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Standing Committee on Agriculture, Resources, Fisheries and Forestry
11/05/2012

MORISON, Mr Mitchell, Member, Grain Exporters Association

RICHARDS, Ms Rosemary Helen, Executive Officer, Australian Grain Exporters Association

[11:01]

CHAIR: Welcome. Thank you very much for your time. Although the committee does not require you to give evidence under oath, I should advise you that this hearing is a formal proceeding of the parliament and warrants the same respect as proceedings of the House. Giving false or misleading evidence is a serious matter and may be regarded as a contempt of the parliament. The committee has received your submission, submission No. 4. Do you wish to make any introductory remarks?

Mr Morison : Thank you very much for the opportunity. Yes, we have made a submission to the committee and I suppose our introductory comments would be that AGEA, the Australian Grain Exporters Association, does support the unwinding of the role of Wheat Export Australia. We are working in various avenues to participate in some of the issues that arise out of the proposed amended act. We certainly view the last four years as a transitionary stage that has been, as you have heard from many of your other witnesses today, a relatively successful period. The Wheat Export Australia function has been done well, but, like many of the people who have presented here today, we are probably at a point where there are other emerging issues, which you have been hearing about, that should probably come to the fore.

We broadly support the proposed amended act and how it can help move the industry forward, but I think there are probably a few issues arising—and I do have some sympathy for the committee with some of the issues that you have been hearing about, at least from the witnesses I have listened to today. Perhaps from an exporter's perspective, we may be able to add a little structure to some of those issues and put them in a context that might assist the committee in its deliberations. This morning you heard about issues in relation to the proposed code of conduct around port access that currently AGEA and a representative of the working group are working on. That arises in relation to the concerns around the existence of the natural monopolies that certain bulk handling companies have and making sure that there is fair and equitable access to ports for all players going forward. That is very important. We are committed to continuing to work through that process to try and get an effective code in place. I heard this morning the ACCC's comments about what the alternative was. I suppose the concern at the moment is that, if the minister does not approve the code, access undertakings will continue. Probably the concern we have at the moment—and it is something the code committee is working through but perhaps may need to be taken into consideration—is, if the code does get approved by the minister but subsequently a signatory to the code elects out of the code, it is unclear as to what regulatory environment a port terminal operator would exist in. That is an aspect which is not covered in the current draft of the amended act and something that is of concern. Whether or not that gets addressed through the code, as to what the alternative is if you do not stay a signatory to the code, that is clearly a concern because of the existence of these natural monopolies. I raise that as one particular issue.

The second issue, which you have heard quite a lot of discussion around, is to do with stock information. Again, the code committee has been asked to look at that. We have made it very clear to the code committee that the issue of stock information under the current act specifically is in relation to information about stock moving in and out of the ports. The vast majority of stock actually sits out in the network that supplies to the ports, and really the key issue that I think you are hearing from grower representatives, and you would probably also hear it from the consumer sector of the industry, is around the supply and demand situation—how much stock exists in country, not necessarily just in the port. So it may not be appropriate for the code to try and sort out the issue around stock information. But I think it is an issue that the participants in the commercial sector are working through, and they should be able to come to a landing about what stock information should and should not be made available to facilitate an effective operation of the market.

The concerns that have been expressed are accurate—that we would like to create as level a playing field as possible for all participants, be they growers, buyers or the trade, so that we can get accurate pricing signals and accurate quality information being transmitted. That is a particular issue that needs to be worked through. I know the Department of Agriculture, Fisheries and Forestry are keen. They have received an independent report, we understand, about what stock information should be made available. That has not been released yet, but we were advised yesterday that it is possibly going to be released in the next couple of weeks. That is an issue that does need some clarity, and the role around making sure that we do have that information made available to all participants is an important one that still needs to be resolved.

The third issue, which can overrun the second point, is in relation to varietal integrity. There have been questions raised by members of the committee about the issue of whether growers understand which varieties they are growing. The gist of the information you have received is that they do understand the varieties they are producing and why they are producing them. There is a forum, Wheat Quality Australia, to set up the classification. There is a technical panel that is responsible for classifying, and a Wheat Classification Council that sits over the top to provide market feedback to the panel, and it does that. The concern in the industry is about making sure that, in the physical transmission of grain and the particular varieties from the farm through to the up-country storage facility, through to the ports and ultimately to the end user, the integrity of the varietal classification system is maintained. Growers understand classification well, traders understand it well and indeed even customers understand it pretty well. The issue is, when you start moving that grain physically along the supply chain, is the integrity of that varietal and the grade maintained?

A lot of the concerns that farmers are raising are in relation to their seeing differentials in price for various grades. They are seeing blending occur between those different grades and believe that they may be being disadvantaged financially by not receiving the benefit of that blending. There are significant initiatives in the industry. CBH in Western Australia has an optimisation scheme that allows growers to participate in blending through their system. GrainCorp has a system called 'load pairing' that facilitates some matching of various loads to try and blend various grades. It is an issue that growers are concerned about. They are doing the right thing about growing the right varieties and the breeders are doing the right thing about breeding the right varieties, but is the functional expression of those varieties happening at the mill, all over the world or in the domestic market, and do we have integrity?

The group that is really tasked with managing that issue and providing security to industry, and to the consumers ultimately, is Wheat Quality Australia. Wheat Quality Australia is a company that is essentially owned by Grain Trade Australia and GRDC. The members of the board met unofficially yesterday. They are working in association with industry to try and work out how to give the industry, right from the breeding community through to the customers, more comfort that there is varietal integrity. That is a particular issue being worked on through the commercial channels in the industry. You may have heard some concerns from growers about funding all these different initiatives and that is where the wheat export charge comes in and there are questions about what to do there. Hopefully that helps align some of the issues you have probably heard this morning.

CHAIR: Container exports are continuing to grow alongside bulk exports, I understand?

Mr Morison : Yes.

CHAIR: Do you have any percentage on that? Is it five per cent of the bulk market or 10 per cent?

Mr Morison : Your next witness probably has a better handle on that than I do. In pure volume terms, you are looking at a market place now where there is probably in excess of two million tonnes of wheat leaving the country now in containers—and that is growing. There are a couple of reasons why that is happening. Obviously a lot of the bulk pathways are under pressure simply because there is no additional capacity to move. As you have seen, the deregulation of the market place has created innovation as new container operators enter that can do the packing. I also think there has been the predicted rise in consumption across a lot of regions which are well suited to managing the boxed trade as opposed to the bulk trade. Those regions do not have the depth at airports or they do not have the storage to manage 30,000-plus tonnes of grain or they do not have the financial wherewithal to fund 30,000 tonnes of grain purchases as a minimum, so that all suits the container industry. Predominantly, we are seeing a lot of growth in the South-East Asian and to a lesser extent the north Asian region.

CHAIR: The growers have lots of concerns about how the signals of the market get back to them for them to know which variety to grow et cetera. In today's world, how are we going to make sure they get the signals? Even under a code, how are we going to do that? Somebody has to run a website.

Mr Morison : The code is a separate issue and is really about port access. There are various numbers of signals that the market and growers are looking for. Obviously there are signals to the breeding community about varieties and that goes through the established Wheat Quality Australia vehicle, which is set up and operating. It just needs to make sure that it is providing comfort to all participants and that there is integrity in that process. That is where the varietal information gets summarised and the Wheat Classification Council is doing its job with the varietal classification panel.

The price is another key transmission. We have the Australian Stock Exchange and potentially other entrants to give growers a view of future price as well as future trade and the risk on signalling and buying physical quantities in advance.

CHAIR: Through the futures market?

Mr Morison : Through the ASX, that is right. The issue of stock and the supply-and-demand situation is not purely an issue of stock at port because grain flows in and out of ports every day and is never really static. It is the issue of the stock in the entire country and what sort of surplus or deficit we are in. We have heard today people talk about the stated and about all sorts of users. Growers are interested in their local region. Port operators are interested in their port catchment area and there are 16 port zones across the country. We have domestic consumers like Allied Flour Mills, Manildra or Ridley who are interested in catchment within their stock feed or milling areas. And then we have the exporters and, indeed, even our customers offshore who are interested in particular regions, particular ports and also the national picture. So supply and demand has many dimensions. Some consider that there is intellectual property which should be protected for the commercial benefit of certain participants. It is about striking the right balance between what should be made available to everybody. The existence of the natural monopolies at the bulk handling level does create a tilted playing field to some degree.

CHAIR: But how does that work in the United States or in Canada for their stock exchange futures markets? We have received a submission from the stock exchange.

Mr Morison : The US Department of Agriculture, under the powers provided to it by the bureau of statistics in the US, do collect information around stocks, and they produce a report every quarter, which is the stocks in all positions report, which the market seeks to validate their estimates of whether their commercial view on the stock situation aligns with what the government view is. The government does a lot of work—it asks growers to fill in surveys and it releases that information once a quarter to the marketplace to ensure that the marketplace continually has fresh information that the industry can trade off. That stock in all positions report essentially breaks down stocks by state. In the US it is a different scale from Australia, but that is the mechanism that is used in the US. That maybe an appropriate approach in Australia to level the playing field. The issue comes down to total stock in relation to total production, and your view about demand, and then available stock, which is that which has already been committed for sale versus that which has not. It is the second piece which is the contentious one.

Mr LYONS: Why could you not include in the code stocks in all positions and varieties in all positions, and what is your company doing now to maintain integrity in a new world? How do we trust you—or why should we trust you?

Mr Morison : The terms of reference that were set out for the code are quite specific in relation to it being an issue in relation to port access. The Department of Agriculture, Fisheries and Forestry has asked the code committee to look at the issue of stocks but, as I said, it is an issue of port stocks—70 per cent of all grain produced flows through there, and it is not static; it is not the true picture of what the stock situation is. The stock situation is stock in all parts of the country. So, really, it is outside the remit of the code committee, albeit that we understand the Department of Agriculture, Fisheries and Forestry are going to be providing a report to us as participants in the code committee development, to give opinions about how that could be looked at. As an industry we are trying to solve it and the code committee are certainly going to be on point to try to come up with a solution. It probably is not the role of the code, however, to enshrine that.

Mr LYONS: Why not?

Ms Richards : Even if the code committee looks at it and comes up with some recommendations, in an implementation sense the signatories to that code are not going to capture everyone who would have to be part of providing that information, so I think we would need a broader mechanism that would capture, in an implementation sense, people who would need to be a signatory to the code and supply the information.

Mr Morison : The point there is the code signatories are only those who operate ports. Cargill, for example, operate through storage and handling in excess of three million tonnes of grain but we operate no ports. Unless we built or bought a port, we would not expect to be a code signatory, yet we do have in our storage system up to three million tonnes of grain at any given time. We would not necessarily be captured by the code in that respect—it depends on how it is drafted. We are working through the issue, and that is the point. We are working through it and I think the industry will be getting to the point of making a recommendation, and whether there needs to be a different approach used, whether Grain Trade Australia should fulfil a particular role in terms of accessing market information on behalf of industry, is something that needs to be looked at.

As far as what Cargill is doing, as the operator of a large storage and handling network we are aligning with the requirements of Wheat Quality Australia, so we are testing according to the receivable standards set out by Grain Trade Australia, which is the recognised industry body to set the standards, we are storing in accordance with the classification requirements to protect the integrity of grades, and we are testing for the varietal integrity of those grades in the stacks that we manage. We have a high degree of confidence that when we are out turning grain from our sites we do maintain the integrity of the varieties delivered to us, and the growers attest by way of a statutory declaration, which is the receival ticket that they sign when they deliver to us, that they are delivering a particular variety, so we have the records of who has delivered what and then we store it in accordance with the receival standards and the classification requirements.

Mr LYONS: How do you guarantee that the port then does not diminish the quality, or mix it?

Mr Morison : That is a problem—I cannot guarantee it because I do not run the ports. That is one of the issues.

Mr LYONS: The integrity is a bit of a problem. I guess the dollars that the farmers get and the dollars that you get are affected by what happens in the ports.

Mr Morison : Yes.

Mr LYONS: You must have an interest in it. That is all I am saying.

Mr Morison : The point is around maintaining integrity for premium markets. There are a lot of markets where you do not really need to worry too much about the varietal integrity. If it is a feed market, they want feed wheats, feed wheats, feed wheats. They do not care about the variety. But, if it is the noodle market of Japan, they want certain varieties and you need to hold the industry to account at a higher level. So preserving integrity, comfort and assurance for buyers is an issue, and the commercial bulk handlers who operate ports need to come up with solutions. That is, in our view, appropriately done through Wheat Quality Australia.

CHAIR: We have heard a little bit of evidence that some mills overseas have been critical of the standard that they have received. Do you have any evidence of that?

Mr Morison : From time to time there will be criticism, and there was under the previous system. I was previously employed with AWB, so I understand that there were, from time to time, concerns about particular cargoes. That is just statistical probability—you are going to have issues. Are there more issues now than there have been? It is very difficult to say. There is a general view that, because there is less differentiation, a monopolist can apply to a particular market and choose the exact stock that it wants to put onto a vessel as one exporter, as opposed to 15 exporters choosing the stock that they have to supply to a market.

If you are a buyer and you buy one cargo from Cargill and then you buy your next cargo from CBH out of the same ports in Western Australia, it is entirely possible that there will be variations between those cargoes. But they will meet the minimum specification. I think it is probably fair to say that some buyers are seeing more variability, but it is still meeting the minimum specification. It is very difficult, under the system as it exists today, to make sure that every customer's experience is absolutely consistent every time that it acquires a cargo. Even if they bought from the same buyer every time, it may still be the case that they experience variability.

So the work of Wheat Quality Australia is very important to ensuring the integrity and the good name and reputation of the Australian industry over the long term. Week by week and month by month there will be issues. The issue is the long term. Are we continuing to increase quality by having a rigorous approach to improving the varieties that are out there and having integrity in how we preserve them, or will integrity diminish because of a lack of policing?

Mr TEHAN: I am interested in the way that the US model works, in that the ABS has the power to say, 'Okay, we need this information.' Could we adopt a similar model here in Australia? We have the Australian Bureau Of Statistics here and they are obviously on the ball. Emerald has just forwarded a media statement which says it is taking the lead in grain stock information provision. That is just what the press release says. Do we need to ensure that we get this through? Obviously the government could require the ABS to use that model, which obviously works in the US. Or is it possible that the market could provide that information? How can we guarantee that that would continue to be done in the most effective way?

Mr Morison : ABS is involved at the moment in collating information about stock at the port, and Wheat Exports Australia has been reporting annually on stock information. The important thing about the information is the currency of the information. If it becomes too old, it does not add very much in terms of an informed market place. However, a stock position report only comes out every quarter in the US. So it is about setting expectations about what it is reasonable and what is efficient in how you capture that information. It may be possible—I do not understand the intricacies of the legislation as it exists today or whether ABS could instruct or empower certain bodies to collect the information and release it to level the playing field. I think the key issue, which I raised before, is what information is really critical. I am aware of Emerald's announcement. As a fellow exporter, I think that is a good initiative. Obviously the individual commercial interests of every player will be in there thinking about what is in their interests. It touches upon the point that has been raised about what intellectual property and information should be preserved for the benefit of the commercial interest and what should be shared to the industry to ensure that there is a more informed market and farmers are making good marketing decisions. Establishing what that boundary is, I think, is the sort of information that the code committee has been asked to look at. Whether or not the code will actually be the right vehicle to enshrine that, if you like, is another question.

Mr TEHAN: From your understanding—and you may not know this; I am happy for you to take it on notice—of the way it is working currently in the US, are most players reasonably happy with that line between what is obviously commercial-in-confidence versus what the market, the growers and all the players need to know? Do you know?

Mr Morison : I could not speak on behalf of industry. I suppose, as a Cargill representative, it is certainly information that Cargill itself looks at very closely to see whether its internal estimates of the supply-and-demand situation are reflective of what the USDA announces. Certainly it is fair to say that the marketplace in the US—the futures market is the most prevalent price indicator—does apply a lot of weight, and the market is able to be moved around based on a view on the USDA report. There was actually one last night. The market will move in relation to what that report says, so it has some effect and it does certainly assist in levelling the playing field about what the stock situation is projected to be.

Mr TEHAN: It would seem a sort of useful contribution that government could make to ensuring proper transparency.

Mr Morison : Yes, I think that is probably something worth consideration by the committee.

Mr TEHAN: In another point in your summary you say:

Future port access protocols need further definition and the implementation of changes should be overseen by ACCC …

Are you confident that the ACCC has the resources and the knowledge to do this?

Mr Morison : Yes. As I said, we have evolved from essentially what the concerns were at the point when we started deregulation to where we are now, and I think everybody understands the real issues out there around extracting efficiencies out of a supply chain. To be honest, where the ACCC probably spends most of its time today in our sector is around this issue of the application of the port terminal access undertakings, so I think it does have a good working understanding of how the industry operates and I think it understands the key issues. That probably goes back to the point I raised at the start: if the code does not get up, the access undertakings stay, according to the newly drafted amended bill. However, the concern is if the code does get up and a signatory signs it but then decides that it does not want to participate in the code. That is a concern. Should that revert back to the Competition and Consumer Act, which is broad and deep, or should it revert back to an access undertaking, which is very specific and targeted at the industry? The exporters have some concerns, and that is something that the code committee is grappling with, but it is clearly an issue that I think the committee needs to be well aware of.

Mr TEHAN: Yes.

CHAIR: And people also play that game.

Mr Morison : Good to understand.

Mr TEHAN: I understand the point you are making there, and it is well made.

Mr Morison : Broadly to your point, the ACCC does have a good body of knowledge about how—

Mr TEHAN: And they would have a full understanding of what is happening in those code negotiations and the ability of one player to walk away and really then just change the whole dynamic—

Mr Morison : Yes.

Mr TEHAN: of what has been agreed.

Mr Morison : I think in their compliance side of their business they have. A lot of people have a very good understanding, whether it is CBH, whether it is Viterra or whether it is GrainCorp, about how those—

Mr TEHAN: About how that works. The final question is to do with the second-last point in your summary about industry self-regulation. You talk about a 'resolution for the funding structure' of Wheat Quality Australia and other groups as being 'key requirements to normalise the industry structure'. In a perfect world, how would you see that funding structure taking place?

Mr Morison : That is a good question. I think Cargill as a commercial operator and many of the larger players are consistently asked to contribute funding. I take the point that levies are growers' funds, and I have heard today growers saying that some of them would not mind contributing. You have heard GGL saying that they did not think that was required.

There are a raft of initiatives, and I have only mentioned Wheat Quality Australia, GIMAF and the National Working Party on Grain Protection, stock information, the port access code—all those things will need to be funded, and that is just the wheat industry. Then you have the barley industry, the canola industry and the pulse industry. I think it is fair to say that all of the fora that are trying to deal with this are grappling with the funding point. It need not necessarily be 22c a tonne, but I think the export charge—and not necessarily a wheat charge but potentially grain more broadly—needs to be looked at as probably a mechanism. I think it is possibly as efficient as any other. It could be done under a trust structure so that there could be a smaller amount taken, perhaps 5c to 10c a tonne, into a trust that is managed on behalf of the growers; put a governance structure in place—an entity such as Grain Trade Australia might be the appropriate body to oversee that and fulfil certain roles to oversee that the funding is undertaken for the appropriate roles that are done within that trust. I think that is a discussion point which is happening amongst the industry groups, whether GPA, Grain Producers Australia, GTA, GRDC or Wheat Quality Australia—this is an issue which is being worked through at the moment. I would be hopeful, as an industry participant, that we will get to a position where we can land on that. That is one solution, I think, which probably has some merit to look at.

Ms Richards : If I can just add to that, certainly broadly from an exporter's point of view we see that a more efficient way to fund these industry functions is to move to a broader based mechanism, because the industry functions that we are focused on in the debate around this bill are very specific on some export wheat issues, but there are a range of other pre-competitive industry functions out there that need to be funded that, as Mitch said, may be broader than just wheat over time. The opportunity is to move this to broader based sustainable funding where everyone pays rather than just one sector or one part of the sector, and it is much fairer across all of the growers and the industry if we can move to that broad based funding.

CHAIR: Yes, that is a very good point, and it is also the information issue as well, I think—

Ms Richards : Yes, that is right.

CHAIR: the storages, and I think the Stock Exchange, the ASX, would like to get something with integrity that people can use within the marketplace as well. Thanks very much.

Mr TEHAN: Chair, just out of curiosity—

CHAIR: Very briefly because we are just fractionally behind now.

Mr TEHAN: very quickly. You worked for the single-desk operator—

Mr Morison : Correct.

Mr TEHAN: and now you are working for Cargill.

Mr Morison : Correct.

Mr TEHAN: In your own personal experience, given that you were in the previous role, how have you found that and how have you seen the change from the single-desk operations?

Mr Morison : I think, to be honest, they operate very similarly. Cargill is obviously a much bigger operation than AWB ever was, but the principles that underpin the activity are exactly the same, so I think that the transition has been very smooth and part of the consolidation of the industry. But I think a lot of the members of this organisation are very similar. Some of them are quite small in Australia but they are very large globally. Cargill is large globally and now relatively big in Australia. But the transition was relatively smooth and was not too difficult to make.

CHAIR: Thank you both very much. We will make sure you get a copy of the Hansard. Just for the housekeeping, we might take that media release from Emerald as an exhibit. Would you like to move that?

Mr TEHAN: Yes. It is both, isn't it?

CHAIR: Both of them, yes. We will take them both.