of competition among the suppliers of chemicals, fertiliser or motor vehicles seem not to appreciate the potential rewards from competition for the haulage and handling of their grain.

POOLING

Pooling is sharing.  It involves cross-subsidisation through risk-spreading or cost-averaging.  It mixes the good with the bad to produce something average.  To varying degrees it softens some economic realities facing the individual.

Since early this century pooling has been advocated by grain-growers who want to be entrepreneurs but not to take risks.  Pooling has been a significant influence on developments in the marketing system.  Pooling affects the distribution of income (equity effects) and also price signals which influence selling and investment decisions (efficiency effects).

Pooling can give a direct feeling of comfort while producing indirect economic costs.  Feeling the benefits but not the costs must explain why grain-growers have continued to support it.

As discussed in Chapter 1, pooling in the wheat industry is applied to returns and off-farm costs.  The grower faces prices and costs not directly related to what he produces or the services he demands.  Distorted price and cost signals distort production and marketing decisions.  This results in economic losses in the form of reduced incomes for grain-growers and welfare losses in the community.  Wheat consumption decisions are also distorted because of the eventual effects of pooling on the supply and price of wheat.

All wheat is not the same.  The pooling of returns disadvantages growers who receive less than the value of their wheat.  It removes any incentive to seek market niches which pay premiums and supply them.  More generally, it confounds the infinitely variable relationship between yield, quality and market price making it impossible for farmers to choose the wheat variety and production circumstances which could maximise profits.  Even if this information were available, pooling would remove the incentives to react appropriately.

The farmer gaining from price pooling gets more than the market value for his product.  This encourages him to produce contrary to what the market wants.  Actions like delivering as many weed seeds as he can get away with pull down the return to other growers.

Pooling costs favours some growers at the expense of others as charges to individual growers do not necessarily equal costs incurred on their behalf.  Decisions by growers on on-farm storage, point of delivery, time of sale, choice of buyer and method of transport are all distorted by pooling the costs of marketing services.

The grower will not store on-farm if the handling and storage cost is equalised throughout the year.  The rational decision is to deliver at harvest.  This creates peak load problems and demand for facilities resulting in over-capitalisation in the handling and storage system.  Pooled handling and storage costs dissuade the grower from avoiding high-cost silos and delivering to more efficient ones.  It also creates an expectation that silos should be near the farm and open for the grower's convenience irrespective of costs.

Pooling of returns and costs makes the individual grain-grower less responsible for his actions.  Costs arising from inappropriate production decisions (or wasteful handling or inhibiting quality control) are shared.  Pooling reduces the incentive to act optimally and honestly.  The result is reduced returns for many growers, and reduced returns overall.

ECONOMIC RENTS AND RENT-SEEKING

Economic rents are advantages that particular individuals can extract from the system by virtue of its institutionalised and non-competitive structure.  The following are some examples in the grain-marketing system.  Pooling of handling charges reduces costs to the grower who is delivering to a high-cost silo.  The economic rent is his saving through pooling, albeit at the expense of fellow growers delivering to low-cost silos.  Similarly, economic rents are available to those growers who benefit from pooling returns because the market value of their wheat is below the pool average.

Those working within the monopolies take their economic rents in the form of working hours and conditions, manning levels and perquisites superior to those achieveable in a competitive market.

Rent-seeking describes the actions taken by individuals to secure and retain the economic rents available within the system.  The rent-seeker says:  "What's in it for me?"  In an open market this is the essence of competitive behaviour resulting in maximum efficiency and minimum cost.  In a controlled market it results in resistance to change and efforts to preserve the status quo.

Rent-seekers are tenacious in their efforts to retain their economic rents.  The direct use of political and industrial power is the least ingenious but often most effective rent-seeking technique.  Those without this power often use rhetoric and assertion to exploit lack of knowledge about alternatives.  Thus rent-seeking is an alternative to facing reality and doing things better.

In summary, the non-competitive market creates the economic rents.  The recipients of those rents -- the rent-seekers -- put their efforts into retaining current advantages and seeking new ones.  The lack of competition restricts the ability of others to challenge this situation.  Economic losses occur and these are spread throughout the industry and the community.

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CHAPTER 3:  THE CURRENT SYSTEM:
EVIDENCE OF POOR PERFORMANCE

This Chapter presents evidence that the expected effects of monopolies and pooling in grain marketing have indeed come to pass.  The need to do this is noteworthy in itself, but the advocate of more competition is in a position akin to that of being presumed guilty until proven innocent.  The lack of pressure on the "orderly marketeers" to prove their approach superior attests to the continuing strength and influence of the rent-seekers and the self-destructive apathy of the rest.

Assessing the performance of the current system is made difficult by restrictions on available information.  Monopolies are noted for being secretive and since there is no competitive pressure on their behaviour, their efficiency and pricing can only be assessed by "looking at their books".  There is little effective pressure to make them allow this.  However, the fact that they withhold information, while also claiming maximum efficiency and minimum costs as achievements, is revealing in itself.

Indexation mentality pervades much of the defence of the poor performance of the current system.  That is, holding cost increases to rates similar to the rate of inflation is said to be satisfactory.  This is economic nonsense.  The objective should be absolute -- to provide the grain-grower with a service at the lowest possible cost.  Farmers who indexed their cost of production of a unit of grain since, say, the 1960's, would today be bankrupt.

CHARGES AND PRACTICES

Handling and storage charges and average rail freight deductions are shown in Tables 3 and 4.  The Australian averages are graphed in Figure 2.  Figure 2 also presents indices of prices paid by farmers for their inputs and received for wheat.

TABLE 3:  WHEAT HANDLING AND STORAGE CHARGES:
BY STATE:  SEASONS 1973-74 TO 1985-86

Season	NSW $/t	Vic $/t	SA $/t	WA $/t	Qld $/t	Aust.(a) $/t
1973-74	5.12	3.41	3.29	4.38	5.59	4.35
1974-75	7.44	2.71	4.07	6.88	5.06	5.74
1975-76	7.26	3.72	4.96	6.45	5.79	6.10
1976-77	8.95	5.21	7.00	10.46	7.86	8.55
1977-78	11.54	7.56	12.90	13.69	13.46	11.70
1978-79	12.00	6.80	7.00	11.10	8.90	9.84
1979-80	12.00	7.00	7.00	11.90	10.50	9.96
1980-81	12.00	8.00	10.00	12.63	16.00	10.92
1981-82	14.40	10.35	11.36	11.67	16.00	12.73
1982-83	14.90	12.00	11.95	12.00	16.50	12.77
1983-84	16.50	12.95	12.43	12.43	21.00	14.73
1984-85	17.20	13.75	12.74	13.05	20.00	15.29
1985-86 (s) (b)	18.36	14.69	12.99	13.55	19.00	15.70

^(a) Receivals-weighted average of charges in each State.
^(s) Estimate.
^(b) including wharfage which is now deducted by the AWB and not included in handling charges.

Sources:  Australian WheatBoard;  Annual Reports of the bulk handling authorities.

Note:  A non-interest-bearing toll is also payable in SA and WA.  In 1985-86 it was $0.74 and $1.84 respectively.

Four States levy a transport loading charge where applicable.  In 1985-86 this charge was 44 ¢/t in Vic., 50 ¢/t in SA, 28 ¢/t in WA and 7 ¢/t in Qld.

TABLE 4:  AVERAGE RAIL FREIGHT DEDUCTIONS
FROM WHEAT GROWERS' FIRST ADVANCE PAYMENT

Pool No.	NSW $/t	Vic $/t	SA $/t	WA $/t	Qld $/t	Aust. (a) $/t
1973-74	8.92	7.52	4.56	6.16	8.02	7.20
1974-75	10.03	8.12	5.68	7.30	8.02	8.31
1975-76	11.99	7.99	5.24	8.46	11.32	9.60
1976-77	12.92	9.16	5.50	7.73	11.03	10.58
1977-78	13.89	9.13	5.96	9.77	11.36	11.31
1978-79	14.14	10.54	6.66	11.08	12.18	11.82
1979-80	15.71	12.48	5.09	9.23	11.99	11.67
1980-81	15.87	14.08	5.63	9.31	11.90	11.62
1981-82	19.38	16.21	6.27	12.18	12.87	14.80
1982-83	19.94	17.21	5.02	13.51	13.08	13.83
1983-84	22.05	19.98	6.87	14.32	14.87	17.56
1984-85	23.63	20.09	6.50	14.79	16.20	17.39
1985-86 (s)	24.80	21.30	7.00	16.00	16.20	18.70

^(s) Estimated.

Note:  The above table shows average figures only.  Actual rail freight paid by individual growers is calculated on the distance from the point of delivery to the natural terminal port.

Source:  Australian Wheat Board.

FIGURE 2:  TRENDS IN WHEAT PRICES, FARM INPUT PRICES,
AND STORAGE, HANDLING AND RAIL FREIGHT CHARGES

Source:  BAE and AWB data

The costs of handling, storage and rail freight and the price of farm inputs nave risen more rapidly than wheat prices over the last decade.  The implications of this are obvious -- the grain-grower has had to improve productivity continually to maintain, let alone raise, income.

Handling, storage and rail charges have risen in line with farm input prices and the underlying rate of inflation.  These charges reflect both the quantity of inputs used per unit of grain handled by the handling and transport monopolies and the prices paid for these inputs.  If the monopolies were achieving improvements in productivity, charges should rise more slowly than input prices, or possibly fall.  This would not happen if the monopoly retained achieved and potential productivity gains in the form of economic rents.

It would appear, therefore, that the monopolies providing handling, storage and transport services have either not achieved substantial productivity gains or, where they have, benefits have not been passed to growers.  Available evidence relating to charges and practices suggests that both explanations are valid.  For example, research by the Bureau of Agricultural Economics (BAE) has concluded that over the six years to 1984-85, marketing costs from primary receival point to export port (fob) rose 52% in Australia while they declined 18% in the United States. ⁽¹⁵⁾  Some of the reasons why Australian costs are relatively higher than foreign competitors' follow.

LABOUR AND GRAIN-HANDLING

Some Australian grain-handling facilities have manning levels up to five times those of equivalent-sized loading facilities in the United States. ⁽¹⁶⁾  In 1984-85 the GHA in New South Wales had 200 wage employees. ⁽¹⁷⁾  In that season the Authority exported 4.8 Mt of grain through the Sydney and Newcastle terminals.  This was a record tonnage and represents 24,000 tonnes per employee.  By comparison, the Alberta Wheat Pool terminal at Vancouver achieves 33,000 tonnes per employee, the Bunge and Cargill terminals at Portland, Oregon, 53,000 tonnes, the Prince Rupert terminal at Vancouver, 75,000 tonnes, the Cargill terminal at Houston, Texas, 86,000 tonnes, the Cargill terminal at Terre Haute, New Orleans, 91,000 tonnes and the Dreyfus terminal at Portland, Oregon, 96,000 tonnes per employee. ⁽¹⁸⁾

There are some clear reasons for this poor labour performance in NSW.  For example, automatic loaders at the terminals, which are capable of non-stop operation, do not operate during shift changes or during tea breaks and smokos.  A representative of grain producers in New South Wales has stated that GHA management has conceded unofficially that the Sydney terminal could be run with 40 employees instead of the current 110. ⁽¹⁹⁾

An unpublished management consultant's report prepared in late 1985 concluded that, in respect of the Sydney terminal, the GHA had been lax in its management control and employees had been running the operation for their own benefit. ⁽²⁰⁾

Work practices leading to relatively low throughput rates are evidence that opportunities to improve productivity and lower costs are being forgone.  As would be expected, rapidly rising labour costs are another consequence of this non-competitive environment.

In 1979-80, total labour costs of the GHA in New South Wales were $3.71 per tonne and less than 30 per cent of the Authority's total costs.  In 1984-85, when the quantity of wheat handled was similar to 1979-80, total labour costs were $7.95 per tonne and nearly 50 per cent of total costs.  This is an increase in unit labour costs of 114 per cent over five years. ⁽²¹⁾

While the above comparisons relate only to New South Wales, there are no reasons for believing that the monopoly system is not under-achieving in other grain-producing States to the economic detriment of producers.

THE TRANSPORT SYSTEM

"Based on information obtained overseas, the cost of transporting grain to end user would appear to be two to three times higher on a cents/tonne/kilometre basis in Australia compared with the situation in the United States and Canada.  Furthermore, given the relative close proximity of the wheat growing areas to terminal port, the Australian wheat farmer should have a transport cost advantage.  Unfortunately, such would appear not to be the case.

For a 650 km haul, the cost in Canada would be $A 15.57 per tonne (of which $A 4.73 would be paid by the wheat grower and $A 10.83 would be paid by way of direct subsidy to the railways by the Canadian Government) whilst such a haul would cost the Australian grower $A 25.48 per tonne in New South Wales, $A 27.34 in Victoria, up to $A 35.40 in Western Australia (being the charge for a 650 km radial distance haul, however, the charge for a 650 km line haul would be less), $A 22.50 in South Australia, and $A 17.39 in Queensland -- the extent of government subsidy (if any) to Australian railways is not known.

In the United States, the movement of grain over a 300 km haul would be either by road or rail.  Over such short hauls, the movement of grain by barge would not be competitive -- hauls of grain over at least twice the distance would be required before barge movement became competitive with either road or rail.

As a general guide, road transport was considered competitive with rail up to at least 700 km and depending on backhaul opportunities up to 1000 to 1500 kms.  Given the average distance hauled in Australia of 300 km with a maximum haul of around 700 km, the above overseas cost information would indicate that road transport should be used far more extensively in the movement of grain and would result in overall cost savings to wheat growers".

These are the conclusions reached by one researcher who has collected information and made comparisons of transport costs in Australia, Canada and the United States. ⁽²²⁾  The same research established that labour accounts for 70 per cent of the total operating cost of railways in Australia, but only 40 per cent in Canada and the United States.

Recent events in Victoria provide an example of transport savings being achieved, but not passed on in lower charges. ⁽²³⁾  Over the last four years, Victoria has developed and implemented a Central Receival Point (CRP) system to reduce handling and transport costs.  Wheat is accumulated at CRP's (sub-terminals) and then moved to port in large "block" trains.  Both providers and users of this system expressed confidence in lower transport costs resulting.  However, in the 1985-86 season rail charges in Victoria have been increased by 6 per cent.

Further, there are reports that the charge to rail grain from one CRP to the port is $14.68 per tonne and that the railway is sub-contracting the cartage to road haulers and paying $7.80 per tonne.

The grower is being charged the full cost and Victorian Railways is apparently pocketing the difference!

These developments in Victoria have goaded growers into action.  In February 1986, growers organised two truck convoys of nearly 600 vehicles and delivered 8000 tonnes of grain to the Geelong and Portland terminals.  This deprived the Victorian railway of considerable revenue and grower representatives claimed savings of $4 to $5 per tonne.

SOME EFFECTS OF POOLING

Pooling conceals variations in the cost of providing marketing services.  An example from Victoria illustrates this point. ⁽²⁴⁾

A silo receives most of its grain over a 90 day period;  12 percent of total receivals arrive in the first 30 days, 63 per cent in the second 30, and 20 per cent in the final 30 days of the period.  The actual "cost to receive" in each period is $4.71 per tonne, $0.92 per tonne and $2.77 per tonne respectively.  This reflects the interaction between costs, which are largely fixed, and variations in throughput.

Pooling through time means the grower is totally unaware of the variation since the charge is the same for each period.  He delivers whenever is convenient to him because pooling removes any incentive to do otherwise.  If he is one of the majority delivering in the middle period, he has forgone a major saving in costs in favour of subsidising the costs of the minority who deliver when throughput is low.

Pooling returns within broad grades is another example of how growers miss potential opportunities to improve income.  Among other attributes, the protein content of wheat largely determines its value -- generally, the higher the protein, the higher the value.  Protein levels can be increased through appropriate varieties, cropping practices, fertiliser usage and the like.  However, a farmer has no incentive to attempt to increase protein level if the return is pooled across a range of protein levels.  In fact, this pooling provides an incentive to do the reverse.  For any grade of wheat, net returns to the individual grower are maximised under pooling by producing wheat with a protein content at the bottom end of the range for that grade.  Lower protein wheats are generally cheaper to produce.

Pooling has created economic rents for some growers which will create resistance to its abolition.  For example, the grower with a high-cost silo nearby will be a supporter of pooling.  The grower located on the inefficient, high-cost rail line will not support a competitive approach to rail services and charging which would result in higher charges to him or the cessation of the service.

In 1985 suggestions to close uneconomic branch lines in Victoria resulted in protest by growers serviced by those lines.  Similarly, in NSW a suggestion to close some old high-cost silos brought strong protests from the growers delivering to those silos,

ESTIMATES OF COST SAVINGS

Most estimates of likely cost savings from introducing more competition are partial and imprecise.  This reflects the almost infinite variety of ways in which savings can be made and the limitations on the available information.  Notwithstanding these deficiencies, estimates convey a clear message:  cost savings are readily obtainable and potentially large.

One major economic analysis of the costs of Australian wheat marketing policy examined the main effects on wheat growers, taxpayers, wheat users and others over the thirty-one years ending 1978-79. ⁽²⁵⁾  The analysis is significant because it quantifies the welfare gains and losses arising from the wheat marketing arrangements and assigns them to key participant categories.  Monetary gains and losses were aggregated over the period analysed and presented in 1979 dollar values.

The research concluded that the wheat-marketing arrangements caused a net social welfare loss (wealth irretrievably lost by the community) of $882m.  The wheat-growers lost $995m, the taxpayers contributed $1,009m and wheat users gained $1,122m.  Even allowing for imperfections in the analysis, the identity of losers and gainers is unequivocal and the size of the transfers huge.

Analyses by the Bureau of Agricultural Economics (BAE) of wheat marketing costs (handling, storage, transport and pooling charges) in New South Wales estimated potential savings of $20 per tonne for direct grower-to-buyer sales at harvest. ⁽²⁶⁾  In the same report the BAE concluded that "total savings from introducing greater competition in the marketing process can be conservatively estimated at $68m on a national wheat crop of 15 million tonnes".

As part of the research for this study, an assessment was made of the potential cost savings of storing grain on-farm and transporting it to the terminal by road throughout the year.  Detailed calculations were made for three grain-growing enterprises located in the Victoria-New South Wales border region.  The calculations are based on farm accounts and reflect what the grain-growers are actually doing.  They are not hypothetical examples.  Details are presented in the Appendix.

The Victoria-New South Wales border region was chosen because there are many growers circumventing the monopolies and effecting savings in this region.  There are several reasons for this.  First, Geelong has road receival facilities and this is the terminal farmers in the border region use.  Second, adjacent to the terminal is a fertiliser manufacturing plant and so farmers derive added benefits from back-loading fertiliser and gypsum. ⁽²⁷⁾  Third, growers in New South Wales can circumvent State restrictions on road transport in Victoria because they are hauling interstate.

For Victorian growers, the railways must be used to take grain to the terminals unless the delivery originates within a 60 km radius of the port or the grain-grower owns the truck and it has "primary producer" registration.  If gypsum or superphosphate is back-loaded, it must be used by the grain-grower.  It cannot be used by another grower or "customer", although it is difficult to see how this can be effectively policed.

The case studies show savings of at least $15 to $20 per tonne of grain with on-farm storage and road transport when back-loading advantages are estimated conservatively and included.  The extent of savings will vary depending on farm location.  Moreover, under the current marketing arrangements it is often physically impossible to attempt the practices adopted by the farms studied.  For example, some terminals do not have road receival facilities.

It was recently announced that the Grain Handling Authority of New South Wales had decided, in principle, to instal road receival facilities at the Newcastle terminal.  Growers in areas adjacent to the terminal believe they would save $10 to $14 per tonne on freight if they could deliver by road. ⁽²⁸⁾

The opportunities for savings would increase if more competition was introduced.  This would lead to increases in activity by grain haulage contractors, storage specialists and manufacturers of on-farm storage and handling equipment.  More activity and increased competition in these areas would result in lower costs than revealed in the case studies.

It is valid to suggest that if a more competitive structure resulted in more road haulage of grain, then road transport taxes and charges would need to be increased to cover the extra costs of road development and maintenance and social costs such as noise and air pollution.  However, there is considerable fat in the system to be absorbed before this would become necessary.

Estimates are available which show that in the early 1980's the total money raised from the users and providers of road transport services greatly exceeded that expended on the road system. ⁽²⁹⁾  At the moment, road users are paying their way and making substantial contributions to consolidated revenue.

QUALITATIVE EVIDENCE

There is also considerable qualitative evidence of the poor performance of the monopoly grain marketing system and the existence of pressures for change.  Over the last decade there have been numerous inquiries and research studies -- many have been referenced in this paper.  There have also been innovations, such as in the case studies referred to here, by growers trying to circumvent regulations and maximise profits despite the monopolies.

Even the politicians, who are ultimately responsible for statutory monopolies and regulations, now accept that regulation prejudices economic performance.  In a speech to the Business Council of Australia on 21 September 1984 the Prime Minister, Mr Hawke, said:

"I am convinced that after eighty-four years of Federation we have accumulated an excessive and often irrelevant and obstructive body of laws and regulations ... We see the removal of unnecessary regulation as contributing significantly to improved economic growth performance."

INQUIRIES AND RESEARCH

Over the last decade the IAC has conducted two major inquiries into wheat marketing.  In 1983 the BAE published the findings of its research into grain-handling in Australia.  Both organisations reached unequivocal conclusions regarding the economic benefits obtainable from more competition in grain marketing.

In 1980 there was a major inquiry into the operations of the Grain Elevators Board (the predecessor of the GHA) in New South Wales -- the Carmichael Inquiry.  The following quotation from the Inquiry's Final Report in 1981 illustrates how little the situation has changed since then:

"Most growers were very critical of the system in general and the GEB in particular.  Major concerns were:

1. truck queues and delays at harvest time
2. high handling costs
3. high railway costs
4. very heavy carryover adversely affecting returns from the AWB pools
5. serious industrial problems particularly at the terminals
6. low terminal throughput and utilisation
7. grain losses due to theft and other factors
8. poor communications and organisation within the industry
9. lack of communication of the true situation to growers." ⁽³⁰⁾

Following the Carmichael Inquiry some changes were made to the grain-handling system in New South Wales.  The name of the statutory monopoly was changed and its Board was restructured and new appointments made.  However, the monopoly was maintained.  As shown m this Chapter, most of the deficiencies identified by the Carmichael Inquiry continue today.  And they will continue until the operating environment is changed and some competition is introduced.

In 1982 the Commonwealth Government received a major report (the Balderstone Report) from a working group it had commissioned to review agricultural policy issues and options for the 1980s in Australia.  The marketing of rural output was considered by the Group.  It concluded that "[T]he best means of ensuring marketing efficiency is to provide direct competition m the market place.  In the absence of competition, there is less incentive for an authority to be efficient, and to adjust rapidly to changes". ⁽³¹⁾

The BAE is continuing with a research program addressing economic issues in grain marketing.  A major study is currently being undertaken jointly with the South Australian Department of Agriculture (SADA).  Its aim is to model, given the existing infrastructure, a least-cost pattern of grain movement in eastern Australia.  Originally the Bureau of Transport Economics (BTE) was to be involved.  This would have been most appropriate given the nature of the project.  However, the BTE subsequently decided not to proceed with the work.  No public reason was given for the withdrawal, but a possibility is that the BTE action reflected the work of vested interests (rent-seekers) in the transport sector, particularly the State railways.

The BAE/SADA project commenced in mid-1984 and is progressing only slowly.  No results are yet available.  Difficulty in obtaining data from statutory monopolies is one factor preventing progress.

Information problems also proved the undoing of the proposed National Co-ordinating Committee on Planning Grain Handling and Transport.  The Committee was a major innovation to emerge from the Australian Grains Industry Conference held in 1981.  Information made available or proposed to be made available by the statutory monopolies was insufficient for any significant decisions regarding better co-ordination.

There is an inconsistency between grain-handling monopolies' assertions that they are efficient and better than what would result if private sector competition were allowed, and the fact that they censor information about their actual performance.

INNOVATION AND CHALLENGE

Challenges to existing controls and innovations to circumvent them are evidence of economic pressures to change the system.

During the 1970s the presumed protection of Section 92 of the Constitution was increasingly used by growers and wheat-users to circumvent controls over wheat-marketing by trading interstate.

S.92 provides for unrestricted trade between the States:  "trade, commerce and intercourse among the States ... shall be absolutely free".  With interstate trade expanding the AWB initiated legal action against stock-feed manufacturers near the New South Wales-Victorian border who were trading directly with farmers.  The background and outcome was described by Watson and Parish:

"The Wheat Board was under pressure from the Western Australian affiliates of the Australian Wheatgrowers' Federation who were distressed at the growth of private trade in other states, Western Australian growers being unable to exploit the possibility of interstate trade in wheat because of the impenetrable 'sand curtain' that separates them from other states.  Furthermore, the proportion of wheat consumed domestically is much lower than in eastern Australia.  Rather against the run of play, given the usual interpretation of Section 92, in 1978 the Court held, by a majority of three to two, that the Wheat Stabilization Scheme was valid.  Not surprisingly, the decision was challenged soon after in a further High Court action." ⁽³²⁾

The case arising from this further High Court action was adjourned in 1981 pending the Court's request for more information from both defendant and plaintiff.  The High Court has yet to receive the information it requested and, consequently, has not recommenced consideration of the case.

In a competitive marketing system innovation would be aimed at reducing costs and charges and providing alternative services so innovators could secure a greater market share.  The innovators would predominantly be those offering marketing services to growers.

Under a monopoly marketing system innovation is concentrated on getting around the system for private gain.  Effort is placed on discovering loop-holes in the regulations and exploiting them.  This is very much a second-best approach.  The benefits from innovation are restricted by the regulatory system.  Because benefits involve beating the system the costs of obtaining them are unnecessarily high.

Innovation which is illegal or exploits grey areas and loopholes has two possible fates.  The regulations will be tightened to prevent it or the law changed to accommodate it.

Wheat has always been traded illegally outside the monopoly system.  The IAC observed that "there is some wheat traded outside the control of the AWB but the Commission received no evidence to be able to quantify this". ⁽³³⁾

Before permit trading for stock-feed wheat, industry folklore has it that it was moved at night and called "triticale".  Triticale is a feed-grain recently introduced to Australia and outside the statutory arrangements applying to wheat.

As already noted, the activities of the grain-growers in the case studies reported here represent innovation within the strictures of the system.  The opportunity for innovation is unnecessarily restricted.  For example, a grain-grower in New South Wales delivering by road to a Victorian terminal can use either owned transport or a contractor.  A Victorian grower does not have this choice.  The grower must own the truck and this restricts the opportunities to innovate available to the Victorian grower relative to his counterpart in New South Wales who can deliver to Geelong.

Western Australia provides an example of innovation exploiting a loophole in the law and the reaction of the law-makers.  The 1966 Western Australian Transport Act allowed grain-growers to transport grain by road without restriction provided they owned the means of transport.  In the case of a semi-trailer, the law applied to the trailer only and not the prime mover.  Innovative farmers bought trailers (much the cheaper component) and engaged contractors with prime movers.

Exploitation of the loophole increasingly threatened the railways.  In 1981 the legislation was amended to require the prime mover also to be owned by the grain-grower.  The innovators responded by entering into short-term leasing arrangements with cartage contractors and hiring the contractor as an employee driver.  Under this arrangement, for the period of the harvest the grain-grower was, for all relevant purposes, the owner of the means of transport.

The regulators' response was to amend the Transport Act again in April 1985 to, outlaw, inter alia "bogus" lease agreements.

A detailed study would be required to ascertain the benefits and costs arising from this saga.  Suffice it to speculate on the benefits to grain-growers and the community if this creative ability and energy had been channelled into improving the system rather than trying to beat it.

Another potential disadvantage of innovation within a regulated system is that successful innovators become rent-seekers.  The innovators are maximising their personal gains within the regulated system:  the case studies detailed in the appendix are examples.  They may be disinclined to advocate further deregulation for fear of losing some of the gain they have secured.

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CHAPTER 4:  WHAT SUSTAINS THE SYSTEM?

Available evidence indicates that introducing competition into grain marketing would benefit growers.  A large minority of growers, including many influential ones, strongly support the introduction of more competition.  Why, therefore, is it not occurring more rapidly?

One reason, already discussed, is the existence of economic rents.  Change, in competitive or regulated systems, usually involves some losses.  Vested interests -- those who believe they will lose from deregulation -- will fight vigorously to retain their current economic rents.  Part of their armoury for this fight is a collection of "fictions" about deregulation, which are discussed in this Chapter.

Many, and probably most, grain-growers, have a fear of the unknown when contemplating the introduction of more elements of competition in marketing.  Supporters of the statutory monopolies are inclined to present "fictions" as facts in their rhetoric.

They exploit this emotional fear of the unknown.  The monopolies' control of information helps this.

Exposing the fictions used by the "orderly marketeers" is an important step in achieving beneficial change.

THE EFFECTS OF DEREGULATION -- MAJOR FICTIONS

1. Deregulation of the domestic market will result in the AWB losing its single-seller role on the export market.

   At this stage in the grain-marketing debate many growers would accept more competition on the domestic market if they could be sure it would not threaten the AWB's export monopoly.  This fiction serves to maintain grower nervousness about domestic market deregulation.

   At the last annual conference of the AWF the Chairman of the AWB told the Federation that "if the Board were to move away from control of the domestic market, then the industry was two years away from the day someone else, rather than the Wheat Board, shipped wheat overseas". ⁽³⁴⁾

   If the current complementary Commonwealth and State legislation was abolished and no alternative arrangements put in place, this fiction would be fact.  The current legislation provides for the statutory definition of wheat, and hence the powers of the AWB, to continue for two years after the expiry of the current scheme and if the legislation is not renewed.  However, in the absence of State legislation the Commonwealth, using its Constitutional powers over exports, could enact legislation to maintain the AWB's export monopoly.

2. Competition will reduce throughput in the statutory system, raising unit costs and charges.

   This fiction envisages competition "picking the eyes out of the market" for grain marketing services and leaving the statutory bodies with lower throughput and only the higher-cost parts of the system.  This would lead to increased unit costs and thence charges.  This would make it hard for the statutory bodies to compete with private operators.  It would also supposedly disadvantage growers who had to use the statutory system because alternatives were not available.

   Superficially this sounds logical but in fact there is no good economic case to support this fiction.

   The first point in demolishing this fiction is to accept that charges for services will and should vary depending on location, degree of service provided, throughput, etc.  The role of competition is not to protect growers from these fundamentals.  Its role is to minimise costs to the grain-grower while taking them into account.  Put another way, a competitive system will minimise costs but it will not pool them between different locations and different operators or over time.

   This fiction presumes that statutory monopolies would, in the presence of competition, still be required to provide services under their current operating rules.  This is nonsense.  The purpose of a competitive environment is to allow (require) the statutory bodies to compete to improve their performance.  Management will be freed from regulatory strictures and required to act commercially, and will be as well placed as private operators to pick the eyes out of the market.  Similarly, higher cost segments of the market will only be catered for by either public or private bodies if charges enable profitability.  Competition will keep charges to a minimum in this segment of the market as elsewhere.

   When competition is introduced there will be an adjustment process for the statutory monopolies.  They will need to consider whether some assets should be sold, whether some should be leased, the role of contractors in providing services within existing facilities and the scope for profitable new investment.  These are management decisions identical to those facing the private sector, not disadvantages.

   It is possible that these changes may expose some past investment decisions as being inappropriate.  This may result in some capital losses and nothing can or should be done about this.  Past mistakes are no reason to prevent future beneficial changes.

   Grain-growers who feel uncertain about introducing competition to the grain handling, storage and transport systems should consider the parallels in the wool-broking industry.  A few years ago there was only two major wool-broking firms in Australia.  This was the result of a series of mergers and takeovers in an industry which for decades experienced strong competition between large numbers of firms.

   The two firms remaining argued that their size and throughput would allow economies of scale and consequent savings for growers.  Growers were rightly suspicious about whether they would be the recipients of these benefits in the absence of effective competition.

   Wool-growers encouraged the re-emergence of smaller wool-broking companies.  Some private buyers commenced brokering activities.

   Competitive pressures re-emerged and the larger firms reduced some charges and began offering innovative payment options.  Wool-growers benefited from competition in the supply of marketing services.  Why should the outcome be any different for grain-growers?

3. Statutory monopolies ensure that growers are not manipulated and exploited and guarantee markets at fair prices.

   This fiction reflects a continuing fear among some growers that competition will bring the return of conditions existing in the 1930s.  Manipulating merchants were blamed for low returns at that time.  However, the technical characteristics of market communications have changed vastly since then.  Today there is no reason why a grower cannot be as well-informed as a buyer about market circumstances.

   In addressing this fiction growers need to decide whether they want to be entrepreneurs or employees.  This highlights the fundamental contradiction in trying to "capitalise profits while socialising losses".  Put another way, risks and profits are closely and directly related.

   There are trade-offs between levels of income and the security of that income.  Individuals will differ in the choice they make between the two.  It is economically costly, and unfair, for grain-growers who want protection from risk and do not mind paying for it in higher charges and lower prices, to prevent the innovators, who accept the risks, from exploiting entrepreneurial opportunities.

   In a competitive system there are ample opportunities to buy protection against risk without forcing everyone to participate.  Examples include private insurance, income equalisation deposits, contracts with buyers and futures contracts.

   Ending this fiction also requires that grain-growers face up to the reality of market signals.  They are there for a purpose and masking them, as occurs with pooling and statutory marketing, will result in wrong investment and production decisions.

4. A deregulated domestic market would allow large traders to accumulate supplies and dictate terms to the AWB or force the Commonwealth to allow exports.

   In a competitive domestic market the realisation of this fiction would require a chain of improbable events.  A trader wishing to corner the market in this way would need to secure the grain.  This would require competing with other purchasers and driving up prices.

   Embarking on a market-cornering strategy would involve considerable cost and risk.  The grain would have to be acquired and stored.  Holding and storage costs would be incurred.  If playing out the strategy became protracted these costs would become large relative to potential profits.

   Traders would also have to assess the probability of the AWB capitulating or of the Government changing the law and allowing private exports.  If the Government or the Board are unlikely to do these things, then there is no point in cornering the market.  In a competitive market the AWB -- given its self-professed commercial excellence -- would not leave unexploited opportunities on the export market.  This alone could thwart a market-cornering operation.

   Government policy decisions are unpredictable, but it is almost certain that it would take considerable time to change the law.  A trader would be forced to hold grain during this time.

   Overall, this fiction is very implausible.  Even if some trader was prepared to embark on such a risky course, the balance of probabilities would strongly favour the AWB in a market confrontation.

5. Insect infestation will increase when competition leads to more on-farm storage and handling and storage operators.

   Insect infestation is an important consideration in the grain trade.  Some export customers have nil tolerance requirements.  One insect in a shipment can lead to rejection of the entire load or price discounting.

   Attention to cleanliness and appropriate use of chemicals are known effective means of insect control in the grain marketing system.  The monopoly system does handle infestation control satisfactorily.  However, the current system requires the grower to deliver insect-free grain to the BHA silo.  A system of checking, and rejecting where infested, operates to ensure insect-free deliveries.

   Where growers have frequent insect infestations, the source of the infestation is traced back and advice is offered on control methods.

   The controls, sanctions and monitoring procedures used under the current system would be equally satisfactory under a more competitive system.  The economic disciplines are likely to increase under competition.  The trader faces big losses if infested grain is unwittingly added to a storage and is therefore likely to be particularly vigilant.  The same incentives would apply in managing private storages, both on-farm and in the private sectors of the marketing system.

   The monopoly system has possibly encouraged grain-growers to be lazy in insect control.  The "someone else will take care of it" mentality has developed.  Grain-growers contacted during this study observed that increased use of on-farm storage was forcing growers to pay more attention to preventative measures and this was beneficial.  The experiences of the case study farmers -- some of whom have stored grain for twelve months -- was that effective insect control was relatively easy.

   The industry should stop using the insect infestation fiction as a barrier to change and concentrate on positive measures for handling the issue within a deregulated system.

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CHAPTER 5:  ACHIEVING CHANGE

OBJECTIVES AND BROAD APPROACH

The ultimate objective of change in the grain-marketing system is to lower growers' costs and raise their net returns.  This can be achieved by providing the grower with more options when deciding how and when to sell grain.  Options will increase if competition is allowed in the grain-marketing system.

Introducing competition does not mean an immediate or extensive dismantling of the current system.  To start with, the existing system has the advantage of sunk costs, i.e. the investment has been made and the facilities are in place.  Pricing of services need only cover variable costs.  The competitive ability of the existing monopolies can also be improved by allowing them to provide services on a commercial basis.  This means pricing services to reflect accurately the cost of providing them.

Removing barriers to entry is required to allow competition to develop in the grain marketing system.  The market for providing services to grain-growers must be made contestable.  The opportunity for alternative services and prices may be sufficient to stimulate improvements in the current system.  Just the threat of competition can produce benefits although in reality new entrants would emerge.

The Industries Assistance Commission observed, in connection with wheat marketing, that "many of the problems of the current system have been evident for a long time.  The problems remain despite numerous inquiries, reports and committees". ⁽³⁵⁾  The reason for this is very straightforward.  Emphasis is invariably on improving the technical efficiency of the system instead of how to get these efficiency gains to benefit growers.

Some have argued that improvements in the regulatory structure and "good people" will achieve the objective of improving performance off-farm in Australian agriculture. ⁽³⁶⁾  Such changes would probably improve performance.  The question is whether all available improvements would be introduced, whether the effects would be lasting and whether the benefits would flow to farmers without the introduction of effective competitive disciplines.  Changing the name, personnel and furniture of statutory monopolies will not alter their incentive or disincentive structure fundamentally.

Attention needs to be focussed on the operating environment.  If competition is introduced then technical and economic efficiency will improve under the influence of market forces.  More importantly, changing the operating environment and introducing market forces will ensure the gains are passed to grain-growers in the form of lower costs.

The key issue, therefore, is how to change the operating environment:  how to increase the marketing options open to growers through greater competition in the system.

The appropriate approach is to identify the key points in the system where the introduction of competition will subsequently stimulate, encourage and require the spread of competitive activity.  The key points are rail transport, handling and storage, ports and their loading facilities, and grain-trading.

This involves maintaining the AWB's export monopoly, which is of course not consistent with the economic logic and arguments in favour of competition advanced earlier.  There are no substantive economic arguments against exposing the AWB to competition in providing export marketing services.  The justification is politically pragmatic.

Many grain-growers currently would support deregulation on the domestic market if it did not put the AWB monopoly at risk.  The attitude of these growers towards the AWB monopoly after they have experienced the economic benefits of domestic deregulation is an issue for the future.

Achieving beneficial change will require strong action by the AWF -- the national body representing wheat-growers.  The first task facing the AWF is to review its current policy on marketing.  In view of the deficiencies in the marketing system its current policy is timorous to say the least:

"[A]ll wheat, except that which is under permit arrangements, should be marketed through the AWB, and that each State be assisted and encouraged vigorously to pursue cost-cutting measures in the handling and transport systems applicable to each State's operations." ⁽³⁷⁾

INCREASE COMPETITION IN AUSTRALIA

The politically feasible and most direct method for increasing competition in grain-marketing is to break the institutional nexus between the domestic and export markets.  The economic nexus would remain because it is in the nature of markets.

The institutional nexus can be broken by using solely Commonwealth legislation to provide the AWB with an export monopoly, operate export pools and continue underwriting assistance to exports.  All the other wheat-marketing legislation, Commonwealth or State, would be repealed.

These changes would have minimal effects on pricing wheat for the domestic market.  For stock-feed wheat the permit is all that remains between the current situation and total deregulation.  Wheat used for industrial purposes is currently priced at export parity and the quantities are small.  The price for human consumption is now directly related to export parity at around the time of sale.  Letting the market determine the price will obviate the need for a formula to set the margin over export parity.

These changes would not reduce the AWB's authority over exports and to that extent control over 80 percent of the wheat crop would not change materially.  However, the economic gains from a competitive system between farm gate and ship's hold would bring big changes in this section of the marketing chain.  Reductions in costs would flow to all wheat-growers regardless of how they disposed of their wheat.

Except that he could not contract to deliver directly to an overseas market, the grain-grower would have complete freedom to decide, at the farm gate, how to market his grain for maximum farm return.  The grower would have more selling options from which to choose.

To encourage beneficial change the AWB should be required to call tenders for the supply of handling, storage and transport services.  The AWB should not be permitted to allow detailed technical requirements in tender specifications to be a quasi-barrier to entry.  The price of a service and its corresponding cost to the Board should determine who supplies what service.  If there are economies of scale in handling, storage and transport, they will be revealed and realised in this tender process.

One option for delivery to the AWB should be "in ship's hold".  This would provide incentive for ship-loading by alternative methods at a wider variety of locations.  It would also put pressure on the States to allow increased private involvement in constructing and using port facilities.

The AWB should be required to introduce port accounting.  The f.o.b. price at any port should reflect the level of efficiency, capacity, and hence costs, at the particular port and the cost of shipping to the particular market.  Growers shipping through high-cost ports will have an economic incentive to force change.  Growers shipping through more efficient ports will secure an improvement in returns.

As part of its commercial orientation the AWB should increase payment options by offering cash on the spot and the choice of whether or not to participate in the pooling system.  It should also be required to take wheat from anyone who wishes to supply for export.  The AWB would be free to determine price but would be required to treat all sellers equitably.  Anyone who sold to the AWB would be eligible for the direct benefits of underwriting.  Maintaining underwriting on exports would indirectly support prices on the domestic market since the two markets represent selling alternatives.

Permit trading will no longer be needed on the domestic market.  However, the concept as it currently applies to stock-feed wheat should be extended to the export market.  The AWB should be required to provide a permit at nominal cost to anyone wishing to export wheat outside the underwriting and pooling arrangements.  The grower could choose between this option and what the AWB was offering.  A permit system would also encourage the private sector to seek out speciality markets and contract with growers to supply them.  There is no reason why the AWB should not offer the same service under the same conditions.

Pooling should be confined to the AWB's export activities and only apply to the returns and direct marketing costs of that wheat.  For all other selling options neither returns nor costs should be pooled.  Sales to any buyer other than the Board should not be subject to any costs or deductions other than those directly associated with the transaction.

A system of buyer registration would be required if the research levy is to be continued in these circumstances.

ACTION BY STATE GOVERNMENTS

A number of the changes essential for more competition in the grain-marketing system are the responsibility of State Governments.  It is important that the States expose their BHA's, railways and ports to competition.  The States should also abolish their Wheat Advisory Committees since they have no role in a marketing system where costs and returns determine production decisions.  There would still be a need for new varieties to be assessed agronomically and this could be done by State Departments of Agriculture.

In most States the political will to make these changes will need reinforcing.  This is the responsibility of growers if they want the benefits that will accrue.  Others with an interest in more private involvement in the marketing system would be supportive.  Inability to restrict interstate trade without the complementary Commonwealth-State legislation will also help keep pressure on State governments.

The State monopolies in the marketing system need to pay their way and be seen to do so.  This means appropriate and public methods of accounting and reporting.  Private-sector standards are required.

State instrumentalities should not be required or allowed to provide subsidised services or overcharge for services.  Charges should reflect costs and if this means little or no demand, the service should cease.  Improving efficiency and lowering costs is the other option.

Restrictions on road transport must be removed and growers will need to lobby vigorously for this to happen.  Grower action and political pressure will be important in introducing competition into the transport system.  Growers also need to insist that State-operated seaboard terminals have adequate road-receival facilities.

State governments must also be required to relax control over ports and associated facilities.  The private sector should be allowed to build and operate seaboard facilities.  The operation of existing facilities should be put to tender, and where port and grain-loading facilities are currently under construction but not commissioned, growers should insist that their operation be put to tender also.

Exposing the State railways and ports to competition is also crucial to achieve more competition in storage and handling.  Without change to transport and ports the States will retain considerable ability to shore up the BHA monopolies, at least in the short term.

A PROGRAMME AND PRIORITIES FOR GROWERS

The current wheat-marketing scheme expires at the end of the 1988-89 wheat season.  In a less urgent situation that might be a convenient time to introduce the legislative changes proposed here.  However, the economic circumstances facing Australian grain-growers today deny them the luxury of being able to wait so long.

The changes proposed in this paper are the minimum necessary in the current cost/price squeeze to save many grain-growers from bankruptcy.  The benefits of more competition are needed immediately and necessary changes should start now.

The AWF should begin negotiations at once with the Federal Government to modify Commonwealth legislation along the lines suggested earlier and before the expiry of the current marketing scheme.  If the Commonwealth legislation was changed the States would have to follow.

Along with legislative action, grain-growers should increase pressure on State Governments to introduce more competition in the areas they regulate and control.  For example, pooling BHA charges could be stopped immediately.  Services could be provided on the basis of cost to supply.  Regulations restricting road transport could similarly be removed without delay.  Growers should put pressure on these and other readily removed impediments to competition and increased selling options.

Without concerted action to achieve the changes described here, grain-growers can expect their proportion of the customer price of wheat to continue declining and their international competitiveness to continue to fall.

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CHAPTER 6:  SUMMARY

Australian grain-growers are seeking lower costs in marketing their grain.  In 1984-85 the gross value of Australia's grain production was nearly $5 billion.  Wheat comprised some 70% and cost over $1 billion to move from farm gate to ship's hold.

There is extensive research indicating that this cost can be reduced significantly.

Statutory monopolies play a central role in handling, transporting, storing and marketing grain in Australia.  Economic theory and available evidence demonstrates that those marketing services would cost less if competition was introduced.  The grain-grower needs to have more options available when deciding how to market his grain.

The existing system does not have to be dismantled or given over entirely to private enterprise.  Removing restrictions which prevent others from offering these services will produce the benefits.  Existing statutory institutions also need increased freedom allowing them to act more commercially.

Minimum-cost grain-marketing will not be achieved by just improving the technical performance of monopolies.  The operating environment (i.e. lack of competitive pressures) means that gains are retained in some form by the monopoly and lower costs are not passed back to growers.  This is the fault of the operating environment which sustains the monopoly and not the fault of those working in the institution.  Those people work very rationally given their objectives and constraints.

Past failure to contain grain-marketing costs reflects concentration on improving the performance of monopolies without appropriate changes to the operating environment.  This has been, and continues to be, a classic case of addressing the symptoms instead of the causes.

Grain-growers are ultimately responsible for the current marketing system and its deficiencies.  Their adherence to "orderly marketing", with an export monopoly, control of the domestic market and pooling (sharing) of returns and costs has distorted market signals and realities past the farm gate.  Grain-growers have a schizophrenic attitude, believing that competition is appropriate up to the farm gate but also that collective action, backed by the compulsion of law and the exclusion of competition, serves their interests best after that point.

This attitude is surprising given that farmers have little trouble in seeing the value of competition in the provision of wool-broking and livestock marketing services and in the provision of inputs such as chemicals, fertilisers and motor vehicles.

The central issue in lowering marketing costs to grain-growers is identifying points in the existing system where removing constraints to entry will encourage and require the spread of competitive activity.  The key points are rail transport, handling and storage, ports and loading facilities, and grain trading.

This study does not advocate the removal of the Australian Wheat Board's export monopoly.  The justification is politically pragmatic and not economic.  Many grain-growers would currently support more competition on the domestic market if it did not put the AWB monopoly at risk.

The politically feasible and most direct method for increasing competition in grain marketing is to break the institutional nexus between domestic and export markets.  The economic nexus would remain because it is in the nature of markets.  Wheat would be traded and priced on the domestic market without restrictions.

The institutional nexus can be broken by using solely Commonwealth legislation to provide the AWB with an export monopoly, operate export pools and continue underwriting assistance to exports.  All the other wheat marketing legislation, Commonwealth or State, would be repealed.  These changes would not reduce the AWB's authority over exports and to that extent control of 80 per cent of the wheat crop would not change materially.  However, the advantages of more competition domestically would benefit all grain-growers.

Other key elements in this strategy would be:

• The AWB would have to call tenders for handling, storage and transport services.
• The AWB would have to introduce port accounting with f.o.b. prices reflecting port costs and costs of shipping to customers.
• The AWB would increase payment options by offering cash on the spot and associated choice on whether or not to participate in the pooling system.
• Permit trading would be allowed on the export market and outside the export underwriting and pooling arrangements.  The AWB would be allowed to offer the same service under the same conditions.
• State instrumentalities would have to compete with new entrants in providing marketing services and should be given the freedom to do so.
• Restrictions on road transport of grain would be removed.  Adequate road receival facilities at all export terminals would be needed to encourage competition in transport.
• States would abolish their Wheat Advisory Committees.  There would be a continuing need for new varieties to be assessed agronomically and this would be done by State Departments of Agriculture.
• States would need to relax control over ports and associated facilities.  There should be opportunities for the private sector to build and operate seaboard facilities and operate existing facilities under contract.

The changes proposed are the minimum necessary in the current cost/price squeeze to save many grain-growers from bankruptcy.  The benefits of more competition are needed immediately and necessary changes should start now.

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APPENDIX:  ON-FARM STORAGE AND
TRANSPORTATION -- CASE-STUDY RESULTS

INTRODUCTION

Past research and anecdotal evidence suggest that on-farm storage is expanding rapidly and, along with alternative transport options, can provide significant cost savings (profit increases) for growers.  For some examples of actual savings, three grain-growing properties in the NSW-Victoria border region were visited.  This appendix sets out the costing of and the savings from the arrangements actually being used by these grain-growers.  It also contains apro forma which growers can use to calculate potential cost savings from on-farm storage and/or road transport in their particular circumstances.

GENERAL ASSUMPTIONS

A uniform approach for the three case studies means some simplifying assumptions are made.  Costs relate to the 1985-86 harvest.

• An interest rate of 17% is adopted for all analyses.
• Grain sheds are assumed to have a 30-year life with no residual value;  grain silos a 25-year life with no residual value.
• A five-year life with a 20% residual is assumed for grain trucks.

CASE STUDY NO. 1

This involves a mixed-farming property situated in southern New South Wales which has on-farm storage capacity of 2,500 tonnes and from which the grower transports 3,000 tonnes of wheat annually to Geelong, backloading with superphosphate and gypsum.  Under the statutory system, it would cost the grower $50.72 per tonne to deliver grain to the Sydney terminal, comprising:

	$ per tonne
Farm to silo freight	9.52
Rail freight (estimate)	24.50
GHA handling charge	16.70
Total	50.72

As an alternative to the statutory system, the grower invested in on-farm storage and trucking capacity and now transports his wheat to Geelong.  Capital costs associated with this operation include:

Item	Capital Cost $	Annual Cost $	Annual Cost per tonne $
Grain shed and loading equipment	52,000	8,918*	2.97
Silos	17,500	3,035	1.01
Prime mover & trailer	87,000	24,743	8.25
Total	156,000	36,696	12.23

* Annual cost is the amortised depreciable value of the item (capital cost less salvage value) plus interest paid on the salvage value.

The truck has a capacity of 20 tonnes net, requiring 150 loads per year undertaken over an eight-month period.  Operating costs for the 1985-86 harvest are budgeted to be:

Item	Annual Cost $
Truck   Fuel, oil and grease   Wages   Registration and insurance   Repairs and maintenance (including tyres)	34,102 19,500 2,680 7,337
Grain handling (including chemicals)	2,100
GEB handling charge	41,400
Total	107,119
Cost per tonne	35.71

The total cost of the grower-operated handling and transport system therefore is $47.94 -- a saving of $2.78 per tonne or $8,340 for the 3,000 tonne-harvest.  This saving is conservative because it does not take account of:

• The savings in transport costs made by backloading super and gypsum from Geelong;  and
• The $1.50 per tonne discount offered by the Victorian GEB for wheat delivered during February and March.

Because the additional fuel, repairs and maintenance costs associated with backloading are already incorporated in the cost estimates, the benefit gained from backloading is equal to the saving in cartage cost if an alternative supplier was used, i.e., approximately $12 per tonne.  This is the minimum cost at which gypsum could be applied and the cost could be as high as $24 per tonne.

Alternatively, the benefit of backloading could be taken as the opportunity cost of not applying gypsum.  Based on a yield improvement of 0.6 tonnes per three years, a GMP of $146 per tonne, a gypsum cost of $25.20 per ha spread and a 17% interest rate, the opportunity cost of not applying gypsum is around $30 per ha per year.

Total benefit obtained by the grower from transporting his own grain, therefore, is at least $15 per tonne and, depending on the method of valuing the backloaded gypsum, could be as high as $33 per tonne:  a total saving of between $45,000 and $99,000 per year.  These benefits would be reduced by the opportunity cost (interest foregone) of delayed payment for the grain even under the current payment arrangements.

CASE STUDY NO. 2

This involves a mixed farming property situated in northern Victoria which has permanent vertical storage of 700 tonnes and temporary storage of 600 tonnes.  The property averages around 1,200 tonnes of wheat and 900 tonnes of peas and barley annually.  For the purpose of this case study, the entire cost of grain handling and storage equipment is initially levied against the wheat enterprise;  a more accurate assessment would offset a portion of the cost against the other grains.

The cost of using the conventional handling and transport system to take the grain to Geelong for the 1985-86 harvest would be around $39 per tonne, comprising:

	$ per tonne
Farm to silo freight	4.00
Rail freight	21.18
GEB handling charge	13.80
Total	38.98

The decision to invest in on-farm storage and modern transport and handling equipment was prompted by the need to upgrade existing farm-to-silo transport.  The capital costs of storage, handling and transport equipment comprise:

Item	Capital Cost $	Annual Cost $	Annual Cost per tonne $
Shed	15,000	2,572	2.14
Silos	17,500	3,035	2.53
Prime Mover & Trailer	89,000	25,283	21.07
Handling equipment (pneumatic)	11,000	2,540	2.12
Total	132,500	33,430	27.86

Operating costs of the grain storage and transporting operation are:

Item	Annual Cost $
Truck   Fuel, oil and grease   Registration and insurance   Repairs and maintenance (including tyres)	5,390 840 1,200
Grain handling (including chemicals)	480
GEB handling charge	16,560
Total	24,470
Cost per tonne	20.39

Wages for labour involved in transporting wheat to Geelong are not included because this is carried out by family labour which has a low opportunity cost during the period when grain is transported.  If outside labour was employed total costs would increase by about $4 per tonne.

Total costs of the operation therefore amount to $48.25;  $9.27 higher than if wheat was handled through the statutory system.  However, this cost of the farm operation is overstated because:

• The capital costs of the operation are not defrayed against the other crops.
• No allowance is made for the $1.50 discount offered by the GEB for delayed receivals.
• No allowance is made for the savings gained from backloading super and gypsum.

Defraying the capital cost of the handling, storage and transport items against all grains harvested would reduce the capital cost per tonne by $11.15, to $16.71 per tonne, resulting in a net gain for the operation of $1.88 per tonne.  Similarly, since 80% of the crop is delivered in February and March, the $1.50 per tonne discount would increase the net benefit of the operation by a further $1.20 per tonne to $3.08 per tonne of wheat transported.

The major benefit of the operation, however, comes from the ability to backload gypsum and super, thereby saving the cost of freight charged by either local contractors or the railway.  Approximately 800 tonnes of super and gypsum are backloaded, resulting in a saving of around $18 per tonne in transport costs, or $12 per tonne of wheat transported.

In summary, total benefits obtained from on-farm storage and farm-to-terminal grain-haulage ranges between $3.93 per tonne and $15.08 per tonne of wheat harvested, depending on whether the full capital cost is defrayed solely against wheat or across all grain.  As with the first case study farm, no allowance has been made for the opportunity cost of delayed payment for the grain.

CASE STUDY NO. 3

The third case study farm is a mixed-farming property in central Victoria producing 2,000 tonnes of wheat and 500 tonnes of summer crop.  As with the other two farms, the catalyst for investing in on-farm storage and large capacity grain transport was the need to upgrade existing farm-to-silo transport.  Moreover, the decision to break from the statutory system was also influenced by the availability of existing on-farm storage capacity.

On-farm storage comprises 1,000 tonnes, providing greater scope for grain segregation.

The cost of remaining in the statutory controlled system for the 1985-86 harvest would be $39.76 per tonne, comprising:

	$ per tonne
Farm to silo freight	4.00
Rail freight	21.96
GEB handling charge	13.80
Total	39.76

In calculating the capital cost of on-farm storage, no allowance has been made for existing silos as these are effectively written off.  However, the effect of constructing new silos of 1,000-tonne capacity is examined.  Capital costs are as follows:

Item	Capital Cost $	Annual Cost $	Annual Cost per tonne $
Existing Silos	nil	nil	nil
Bunker storage	13,000	3,505 *	1.75
Prime Mover & Trailer	70,000	19,886	9.94
Proposed silos	35,000	6,069	3.03
Total	108,000	27,656	14.72

* Annual cost assumes a 10-year life for the earthworks and a three-year life for the covering, both with no residual value.

Item	Annual Cost $
Truck   Fuel, oil and grease   Registration and insurance   Wages   Repairs and maintenance (including tyres)	7,840 1,800 8,000 3,020
Grain handling (including chemicals)	2,000
Bunker repairs and maintenance	300
GEB handling charge	27,600
Total Cost	50,620
Cost per tonne	25.31

Annual cost of the existing operation (ie., excluding the proposed new silos) is $37 per tonne;  $2.76 less than the cost of the statutory system.  If the capital cost is averaged over the entire grain crop and not just wheat, the saving would be $5.10 per tonne.

However, these savings do not take account of the GEB discount for delayed receivals nor the savings arising from backloading super and gypsum.  On the basis of backloading, 2,000 tonnes of gypsum and super, an additional saving of $16 per tonne is obtained.

Total savings from investing in on-farm storage and transporting facilities therefore ranges between $19.96 and $22.30 per tonne.  The opportunity cost of delayed payment has not been taken into account.

Inclusion of the proposed new 1,000-tonne permanent storage would reduce the benefits by $3.03 per tonne, but would still provide a substantial return on capital invested.

A FRAMEWORK FOR CALCULATING POTENTIAL SAVINGS

The following steps outline how to assess whether it is more economical to store, handle and transport your own grain compared with current charges levied by bulk handling and rail authorities.

Step One:  Assessing existing storage, handling and transport costs

This step assesses the cost of existing handling and transport activities.

	Annual Cost $	Cost per Tonne $
On-farm storage cost (if any):	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Farm to silo transport:	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Bulk handling authority charge:	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Transport cost (usual rail freight):	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Total	$	$

Step 2:  Assessing Capital Cost of New System

This section lists capital costs required for you to store, handle and transport your own grain.  Total capital costs are transferred to an annual cost by making proper allowance for depreciation and interest.  The following formulae are used for this purpose:

Annual Depreciation = Capital cost less expected resale value
                                                   expected life

Annual Interest = Capital cost + expected resale value x interest rate
                                                             2

Thus, the annual capital cost of any item is equal to the interest plus depreciation cost of that item.

ADDITIONAL CAPITAL COSTS

Item	Capital Cost (1)	Depreciation Cost (2)	Interest Cost (3)	Annual Cost (2)+(3)
Storage facilities:	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Handling equipment:	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Transport (prime mover and trailer):	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Other:	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .	. . . . . . . . . . . . .
Total:	$	$	$	$
Capital cost per tonne				$

Note:  Depreciation and interest need to be calculated separately for each new capital item.

Step 3:  Assessing operating costs of new system

This section assesses the annual operating costs associated with storing, handling and transporting your own grain.

OPERATING COSTS

Item	Annual Cost $
Grain Handling and Storage:	. . . . . . . . . . . . .
Repairs and maintenance:	. . . . . . . . . . . . .
Fuel and electricity:	. . . . . . . . . . . . .
Chemicals:	. . . . . . . . . . . . .
Additional labour (if any):	. . . . . . . . . . . . .
Other:	. . . . . . . . . . . . .
Sub Total:	$
Transport Costs
Fuel, oil and grease:	. . . . . . . . . . . . .
Registration and insurance:	. . . . . . . . . . . . .
Repairs and maintenance (tyres, brakes, etc.):	. . . . . . . . . . . . .
Wages (driver):	. . . . . . . . . . . . .
Other:	. . . . . . . . . . . . .
Sub Total:		$. . . . . . . . . . . . .
Bulk Handling Authority Charge:		$. . . . . . . . . . . . .
Other Costs:		$. . . . . . . . . . . . .
Total Operating Cost:		$
TOTAL OPERATING COST PER TONNE:		$

Step 4:  Total Annual Cost of New System

Annual Capital Cost per tonne (Step 2):	$. . . . . . . . . . . . .
Annual Operating Cost per tonne (Step 3):	$. . . . . . . . . . . . .
Total Annual Cost:	$

Step 5:  Comparison of Existing and New Systems

Annual Cost of New System (Step 4):	$. . . . . . . . . . . . .
Less Annual Cost of Existing System (Step 1):	$. . . . . . . . . . . . .
Net Benefit (Cost) per tonne of charging:	$

Step 6:  Additional Benefits

In many cases additional benefits arise from handling and transporting your own grain.  One of the main benefits is the ability to backload fertiliser at a marginal cost which is considerably below that charged by contractors or State rail authorities.  This benefit should be added to the benefit calculated in Step 5.

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ENDNOTES

1.  See Bureau of Agricultural Economics (BAE), Quarterly Review of the Rural Economy, 8:1, 22-26 and 54-59, 1986.

2.  BAE, Performance of the Farm Sector, Paper presented to the National Agricultural Outlook Conference, Canberra, 29-31 January 1986.

3.  BAE, Medium-term Outlook for the Rural Sector, A Submission to EPAC, Australian Government Publishing Service, Canberra, 1985.

4.  For a more detailed description readers are referred to BAE, Wheat Marketing in Australia -- An Economic Evaluation, Occasional Paper No. 86, AGPS, Canberra, 1983 and Industries Assistance Commission, The Wheat Industry, Report No. 329, AGPS, Canberra, 1983.

5.  Minister for Primary Industry Joint Statement, Australian Wheat Board Agreement, Media Release, 85/129, 9 July 1985.

6.  Australian Wheatgrowers' Federation, Legislative Changes for Wheat Marketing, A Paper prepared for the information of wheatgrowers, Canberra, July 1984.

7.  BAE, 1983, op. cit., 21.

8.  AWF, Submission to the Public Bodies Review Committee of Victoria -- Review of the Victorian Wheat Advisory Committee, Canberra, 3 September 1985.

9.  Ibid.

10.  Dunsdorfs, E,, The Australian Wheat-growing Industry:  1788-1948, Melbourne, The University Press, 1956.

11.  Gavel, P.M., The Growth of Orderly Marketing in the Wheat Industry, Bachelor of Economics (Honours) Thesis, Department of Economic History, University of Sydney, 1983.

12.  Miller, G. and White, G., The Seventh Wheat Industry Stabilisation Scheme -- Evolution and Economic Effects, Paper presented to the twenty-fourth Annual Conference of the Australian Agricultural Economics Society, Adelaide, 12-14 February 1980.

13.  IAC, Wheat Stabilization, Report No. 175, June 1978.

14.  Miller and White, op. cit., 34.

15.  BAE (1985), op. cit., 24.

16.  Ibid., 25.

17.  Grain Handling Authority of New South Wales, Annual Report, Year Ended 30 September, 1985, 1986.

18.  Jeffery, Ray, pers. comm., information obtained during a Winston Churchill Memorial Trust Fellowship Study of Grain Storage, Handling, Transport and Marketing Overseas, 1986.

19.  The Bulletin, February 25 1986, 34.

20.  Ibid.

21.  Grain Handling Authority of New South Wales, Annual Report, various issues.

22.  Jeffery, Ray, Grain Storage, Handling, Transport, and Marketing Overseas, Interim Report to the Winston Churchill Memorial Trust, 22 March 1986.

23.  Cock, Michael, Handling and Transporting Victorian Grain:  Where to Now?, Address to the Institution of Engineers, Australia (Victorian Division), 19 February 1986.

24.  Grain Elevators' Board of Victoria, pers. comm., 1985.

25.  Longworth, J.W. and Knopke, P., "Australian Wheat Policy 1948-79:  A Welfare Evaluation", American Journal of Agricultural Economics, 64 (4), p. 642-654, 1982.

26.  BAE, (1983), op. cit.

27.  Gypsum is a by-product of fertiliser manufacture and is used as a soil conditioner.  In parts of Victoria and NSW, gypsum, when combined with appropriate cultivation and cropping practices, has been improving wheat yields.

28.  The Land, "Agriculture '86 Supplement", January 30 1986, 28.

29.  AWF and National Farmers Federation, Joint Submission to the Inter-State Commission Inquiry on Cost Recovery Arrangements for Interstate Land Transport, 1 November 1985.

30.  NSW Grain Handling Inquiry, Final Report, February 1981, 27.

31.  Agricultural Policy:  Issues and Options for the 1980s (Balderstone Report), Working Group Report to the Minister for Primary Industry, AGPS, Canberra, September 1982.

32.  Watson, A.D. and Parish, R.M., "Marketing Agricultural Products", in D.B. Williams (ed.) Agriculture in the Australian Economy, 2nd edition, Sydney University Press, 1982, 326-52.

33.  IAC (1983), op. cit., 4.

34.  AWF, Proceedings of Annual Conference, Coolangatta, 15-16 April 1985, 26.

35.  IAC (1983), op. cit., 40.

36.  Miller, G.L., Economic Organisation of Australian Agriculture, Paper presented to the National Agricultural Outlook Conference, Canberra, January 1984.

37.  AWF (1985b), op. cit., 47.