Download PDF

X AUSTRALIA ./}

Royal Commission into

G R A IN STORAGE, H A N D LIN G A N D TRANSPORT

Volume 3

Supporting Papers

Commonwealth, New South Wales, Victoria Queensland, Western Australia, South Australia

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

VOLUME 3: SUPPORTING PAPERS

FEBRUARY 1988

Commonwealth of Australia 1988 ©

ISBN for set of three volumes: 0 644 07232 6 ISBN for Volume 3: 0 644 07237 7

This Report consists of three volumes:

Volume 1 - Report (ISBN 0 644 07236 9) Volume 2 - Supporting Papers (ISBN 0 644 07740 9) Volume 3 - Supporting Papers (ISBN 0 644 07237 7)

This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without written permission from the Director Publishing and Marketing AGPS. Inquiries should be directed to the Manager, AGPS Press, Australian Government Publishing Service, G.P.O. Box 84, Canberra, A.C.T. 2601.

Time constraints determined by the author department prevented AGPS editorial and design input into this work.

™ P O iE IE N T OF THE in" AijSmiA . ,,Α ,.ί . A. cit

h!& 4 2 si 1988

Ordered to be printed by authority ISSN 0727-4181____

Printed in Australia by Watson Ferguson and Co.. Brisbane

CONTENTS

VOLUME 3

Page

GLOSSARY

ABBREVIATIONS

PRICING PRACTICES

COMPETITION AND CONTESTABILITY

ALTERNATIVE SYSTEMS

GRAIN HYGIENE

INDUSTRIAL RELATIONS

V

ix

SUPPORTING PAPER 6

SUPPORTING PAPER 7

SUPPORTING PAPER 8

SUPPORTING PAPER 9

SUPPORTING PAPER 10

ill

GLOSSARY

Avoidable costs: The reduction (increase) in total costs resulting from the withdrawal (introduction) of a service.

Equivalent to incremental costs.

c.i.f. : Abbreviation used in some

international sales contracts, when the selling price includes all

'costs, insurance and freight' for the goods sold.

Compensation payments: Payments between bulk handling agencies and the Australian Wheat Board as penalties or bonuses for slow or rapid ship-loading times respectively.

Contestable: Derived from 'contestable markets

theory', which postulates that with completely free entry and costless exit of firms a market will not

exhibit monopoly behaviour, even if only a single producing firm is

operating in the market. Such a market is said to be 'contestable'.

Cross-subsidisation: Occurs when price is set outside the range of stand-alone costs and

avoidable costs.

Demurrage: An amount paid as a penalty for

ship-loading times in excess of an agreed level.

Despatch: An amount paid as a bonus for

loading vessels in a time less than that stipulated in the relevant agreement.

Economies of scale: Occur when a given increase in

inputs results in a more than

proportionate increase in output. Hence, the average cost of each unit of output falls as the level of

production is increased.

Economies of scope: Occur when it is possible to produce a service at a lower cost by

producing it in combination with other services rather than as a

single product.

v

Fixed costs: Costs that do not vary with the

amount of a good or service produced in the short run.

f. o . b . : Abbreviation used in some

international sales contracts, when imports are valued at a designated point, as agreed between buyer and seller, that is considered 'free on board'. The seller is obliged to have the goods packaged and ready

for shipment from the agreed point, from which point the buyer assumes all subsequent costs including transportation, handling and insurance.

Incremental costs: see Avoidable costs.

Joint & common costs: Costs that are created jointly by the production of a number of

services but cannot be directly attributed to any individual

service.

Long run: Time period in which all costs are

variable with the level of

production.

Marginal costs: The change in total costs when there

is a one-unit change in the level of production. In some circumstances this will be approximately equal to the incremental (or avoidable) cost.

Market driven: Market-related price signals are

permitted to flow between, and

within, the various markets

representing the interaction between growers, suppliers of services and domestic and overseas grain buyers, thus driving the quantity and

distribution of resources used in the grain distribution system.

Non-statutory grains: Grains that are not controlled by statutory marketing boards and hence can be traded freely.

vi

Pooling: Occurs when all costs of producing a

service are combined, with users paying an average price either

across a number of locations

(spatial pooling) or across a

number of time periods (temporal pooling).

Predatory pricing: Occurs when prices are set below the marginal cost of producing a

particular service for a given

period of time in order to price

competitors or potential

competitors out of the market.

Price differentiation: Occurs when prices for services vary for different consumers in order to reflect supply cost differences in servicing those consumers.

Equivalent to price disaggregation.

Price disaggregation: See price differentiation.

Price discrimination: Occurs when different buyers are charged different prices for the same service, where these different prices do not reflect differences in costs of supply. The differences may relate to demand or competitive conditions.

Radial rating:

Ramsey pricing:

Restricted grains:

Service driven:

Occurs where rail rates are based on the straight line (or ’as the crow flies' ) port.

distance from the nearest

Pricing services at their average cost where average cost in this

context is defined as the marginal cost plus a component for fixed and joint costs allocated on the basis of demand elasticity.

Grains that are restricted to

transport by rail with certain

exceptions. These grains are the statutory grains.

Where a predetermined level of

service drives the level of

resources applied and their physical disposition in the production

process.

vii

Short run: Time period in which some costs are

fixed irrespective of the level of service produced.

Stand-alone costs: The cost of producing a particular service in isolation; that is, assuming the multi-service firm hypothetically shuts down all other services.

Statutory agencies: Organisations that are established under or supported by legislation.

Statutory grains: Grains that are controlled by

statutory marketing boards.

Unit trains: Train loads that exceed 90 per cent

of the capacity of a single

locomotive or 85 per cent of the

capacity of multiple locomotives.

viii

ABBREVIATIONS

ABARE

ABB ACIL ACIR AFULE AGAL AGEA AN AMEC APB AQIS ARU ATMMB AWB AWU BAE BGQ BRS BTCE BTE c . & f .

c . i . f. c/ntk CQGSMB CRP CSIRO

DPIE dwt FAO f . o . b . GEB

GHA GCA GPWA IAC

ISC km kt LDP MSB mt NAASRA

N/A n. a. NH&MRC NRFII

Australian Bureau of Agricultural and Resource Economics Australian Barley Board ACIL Australia Pty Ltd Advisory Council for Inter-government Relations Australian Federated Union of Locomotive Enginemen Australian Government Analytical Laboratories Australian Grain Exporters Association Australian National Railways Australian Malt Exporters Committee Agriculture Protection Board of Western Australia Australian Quarantine and Inspection Service Australian Railways Union Atherton Tablelands Maize Marketing Board Australian Wheat Board Australian Workers' Union Bureau of Agricultural Economics

Bulk Grains Queensland Bureau of Rural Science Bureau of Transport and Communications Economics Bureau of Transport Economics cost and freight cost, insurance, freight cents per net tonne-kilometre Central Queensland Grain Sorghum Marketing Board Central receival point Commonwealth Scientific and Industrial Research Organisation Department of Primary Industries and Energy deadweight tonnes

Food and Agriculture Organisation free on board Grain Elevators Board of Victoria Grain Handling Authority of New South Wales Grains Council of Australia Grain Pool of Western Australia

Industries Assistance Commission Inter-State Commission kilometres kilotonnes Low Dose Probability Maritime Services Board of New South Wales million tonnes National Association of Australian State Road Authorities Not applicable not available National Health and Medical Research Council National Road Freight Industry Inquiry

ix

NSWDA NSWFA ntkm PWA QDPI QGGA QR RIGS RMB SACBH SADA SRA SWB t tpa tph TWU UF&S VFF VFGA V/Line VOP WACBH WAFF Westrail wte WHO

New South Wales Department of Agriculture New South Wales Farmers' Association net tonne-kilometres Prime Wheat Association Limited Queensland Department of Primary Industries Queensland Graingrowers Association Queensland Railways Rolling/stock information control system Rice Marketing Board South Australian Co-operative Bulk Handling South Australian Department of Agriculture State Rail Authority of New South Wales State Wheat Board tonnes tonnes per annum tonnes per hour Transport Workers' Union United Farmers and Stockowners of South Australia Victorian Farmers' Federation Victorian Farmers and Graziers Association

State Transport Authority of Victoria Victorian Oatgrowers Pool & Marketing Co. Limited Co-operative Bulk Handling of Western Australia Western Australian Farmers Federation Western Australian Railway Authority wheat tonne equivalents World Health Organisation

x

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

PRICING PRACTICES

Supporting Paper 6 February 1988

CONTENTS

Page

1. INTRODUCTION 1

2. ISSUES RELATED TO THE CURRENT PRICING PRACTICES IN THE STORAGE, HANDLING, AND TRANSPORT SYSTEM 3

2.1 Background 3

2.2 Current pricing practices 5

2.2.1 Land Transport 5

2.2.2 Storage and handling 10

2.2.3 Marketing 13

2.3 Rationale for current pricing practices 14 2.3.1 Land Transport 14

2.3.2 Storage and handling 16

2.3.3 Marketing 17

2.4 Grower attitudes to pricing practices 17

2.4.1 Land Transport 17

2.4.2 Storage and handling 18

2.4.3 Marketing 18

3. ECONOMIC EFFECTS OF CURRENT PRICING PRACTICES 20

3.1 Background 20

3.2 Transfers between growers 20

3.2.1 Land Transport 20

3.2.2 Storage and handling 22

3.2.3 Port services and sea transport charges 29

3.3 Loss of economic efficiency 37

4. ALTERNATIVE PRICING PRACTICES 41

4.1 Background 41

4.2 Pricing under alternate market structures 41 4.3 Recovery of the costs of road damage 43

4.4 Problems of recovering joint and common costs of rail transport 45

4.5 Pricing of port services and sea transport 46

APPENDICES

A Pricing practices of statutory agencies in the grain distribution system 47

B Peak-load pricing 58

iii

REFERENCES 78

TA B LE S

2.1 Components of the export price of wheat: Australia, 1986-87 6

2.2 Storage and handling charges for wheat, 1984-85 to 1987-88 11

3.1 Percentage difference between least and most costly country receival points in each State, 1982-83 to 1985-86 25

3.2 Transfers between growers: Western Australia, ten selected sites, 1981-82 to 1984-85 29

3.3 Wharfage charges and deductions, by State and port, 1986-87 30

3.4 Comparison of selected grain sea transport costs - medium market 32

3.5 Port disbursement charges by port for a 31 400dwt vessel 33

3.6 Estimates of transfers associated with pooled two-port loading charges for wheat: South Australia, 1985-86 and 1986-87 36

FIGURES

2.1 Typical pricing practices for services provided by statutory agencies in the grain distribution system 4

2.2 Export wheat rail freight rates, 1986-87 7

3.1 Frequency distribution for rail transfers 23

3.2 Frequency distribution for rail transfers - per cent 24

3.3 Frequency distribution for storage and handling transfers 26

3.4 Frequency distribution for storage and handling transfers - per cent 27

iv

1. INTRODUCTION

In this paper, issues relevant to pricing practices in the grain distribution system are discussed. The information presented has been drawn from submissions, evidence given at public hearings, the Commission's own research and other relevant research.

In a number of its papers and in discussions with the

industry the Commission emphasised that it favoured a 'market driven1, as opposed to 1 service driven', approach as the main driving force behind a preferred storage, handling and transport system. 'Service driven' refers to an approach whereby a predetermined level of service drives the level of

resources applied and their physical disposition. This predetermined level of service is not particularly responsive to the changing economic forces characteristic of the current market (be it the grain market, the transport market or the

storage and handling market).

In a 'market driven' system cost-related price signals flow between and within the various groups and individuals with interests in the system. The interaction of such groups and individuals - which include growers, suppliers of services,

and domestic and overseas grain buyers - drives the quantity and allocation of resources. A key characteristic of this process is that it is dynamic, with the level of service continually responding to changes in the market.

To the extent that prices for off-farm services do not reflect true market realities (costs and competitive pressures), growers' production, marketing and investment

decisions will be distorted. In this paper the advantages and disadvantages of current and alternative pricing practices are assessed. In accordance with the Commission's Letters Patent the primary criterion for assessment is economic efficiency. As pointed out in Volume 1 of this report, the term 'economic efficiency' goes beyond maximum technical efficiency and cost minimisation to include the longer term objective of ensuring that maximum benefit is achieved from the employment of society's resources in the provision of grain storage, handling and transport services.

It is the Commission's intention in this paper to address the requirement in its Letters Patent to devote attention to the following matters:

. the effect on Australian grain marketing authorities and organisations and Australian grain growers of the present pricing and charging practices for grain storage, handling and transport services;

. the costing and pricing methods that might be used to enable Australian grain marketing authorities and organisations and Australian grain growers to select the most cost-effective combination of services.

1

SUPPORTING PAPER 6

A better understanding of the relationship between pricing practices and the institutional, legislative and market environment in which these practices have emerged will also assist in determining the system that best achieves the appropriate flow of signals between participants in the various markets.

Any constraints, either legislative or administrative, that are placed on the pricing practices of the various agencies and that might prevent them from pricing efficiently should be closely examined. In this paper some existing constraints are considered in the context of their impact on current and alternative pricing practices. Further details on the current institutional environment are provided in Supporting Paper 2.

Pricing practices in all stages of the grain distribution system are considered. Chapter 2 gives a brief outline of the existing pricing practices of statutory storage, handling, transport and marketing agencies and their perceived rationale. Growers' attitudes to these practices are also outlined. The economic effects of these pricing practices are discussed in Chapter 3 and estimates are given of the extent of transfers between growers in particular States. Finally, a discussion of alternative pricing practices is provided in Chapter 4.

2

2. ISSUES RELATED TO THE CURRENT PRICING PRACTICES IN THE STORAGE, HANDLING AND TRANSPORT SYSTEM

2.1 Background

The major portion of Australian grain is classified as statutory grain and is stored, handled and transported mainly by statutory agencies (that is, bulk handling agencies and railway authorities). The pricing policies of the statutory agencies generally have the common feature of not reflecting the cost of providing a service to an individual user. Rather, simple pricing rules tend to be formulated, aimed at some level of cost recovery for total services provided by the agency. This inevitably leads to some users paying significantly more than the cost of the service provided to them and others paying considerably less. The extent of divergence depends on the pricing practice used and on the range of costs for services provided.

Figure 2.1 provides a generalised version of pricing practices employed by statutory agencies in the various stages of the grain distribution system. Although the

diagram does not capture the details of storage, handling, transport and marketing charges in each State, it does provide a useful framework for describing the general pattern of practices actually used.

The bulk handling agencies aim for full cost recovery, generally pool all costs, and determine an average price per tonne for whatever level of service is provided. This is paid by the marketing board and generally passed on directly to growers by deduction from marketing proceeds. It should be noted, however, that although the marketing board is

sometimes charged different prices for storage and handling of domestic and export grain, it actually pools these two charges.

Apart from delivery by growers to the local silo, the

transport of statutory grain is undertaken largely by rail in all States other than South Australia. This is due,

substantially, to legislative and administrative restrictions that apply in most States.

Across Australia, the railway authorities have a variety of pricing rules that are based on either road, rail or radial distance. The rate that any particular grower is charged may be subsidised by other growers, by other rail traffic or by taxpayers in general - and in some cases all three. A purely distance-related rate may not adequately cover the avoidable cost of a particular service and, therefore, subsidies between growers may occur. Subsidies between traffic types

may occur either because the costs of particular types of traffic are not individually known or as a result of

decisions by State governments or rail authorities to generate revenue on some traffics to offset costs elsewhere.

3

Grower

FIGURE 2.1

Bulk

handling agency

Railway authority

off-farm costs

distance based

pooled charges

Marketing board

pooled by board

pooled by board

Shipping costs

Marketing costs

TYPICAL PRICING PRACTICES FOR SERVICES PROVIDED BY STATUTORY AGENCIES IN THE GRAIN DISTRIBUTION SYSTEM

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 6

Finally, general subsidies to rail authorities from taxpayers have been based historically on the notion that government support is necessary to provide a public service that would not otherwise be provided. In recent times, governments have aimed to reduce subsidies, and rail authorities have been aiming for (although not always achieving) higher levels of cost recovery.

Marketing costs incurred by marketing boards are generally pooled, with growers being charged an average price. Even though returns to growers are quite often, to some extent, disaggregated according to grain quality, the specific costs of marketing individual qualities of grain are not passed on to the growers delivering that grain. Because export revenues are pooled, the port service and sea transport costs of exporting grain are also effectively pooled (either on a

State or a national basis).

The significance of these various storage, handling and transport costs can be gauged from inspection of Table 2.1. It can be seen that combined storage, handling and rail freight charges represented almost 18 per cent of the customers price in 1986-87. The other major cost components are sea freight (15 per cent) and Australian Wheat Board

(AWB) administration and interest costs (9.6 per cent).

In the remainder of this chapter more detail on the practices used by the statutory agencies is provided and justifications for these practices, as submitted to the Commission, are given. Growers' attitudes to these practices are also outlined.

2.2 Current pricing practices

2.2.1 Land transport

The pricing practices of the rail authorities can be

described as a combination of simple pricing rules and market-related price discrimination with some elements of cross-subsidisation both within and, in some States, between

traffic types, and various degrees of subsidisation from general taxation revenue. Figure 2.2 shows a comparison of freight rates in each of the States for 1986-87. An outline of transport pricing practices is presented below with a more

detailed description provided in Appendix A.

The pricing formulae used are primarily distance related, be it rail, road or radial distance, and generally involve a diminishing rate of increase with distance. Rail rates in

both Queensland and New South Wales are based on rail

distance covered. The rate charged in Queensland is the same for all grain types although 'concessional' rates are offered to signatories of the Rail Freight Agreement.

5

TABLE 2.1 COMPONENTS OF THE EXPORT PRICE OF WHEAT: AUSTRALIA, 1986-87

$/tonne % of Customer Price

Customer Price (c.i.f.) 186.70 - sea freight 27.70c 14.8

. Average FOB Port Price 159.00

- AWB administration & interest cost 17.94 9.6

Net Pool Contribution 141.06

- Storage and Handling 14.94° 8.0

- Rail Freight 17.88° 9.6

- Wharfage 1.12° 0.6

- Research Levy 0.40 0.2

- Ceres House 0.10 -

• Farm Gate Return 106.62 57.1

a. Gross interest cost estimate. b. Weighted State average using 1986-87. charges and receivals for c . Based on freight rate for shipment from east coast of

Australia to Kuwait as at 28 November 1986 (US$18.00).

Source: AWB, personal communication, 12 January 1988.

Overall, Queensland Railways (QR) claims that it covers avoidable costs for grain freight (transcript, p. 627). Discounts apply to Bulk Grains Queensland (BGQ) for unit train loads; additional charges are incurred for stopovers at intermediate receival points on direct haulage routes. These discounts and additional charges relate to specific receival points but are pooled across all Queensland growers and do not therefore accrue to growers delivering to those receival points.

In New South Wales, similar discounts and premiums exist although mainly in border regions. Unlike Queensland, discounts in New South Wales are passed on directly to

growers. Grain freight in New South Wales does not currently cover its avoidable costs and it is estimated that a subsidy of some $68 million was made to this traffic in 1985-86, of which $36 million related to debt servicing (State Rail Authority (SRA), 1986). In 1987 the SRA proposed a number of options for making rates more accurately reflect the costs of individual

lines while maintaining the same level of subsidy overall to this traffic. Under these options rail distance remained an underlying determinant of rates but allowance was made for cost differences arising from variations in in-loading and out-loading rates and operating and maintenance costs for branch lines as compared to main lines. Key elements of the SRA's Option 3 are currently being implemented.

6

24

22

20

1 2-

10

160 km 275km 310km 350km

Average haul

200

Kilometres

FIGURE 2.2 EXPORT WHEAT RAIL FREIGHT RATES, 1986-87

Source: Australian National submission.

400

^ NSW

/ / / / an'

I foid

Vic

440 km

SUPPORTING PAPER 6

Australian National Railways (AN) undertakes the rail movement of grain in South Australia and uses rates based on the road distance from port. As roads are generally less circuitous than rail routes, this pricing practice puts AN in a position to compete directly with road transport. The rates are subject to an agreement between AN, the growers' organisation (United Farmers and Stockowners of South Australia (UF&S)), the bulk handling agency (South Australia Co-operative Bulk Handling

(SACBH)) and marketing boards. Variations in rates occur for unit train operations, for some selected sites, and in border regions. All of these variations are directly reflected back in the rates paid by individual growers. Rail rates for grain aim at obtaining ' . . . total revenues sufficient to cover the full costs of grain transport in an "average" season' (AN submission, April 1987, p. 19).

Full cost recovery was effectively attained in 1984-85 and 1985-86 - (D.G. Williams, General Manager, AN, personal communication, 19 March 1987); however both years were better than average in terms of the quantity of grain transported. Although costs have been recovered for total grain traffic, the level of cost recovery varies for individual lines, some branch lines having a lower cost recovery than main lines.

The rail authorities in both Victoria and Western Australia use a radial rating approach, with rates based mainly on the straight-line distance between receival point and the nearest port, which is not necessarily the port to which the grain is eventually sent. In Victoria there is very little price differentiation away from the basic radial pricing pattern, although discounts for loading at central receival points have been suggested in the past. With respect to cost recovery, the State Transport Authority of Victoria (V/Line) aims to fully recover what is termed 'the cost of an efficient system', which tends to be somewhat less than actual costs. However, full recovery of costs for the total system does not necessarily mean that individual lines are covering their costs. The rates

are negotiated with the Victorian Farmers Federation (VFF) and marketing boards but a consensus is rarely achieved so separate recommendations are frequently made to the Minister of Transport.

In Western Australia, the radial rates are set under a formal agreement between Westrail, the Western Australian Farmers Federation (WAFF), Co-operative Bulk Handling of Western Australia (WACBH) and the Grain Pool of Western Australia. As

in Victoria, the Minister has had to decide on the rates when agreement has not been possible. The so-called schedule rates which are based on distance, are adjusted by a factor that will allow them to gradually approach a hypothetical competitive

rate by 1989-90. In practice this competitive rate is the road rate plus a 20 per cent adjustment for road maintenance and other social costs that, it is claimed, are not covered by road operators.

Overall, the nature of the pricing formulae used by each authority means that the cost to an individual grower does not

8

SUPPORTING PAPER 6

necessarily reflect the cost (in some cases not even the avoidable cost) of the service provided.

In the case of road transport, the industry is characterised by a large number of operators with relatively easy entry and exit from the industry. The resources involved, primarily trucks and trailers, are flexible in their usage and tend to be deployed when and where there is demand. Freight rates, therefore, are primarily determined by competitive pressures

and are likely to closely reflect the operator's costs. Estimates of the direct costs of road transport can, therefore, be made on the basis of observed grain road freight rates.

For the journey from farm to silo, two types of vehicles are generally involved: grower-owned two-axle rigid trucks and contractor-owned six-axle articulated trucks. Current contractor charges are around $5 per tonne for short-haul trips of approximately 20 kilometers. However, these charges can

fall to as low as $3.50 per tonne under market pressure. Conversely, if the access road is poor, rates are increased. A recent BGQ survey found that growers pay an average of $7.42 per tonne for delivery to their silos.

Line-haul road operations are generally undertaken by contractors operating six-axle articulated vehicles, These are either tippers or flat-top trucks with tarpaulins. Distances hauled range from 50 kilometres to over 400 kilometres. The rates charged are remarkably uniform across the various States, lying in the range of 5.5 cents per net-tonne-kilometre for the longer hauls to 7 cents per net-tonne-kilometre for shorter distances. The rate charged has two components:

. a fixed element to cover standing time for loading and unloading, typically $1 to $5 per tonne depending on the operation and the expected delays;

. an element variable with distance, typically around $1.50 per kilometre.

The question arises, however, of whether the road operators adequately cover the cost to society of their operations. In its submission the Bureau of Transport Economics (BTE) stated,

Three broad cost types are relevant, namely, vehicle operating costs, the cost of damage to the road and the cost of externalities. Vehicle operating costs include those items directly paid for by the truck operator, whereas the components of the cost of damage to roads and externalities (for example, air and noise pollution) are costs attributable to the operation of trucks but are generally not paid for directly by the truck operator. Such costs are, however, recovered to various extents from truck operators in the form of annual registration fees, taxes, and charges unique to vehicle ownership and use.

(P- 58)

To the extent that road transport does not cover the cost of road damage and other external costs, it would be able to

9

SUPPORTING PAPER 6

charge lower rates and may gain a competitive advantage over rail. The competitive position of road transport would also be enhanced in the event that truck operators engaged in

overloading, speeding or operating excessive driving hours (AN submission, April 1987, p. 50). The efficient pricing of road use is one of a number of important issues in the debate about road/rail competition which are discussed in detail in Supporting Paper 4. Some discussion of this issue is also presented in Chapter 4 of this paper.

2.2.2 Storage and handling

In most cases bulk handling agencies require total cost recovery for their overall business. However, the allocation of costs to individual users is not generally determined by either the actual cost of servicing that user or other market factors such as the price that the market will bear. Rather, charging practices tend to be based on the concept of cost pooling. In Table 2.2 storage and handling charges over the period 1984-85 to 1987-88 are presented.

An outline of the pricing policies of the bulk handling agencies follows; a more detailed description is provided in Appendix A.

In general terms, 'pooling' refers to the combining of items into a common fund. In its narrow sense 'cost pooling' is simply the combining of costs, but more generally the term is used to refer to the practice of pooling costs and charging growers an average price. The degree to which costs are pooled varies between States. The highest degree of pooling occurs in the States that have co-operative bulk handling agencies

(Western Australia and South Australia). In both of these States the only price disaggregation practised involves different charges for different grain types. Growers pay the same charge regardless of whether the grower’s grain is delivered directly from farm to a port terminal or handled an additional number of times after being delivered to a country receival point. Further, in both States the bulk handlers impose an annual toll on growers delivering grain. This toll is interest free and repayment commences to the grower after ten years in Western Australia and after twelve years in South Australia. The toll is primarily used for funding capital works and enables the bulk handlers to minimise their annual

finance charges.

BGQ has the highest degree of disaggregation of prices. Charges are disaggregated into four separate zones - southern Queensland country, southern Queensland ports, central Queensland country and central Queensland ports - but competition between zones is restricted by transport legislation that limits the distance grain can be carted by road. Charges also vary by grain type and time of delivery.

10

TABLE 2.2 STORAGE AND HANDLING CHARGES FOR WHEAT, 1984-85 TO 1987-88 ______________________ ( $/tonne )___________________

State 1984-85 1985-86 1986-87 1987-88

New South Wales 17.20 16.70 16.70 16.70

Victoria 13.75 13.80 14.63 15.43

Queensland6 ^ 20.00 19.00 17.00 17.00

South Australia0 ^ 12.74 11.93 12.44 11.76

Western Australia0 13.05 13.05 13.05 13.70

a. Charge for southern Queensland (charge for central Queensland was $16.50 in 1986-87 and 1987-88). b . Excludes grower toll which in 1987-88 was $0.25 for members of SACBH ($1.25 for non-members) and $1.84 for

members of WACBH.

Source: AWB, personal communication, 1987.

In both Victoria and New South Wales costs are generally pooled, although there are minor exceptions. In Victoria rates vary by grain type, and price differentiation also occurs with respect to border discounts, overtime surcharges,

and deferred delivery discounts and penalties. Some price differentiation also occurs in New South Wales for different grain types and border and deferred delivery discounts.

Pooling of costs that occurs across sites within a particular year is known as spatial pooling. Pooling of costs either within a season, when the demand for storage and handling services varies according to the delivery pattern, or between

seasons, in order to smooth any fluctuations in charges that would result from production fluctuations, is known as temporal pooling. With regard to the seasonal fluctuation in charges that would result from varying levels of grain production, most bulk handling agencies have established reserve funds to accommodate such situations. In

above-average production years, charges are set above costs, thus contributing to reserves that can be drawn upon in years when throughput is low; this allows charges to be maintained at about average cost. In Queensland, the charge for fixed

costs is averaged by dividing total fixed costs for a particular year by a three-year moving average of grain handled or shipped in each zone.

Overall, as with rail pricing, cost pooling by bulk handling agencies will lead to individual growers rarely being charged the true cost for storage and handling of the delivered grain.

Given the monopoly powers provided to the bulk handling agencies, either through legislation or by means of agreements with statutory marketing boards, there is little scope for competition from private storage and handling firms. The few private firms involved store and handle

11

SUPPORTING PAPER 6

relatively small tonnages. Pricing practices vary from situation to situation depending on the nature of the business and how it is integrated with other activities such as transport. Some information on private operators' charges is provided in a BAE study prepared by Spriggs, Geldard, Gerardi and Treadwell (1987). The BAE conducted a census of all private grain merchants in New South Wales with more than

500 tonnes of storage capacity for hire. Each merchant was asked to provide the current charges per tonne for handling and six months' storage of a range of grain types.

Respondents (20 out of total of 27) accounted for a total hireable storage capacity of about 0.3 million tonnes (wheat equivalent) out of a State total of 12 million tonnes.

A number of supply and demand factors were found to influence charges, but not every factor influenced every firm. Factors mentioned were volume of grain, type of grain, length of storage time, type of storage (for example, aerated or non-aerated), insect control, and package deals with complementary business activities.

In comparing the private handlers' charges with those of the Grain Handling Authority of New South Wales (GHA), the BAE came to the following conclusions:

For every commodity included in the analysis, the Grain Handling Authority's charge was higher than the average charge of private firms, the difference ranging from

80c/t for barley to $5.59/t for oilseeds. However, except for oilseeds, the authority charges were not substantially greater than the average private charge.

The effective private charge for the storage and handling of wheat (all of which is permit wheat) is very close to the Grain Handling Authority's charge when the $2/t compulsory fee on all permit wheat sales it added to the private charge. This similarity could be due to the dominance of the authority in the wheat storage and handling market, and the relative thinness of the private market for storing wheat. That is, the private companies may be guided by the authority's charge.

(Spriggs et al. 1987, pp. 47-48)

In the Commission's survey of private handlers, the results of which are presented in detail in Supporting Paper 3, questions were asked regarding pricing practices used. The responses obtained tended to confirm the BAE results. In particular, prices for those grains handled by bulk handling agencies, tended to be based on the relevant bulk handling agency's charges. In those circumstances where pricing was independent of bulk handlers charges, the factors seen as important in determining the level of charges were the same as those found by the BAE.

Under the current regulations, with a restricted private market, it is logical that the private companies should use the bulk handling agencies' prices as a benchmark for setting

their charges, but such pricing practices could be expected

12

SUPPORTING PAPER 6

to change under less regulated conditions. Respondents in the BAE study (which focussed primarily on wheat) stressed that throughput and volume are important determinants of their charges and that charges would be reduced if they could store and handle more wheat.

2.2.3 Marketing

Marketing arrangements affecting the actual buying and selling of grain are not explicitly included in the

Commission's Letters Patent but the marketing boards do influence (both directly and indirectly) the storage, handling and transport system. In particular, the pricing activities of the statutory marketing boards are of direct relevance to port services and sea transport and to the

deduction of storage, handling and land transport charges to growers. They also influence the costs of the system; for example, by imposing certain segregation requirements on the distribution system.

Statutory marketing boards in Australia operate on a national basis (the AWB), a semi-national basis (for example, the Australian Barley Board (ABB), which operates in Victoria and South Australia) or on a State or regional basis. Grain is

acquired compulsorily or on a voluntary basis.

The pricing practices of these boards tend to be quite similar. In each case, the boards pool revenue received from a certain number of categories of each type of grain and

return to growers an average receipt based on the category delivered. Similarly, the costs incurred in marketing the grain tend to be pooled, with an average price being charged to growers.

The categories used for the pooling of receipts do not always reflect fully the actual grades of grain that are sold, but in general they do give the grower some signals concerning desirable quality requirements of buyers (such as protein and moisture content and the degree of weather damage). There

continues to be debate about whether the number of categories used gives growers adequate signals about the characteristics of grain required by international and domestic markets.

The receipts pooled by marketing boards generally contain some element of port services and sea transport costs where these are borne by the shippers. In the case of wheat, actual port service and sea transport costs are likely to vary depending on the port at which the grain is loaded for

export; however, since contracts are mainly specified on a free-on-board (f.o.b.) basis and receipts are pooled nationally, this difference is not usually reflected back to growers (even port service costs, which are borne directly by the AWB in the case of cost and freight (c&f) sales, are pooled nationally). There are four principal exceptions to the national pooling of port service and sea transport costs. The costs of wharfage and two-port loading are pooled on a State basis as is the cost of out-of-zone movements of

13

grain. Also, for grain exported from Western Australia, where proximity to some markets leads to reduced sea transport costs, growers in that State benefit by way of a

discount of approximately $2 per tonne. It should be noted that contracts made by the AWB do not generally specify the port of loading so that allowances made by shippers for port services and sea transport costs are not usually related to a particular port. This pooling of port services and sea transport costs is less important for State-based marketing boards which ship from one or only a limited number of ports; however, the ABB pools export receipts across both Victoria and South Australia and as a result, sea transport costs are also pooled.

The pooling of receipts has several other important effects. In particular, the varieties of grain grown are affected by the degree to which signals are reflected back to growers from the market. Discounts for weather-damaged or high moisture grain affect growers' decisions about investment in on-farm storage and grain dryers. If buyers' requirements are not adequately reflected back to growers and handlers, inefficient investment decisions are likely to be made.

The final issue of relevance to the marketing boards' pricing practices relates to the storage, handling and land transport charges that are paid by marketing boards. These costs are generally passed directly on to growers. Although it is possible for the marketing boards to pool charges to growers

even if the bulk handling agencies' costs were disaggregated, generally there is no reason for doing so. However, there are exceptions; for example, in Queensland, marketing boards pool the different rates charged by the handling agency (BGQ)

for export and domestic grain. (See Appendix A for further information on marketing board pricing practices.)

SUPPORTING PAPER 6

2.3 Rationale for current pricing practices

2.3.1 Land transport

Pricing of rail services is often claimed to be very

difficult because of the lack of a '... unique "full cost" for any service which can be simply compared with the price for that service' (F.N. Affleck, AN, personal communication,

9 April 1987). This problem is due largely to the extent of joint costs that arise from different traffic types using the same facilities. For example, V/Line suggested

Because of the complexity involved in the allocation of joint costs, the costs generated for any movement or any class of activity will not be definitive. This

potential lack of accuracy in determining actual costs is a significant impediment to the disaggregate cost approach. (V/Line submission, March 1987, p. 38)

As implied here, the definition of a joint cost will vary depending on whether the price for a single train, for a

14

SUPPORTING PAPER 6

line, or for traffic in the whole system is being

considered. Given the difficulty of attributing joint costs to individual loads, a pricing rule must be used which will ensure that joint costs are recovered. Usually, some form of discriminatory pricing is adopted whereby all lines do not contribute equally to the recovery of joint costs. This practice is often justified by the relevant rail authorities

on the basis that they are pricing in a competitive manner. That is, where the rail authority has market power, users are charged more than the avoidable cost of the service, whereas where demand for the service would fall significantly if the price increased - say, by using road transport or by

delivering interstate to a competing rail system - users are charged at a lower rate. To the extent that this traffic is at least covering its long run avoidable costs and

contributing to joint costs, then this traffic acts to lower rates overall. AN ' s pricing policy in general and border discounts offered by rail authorities in a number of States are often based on this type of argument. For example, the

SRA commented that under its then new pricing proposal (Option 3),

In NSW border areas where growers may choose to send wheat to interstate ports, Option 3 would offer certain wheat rate reductions to enable the SRA to compete more effectively with interstate rail and road alternatives.

. . . SRA management fully supports a system in which grain moves by the shortest distance or least costly route to ports. However, operational efficiency and cost reductions to growers require that high tonnages

are maintained. Under Option 3 concessions would be aimed at wheat from areas where the choice of seaboard terminal and hence rail system is a marginal decision to growers. The effect will be to consolidate wheat movement to NSW ports and maintain tonnages from these marginal border areas. Freight rates have been set to recover all operating costs and contribute towards the

fixed costs of the network. This policy will minimise fixed operating costs per tonne throughout the NSW system. (SRA submission, February 1987, p. 19)

Rating practices based on radial road distances are generally justified in terms of pricing to be competitive with road (even though road competition may not exist) and on the grounds that these practices are 'fair'. For example, in South Australia, which has the greatest competition between road and rail, AN claimed, '... AN has made every attempt to provide fair rates for the growers by calculating the distance for rating purposes on the shortest reasonable road route' (AN submission, p. 47). V/Line claimed that

'... Radial rating was introduced because it was more

commercially oriented than using linehaul distances' (V/Line submission, p. 37). But it added

15

SUPPORTING PAPER 6

V/Line's current rates are the product of the industry's desire to maintain pooled pricing. It would be more good luck than intention if any single rate reflects the actual cost of a single service. Rather, total V/Line charges approximate total V/Line efficient costs,

(p. 38)

In Western Australia, radial rating is used as a means to '... provide competitive rating' (Westrail submission, April 1987, p. 3). As in Victoria, rates are to be gradually adjusted to an 'efficient' level which is based on road rates. The use of road transport is only permitted in certain areas in Western Australia, and Westrail contends that

[the road transport] market, which is deregulated, provides a market price which is perfectly competitive and contestable. By adopting that price as the price for its services ensures that the rail market is for all intents and purposes 'contestable'. This means that regulation to rail can be justified to ensure that the industry does gain the economies of scale and at the same time has available competitive prices. (Westrail submission, April 1987, p. 4)

Rail rates in New South Wales and Queensland are currently rail distance based; although this method of pricing has now been rejected by the SRA on the grounds that rail distance does not fully reflect the costs of different lines. The adoption of the new pricing proposals made by the SRA will mean that rates in New South Wales will be based more on cost

and 'market' considerations (SRA submission, February 1987, p. 19).

2.3.2 Storage and handling

As noted, the pervasive feature of the pricing practices adopted by the bulk handling agencies is the pooling of costs and the charging of a pooled (averaged) price. These pricing

practices are not generally imposed by legislative requirement but are adopted by the agencies themselves for a number of reasons (although a clause in the South Australian Bulk Handling of Grain Act 1955-1969 could be interpreted to mean that price differentiation for various handling sites is not permitted). The arguments in favour of pooling tend to be couched publicly in terms of equity between users, the

need to reduce seasonal fluctuations in charges,

administrative ease and problems of adopting a less aggregated system of pricing, such as the difficulty in determining what the correct price ought to be. Support for pooling and opposition to change appear particularly strong

in the co-operative bulk handling systems of South Australia and Western Australia.

16

SUPPORTING PAPER 6

2.3.3 Marketing

In grain marketing, the pooling of revenue within grades is generally regarded as providing appropriate price signals without the distorting effects of short-term price fluctuations. However, Jeffery (1983) has argued that there needs to be an adequate number of grades to reflect quality

differentials. The Industries Assistance Commission (I AC, 1983) supported this view and since that time the AWB has increased the number of categories and grades under which

payments to growers are made.

2.4 Grower attitudes to pricing practices

2.4.1 Land transport

While individual growers made numerous comments to the Commission on the general cost of rail transport and apparent anomalies that occur in specific cases, there was little comment on the actual pricing practices used. This may be the result of a general lack of information available to growers about rail pricing practices rather of an acceptance of the practices used. Grower organisations (with the exception of the Queensland Graingrowers Association (QGGA), which generally commends QR's 'concessional' pricing) tend to be critical of rail pricing policies.

The VFF, for example, advocates disaggregation of charges combined with a general deregulation of transport. In its submission, the New South Wales Farmers Association (NSWFA) supported the phasing out of ' . . . cost pooling and averaging of charges ... due to the inefficiencies that are created'

(p. 10).

In South Australia, the UF&S and many individual growers strongly advocate the removal of the surcharge imposed by AN on grain moved by road between rail-served sites (UF&S submission, April 1987, p. 40) and thus the removal of one of the last impediments to free competition between road and rail in that State. The WAFF also supports increased competition in grain transport, but, in the absence of this, supports Westrail's current pricing strategy.

Although growers made little comment in submissions regarding rail pricing practices, it appears that they do not always support the attitudes of grower organisations, as expressed above. For example, 'V/Line tried to introduce a rate incentive at CRPs (central receival points) in 1984 to reflect their inherent cost differences. However, this was rejected by growers who insisted that any benefits that

accrue from the CRP system, be spread amongst all growers (Victorian Government submission, November 1987, p. 14).

17

SUPPORTING PAPER 6

2.4.2 Storage and handling

In considering the prevalence of cost pooling in the grain storage and handling system, Lloyd (1986) questions why such a pricing system has been supported by growers in the past. He suggests that growers may have confused the advantages of

averaging wheat prices and pooling storage and handling charges:

Their preference for the general principle of pooling is doubtless linked to the attitudes which formed 1 orderly marketing' of wheat. Pooling of product prices has benefited farmers in that it has been the chosen method of establishing high home prices for several products,

including wheat, and for some products pooling has been seen as insulating the producer from short term price fluctuations. Furthermore, with all producers receiving a common price, pooling was perceived as being

egalitarian and therefore 'fair'. In fact both fairness and efficiency require that prices of outputs and inputs should reflect differences in quality, location and time of delivery, since these attributes involve different costs and product values. ( p. 92)

Dissatisfaction, so far as growers are concerned, with the current pricing policies of bulk handling agencies would appear to be, at least to some extent, a result of the lack

of information available to growers to properly assess current and alternative practices. This was a common complaint made by growers in submissions and at hearings (for example, UF&S submission, April 1987, p. 70; WAFF,

Transcript, pp. 1740-40a; NSWFA submission, February 1987, p. 2). In some cases it would appear that cost information on individual receival sites is not collected by the agency in question; in other cases the agencies appear to have a paternalistic attitude toward growers and to withhold information on the grounds that it will be misunderstood or will cause dissension among growers (WACBH, Transcript,

pp. 1926-32).

2.4.3 Marketing

Growers generally support the concept of revenue pooling across grain of the same quality. For example, the VFF submitted, 'There are sound marketing reasons to support the system of revenue pooling and the VFF sees a net disadvantage to growers in moving away from this' (VFF submission, March 1987, p. 41).

However, some grower organisations argue for greater reflection of returns from different grades. Furthermore, some grower organisations also appear to be less supportive of other pooling done by marketers, particularly with respect to port services and sea transport charges. For example, the QGGA submitted,

18

SUPPORTING PAPER 6

We believe that changes should be made to allow the industry in Queensland to receive the benefits of the physical performance of this State's grain export facilities, the benefits of its closer proximity to markets and the benefits of its superior industrial relations climate. (QGGA submission, March 1987, p. 11)

The UF&S supports this view and suggests it be taken further, with two-port loading costs and other port services costs (as well as any despatch earnings) in general being recovered on a 'port/divisional basis' (UF&S submission, April 1987, pp. 58-61).

In order to disaggregate port services and sea transport costs it would be necessary to change the form in which the sales contracts are written, as highlighted by the NSWFA:

. . . the Association has been advised that the AWB could secure lower quotations for shipping services from commercial sources if it were more specific regarding the port(s ) of loading in its tender specifications.

(NSWFA submission, February 1987, p. 16)

This would apply equally to contracts arranged for f.o.b. sales.

A number of grower organisations (for example, QGGA, UF&S) also support carry-over interest costs being borne by the relevant State creating those costs if it is at fault. For example, the QGGA submitted, ' Where it is the State that is at fault, we favour interest incurred on carryover wheat being charged to that State' (QGGA submission, March 1987, p. 12).

19

3. ECONOMIC EFFECTS OF CURRENT PRICING PRACTICES

3.1 Background

The economic effects of current pricing practices for storage, handling, transport and port services are of two types: the transfers between growers; and the reduction in

production efficiency caused by distorted prices. In this chapter these economic effects are considered and the extent of some of the transfers between growers estimated.

3.2 Transfers between growers

The transfer of revenue from one section of the farming community to another is the most obvious effect of pooling and cross-subsidisation. For example, pooling of storage and handling costs across growers results in a transfer from producers who deliver to a low cost facility to those who deliver to a high cost facility. Similarly, the pooling of two-port loading charges across growers within a State represents a transfer from growers supplying to a deep-water port to those supplying shallow ports, where ships require

' topping up' at another port. In the case of rail freight rates, cross-subsidisation can lead to transfers from growers delivering direct to low cost main lines to those using high cost branch lines. There may also be cross-subsidisation between different types of freight and subsidisation of all rail users by taxpayers.

To determine the actual level of transfers in any situation it is necessary to establish the price that would exist without cross-subsidisation and compare it with the price currently charged. Two approaches are possible. First, using data on marginal and joint costs and demand conditions throughout the system, the theoretically optimal price could, in principle, be determined and compared with current charges. This method has academic appeal but the Commission rejected it because the difficulties of estimating the necessary price elasticities and marginal costs would introduce significant inaccuracies into the results. As a more practical alternative, an estimate of the extent of

likely transfers can be provided by comparing charges with known estimates of costs. This approach has been adopted in this paper for various parts of the grain storage, handling and transport system. It should be noted that while specific examples have been selected, other information provided to the Commission shows that they are indicative of similar transfers that occur throughout the system.

3.2.1 Land transport

Cross-subsidisation occurs in a number of parts of the land transport system. In both rail and road systems there is the potential for extensive cross-subsidisation to occur between traffic types. As is discussed in Supporting Paper 4, while

20

SUPPORTING PAPER 6

road users overall recover the costs of road infrastructure some users (in particular passenger vehicles) tend to over-recover while other users tend to under-recover, the extent of under-recovery depending on estimated road damage and the proportion of road taxes paid that are arbitrarily attributed to cost recovery. Varying levels of cost recovery also occur for different traffics in the rail system but,

unlike the road system, revenue does not generally cover costs over all traffic and the railways receive a government subsidy.

Cross-subsidisation can also occur between users of rail services within particular traffic types, and, in particular, between users of rail services on main lines and users on branch lines. A case study of transfers between growers, based on grain freight rates in New South Wales, is used to

illustrate the extent of the rail transfers.

The current freight rate structure used by the SRA is based on rail distance travelled, with the rate of increase in charges decreasing as rail distance increases (as shown in Figure 2.2). Even allowing for the direct subsidy of

approximately one-third paid on grain freight by the New South Wales Government, this pricing structure does not match the cost pattern incurred by the SRA for grain freight. Consequently a significant element of cross-subsidisation between growers occurs. In particular, the current rating

structure does not reflect the fact that many outer branch lines are operated solely for grain traffic and therefore track maintenance costs should be wholly attributed to this traffic. Because this cost is not reflected through the current charges to branch line users, those growers

delivering to main line silos and terminals tend to be paying more than would otherwise be the case.

The shortcomings of the existing pricing structure are recognised by the SRA and it is currently restructuring its grain freight operations (while retaining the overall direct subsidy) by replacing some high cost branch line operations with road haulage and modifying freight rates to better reflect costs and improved operating efficiencies. In the process of establishing these plans the SRA derived a formula that reflects the cost factors in grain transport by rail

from any particular site in New South Wales (SRA 1986). Four cost components are used:

A distance - fixed rate/tonne km;

B port terminal cost plus indirect costs ($/tonne);

C loading silo cost and branch line operating cost ($/tonne);

D branch line track maintenance costs ($/tonne).

Using this formula, with no allowance for any potential cost savings that may be achieved in the future or for special border rates, the Commission was able to estimate transfers

21

SUPPORTING PAPER 6

between growers by comparing the current charges with the estimated costs of providing the service. (The direct State government subsidies are accounted for in both the charges and cost formula so that the difference provides a

satisfactory estimate of the transfers involved.) The data set used in this analysis was derived from SRA (1986).

The results (presented in Figure 3.1) indicate that transfers range from subsidies of around $17 per tonne for growers delivering to certain branch line site, to additional payments of between $6 and $8 per tonne by growers delivering to certain main line sites. Overall, growers delivering to 60 delivery points received subsidies of $2.50 per tonne or more while growers delivering to 133 delivery points paid

additional rail freight of $2.50 per tonne or more. Figure 3.2 shows these subsidies and payments as a percentage of the freight rate paid. Growers delivering to 40 sites received a subsidy of more than 25 per cent while growers delivering to only three sites paid an extra amount in excess of

25 per cent. The majority of sites were within this plus or minus 25 per cent range.

Obviously, the impact of these transfers on individual growers can be significant. Taking a typical farm's production level of 600 tonnes, the cross-subsidies occurring in New South Wales would involve income supplements of over $10 000 in some cases and income reductions of over $4000 in other cases.

The analysis of the cross-subsidies occurring under the SRA's current pricing policy also confirms the high cost to the grain industry of maintaining some low volume branch lines. The SRA has estimated the cost of maintaining such branch

lines at $7500 per kilometre per year (SRA submission, February 1987). Growers delivering to thirty delivery points on grain-only branch lines received cross-subsidies from other New South Wales growers of between $9 and $17 per tonne.

3.2.2 Storage and handling

The practice of pooling of storage and handling charges also creates significant transfers between growers. The extent of this is apparent when one considers the range of operating costs between individual country receival points. In Table 3.1 the percentage difference between the least and most costly country receival points in each State is presented. As a result of differences in the methods used to determine costs in each State, it is not valid to make interstate comparisons; nevertheless, the figures indicate the likely extent of transfers that occur within the States.

22

I >7.50________7.5 0-5 .00 5.00-2.50 2 .5 0-0 ^ i < 0-2.50_______2.50-5.00 5.00-7.00

Subsidy ($) ' Extra payment ($)

FIGURE 3.1 FREQUENCY DISTRIBUTION FOR RAIL TRANSFERS — DOLLARS.

Source: State Rail Authority of New South Wales.

> 7.5 0 ^

1 ~ 1

80

150-

120

$ 90

60

30

75 -50 > 7 5 50 -25 25 -0 0 -2 5 2 5 -5 0

Subsidy (%) 1 Extra payment (%)

FIGURE 3.2 FREQ UENCY DISTRIBUTION FOR RAIL TRANSFERS — PER CENT

Source: State Rail Authority of New South Wales

TABLE 3.1 PERCENTAGE DIFFERENCE BETWEEN LEAST AND MOST COSTLY COUNTRY RECEIVAL POINTS IN EACH STATE, 1982-83 TO 1985-86

(per cent)

Region 1982-83 1983-84 1984-85 1985-86

New South Wales southern 442 584 480 282

northern 1783 440 431 1213

Victoria a 714 256 243 243

Queensland ^ southern 428 429 184 158

central 153 156 119 139

South Australia 2008 461 822 442

Western Australia 701 654 684 787

a. In Victoria costs were available only on a regional basis; figures are therefore based on least and most costly regions rather than receival points. b . In Queensland costs were available only on a

'supervisor's area basis' (6 to 8 silos); figures are therefore based on least and most costly areas rather than receival points.

Note: Different methods were used to determine costs in each State; interstate comparisons are therefore invalid

Source: Bulk handling agencies.

To obtain a more detailed picture of the range of storage and handling costs, the Commission undertook some limited analysis of such costs in New South Wales. Information on the main operating costs for each delivery point in New South Wales for the year 1985-86 was obtained from the GHA. Operating costs (as measured) ranged from under $1 per tonne

to over $23 per tonne. Using a weighted average of $4.44 to approximate the silo operating cost component of the pooled storage and handling charge, transfers between growers were estimated to range between a $19 per tonne subsidy and a $3.50 additional payment. The distribution of transfers calculated in this way is presented in Figure 3.3. Although the range of estimated transfers is wide, the majority

(84 per cent) of receival points incur a transfer in the range plus or minus $2.50.

25

kWWWWWWWI

> 7.5 0____________ 7.50-5.00__________ 5.00-2.50___________ 2 .5 0 -0 ι 0 -2.50____________2.50-5.00

Subsidy ($) I Extra payment ($)

FIGURE 3.3 FREQ UENCY DISTRIBUTION FOR STORAG E AND HANDLING TRANSFERS — DOLLARS

Source: Grain Handling Authority of New South Wales.

> 7 5 7 5 -5 0 5 0 -2 5 2 5 -0 , 0 -2 5 2 5 -5 0 5 0 -7 5 > 7 5

------------------------------ ----------------------------------

Subsidy (%) 1 Extra payment (%)

Source: Grain Handling Authority of New South Wales.

FIGURE 3.4 FREQ UENCY DISTRIBUTION FOR STORAGE AND HANDLING TRANSFERS — PER CENT

SUPPORTING PAPER 6

In Figure 3.4 the transfers are depicted as a proportion of the average operating cost (that is, of $4.44). This reveals that at 73 receival points users receive a transfer in excess of 25 per cent, while at 69 receival points users contribute an additional payment in excess of 25 per cent of the

operating cost. At 19 delivery points users receive a transfer in excess of 75 per cent of the actual cost.

Some care should be taken with the interpretation of these results because they do not include capital costs. If more modern and technically advanced capital equipment improves efficiency then it is possible that, for a given level of throughput, the capital costs of sites with low operating costs per tonne will be higher than those of less efficient sites (those with relatively higher operating costs), thus offsetting some of these transfers. Further, these estimates of transfers have been calculated for only one year. Variations in tonnages, and the accuracy of forecasts of

throughput can have an effect on costs from year to year, with different effects on different silos. Therefore, the extent of these transfers, and even the direction of these transfers, can change across years. However, it is clear that the transfers between growers can be large, with some benefitting substantially at the expense of others.

Similar effects occur in other States, as is illustrated by WACBH in an analysis of ten selected sites representing high and low throughput receival points (WACBH submission, April 1987). Other information provided confidentially to the Commission indicates that these sites are clearly not the most efficient or the least efficient; they do, however, provide a reasonable spread around the average cost. In its submission, the WACBH compares allocated costs to each site with the pooled handling charge. The allocated costs contain direct costs (including operating costs, maintenance,

supervision, and depreciation) for each site, a port handling charge on the basis of the port zone in which the site is located (the port handling charge is spread over all receivals in that zone, with some allowance for inter-zone movement), an allocation of general overheads (including interest and charges, insurance, general depreciation, and head office costs) which are spread evenly over all tonnes received, and an average contribution to reserves for each tonne received.

Comparing these allocated costs to the total handling charge, Table 3.2 shows the transfers that occurred between growers for each tonne delivered at each site for the period 1981-82 to 1984-85. Variation occurs from site to site and year to year, depending primarily on throughput.

As is apparent from Table 3.2, even a limited sample of sites shows significant variation in the transfers, with some growers receiving subsidies of over $3 per tonne and others contributing an additional payment of over $2 per tonne.

28

TABLE 3.2 TRANSFERS BETWEEN GROWERS: WESTERN AUSTRALIA, TEN SELECTED SITES, 1981-82 TO 1984-85 __________________________ ( $/tonne ) _____________________

Site 1981-82 1982-83 1983-84 1984-85

Mingenew 0.45 0.12 -0.09 0.33

Buntine 0.23 -0.09 -2.62 -2.13

Mollerin 0.17 -0.14 -0.67 0.97

Tammin 0.82 1.40 1.11 2.39

Quairading -1.08 0.40 -1.47 1.19

Narrogin -1.54 0.53 -3.22 0.31

Lake Cairlocup -2.52 -2.04 -3.65 -2.16

Katanning -3.33 -1.64 -2.57 -0.27

Lake King -3.46 -1.92 -3.65 -1.54

Fremantle -8.00 -2.03 -2.45 0.23

Note: A positive amount represents an extra cost

incurred; a negative amount represents a subsidy.

Source: Derived from WACBH submission, April 1987.

3.2.3 Port services and sea transport charges

Port and shipping services can be regarded as the point of contact between the domestic storage and handling system and the overseas buyer. Some charges, such as wharfage, are levied on the shipper (that is, the exporter), others such as light dues, towage and pilotage, are levied on the ship owner and are indirectly reflected in the price obtained for Australian grain. Where these costs are borne (and the transfers involved) depends on the way costs are levied and returns are distributed.

Wharfage is the main port-related charge levied on the shipper (for example, the marketing boards) rather than the ship owner. It has developed as a general revenue-raising charge to contribute to the cost of providing port services, and it tends to involve different per tonne rates for different commodities. The rates also vary significantly from State to State and, in Western Australia and Queensland, from port to port.

The cost of wharfage is recouped directly from all growers by means of a deduction from their first advance. The amount of this deduction is the same for all growers in a State and is determined where necessary as a weighted average of the wharfage charges at each port in the State. The total wharfage payable is estimated using expected export shipments

from each port and this amount is then distributed across all growers on the basis of expected total receivals (whether exported or used domestically). Table 3.3 shows the wharfage deduction for each State in 1986-87 and the range of actual wharfage charges that apply in the State. State pooling of wharfage charges, where these charges differ between ports,

29

SUPPORTING PAPER 6

effectively leads to transfers from growers supplying grain to ports with low wharfage charges to those supplying grain to ports with high wharfage charges. Transfers also occur from growers whose grain is delivered to the domestic market

(which avoids wharfage and other port services and transport costs) to those growers whose grain is delivered to ports.

Port charges levied on shipowners and other shipping costs also affect the net return to Australian grain growers, although the nature of this effect is indirect. As Australia is generally a price-taker in the world grain market, any additional port services and sea transport charges that increase the landed cost of Australian export grain will reduce the net price paid to Australian growers. As with wharfage charges, other port and shipping charges vary from

State to State and port to port but in the case of wheat their impact on net grower returns is generally pooled across all Australian growers.

TABLE 3.3 WHARFAGE CHARGES AND DEDUCTIONS, BY STATE AND PORT, 1986-87 ______________________ ($/tonne shipped)_____________

State and port

Actual wharfage charge

Weighted average wharfage charge

Grower deduction

Queensland 1.67 1.15

Mackay 0.90

Gladstone 0.90

Brisbane 2.00

Western Australia 0.43 0.42

Esperance 0.80

Albany 0.95

Bunbury 0.70

Kwinana 0.14a

Geraldton 0.80

New South Wales 1.78 1.78 1.75

All ports

Victoria 1.00 1.00 0.91

All ports

South Australia All ports 1.23 1.23 1.03

a. Equivalent rate: WACBH owns the jetty at Kwinana and pays a flat rate of $300 000 per annum for maintenance.

Source: Royal Commission into Grain Storage, Handling and Transport.

30

SUPPORTING PAPER 6

National pooling of revenue currently ensures that the costs of sea transport are spread across all growers irrespective of the port to which they deliver grain or of whether they supply the domestic or export market. A minor exception to the general pooling occurs in the case of Western Australia, where a freight differential is paid to growers in

recognition of the fact that Western Australia is closer to some Asian and European markets.

A comparison of costs of shipping from various ports in Australia to a number of destinations in a median shipping market for a 29 000 tonne cargo is presented in Table 3.4 (see Supporting Paper 5 for details for a high and a low

shipping market and for 59 000 tonne cargoes). This

comparison reveals a wide range of costs between ports, which is concealed within current pricing and contract

arrangements. Specification of particular ports of loading in contracts would allow such variations in costs to be more readily reflected in grain prices received by growers delivering to those ports. Information is also available on the port costs levied on ship owners servicing the Australian wheat trade. These have been collated by the Commission and

are presented in Table 3.5. From this information it would appear that, for a ship of 31 400 deadweight tonnes, port services charges range from a minimum of $24 174 ($0.84 per tonne) at Fremantle (Kwinana) to a maximum of $41 520

($1.44 per tonne) at Geraldton. However, the relationship between port services charges and actual costs is unclear. Moreover, the charges are likely to understate significantly the differences in the cost of port operations because many port costs are pooled within States, and sometimes

nationally. For example, State conservancy dues, which purport to cover port, river or estuarine maintenance but actually are paid into the State's consolidated revenue, are applied at a common rate for all ports in each State.

Similarly, berthage, which is a charge levied by each port authority for the use of the wharf, is a pooled charge in each State except Western Australia. Commonwealth light dues are charged at a uniform rate throughout Australia, based on the registered tonnage of a ship. The Commonwealth dues cover the ship for three months irrespective of the number of ports visited.

As with other instances of cost pooling, these pricing practices tend to disguise the actual cost of providing the services and reduce the scope for cost accountability. The pooling of port services charges on a State basis and the national pooling of revenue, together with the practice of

not specifying a particular port of loading in Australian Wheat Board f.o.b. contracts, results in transfers of income from growers supplying to low cost port facilities to those

using high cost ports. Moreover, these practices also minimise competition between ports and reduce the incentive to use the most efficient least-cost facilities.

31

TABLE 3.4 COMPARISON OF SELECTED GRAIN SEA TRANSPORT COSTS - MEDIUM MARKET (US$ per tonne for a 29 000 tonne cargo)

Loading _______________________________________________________ Discharge country and port

country and Egypt Iraq Iran Saudi Arabia Japan Pakistan

port Port Said Aqaba Bandar Abbas Dammam Yokohama Karachi

Australia Brisbane 25.60 19.73 2 6 .2 6 1 8 .0 8

Port Lincoln 2 2 .8 2 16.94 23.50 15.33

Kwinana 20.55 14.64 21.14 12.95

Newcastle 2 5 .1 6 19 .03 2 5 .6 0 18.42

Port Kembla 24.35 18.22 24.83 16.35

Geelong 23.87 17.58 24.32 16 .16

Portland 23.72 17.59 24.14 15.97

Adelaide 23.33 17.41 2 3 .9 8 15.79

Port Pirie 23.79 17 .86 24.43 16.25

Wallaroo 23.57 17.63 24.20 1 6 .0 2

Albany 2 1 .1 9 15.27 21.83 13.65

10.79 13-73 11.87 11 .71

1 1 .1 9 12.77 13.15 13.95

14.58 14.35 1 2 .7 0

1 7 .6 2 15.50 13.14 17.63

1 6 .8 2 16.16 16.18 16 .01

16.46 16.23 13.87

a. Includes port disbursements at unloading port and commission allowance.

Source: Royal Commission into Grain Storage, Handling and Transport.

Item Gladstone Brisbane Newcastle Sydney Geelong Portland Adelaide Ardrossan

Commonwealth light dues 5 4?0 5 470 5 470 5 470 5 470 5 470

Survey fees ^ 1 500 1 500 1 500 1 500 1 500 1 500

Conservancy 2 716 2 716 3 692 3 692 2 868 2 868

Berthage/tonnage rate 2 495 1 219 1 272 1 272 2 031 3 Ο85

Pilotage 2 304 3 596 4 032 4 032 3 917 1 180

Port improvement dues - - - - - -

Towage 9 428 10 400 6 004 6 305 14 650 7 760

Linesmen/launch 235 350 350 350 350 350

Mooring/unmooring 1 164 1 500 931 884 2 440 960

Agency 2 000 2 000 2 000 2 000 2 000 2 000

Miscellaneous 350 450 450 500 350 350

Gangway watchmen 895 689 689 826 1 240 1 378

5 470 1 500

4 650 4 500 1 832

12 264 350 650 2 000

350

1 929

5 470 1 500

4 650 4 018 1 832

14 149 350 650 2 000

350

1 722

Total cost Cost per tonne

28 557 29 890 26 390 26 831

0.99 1.04 0.92 0.93

36 816 1.27

26 901 0.93

35 495 1 .2 3 36 691 1 .2 7

Item Wallaroo Port Port Thevenard Esperance Albany

Pirie Lincoln

Kwinana Geraldton

Commonwealth light dues 5 470 5 470 5 470 5 470 5 470 5 470

Survey fees . 1 500 1 500 1 500 1 500 1 500 1 500

Conservancy 4 650 4 650 4 650 4 650 1 399 1 399

Berthage/tonnage rate 1 607 1 941 1 607 3 482 4 047 6 339

Pilotage 1 832 1 832 1 832 1 832 1 750 1 750

Port improvement dues - - - - 5 800 3 654

Towage 5 536 13 248 7 558 4 400 4 840 4 840

Linesmen/launch 350 350 350 350 350 350

Mooring/unmooring 650 650 1 000 650 600 813

Agency 2 000 2 000 2 000 2 000 2 000 2 000

Miscellaneous 350 350 350 300 300 300

Gangway watchmen 689 826 413 4 272 2 343 1 653

5 470 5 470

1 500 1 500

1 399 1 399

1 386 12 648

1 562 1 750

-

5 075

8 892 7 840

350 350

862 1 200

2 000 2 000

400 350

413 1 998

Total cost cost per tonne

24 634 32 817

Ο.85 1.14

26 730 28 906 30 339

0 .9 3 1 .0 0 1 .0 5

30 008 1.04 24 174 0.84

4i 520 1.44

a. Grain load of 29 000 tonnes. b . Includes State light dues where applicable.

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 6

Significant transfers also result from the pooling of the two-port loading charges across all growers within a State regardless of whether or not they deliver to a shallow-water port. To illustrate the extent of these transfers the Commission carried out an analysis for South Australia.

Because of the limited availability of deep-water port facilities in South Australia, a substantial proportion (50-60 per cent in recent years) of shipments from that State

require two-port loading. The AWB imposes a pooled two-port loading charge on all receivals of wheat in South Australia to offset the extra shipping costs involved. The charge is set at the beginning of the season, based on port services and sea transport costs, anticipated receivals, two-port loading requirements, and exchange rates. For 1985-86 the AWB estimated that the additional costs for all wheat loaded at two ports amounted to US$1.00 per tonne while for 1986-87 the estimated cost was reduced to US$0.75, mainly as a result of more competitive shipping conditions. Converting these costs to Australian dollars and pooling across all receivals, the resulting two-port loading charges in South Australia were

$A0.50 per tonne in 1985-86 and $A0.59 in 1986-87.

In addition to two-port loading, there is also a need, on occasions, for wheat to be moved from one port division or zone to another in order to provide grain for topping up and to ensure adequate supplies of particular grades to fill orders. A substantial proportion of these out-of-zone movements are necessary because of the inadequacy of local ports to handle larger grain ships. Prior to 1986-87, the extent of out-of-zone movements was relatively small and the cost incurred by the AWB was pooled nationally; however, with the trend toward larger ships, the need for out-of-zone movements to service such ships has become more significant, especially in South Australia. Consequently, for 1986-87 the AWB added an additional component to the two-port loading charge to cover the cost of necessary out-of-zone movements. This component, based on the predicted cost of out-of-zone movements and pooled for all receivals, was set at $A0.48 per

tonne.

For both the out-of-zone and shipping components of the two-port loading charge, any difference between the revenue raised and the actual cost incurred by the AWB is ultimately adjusted in subsequent pool payments to South Australian growers.

Under a disaggregated pricing policy the costs of two-port loading would be borne by growers delivering to shallow-water ports while out-of-zone movements would be borne by growers in areas being serviced by shallow ports. In effect, such charges would account for the additional cost of marketing wheat from such areas.

To estimate the disaggregated charges and thus determine the extent of transfers under the current pooling procedures the Commission took the following approach. Using data on the actual occurrence of two-port loading in 1985-86 and AWB

34

SUPPORTING PAPER 6

estimates of the shipping cost of such loading, the total cost for South Australia was determined at $1.17 million. This cost was then attributed to the various ports on the basis of the amount of grain loaded at each port onto ships that subsequently required topping up. The cost attributed to each port in this way was then determined as a cost per tonne received in each port division. Using AWB estimates of two-port loading and costs and assuming the 1985-86 pattern of two-port loading, some estimates of distributed costs and charges can be calculated for 1986-87.

In addition to these shipping-related charges, it is possible to estimate disaggregated charges for out-of-zone movements based on AWB projections of the incidence and cost of such movements in 1986-87. The cost of projected movements was

attributed to the division (zone) of origin and then determined as a cost per tonne for all receivals in that division. The results of these calculations are presented in Table 3.6 together with estimates of the transfers involved. The Commission stresses that these estimates are indicative only. The actual incidence of two-port loading and

out-of-zone movements and associated costs will vary from those predicted by the AWB and assumed in this analysis. Nevertheless, the analysis does provide an indication of the

magnitude of transfers that are occurring under the current practice of pooling charges. These transfers range from a $2.57 per tonne subsidy to an additional payment of $1.07 per tonne.

As expected, the transfers associated with the pooled two-port loading charge favour growers in the region of shallow ports (especially Port Pirie) at the expense of growers with ready access to deeper water ports such as Port Lincoln and Port Giles.

The above examples indicate the nature of transfers currently occurring in the Australian grain storage, handling and transport system. The extent of these transfers is likely to be substantial, particularly if they accumulate throughout

the system. On the other hand, the net transfer for some growers may be reduced if off-setting transfers occur in different parts of the system. In any case, the size and

extent of the transfers are generally not recognised by growers because of the process of cost pooling and the resulting absence of data on the costs of various parts of

the system.

3.3 Loss of economic efficiency

To a significant extent the question of the transfers between growers is a matter for debate between the individuals and groups involved; there is nothing to stop one group of growers knowingly and willingly subsidising another group. Transfers as such may not lead to large economic losses except where groups commit significant resources to lobbying and campaigning to receive or maintain transfer benefits.

35

Port Adelaide 0.10 -0.40

Port Pirie 2.04 1 .5 4

Wallaroo 1.21 0 .7 1

Thevenard 1.08 0 .5 8

Port Giles 2.59a 2 .0 9

Port Lincoln - -0 .5 0

Ardrossan - -0 .5 0

0.09 0.11 -0.87

1.89 1.65 2.4?

1.16 0.20 0 .2 9

1.05 0.38 0.36

- - -1.07

- - -1.07

- - -1.07

a. Wheat Shipments from Port Giles involved two-port loading in 19 85-86 because the total volume shipped (I327I tonnes) did not constitute a full ship load.

Source: Royal Commission into Grain Storage, Handling and Transport estimates based on information provided by the AWB.

SUPPORTING PAPER 6

There is, however, another aspect of cross-subsidisation and pooling that does have wider economic significance. This is the effect that cross-subsidisation has on the efficiency of resource allocation. To the extent that resources are misal located, that is, are not being used in their most

efficient activity, then the welfare of the industry and society in general is diminished.

The cost of such resource misallocation arises when growers, statutory agencies and others make investment/disinvestment and other management decisions in response to prices and

costs that have been distorted by inefficient pricing practices. Because these decisions are not based on accurate price signals they lead to inefficiencies through the over- or under-utilisation of certain inputs and services and, ultimately, the over - or under-production of particular farm products. For example, in an area where the costs of storage

and handling are high but charges are reduced by pooling, growers will be encouraged to increase production beyond that justified by the true cost structure. Increased production will also mean that additional deliveries and, consequently,

investment will be made into the local (high cost) receival facilities when alternatives such as on-farm storage or delivery to more efficient facilities may be more resource efficient. Some high cost facilities may be maintained when they would be better closed down. Consequently, resources - land, labour, capital and other inputs - will be used when they would be more productively used in some other way perhaps producing some other product or perhaps in other

areas of the industry.

The extensive use of cost pooling and, in some cases, the apparent lack of detailed cost information, brings into question the ability of storage, handling and transport agencies to make economically justifiable investment and operational decisions. In such circumstances, non-commercial objectives will tend to dominate the decision-making process

and, in particular, decisions will tend to be service rather than market driven. Combining these non-commercial objectives with average costs and returns being attributed to

any new investment project, there is likely to be

over-investment in some areas and under-investment in others.

Cross-subsidisation in land transport has the effect of encouraging the use of high cost services in some areas and under-utilisation of efficient alternatives in other areas. This effect is clearly illustrated, for example, in the case of the New South Wales rail system, where the rating

structure has subsidised the users of some high cost branch lines and discouraged the use of road transport that may be available at a lower resource cost.

A similar loss results when efficient production and input usage is discouraged as occurs, for example, when relatively low cost storage and handling services are charged at a higher pooled rate. Growers respond to this higher cost by producing less grain than is desirable from an efficiency point of view and diverting resources into other areas of

37

SUPPORTING PAPER 6

production. As a result, the low cost storage and handling system is under-utilised. Together, the under-production of grains and the under-utilisation of the low cost storage and handling system represent a misallocation of resources.

In addition, where the pooling of port service and sea transport charges results in the true cost of using a high cost port not being reflected in growers' returns, such a port will be over-utilised. Some resources will be used to produce and ship grain through that port which would be better utilised elsewhere. Further, the use of efficient low cost ports will be discouraged. The cost savings that would result from using such ports are not reflected back to the grower (or bulk handling agency). Where growers supply the domestic market they still bear port services and sea transport costs. This would tend to discourage the most efficient choice of area to supply this market.

Consequently, efficient production and storage and handling options are by-passed at a cost to the grain industry and to the economy in general. If charges were disaggregated it is likely that the pattern of grower deliveries would change, with increased deliveries to lower cost and deeper water ports and a more efficient choice of production areas to supply the domestic market. Overall, the cost of port services and the need for and cost of two-port loading and out-of-zone movements by the AWB could be expected to be reduced.

Resource cost savings may also arise from peak-load pricing practices which lead to a more uniform spread of deliveries to bulk handling agencies over the harvest period. To

illustrate some of the benefits that might arise from price differentiation across time, the Commission considered peak-load pricing at country receival points. The analysis is based on material prepared by Dr J. Quiggin and

Professor B.S. Fisher in a consultancy prepared for the Commission.

At present, wheat growers are paid, shortly after delivery, an advance equal to the net guaranteed minimum price. The earlier the wheat is delivered, the earlier the advance is received. Since the amount received is largely independent of the time of delivery there is a significant incentive for early delivery.

The operating costs of receival points are likely to be affected by the time of delivery. It seems reasonable to assume that costs are lowest when the pattern of deliveries

is fairly uniform throughout the harvest period. Thus, deliveries at peak times would impose a higher marginal cost on the system than would deliveries at off-peak times. It

also seems likely that there would exist some optimal opening period that would minimise operating costs.

A four-period model was developed to investigate potential savings. In the model, the amount harvested in each period was fixed, with Period Two being the peak of the harvest.

38

SUPPORTING PAPER 6

Growers had the choice of delivering directly upon harvesting or storing on-farm for delivery in a later period, with all grain being delivered at some time within the four periods. Growers will make this choice in response to the costs they face. These costs will not reflect the true costs of their decisions within the current system for two reasons. First, pooling of costs, in particular, charging a fixed price at an individual site for the whole period, will create a

divergence between costs borne by the bulk handling agency and costs borne by the grower, if delivery at particular times or in particular ways, imposes greater marginal costs on the grain handling system. Second, growers do not face the full social cost of congestion caused by delivering in peak periods. Growers will take account of the length of the queue in deciding when to deliver, but they are unlikely to

take account of the impact of their decision on others in the queue. Details of the model and data used are presented in Appendix B .

Results of the model indicate that switching from the current pricing system to a system where growers face an additional charge in the peak delivery period and where storage and handling charges are based on marginal or average costs for

each of the four periods can result in savings of between $0.95 and $1 per tonne. Most of these savings result from growers spreading deliveries more evenly over the harvest period, with increased amounts of grain being stored on farm

from the second to the third and fourth periods. This model assumes that grain deliveries are not extended beyond the harvest period and so does not account for any gains that might arise from later deliveries.

Some of the gains described would be offset by the

administrative costs of introducing such a policy. These additional costs have not been evaluated.

While rationalisation of pricing policies should lead to efficiency gains, the full extent of the gains will not be realised unless decisions recognise the highly integrated nature of the storage, handling and transport system. An

interesting example in this regard is the Victorian situation, where there are several central receival points that have higher freight rates than nearby fill-and-close silos. Growers are therefore given a financial incentive to deliver to the less efficient sites. In this case some disaggregation of the receival point charges (and perhaps some adjustment to the radial freight rates) may facilitate optimal delivery patterns.

A further illustration of this effect is that if transport costs are ignored it is likely that losses associated with pooling of costs among receival points will arise when deliveries are made to points with high marginal costs rather than to nearby sites with low marginal costs. If transport costs to the two sites are equal, the social loss is equal to the difference in marginal costs. But if the high cost site

is closer, the loss from pooling is equal to the difference in marginal costs less the saving in transport cost.

39

SUPPORTING PAPER 6

Obviously, effects of this kind are relevant only within a region where differences in marginal costs are greater that the additional transport costs.

The loss associated with pooling among nearby sites has also been addressed by Dr J. Quiggin and Professor B.S. Fisher. In particular, the consultants consider two receival points which are 20 kilometers apart and assume that farms are uniformly distributed along the interval between them. In

addition, it is assumed that each site is subject to constant marginal costs, that these marginal costs are $2 higher at Site A than Site B (in line with differences of $2 per tonne to $5 per tonne which were found as typical in New South Wales) and that the marginal cost of transport is $0.20 per tonne-kilometre. The most cost effective solution is for growers less than 5 kilometers from Site A to deliver to that site and for all others to deliver to Site B. Under pooling, all those less than 10 kilometers from Site A will deliver to that site. The average social loss associated with

deliveries to the 'wrong' site is $1.50 per tonne. Since this represents 25 per cent of total deliveries, the average social loss across all deliveries is 38 cents per tonne.

Broadly speaking, this loss will increase with the square of the divergence in costs. Once the cost divergence rises above $4 per tonne, the optimal solution involves closure of Site A. The social cost of pooling in this case is $1.50 per tonne. Beyond this point, each additional increase of $1 per tonne in the divergence yields an increase of 50 cents per tonne in social costs of pooling (since only the 50 per cent delivered to Site A is affected).

40

4. ALTERNATIVE PRICING PRACTICES

4.1 Background

The extensive use of pricing practices that lead to

significant cross-subsidisation in the Australian grain storage, handling and transport system occurs because of the absence of mechanisms that would encourage more efficient pricing practices. In many cases a more competitive market could improve pricing efficiency because in such markets cost pooling occurs only to a minor extent. There may be some pooling to the extent that total price differentiation is impractical but cross-subsidisation is virtually non-existent as a conscious policy. Extensive cost pooling is not possible because it would either price the firm out of a particular market or the firm would not recoup its costs, depending on the level of the pooled charge relative to costs. If a section of the business is not satisfactorily covering its costs and competitive pressures prevent price increases, then this part of the business would eventually close.

Price differentiation implies greater flexibility in the setting of charges, so that the charges can be adjusted to reflect costs, demand conditions and competitive pressures, not only between sites but possibly between storage types within a site or at a site over time. It is therefore

appropriate that charges vary as receival point, transport or port costs change even during the harvest due, for example, to the high cost of after hours or late season deliveries or the need to use bunker storage instead of cheaper permanent

storage.

In the following section some general pricing issues relevant to pricing of storage and handling, land and sea transport and port services are outlined. This is followed by a discussion of two particular pricing problems, namely the recovery of the costs of road damage and the recovery of joint and common costs of rail transport. Finally, in Section 4.5, alternative pricing practices for port services and sea transport are considered.

4.2 Pricing under alternate market structures

From a social welfare point of view, the optimal pricing strategy for any agency providing a service (other than a natural monopoly) is to set the price of providing the service equal to the cost of providing the last unit of that service (marginal cost). In the case of a natural monopoly, economies of scale exist over the entire range of output. This means that the cost of providing each additional unit of

service will always be less than the cost of providing each of the preceding units, and the marginal cost will always be below the average cost. Thus, if the price received per unit of the service was set at the marginal cost the agency would never cover its average costs and it would run at a loss.

41

SUPPORTING PAPER 6

One economic argument suggests that it would be most efficient if government subsidised this loss. This would be the case if the government could collect all its taxes in lump-sum form, that is, a tax that is not influenced by the behaviour of the individual (see Atkinson & Stiglitz 1980).

Inevitably, however, government needs to collect at least some of its taxes by means of excises and sales taxes, which distort prices. Given this, and the fact that such price distortions create inefficiencies, the second-best pricing approach for public authorities may be to price in such a way that the average costs of the particular service are covered and thus no subsidy is required (this is known as Ramsey pricing).

This does not imply that costs across all services should be pooled, with the grower facing an average price; the inefficiencies created in attempting this have already been discussed. Rather, the average cost of each service should be reflected back to the grower. Ramsey pricing thus ,

involves a mark up above the marginal cost, to cover a portion of the fixed and joint costs of the operation. The appropriate mark up is determined by the demand

characteristics of each market segment; it will be larger where demand is relatively unaffected by price and smaller where demand is sensitive to price.

In its submission (May 1987, pp. 12-13) the Bureau of Transport Economics suggests that two major problems exist with this type of pricing: first, it is difficult to

implement due to the problem of accurately determining the demand characteristics of each market segment; second, it ignores the consequences of the policy for those consumers who may be allocated the major part of the fixed costs.

With respect to the first problem, if the market is

contestable then in a deregulated environment a Ramsey price ^ would naturally arise through the working of the market (Baumol & Willig 1986). The problem arises only if it is necessary to regulate the price to equal the Ramsey price, either in a regulated setting or in a non-contestable monopoly setting. The United States Interstate Commerce

Commission (ICC) has considered a number of options for ■ establishing efficient pricing levels for railways possessing a high degree of market dominance - Baumol & Willig discuss the ICC findings in some detail. The ICC concluded that

'... while Ramsey pricing is useful as a theoretical guide, it is too difficult and burdensome for universal application' (quoted in Baumol & Willig 1986, p. 29).

The ICC criticised the concept of Ramsey pricing in the context of a regulated price. As an alternative, it proposed 'constrained market pricing', which is basically used to define a ceiling for prices generally, and in particular for rail rates. The ceiling proposed was the stand-alone cost.

With respect to the second problem - the effect on some consumers - some upper bound could be placed on the extent to

! P l

42

SUPPORTING PAPER 6

which growers are charged excessive proportions of the costs. This bound is the stand-alone cost.

The stand-alone cost sets the bounds on an efficient ceiling but it does not represent what is the lowest efficient price. Baumol and Willig suggest the lowest efficient price to be the ' incremental cost' of a given service, which is

'... the increment in total costs on the supplying firm when that service is added to its product line' (1986, p. 31). This concept appears to be equivalent to the long run

avoidable cost concept more frequently used in Australia.

If there is competition or a strong threat of competition in the market (that is, the market is contestable) then the price will lie between the stand-alone cost and the

incremental cost, depending on demand influences (that is, in effect a Ramsey price is determined) in both the short run and the long run. However

... if, in fact, market forces are not sufficiently

strong then there is likely to be a proper role for

regulation, and the theoretical guidelines derived from the workings of contestable markets are the appropriate ones to apply. That is, prices must be constrained to lie between incremental and stand-alone costs. (Baumol & Willig 1986, p. 32)

In the absence of contestability, this type of policy could be applied across all parts of the grain distribution system, including storage and handling services, transport services, marketing services and port services. Clearly, the issue of

the contestability of the various parts of the grain

distribution system is of critical importance in considering appropriate pricing and regulatory policy. The question of competition and contestability within the system is considered in Supporting Paper 7.

4.3 Recovery of the costs of road damage

A central issue in the land transport debate has been the degree to which road transporters cover the costs of road damage. This issue is discussed in some detail in Supporting Paper 4. However, no matter what the level of cost recovery, the most appropriate method of collecting the cost of road damage is also an important issue, both in the current environment and in a deregulated one. The discussion needs to be broadened beyond cost recovery for grain trucks to consideration of the general issue of the appropriate means of recovering road damage costs.

A number of taxes are currently imposed on road users, although these are not always justified on the basis of road damage cost recovery. At the Commonwealth level, vehicles are subject to sales tax and import duty. Fuel taxes or excises are imposed at both Commonwealth and State levels. In addition to this, at the State level there are also

vehicle registration charges, which vary according to vehicle

43

SUPPORTING PAPER 6

type and use. Local governments also collect revenue by way of rates and parking charges which partially go towards road maintenance.

In a recent report the IAC (1986) considered a number of alternative approaches to recovering the cost of road damage. The objective was to ' . . . pursue charging devices which accurately reflect the damage and congestion costs

arising from road use' (IAC 1986, p. xii).

In evaluating the current means of recovering road damage costs, the IAC concluded that as road damage is related more to axle load rather than fuel consumption (road damage increases more than proportionally with increasing axle load; fuel consumption increases at a much slower rate) it appeared unlikely that fuel excises and taxes would accurately reflect the damage done by various vehicle types. Further,

congestion costs are more related to time wasted and

inconvenience than to fuel used, so such taxes do not capture the social costs of congestion caused by individual road users.

Given these problems with current charging mechanisms, the NRFII in 1984 stated:

the fundamental problem is to devise a charge (or

combination of charges) which is proportionate to distance travelled, and is also related in an appropriate manner to some of the vehicle's characteristics, such as axle loads and gross vehicle mass. These characteristics directly determine some components of attributable cost

(and are a sound basis for the sharing out of other

components)...Once the characteristics of an individual vehicle are specified, an aggregated attributable cost per km can be assessed provided the distance travelled by the vehicle is known. (p. 233)

The IAC evaluated a number of alternative charging methods, including the use of tolls on roads, the use of fees and fines to ease congestion, distance-based charging by means of a ' hub-meter' , or a mixture of these approaches, as is practised in some other countries. It favoured the adoption of a hub-meter approach (as used in New Zealand) on the basis that '...a substantial proportion of damage is caused by heavy vehicles and the charge per kilometre can be set at the rate necessary to reflect this damage' (IAC 1986, p. xiv). It has, however, been argued that such a system is likely to have a high administration and enforcement cost. In addition, to cover congestion costs, some direct charging mechanism may have to be adopted in certain geographical areas (in particular city areas) to reduce traffic congestion problems. In both cases the IAC felt that such charging mechanisms could be introduced in the longer term ' as they become practicable' (IAC 1986, p. xv) but 'as quickly as possible' (IAC 1986, p. 115).

The main point here is that alternative mechanisms do exist which allow a greater degree of reflection of road damage

44

SUPPORTING PAPER 6

costs to specific users than currently occurs. The

implementation of such mechanisms is currently being considered as part of a general reform of road-user charges. In particular, progress has been made in relation to registration of interstate freight transport (Inter-state Commission, 1987) Overall, the Commission supports the principle that there should be a closer linkage between the

costs of road usage and road user charges. This issue is discussed in more detail in Supporting Paper 4.

4.4 Problems of recovering joint and common costs of rail transport

Rail traffic needs to pay an amount in excess of marginal (or avoidable) costs in order that the joint and common costs of the rail system are covered. The problem arises that, given the pricing rule that prices should lie between avoidable and stand-alone costs, if vigorous competition occurs between road and rail throughout the system (that is, across virtually all types of business) it may be difficult for rail

to fully cover the joint and common costs of the entire system. While on the basis of relative social marginal costs, it may be desirable to have a particular mix of road and rail, this mix may be unattainable if rail is forced to cover its joint and common costs for the rail system.

Although the Commission considers the issue of total rail infrastructure funding to be in the broader arena of government transport policy and as such largely beyond its terms of reference, some observations can be made about the grain transport market. First, the results obtained from the Commission's analysis of alternative distribution systems

(see Supporting Paper 8) indicate that, in a deregulated storage, handling and transport environment, rail can be expected to largely maintain its share of the overall grain transport task. This suggests that, in many situations, rail is less costly than road transport and that rail will be able to make a significant contribution to its joint and common costs. Second, the Commission's results suggest that, while rail's overall share of the grain transport task is

maintained, it does lose grain traffic from higher cost branch lines. This will enable rail authorities to focus their efforts on those parts of the network where rail has comparative advantage and may provide for lower overall costs

(including joint and common costs).

To the extent that rail is unable to recover all of its joint and common costs in a deregulated environment, consideration must be given to other initiatives. The option of continued government subsidies cannot be supported because of the

inefficiencies of the tax system and the difficulty of establishing and maintaining an appropriate subsidy limit. On the other hand, the contraction of railway operations that could result from a rigid imposition of a full cost recovery budget limit could lead to a sub-optimal modal balance as mentioned above. An approach that appears to the Commission

to have merit is the administrative imposition of road and

45

SUPPORTING PAPER 6

rail joint and common costs across both road and rail

traffics, in a way that minimises the disruption of the modal balance. In this regard, the submissions from the Western Australian Department of Transport are of interest.

4.5 Pricing of port services and sea transport

In Chapter 3, it is pointed out that extensive pooling of port services and sea transport charges occurs under the current pricing practices. Effective disaggregation of these charges would require modification of pricing practices at several points in the system. First, in the case of South Australia, Victoria and New South Wales, the departments

responsible for port service charges would have to

disaggregate their costings on a port-by-port basis before differential wharfage charges could be adopted. If this occurred, the charges could then be passed back to the growers delivering to each port by means of deductions from the first advance. Growers in those areas which supply the domestic market would either not face this charge, or face a proportionately lower charge based on the quantity of grain

delivered to the domestic market and that delivered to port. This would also apply to other port services and sea

transport charges.

Similarly, for the pooled port services charges levied on the ship owners, such as State conservancy dues, berthage and Commonwealth light dues, disaggregation by port would be necessary so that all the charges reflect the services and conditions applying at each port. For all port services charges the relationship between costs and the charge should be clear.

Finally, to ensure that actual port services charges and sea transport costs are reflected back to growers supplying to each port, it would be necessary to change the form of contract used by the AWB and to modify the practice of

revenue pooling. Instead of specifying f.o.b. contracts on a multiple port basis it would be necessary to nominate a particular port for loading so that the differential port services charges and sea transport costs would be accounted

for in the net price paid for the grain. Revenue pooling would have to be modified so that the differences in net price paid for the grain (attributable to port services and sea transport costs) could be passed on to the grower.

The same approach could be taken with respect to the cost of two-port loading. Contracts would specify the requirement for two-port loading and the additional cost would be allowed for in the price quoted (f.o.b. ) for grain from the ports involved.

In its response to the Commission's Discussion Paper No. 5, the Australian Wheat Board agreed that costs associated with port services and sea transport should be reflected to the users of port facilities wherever possible.

46

APPENDIX A PRICING PRACTICES OF STATUTORY AGENCIES IN THE GRAIN DISTRIBUTION SYSTEM

A.1 Victoria

A. 1.1 Storage and handling charges

In general, all costs incurred by the GEB in the Victorian storage and handling system are pooled, with growers paying an average price per tonne for services provided. There are, however, a number of exceptions to this rule. First, rates vary according to grain type and destination (export or

domestic market). Second, with respect to wheat handled for the AWB, barley handled for the ABB, and oats ex farm, some price discrimination occurs in order to influence the size, direction and timing of grain flows. This takes the following

forms:

. A border discount of $0.50 cents per tonne is offered to growers who deliver to any of four stations near the South Australian border; similar discounts in the handling charge are offered to New South Wales growers delivering into the Victorian system. This

discrimination is aimed at discouraging and encouraging interstate flows respectively.

. An overtime surcharge was introduced in the 1986-87 season for growers delivering on weekends and public holidays. Charges were $0.75 per tonne for growers delivering on Sundays and public holidays and $0.40 per tonne for Saturday deliveries.

. A quantity rebate is paid to growers when total tonnages of wheat, barley and oats received exceed specified levels; the rebate ranged from 15 to 35 cents per tonne and is paid in recognition of economies of scale

achieved by the GEB.

. Delivery date discounts and penalties are applied. The GEB participates in the Deferred Delivery Interest Scheme under which the AWB offers growers a discount for deliveries made within a certain period after the peak of the harvest. This discount is meant to reflect a

saving in interest charges made by the AWB in deferring payment to growers. The GEB offers a further discount of $1.10 per tonne (in 1986-87) to growers for late deliveries to nominated silos during a nominated period

(1 February to 15 March). This is aimed mainly at

reducing the incidence and extent of penalty costs incurred during the peak harvest period. A late delivery penalty applies after July to discourage deliveries during the period when preparations are being made for the new seasons receivals.

47

SUPPORTING PAPER 6

A central receival point (CRP) discount was also offered in 1983-84 to encourage the acceptance of the 'fill and close' silo and CRP system. It was subsequently suspended.

A.1.2 Transport charge

Transport of statutory grains (wheat, barley and oats) in Victoria is restricted to V/Line with two exceptions. First, such grains may be carried by private road hauliers for distances up to 60 kilometres from the place of consignment. Second, growers are exempt from the regulation if they transport their own grain in their own trucks provided those trucks have primary product (rather than commercial vehicle) registration. Provision exists in the legislation for the Road Traffic Authority to issue permits to allow road hauliers to transport grain further than 60 km. The

Government's policy has been to refuse to issue such permits. However, the Supreme Court of Victoria recently ruled that the 1981 directive of the then Minister for Transport, which effectively prevented the issue of permits, was invalid.

V/Line's pricing practices are based on radial rating. This approach was first introduced for the 1986-87 season, replacing a rail distance approach. Under radial pricing rail charges in Victoria are calculated on the basis of straight-line distance from the nearest port (either Portland, Geelong or Port Adelaide). The notion of radial pricing is based on an attempt to competitively price rail

against road transport, regardless of the actual distances travelled and the actual port to which delivery is made.

The current process of setting freight rates involves annual consultation between the Grains Group, the AWB, the ABB, the GEB and V/Line. The aim of these negotiations is to produce a consensus recommendation on freight rates for presentation to the Minister for Transport. However, agreement between the parties is rarely reached so separate recommendations from V/Line and the growers tend to be made to the Minister. In an attempt to aid the negotiations V/Line offered to provide growers with details of its costings so that the two parties might reach agreement on the basis of V/Line's cost estimates. However, despite many months of analysis during 1987 the VFF and their consultants were unable to reach agreement with V/Line on some cost estimates. As a result of the examination the VFF contended that a 3 per cent reduction in grain freight rates would enable V/Line to meet its

'efficient' costs, while V/Line argued that an increase of 5 per cent was required. The final outcome was an overall increase in freight rates of 2 per cent.

V/Line has offered reductions in rates for grain received from central receival points to reflect the considerable cost savings available in loading grain from these facilities. In general, growers appear to have rejected such offers.

48

SUPPORTING PAPER 6

With respect to cost recovery, the State government requires only that V/Line recovers the full cost of an efficient system and that growers are required to contribute a real rate of return only on capital invested in the rail network since 1982-83. Since 1984 significant cost savings have been made in line with recommendations contained in the CANAC report. These savings have arisen from the increased use of unit trains, track upgrading, the introduction of two-man crewing, rationalisation of shunting operations, staff reductions and network rationalisation.

A.2 New South Wales

A.2.1 Storage and handling charge

As with the Victorian system, the GHA pools all costs of storage and handling and charges growers an average price per tonne delivered. Wheat is the only statutory grain over which the GHA has monopoly storage and handling rights, but it does handle some quantities of other grains.

Some price discrimination is practised in border regions to discourage grain flows into Queensland, Victoria and South Australia. The option of discounting charges in border regions tends to be used strategically depending on

carry-over conditions and competition from the adjoining States. For the 1985-86 season, border discounts (together with other location-related discounts) were suspended in the light of the large carry-over situation. Special rates have subsequently been reintroduced for the Queensland border regions.

An attempt has also been made at price differentiation based on cost differences. In particular, a trial scheme was introduced in 1983 whereby discounts of $2 per tonne

(comprising $1 in reduced GHA handling charges and $1 in reduced SRA freight charges) were offered to growers delivering to the new bulk receival facilities at West Wyalong. The discount was part of a package of changes which

included longer opening hours and shorter queuing at West Wyalong and the introduction of a fill-and-close policy for some district silos. The trial was satisfactory, with

increased deliveries to West Wyalong, but the discount was removed in 1985-86 as part of the general suspension of location-based discounts. Some dissatisfaction with the

arrangement was expressed by farmers who claimed that the discount did not compensate for extra trucking costs and that it was a forerunner to silo closures.

The GHA has also participated in the Deferred Delivery Interest Scheme but appears unlikely to continue to do so because some difficulties are being encountered. The GHA claims that the Scheme contributed significantly to the disruption of the handling system through the late delivery of heavily insect infested grain of varying quality.

49

SUPPORTING PAPER 6

A.2.2 Transport charges

Although there are no legislative or contractual restrictions on the movement of grain by road in New South Wales, road movements are restricted by, among other things, the lack of road receival facilities at existing ports. Current rail charges are based on rail distance travelled, with the rate of increase in charges falling as distance travelled increases. Additional charges are made to the GHA for grain passing through sub-terminals and for shunting services. Price discrimination occurs in border regions to discourage interstate movement of grain. Throughout the State grain freight charges to growers are reduced by about one-third by specific State government subsidies that apply in addition to the Government's funding of the SRA's operating deficit.

Some attempt has been made to replace current charging practices with a more cost related system while maintaining the overall subsidy level. Three options were proposed by the SRA. Under Option 1 it proposed a number of efficiency improvements, including the use of unit trains, two-man crewing, and various other general 'belt-tightening' proposals. Accompanying these would be changes in the rate structure, including elimination of stopover and shunting charges for wheat taken to sub-terminals. The SRA suggested that these improvements would reduce rail transport costs paid by growers by 15 per cent.

Under Option 2 the SRA proposed to make the efficiency gains outlined under Option 1 and to change the charging practice so that it would be related to four cost factors - rail

distance, port terminal out-loading and indirect costs, silo loading and branch line operating costs, and branch line track maintenance costs.

Option 3 was put forward in response to criticism of Option 2 and involves a more rapid rationalisation of the existing rail network, with the substitution of road transport for

rail transport on some branch lines. Rail charges under Option 3 will be the lesser of the existing rate and a

revised Option 2 cost. This means that, in general, growers delivering to branch line silos will continue to pay the existing rate while growers delivering to main line silos will be charged the lower Option 2 cost. In order to make this concession the proposed distance-related charge (which is a flat rate per kilometre) would be marginally increased, from 2.5 cents per tonne-kilometre to 2.6 cents per tonne- kilometre, resulting in a revised Option 2 cost. Option 3 is currently being implemented by the SRA.

50

SUPPORTING PAPER 6

A .3 Queensland

A.3.1 Storage and handling charge

In Queensland, costs incurred by BGQ are disaggregated into four zones: southern Queensland country, southern Queensland ports, central Queensland country, and central Queensland ports. The factors considered in determining the charge for

each of the zones are the size of fixed and variable costs, likely harvest conditions, seasonal prospects, grain densities, average period that different grains are held in storage, and the number of segregations for each grain type. Charges vary according to grain type but not for segregations of a particular grain.

Some pooling of costs across time occurs. In above average production years charges are set above costs, allowing reserves to be established. These reserves are drawn upon in years when throughput is low, allowing charges to be maintained below average costs for that particular year.

Fixed charges are also pooled over time, with the charge to growers being calculated by dividing total fixed costs for a particular year by a three-year moving average of grain handled or shipped in each zone.

Charges are determined prior to the commencement of each season with the various marketing bodies involved. In addition to the basic charges set, a late delivery charge is imposed for grain delivered after a certain date.

This policy has been introduced to discourage a spread of deliveries which results in increased costs of handling, hygiene and fumigation and increases the incidences of insect infestations. In addition, carry-over charges are applied by BGQ on grain held beyond nominated dates on behalf of the various

marketing organisation clients as an incentive to have grain outturned prior to the next season's grain intake. (D.S. Christmas, General Manager, BGQ, personal communication, 9 April 1987)

Segregation appears to be more of a problem in Queensland than in other States because of the diversity of grains handled by BGQ.

A.3.2 Transport charges

Under Queensland's State Transport Act 1960-1985, as 'principal carrier' Queensland Railways is granted monopoly rights over the transport in that State of 'restricted goods', with certain exceptions. In the case of grain, the restricted goods are the statutory grains (wheat, barley and central Queensland sorghum), and exceptions to the monopoly rights include the following: road may be used up to a

distance of 120 kilometres from a point of marketing board origin; farmers may deliver grain by road within a

51

SUPPORTING PAPER 6

40 kilometre radius or to the nearest BGQ depot; road may be used subject to a permit when rail cannot handle the

transport task; and some specific exceptions exist for certain geographical areas.

Under the Act, non-statutory grain is not restricted to rail - for example, there is no restriction on the transport of southern Queensland sorghum - but QR has the power to exclusively transport non-statutory grains (subject to exceptions similar to those under the Act) that are handled or marketed by signatories to the Rail Freight Agreement. These signatories include BGQ, the various statutory marketing boards and originally the various QGGA marketing committees (now Elders-QGGA).

QR charges are rail distance related, with no distinction being made between different grain types. A clause under the Rail Freight Agreement allows rates to be increased by 6 per cent each year. QR has foregone these increases for grains for export for the last three years and since 1986 for grains for domestic consumption. Rail charges for non-signatories to the Rail Freight Agreement are between 8 and 20 per cent higher, depending on consignment size (QR, Transcript, p. 626).

Some pricing on the basis of disaggregated costs occurs, with a rebate of $1 per tonne offered to BGQ for unit train loads (in Queensland a unit train is achieved if gross tonnage is at least 90 per cent of the maximum for a single locomotive or at least 85 per cent of the maximum for multiple

locomotives). BGQ has upgraded a large proportion of country silo facilities to meet unit train requirements (55 out of 87 as at January 1987). This saving is not reflected directly back to growers who use these facilities. A stop-over charge of $2 per tonne is charged to BGQ when grain is discharged at an intermediate depot on a direct haulage route, but this occurs infrequently.

A.4 South Australia

A.4.1 Storage and handling charge

SACBH pools all handling and storage costs and charges growers an average price. The only divergence from the pooling concept is that charges vary according to the type of grain delivered - wheat, barley, peas, and so on - based on costs incurred in handling and storing each grain type

(considering such things as density, time in storage, and segregations required). Section 10.1 of the South Australian Bulk Handling of Grain Act 1955-1969 is generally invoked to support pooling. It states that SACBH shall not '...give to any persons desiring the services of the company preferential treatment as against other persons desiring such services'. It is possible that this same section could be used to support cost disaggregation on the basis that some growers

52

SUPPORTING PAPER 6

are getting preferential treatment because of the

cross-subsidisation inherent in the pooling process.

A.4.2 Transport charge

In South Australia, grain rail freight charges are determined under agreement between AN, UF&S, SACBH, the AWES and the ABB. The rates are primarily based on road distances between country silos and the nearest port. Except for proposed block train lines (which account for approximately 70 per cent of grain moved by rail) the per tonne rate for 1986-87 is calculated using a formula of $2.66 for the first

5 kilometres plus an additional marginal cost declining from approximately 9 cents per kilometre for 5 to 30 kilometers to approximately 2 cents per kilometre for distances between 500 and 600 kilometres. Additional pricing adjustments occur to account for the following:

. Block train operations. No increase was applied in 1986-87 to grain moving from rail-served inland silos on designated block train lines. Rates on block train lines in 1986-87 were therefore calculated with the 1985-86 grain formula of $2.58 for the first

5 kilometres plus an additional marginal cost declining from approximately 8.6 cents per kilometre for

kilometres 5 to 30, down to approximately 1.8 cents per kilometre for distances between 500 and 600 kilometres.

. Selected sites are subject to relatively cheaper freight rates (known as selective base rates) where special market factors and cost-saving operating conditions apply.

. Border regions in both the south-east of South Australia and south-west of Victoria are offered rates negotiated between AN and V/Line which are below normal V/Line rates. (F.N. Affleck, Assistant General Manager, AN, personal communication, 9 April 1987)

A.5 Western Australia

A.5.1 Storage and handling charges

In Western Australia, costs are pooled and averaged across all growers, the only exception being charges for different types of grain. The handling charges for different grains are based on volumetric differences with some adjustment for the different handling characteristics. Pooling is considered by WACBH to be an appropriate policy for a

co-operatively based handling authority because it accords with the 'co-operative principle'.

Handling charges are determined annually and as close as possible to the commencement of the harvest, when the throughput quantity can be gauged with reasonable certainty.

53

SUPPORTING PAPER 6

In determining the handling charge to apply for the

forthcoming season, the following factors are taken into consideration:

. the estimated total operating costs of the Company for the ensuing year - this is based partly on cost trends in previous seasons;

. the estimated quantity of grain for the season under review;

. any additional revenue carried forward from the previous year;

. the state of the grain industry; and

. the anticipated surplus based on 9 per cent of

shareholders' funds.

A seasonal equalisation reserve fund is maintained to allow charges to be stabilised from season to season.

A.5.2 Transport charges

Westrail has the sole right to transport (either by road or rail) all grain delivered to scheduled receival points in rail-designated regions and may tender for the transport of grain delivered to the non-rail-designated regions. As in Victoria, the Western Australian rail pricing system is based primarily on a radial pricing formula. The rates are determined under the terms of the Grain Agreement, which involves Westrail, WACBH, and the industry as represented by the AWB, the Grain Pool of Western Australia, the

Pastoralists and Graziers Association of Western Australia, and the WAFF. The radial distance from the nearest port is determined for all receival sites and a 'schedule rate' for the base year of 1983-84 is calculated using the following formula:

$7.30 per tonne up to 75 kilometres; plus

$0.06 per kilometre for 76 to 150 kilometres $0,055 per kilometre for 151 to 250 kilometres $0,045 per kilometre for 251 kilometres and over.

The actual rates charged are based on these schedule rates adjusted by a factor to allow charges to gradually approach a hypothetical 'competitive' rate by 1988-89. In the context of the Grain Agreement, 'competitive' means that

in a situation where a choice of transport mode is available the user will judge the rail mode as being no less desirable than the road mode when all the

attributes of each mode are considered including the level of freight rates, the ability of the modes to respond to receival period and cyclic seasonal peaks of demand, flexibility of co-ordination with the Company

54

SUPPORTING PAPER 6

[WACBH] to maximise the efficient use of the Company's investment and minimise its operating cost when the grain task is viewed as a whole, and such other values as may be agreed between the parties hereto.

In practice, the competitive rate is being interpreted by Westrail as the guoted road rate plus 20 per cent to allow for road maintenance and other costs not covered by road operators.

A.6 Marketing board charges

A.6.1 The Australian Wheat Board

The AWB is the only grain marketing board that operates nationally. It markets 12 categories of wheat, which are defined in terms of protein content, variety and degree of weather damage. The price received on international markets for these various wheat categories is not fully reflected in the first or final advance payments to growers under the guaranteed minimum price (GMP) payment scheme. The first advance payment in 1986-87 was based on only six categories. The final advance (received in the March preceding the harvest) was also based on six categories, although a greater number of payment divisions are used, based on protein increments for hard wheat categories (0.5 per cent increments in all States; except in Queensland, where it is 0.1 per cent). While this goes some way in relating premiums back to

farmers, it is still based on an average return for the six categories. Therefore, fewer categories are defined for GMP payments than are marketed. The AWB has recognised the need to relate accurate market signals back to growers and has reviewed the number of categories to be used in the 1987-88

season.

On the cost side, the AWB administrative and marketing costs are pooled on a national basis. Generally it would seem difficult to allocate the costs of administration and

marketing on any practic il basis that would justify differential charges to different States or against different categories. Where some differential costs could be identified, it is debatable whether the administrative cost would justify the possible efficiency gains of disaggregating marketing charges by type of wheat.

The charges imposed on wheat sold in Australia for domestic use provide an exception to this general observation. For permit sales of wheat for stockfeed purposes in Victoria, New South Wales and Queensland there is a bulk handling charge

included in the price of permits, even though permit sales do not usually involve the use of authority services. In addition, for wheat sold for use in Australia (including feed wheat) a levy is added to meet the cost of shipping wheat to Tasmania. Under the terms of the Grain Storage and Handling Agreement, costs associated with the storage and handling of carry-over and which can be attributed to the performance of

55

SUPPORTING PAPER 6

a particular bulk handling agency are allocated to that State; other costs associated with this carry-over, including interest on the advance payment for the grain, are pooled nationally. While a case could be made for further

disaggregation to include interest costs, some additional administrative costs would be involved.

The AWB also practices some price discrimination to allow for shipping costs. Any costs, such as wharfage and harbour dues, incurred by the Board in loading in a particular State, are borne by the growers in that State. Some allowance is also made for the costs and benefits accruing to the wheat industry as a result of State shipping and port conditions. In particular, a freight differential benefits Western Australian growers in recognition of Western Australia's relative closeness to its main export markets in Asia, Africa and Europe. Two differentials apply to Western Australian wheat shipments: currently US$1.75 per tonne for shipments to

Indonesia, Malaysia, Singapore and Thailand, and US$2.00 per tonne for shipments to countries in the longitude range of 100 degrees east and 30 degrees west (effectively including western Asia, Africa and Europe). These differentials are reviewed quarterly, based on shipping broker's estimates of the appropriate shipping costs.

On the other hand, a surcharge is made against States where two-port loading is necessary and this represents an additional cost to the AWB and the shipowner. The surcharge is based on the expected effect of two-port loading on wheat prices obtained for f.o.b. sales and AWB shipping costs for c&f sales.

Apart from cost differentiation associated with the two-port loading charge, wharfage and the Western Australian freight differential, other shipping costs, including port charges and stevedoring, whether direct or indirect (through their effect on f.o.b. prices), are pooled nationally. This practice means that the true cost of port and shipping arrangements in a particular State is not fully reflected back to growers in that State. Growers in States with efficient port operations are cross-subsidising growers in States where port operations are costly and slow.

The AWB also operates the Deferred Delivery Interest Scheme, which is intended to reflect interest savings that accrue to the AWB because it can delay its borrowings for the payment of the first advance. The Scheme was initiated in Victoria and currently operates in Victoria and New South Wales.

A. 6.2 The Australian Barley Board

The ABB has the sole right (subject to minor exceptions) to acquire for marketing purposes barley grown in Victoria and South Australia and oats grown in South Australia. The exceptions relate mainly to grain retained by growers for their own use and to approved and permit sales. The ABB generally classifies barley into two main categories -

56

SUPPORTING PAPER 6

malting barley and feed barley - with further classifications made where necessary ' to meet marketing and seasonal requirements' (ABB submission, April 1987, p . 12).

Growers in each State served by the ABB receive a pooled return on each grade of barley delivered, based on receipts allocated to that State. Receipts on domestic sales are allocated on a State basis; receipts for overseas sales are

pooled across States unless the particular grade sold was only produced in one of the States.

Those costs that can be directly attributed to a State are pooled across growers in that State. 'These costs would include freight, bulk handling charges, wharfage, belt charges, other shipping costs and quality control costs' (ABB

submission, April 1987, p. 16). Marketing, administrative and financial costs are pooled across the two States.

A.6.3 Other marketing boards

A number of State marketing boards exist, some of which have legislative power to acquire compulsorily certain types of grain grown within a particular State (such as the Queensland Barley Marketing Board, and the New South Wales Barley, Oats, Oilseeds, and Grain Sorghum Marketing Boards) or within a certain area of a particular State (such as the Central Queensland Grain Sorghum Marketing Board and the Atherton Tableland Maize Marketing Board), while others act as voluntary marketing organisations (such as the Victorian Oatgrowers Pool). These boards perform a range of services,

including marketing grain both domestically and overseas, licensing receivers of grain (generally the bulk handling agency in each State), operating permit schemes and arranging shipping. In general, these boards pool their costs and

receipts and pay growers an average return for grain delivered. Due to the number of boards involved and the similarities in their pricing practices, the detailed pricing procedures of each are not considered here. Some details of these practices are contained in the Commission's Supporting Paper 2, which deals with institutional arrangements.

57

APPENDIX B PEAK-LOAD PRICING

In this appendix details are provided of the model used to obtain the potential savings from peak-load pricing outlined in Section 3.3. Further details are provided of results of the model and the sensitivity of those results to changes in parameters of the model. The discussion is based on material prepared by Dr J. Quiggin and Professor B.S. Fisher in a consultancy prepared for the Commission.

Four main questions are addressed in the model. First, given the incentives under which farmers currently operate, how do their delivery patterns differ from those that would minimise total social costs? Second, is there a pattern of incentives that would minimise total social costs? Third, what pattern of incentives could be produced by alternative institutional structures (including changes within the present structure) and finally, what is the pattern of gains and losses

associated with the adoption of such a structure?

It is important to note that social costs of the on-farm grain storage and delivery process are likely to diverge from private costs borne by growers. Two main sources of

divergence can be identified. The first divergence is the congestion externality associated with queuing. Congestion externalities of this kind are discussed by Baumol & Oates (1975) and Layard (1977). As with other problems involving

congestion, the private marginal cost of delivering at peak times will be less than the social marginal cost. Farmers will take account of the length of the queue in deciding when to deliver, but they will not take account of the impact of their decision on others in the queue.

The second source of divergence arises from pooling of grain handling costs across users. If delivery at particular times or in particular ways imposes greater marginal costs on the grain handling system, then the operation of cost pooling, by not reflecting this in prices charged, will create a divergence between private and social marginal costs.

B.1 Model outline

In constructing the model, the objective is to represent farmers' decisions regarding on-farm storage and grain delivery. It is assumed that harvests are determined exogenously and stochastically.

Thus, given n farms and m harvesting periods, h ^ denotes the harvest of farm i in period j . The total harvest in

period j, H^, is given by

Hj = Σ hjj (B.l)

58

SUPPORTING PAPER 6

In each time period farmer i faces the choice of delivering grain immediately to the receival point or storing it on farm for later delivery. The total amount, D., delivered in period j is given by J

n

D j = Σ dy ( B. 2 )

The cost of on-farm storage from period j to period j+T is assumed to take the form

C = cT Si(j,j+T) (B’3)

where s^(j,j+T) is the amount harvested by farmer i in

period j and stored for T periods.

The cost incurred in delivery at time j is made up of transport costs and the opportunity cost of time spent queuing at terminals. Transport costs are assumed to be linear in amount delivered and a concave function of distance

from the receival point.

Z ;j = κφ(δί) dy ( B . 4 )

where is the distance, in kilometres, from the receival point.

In the present formulation, transport costs are assumed to be independent of delivery time, although it would be possible to incorporate a peak-load pricing element.

Queuing time per unit delivered in period j, Q^, is assumed

to be an exponential function of the total amount delivered

in the relevant time period.

Q j = 0D ja dy, (B.5)

and the associated cost is

opportunity cost of time. Thus, queuing takes the form

k6D°d.., where k is the

3 iJ

the marginal private cost of

dQ j/ddij = k 9 D ja ( B . 6 )

The discounted present value of the price received for delivery at time period j is denoted Pj . The problem of

maximising the present value of net returns may be stated as

59

SUPPORTING PAPER 6

m m-1 m— j

Max Σ (Pj - k9(Dj)a - κφ(δ;)) d;j - Σ Σ CTSj(j,j+T) ( B . 7 )

j = l j = l T=1

subject to the conditions

dij = hij + Σ si ( j - T , j ) - Σ ' Si (j,j+ T ) j = l..m ( B . 8 )

T

and the inequality constraints

S i ( j , j + T ) > O V j , T ( B - 9 )

dy > 0 V j

This problem may be solved using Kuhn-Tucker programming techniques.

The model may also be solved for a social optimum. As noted, social marginal costs will differ from private marginal costs because of congestion externalities associated with queues at receival points and because, under pooling, prices do not reflect variations in receival point operating costs associated with load levels. Within the model, it may be analysed as follows. The total cost associated with queuing in period j is

C = (k6Dja)Dj (B.10)

and hence the marginal cost is

dC/dDj = k6 (a+1) Dja (B . 11)

so that the marginal social cost is equal to 1+ a times the private marginal cost.

In order to analyse the congestion externality, it is necessary to replace the price with an operating cost variable and convert the problem to a minimisation problem, as well as replacing marginal private costs of queuing with marginal social costs. The new objective function is

m m—1 m— j n

Min Σ OC(Dj) + 2k0 (Dj)1+Ct + Σ Σ Σ ct s; (j,j+T) ( B . 12 ) j = i j = i T = i i = l

The solution to this problem is of interest in itself. It is also useful as a base line, to compare the minimum value of the objective function with the value taken by the function under alternative solutions such as that obtained by maximising (B.7). Even if it is not possible to design an institutional structure that will yield the minimum (B.12), the divergence between the existing situation and the minimum gives an indication of the potential gains from change.

60

SUPPORTING PAPER 6

B.2 Model parameters

The following inputs are required for the model:

. amounts harvested (tonnes) in period i, i = l...m;

. on-farm storage costs; that is, the cost to store

1 tonne for j periods j=l...m-l;

. transport costs;

. relationship of queuing time (hours) per tonne delivered to the amount delivered in any period;

. opportunity cost of time ($/hour);

. receiva.l point operating costs;

. pricing structure.

It should be noted that the precision of model results is constrained in the first instance by the precision with which these inputs can be supplied. In view of uncertainty about the values of some of the parameters in the model, the results of some sensitivity analyses are presented forthwith.

The number of time periods, m, was set at four. This setting permitted the development of a model which is both analytically tractable and sufficiently rich to capture the crucial features of the problem under consideration. In particular, with four time periods it is possible to

represent the most common peak-load pricing schemes, such as those based on peak, shoulder and off-peak periods. The total delivery period varies between sites but generally

ranges from four to eight weeks. Thus, the individual time periods in the model represent a period of one to two weeks. For the present simulations the time period was set equal to one week.

The number of farms, n, was set at eighty. The harvest

levels used in the sample solutions are chosen to represent a medium to large receival point with an annual throughput of the order of 90 000 tonnes. It was assumed that, on each farm, harvesting was completed within two periods. Harvest times were assumed to be distributed randomly over the harvest period in a manner reflecting typical patterns with

an early peak.

On-farm storage cost estimates were derived from Kerin (1985), who estimated an annual charge of $6 per tonne associated with fixed capital costs and in-loading and out-loading costs of $1.50 per tonne. It seems likely that

farm storages are constructed primarily to cater for the possibility of harvests too large to deliver immediately, rather than as a means of permitting more flexible delivery in normal years. For this reason, the fixed capital charge attributable to flexible delivery was reduced to $1.50. In addition, an allowance of $0.50 per tonne per week is

61

SUPPORTING PAPER 6

included to cover costs associated with insect damage and so on.

Finally, under the present pricing structure, storage involves an interest penalty associated with later payment. Since the price received is fixed in nominal terms (so that those who are paid later are not compensated for inflation), the appropriate cost is the nominal interest rate, in this instance assumed to be 14 per cent per annum (a real rate of 5 per cent plus 9 per cent inflation). The grain price is assumed to be $100 per tonne. Thus, the interest foregone is $0.27 per tonne per week.

Payment upon delivery would be appropriate if there were economic benefits from early delivery. However, in many cases, such as when receival points operate on a fill-ana- close basis, there is clearly no difference in the final value of wheat: delivery time is irrelevant. Only if wheat was out-loaded within a short time of delivery would an interest incentive of this kind be appropriate.

Transport costs are based on contract haulage rates. It is assumed that farm investment decisions equilibrate the cost of self-delivery and contract delivery. Since the derivation of contract delivery costs is much more reliable than that

for self-delivery, contract delivery charges are used. These take the form

A similar result is obtained using the cost data presented by Kerin (1985). However, in both cases these estimated costs include allowances for time spent in queuing. Queuing costs are accounted for directly in the present model. For this reason, the fixed cost of $7.00 was adjusted to $4.00 to allow for an average queuing cost of $3.00 per tonne.

Distances,δ^, from the receival point were generated

randomly in line with the observed distribution for receival points in the north-west of New South Wales. The mean distance was 19.3 kilometres and the standard deviation was 6.7 kilometres.

Queuing time is determined by the parameter a in (B .5). Kerin (1985) examined this question, but unfortunately did not present an equation in this form. The most useful equation derived is of the form

17.00 + 0.125 (δ; - 16) δ; < 16 §i > 1 6 (B .13)

TQCj = ai Dja2NHH ~ a3 (B.14)

where:

TQC = 0 DjTj is the total queuing cost

NHH = number of hopper hours available at the site.

62

SUPPORTING PAPER 6

It would be preferable for the purposes of this study to have an equation that related queuing time to deliveries and a

fixed measure of capacity, such as the number of hoppers

available. Unfortunately, the number of hours for which

hoppers are available on a given day is likely to be related

to the total volume of deliveries. If hopper hours were

linearly related to the number of hoppers, it would be possible to set a = - 1. However, if unloading rates

are constant, so that hopper hours for a given receival point

are proportional to the amount delivered, a should be set

equal to a^ - 2. Given Kerin's estimate of = 2.85, this yields a range of values for a from 0.85 to 1.85. In the present simulations, a value of a = 1.35 has been adopted.

Opportunity cost of time is set at the rate of $26 per hour. This is based on Kerin's (1985) estimate for contract hauliers. Kerin used the substantially lower figure of $15.09 as the weighted average opportunity cost of queuing

time. However, this estimate was based on the assumption that the opportunity cost of idle time for farm trucks should be set to zero. This assumption would be valid only if the total stock of farm trucks is independent of the amount of grain hauled by farmers. In fact, grain delivery is one of the most important uses of farm vehicles, and it seems more reasonable to assume that the costs of private and contract delivery are equilibrated.

The level of operating costs was determined on the basis of an estimate of the operating cost function for a sample of 72 receival points in New South Wales. This yields an estimate of average operating costs of the form

A O C = ao + cti/D + ct2 A G E + a3 CAP + a4 (D * CAP) + a5 D 2 (B . 15)

where:

D = Σ Dj represents total deliveries for

the season in units of 100 000 tonnes

AGE = average age of the receival point

CAP = capacity of the receival point in units

of 100 000 tonnes.

The runs presented here are based on the assumption that the capacity of the receival points is 90 000 tonnes and that there are five grades.

From (B .15), total operating costs take the form

TOC(D) = αχ + (oq + a .2 A G E + a3 CAP) D + a4 (D~ * CAP) + a3 D® (B . 16 )

63

The problem is to derive a cost function for each period j

depending on the deliveries, D^, taking place in that period. The appropriate transformation is

SUPPORTING PAPER 6

cqm

OC (D j) = α ι/m + (oq + a2 AG E + a3 C AP)*Dj + (D j2 * CAP)

( B .1 7 )

«5m

1 + φ Dj3

where:

Θ = the coefficient of variation of the D. 3

E [D j3] - (E [D j] )3

E[Dj]

skewness.

is the corresponding parameter for

In order to show that this is the appropriate transformation, it is necessary to verify that

m Σ OC(Dj) = TO C(D) ( B . 18 )

j=i

This is immediately apparent for the first two terms in the right-hand side of (B.16). For the third term, it is

necessary to show that

m

1 + Θ2 D j2 = D 2 ( B .1 9 )

m2 ( ( E [ D j]) 2 + v a r(D j))

var (Dj) ( B . 20 )

1 + (E[Dj])2

= m2 E [D j]2 ( B . 2 1 )

= D 2 ( B . 2 2 )

as required. The proof for the final term is similar.

Two polar cases are of interest. The first is the case where deliveries are evenly spread over the m time periods. In this case g and φ are zero and D. = D/m for all j .

Observe that: m__

Σ j=l i + Θ2Dj2:

64

SUPPORTING PAPER 6

Verification of (B.18) is particularly easy in this case. The second polar case is where all deliveries take place in a single period, say, period 1. In this case, the coefficient of variation, Q , may be shown to be equal to i/m-l, and equality (B.18) is once again verified. Similarly, the

2

skewness measure, φ , becomes m - 1, ensuring that

2

m /( 1+Φ) = 1. The constant term,a ^, in (B.16) requires

careful treatment in this case. The procedure used is based on the assumption that this term represents costs incurred regardless of the level of throughput. These costs may therefore be apportioned evenly across the m periods. However, it may be that some or all of these costs are

' flagfall' costs incurred for any positive level of deliveries but not incurred for zero deliveries. These costs would be incurred as soon as the facility opened for

deliveries in a given period, but not if the facility

remained idle during this period. If such costs are present, and (B.16) is estimated while the facility is open for only one period, then the procedure for deriving (B.17) from (B.16) must be adjusted. The 'flagfall' costs should be included in full for each period with non-zero deliveries. The costs that are incurred regardless should be spread across all periods, whether or not delivery takes place.

Pricing structures may either be imposed exogenously or derived as a consequence of some maximisation rule (for example, maximisation of social welfare or operating profit). The following pricing structures are considered:

. uniform pricing;

. uniform prices, with all farmers being paid at a set date rather than on the basis of delivery time;

. as in the preceding item, with an allowance for social costs associated with queuing;

. as in the preceding, with charges reflecting differences in receival point operating cost (assuming average cost pricing);

. as in the third item, with charges reflecting

differences in receival point operating cost (assuming marginal cost pricing).

The approach used in the solution of the model was to use Kuhn-Tucker programming to derive solution conditions. These conditions were then incorporated into a spreadsheet, together with the equations of the model and various

auxiliary computations.

This approach has a number of advantages. The use of

spreadsheets eases many of the tasks associated with model development, particularly those relating to the management of data, documentation, respecification of the model and the reporting of results. However, spreadsheets become unwieldy

65

SUPPORTING PAPER 6

with large models and the techniques used to achieve

convergence to a solution are fairly crude. In the present case, these problems were not serious and the advantages of the spreadsheet approach were considerable.

B.3 Results

B.3.1 Base solution: uniform pricing

The base solution is presented in Tables B.l and B.2. This corresponds to the current situation, where farmers minimise their own transport and queuing costs, taking no account of congestion effects on other farmers or of differences in operating costs associated with peak loads.

In Table B.l, the entry in position (i,j ) represents the amount harvested in period i and delivered in period j . Obviously the entry can be positive only if j >i. Positive

entries in off-diagonal elements, where j is strictly greater than i, represent on-farm storage. In the present solution, the only storage that takes place is from the 'peak' period 2 to the off-peak period 4. The resulting pattern of total deliveries is substantially more uniform that the

distribution in the absence of on-farm storage given by the total harvest column. Average queuing time ranges from about 1 hour to about 3.5 hours.

The various costs associated with the grain handling process up to and including delivery to a country receival point are summarised in Table B.2. The total cost per tonne delivered is $15.75. This solution represents a saving of about $3.20 per tonne, compared with the situation where no on-farm

storage is permitted. This is made up, in approximately equal proportions, of a reduction in delivery costs (transport, queuing and on-farm storage) and a reduction in operating costs resulting from the more even distribution of deliveries.

The private costs, in Columns 1 to 4, represent the average unit cost to a farmer delivering wheat in the relevant period.

This is made up of transport and queuing costs for the period concerned, operating costs pooled across the four periods and the cost of time of delivery in terms of interest saved or

foregone by early or delayed delivery respectively. Although the private costs of delivery in period 4 are lower than those for period 3, the difference is not great enough to offset the costs of on-farm storage. By contrast, the difference between costs in periods 2 and 4 is large enough to encourage a significant amount of storage.

6 6

SUPPORTING PAPER 6

TABLE B.X STORAGE AND DELIVERY: BASE SOLUTION ___________________________ (tonnes )___________

Harvesting Amount delivered in period Total

period 1 2 3 4 harvest

1 22 449 0 0 0 22 449

2 0 33 210 0 9 370 42 580

3 0 0 18 097 0 18 097

4 0 0 0 4 120 4 120

Total deliveries 22 449 33 210 18 097 13 490 87 246

Waiting time (hours) 2.02 3.42 1.51 1.01

Source: Royal Commission into Transport Grain Storage, Handling and

TABLE B.2 COSTS: BASE SOLUTION ($’000)

Cost Delivered in period

item 1 2 3 4 Total

Storage 0 0 0 44 44

Queuing 98 246 59 30 433

Transport 125 184 100 75 484

Operating 92 206 67 48 413

Total 315 636 227 196 1 374

Private costs ($/t) 14.25 17.50 13.75 12.88 15.75

Source: Royal Commission into Grain Storage, Handling and Transport

67

SUPPORTING PAPER 6

B.3.2 Solution (b): uniform pricing with payments at a set date

Simulation (b) represents a situation where time of payment is independent of time of delivery, thereby removing the interest disincentive to storage. This leads to an increase in total storage, as shown in Table B.3.

TABLE B.3 STORAGE AND DELIVERY: SOLUTION (b) ___________________________ (tonnes )__________

Harvesting Amount delivered in period Total

period 1 2 3 4 harvest

1 22 449 0 0 0 22 449

2 0 31 741 0 10 838 42 580

3 0 0 18 097 0 18 097

4 0 0 0 4 120 4 120

Total deliveries 22 449 31 741 18 097 14 958 87 246

Waiting time (hours) 2.02 3.22 1.51 1.17

Source: Royal Commission into Grain Storage, Handling and Transport

In this solution, the total amount stored has increased from 9400 to 10 800 tonnes, an increase of 15 per cent. Average queuing time in the peak period has been reduced by 0.2 hours, or about 12 minutes. The corresponding increase in the off-peak period is only 0.15 hours, or about 9 minutes. The weighted average queuing time is reduced even more since more grain is delivered in period 2 than in period 4. This gain reflects the non-linearity inherent in the congestion externality.

Table B.4 shows there is a reduction in total costs of $0.38 per tonne. The benefits are mainly due to reduced queuing and operating costs associated with a more even pattern of delivery. The reduction in costs benefits all farmers except those harvesting and delivering in period 1, who lose because of the reduced real value of the price they receive as compared with the situation where payment is made on delivery. However, since many of these farmers also harvest in period 2, they would benefit from the reduction in congestion as well as sharing in the general reduction in operating costs. Thus, this change would be fairly close to a Pareto improvement.

68

SUPPORTING PAPER 6

TABLE B .4 COSTS : SOLUTION (b) ($'000)

Cost Delivered in period

item 1 2 3 4 Total

On-farm storage 0 0 0 43 43

Queuing 98 221 59 38 417

Transport 125 176 100 83 484

Operating 92 185 67 53 397

Total 315 582 227 217 1 341

Private costs ($/t) 14.47 17.08 13.37 12.63 15.37

Source: Royal Commission into Grain Storage, Handling and Transport

B.3.3 Solution (c ): social cost of queuing

Simulation (c ) represents a situation where the congestion costs associated with queuing are taken into account in the price charged for deliveries. Thus there is a higher charge for deliveries in the peak period 2 than in the shoulder periods 1 and 3 and both of these charges are higher than those for the off-peak period 4. At the equilibrium

solution, the extra charge would be of the order of $1.30 per tonne for the peak period and there would be a corresponding reduction for off-peak deliveries.

In this solution the pattern of storage has changed, with grain being stored from the peak period 2 to both the

shoulder period 3 and the off-peak period 4. The result is a much more even pattern of delivery than in the previous solution. Queuing time in the peak period is now reduced to

approximately 2.5 hours.

This change yields an overall reduction in costs of $0.57 per tonne, compared with Solution (b ) and $0.95 per tonne compared with the base solution. Compared with Solution (b ), costs are reduced in every period except period 3, where increased deliveries raise congestion costs. Compared with the base solution, there are large reductions in costs in periods 2 and 4 and small increases in periods 1 and 3. Assuming that most farmers harvest and deliver in more than one period, this is likely to imply a result close to a

Pareto improvement.

69

SUPPORTING PAPER 6

TABLE B.5 STORAGE AND DELIVERY: SOLUTION (tonnes) (c)

Harvesting Amount delivered in period Total

period 1 2 3 4 harvest

1 22 449 0 0 0 22 449

2 0 26 063 3 799 12 718 42 580

3 0 0 18 097 0 18 097

4 0 0 0 4 120 4 120

Total deliveries 22 449 26 063 21 897 16 838 87 246

Waiting time (hours) 2.02 2.47 1.95 1.37

Source: Royal Commission into Transport Grain Storage, Handling and

TABLE B.6 COSTS: SOLUTION (c) ($' 000)

Delivered in period

Costs 1 2 3 4 Total

Storage 0 0 13 51 64

Queuing 98 139 93 50 380

Transport 125 145 122 93 484

Operating 92 121 89 61 363

Total 315 405 316 255 1 291

Private costs ($/t) 14.29 16.42 13.96 11.07 14.80

Source: Royal Commission into Grain Storage, Handling and Transport

I

SUPPORTING PAPER 6

B.3.4 Solution (d): average cost pricing

Simulation (d ) represents a situation where variations in average operating costs associated with delivery time are taken into account in the price charged for deliveries. In the equilibrium solution this implies a surcharge of about $0.70 per tonne for delivery in the peak period and a

corresponding rebate in the off-peak period. However, this is offset by a reduction of about $0.30 in the peak-load charge for congestion. This offsetting reduction occurs because the policy of charging for differences in average costs reduces the variability of deliveries and hence the

level of congestion in the peak period.

Solution (d) differs only slightly from Solution (c ). There is a further small decrease in the amount delivered in the peak period, and in the associated queuing time. As shown in Table B . 8, this leads to a reduction of $0.05 per tonne in total average costs.

TABLE B .7 STORAGE AND DELIVERY: SOLUTION (d) ____________________________ (tonnes ) _________

Harvesting Amount delivered in period Total

period 1 2 3 4 harvest

1 22 449 0 0 0 22 449

2 0 25 284 3 847 13 449 42 580

3 0 0 18 097 0 18 097

4 0 0 0 4 120 4 120

Total deliveries 22 449 25 284 21 944 17 569 87 246

Waiting time (hours) 2.02 2.37 1.96 1.45

Source: Royal Commission into Grain Storage, Handling and Transport

71

SUPPORTING PAPER 6

TABLE B.8 COSTS: SOLUTION (d) _____________________________ ($’000)

Cost Delivered in period

item 1 2 3 4 Total

Storage 0 0 13 54 67

Queuing 98 130 93 55 376

Transport 125 140 122 98 484

Operating 92 114 89 64 360

Total 315 384 317 271 1 287

Private costs ($/t) 14.24 15.92 13.88 10.99 14.75

Source: Royal Commission into Grain Storage, Handling and Transport

B.3.5 Solution (e): marginal cost pricing

Simulation (e) represents a situation where the charge for variations in operating costs is based on differences in marginal costs rather than in average costs. This yields a usage pattern which minimises total social costs, under the solution conditions for equation (B.12).

The solution is fairly similar to that of the previous two simulations, the major difference being a decrease in the amount stored from period 2 to period 3 and a corresponding increase in the amount stored from period 2 to period 4. Costs are reduced very slightly, by $0.01 per tonne. Compared with the base solution, the total gain is $1.01 per tonne, with reductions in costs accruing regardless of the period in which delivery takes place.

The absence of significant gains associated with the last two stages does not imply that variations in operating costs are unimportant. Rather, they reflect the fact that Solution (c) is already fairly close to the global minimum for social costs. In the base situation, a small charge on peak-load deliveries leads to a fairly large increase in on-farm storage and to very substantial welfare gains. As the optimum is approached the responsiveness of the level of storage declines, as do the gains associated with a given increase in storage. This is a reflection of the standard

'welfare triangle principle', which states that welfare losses are quadratic in the size of the relevant distortion.

72

SUPPORTING PAPER 6

TABLE B.9 STORAGE AND DELIVERY: SOLUTION (e) (tonnes)

Harvesting Amount delivered in period Total

period 1 2 3 4 harvest

1 22 449 0 0 0 22 449

2 0 25 464 3 200 13 916 42 580

3 0 0 18 097 0 18 097

4 0 0 0 4 120 4 120

Total deliveries 22 449 25 464 21 297 18 036 87 246

Waiting (hours) time

2.02 2.39 1.88 1.50

Source: Royal Commission into Transport Grain Storage, Handling and

TABLE B. 10 COSTS: SOLUTION (e) ($'000)

Cost Delivered in period

item 1 2 3 4 Total

Storage 0 0 11 56 67

Queuing 98 132 87 59 375

Transport 125 141 118 100 484

Operating 92 116 85 67 359

Total 315 389 301 281 1 286

Private costs ($/t) 14.25 16.03 13.57 11.71 14.74

Source: Royal Commission into Grain Storage, Handling and Transport

73

SUPPORTING PAPER 6

B.4 Sensitivity testing

As shown, extensive sensitivity testing was undertaken to test the effect of variations in the model parameters on the outcomes. The primary variables considered were a , the parameter for the degree of non-linearity in the queuing time

function, Θ , the opportunity cost of time and CT(0), the

fixed cost of on-farm storage. In addition, the effect of changes in the pattern of harvest was considered.

There is insufficient space to report complete results for such a program of sensitivity testing, and so attention is confined to the average cost per tonne. In view of the fact that Solutions (c ), (d ) and (e) are usually fairly similar, only the results for Simulations (a), (b ) and (c) are reported.

TABLE B.ll RESULTS OF SENSITIVITY TESTS

Parameter values Unit costs

a Θ CT Solution(a) Solution(b) Solution(c)

1.35 26 1.5 15.75 15.37 14.80

1.35 15 1.5 15.34 14.58 13.22

1.35 40 1.5 17.62 17.36 17.02

1.35 26 0 14.39 14.17 14.02

1.35 26 6 17.70 17.23 15.66

1.85 26 1.5 14.85 14.43 13.67

0.85 26 1.5 16.98 16.67 16.32

Source: Royal Commission into Grain Storage, Handling and Transport

The main focus of interest here is not on the absolute values but on the differences between the three solutions. In general, the differences are largest when the cost of on-farm storage is high, when the opportunity cost of delivery is low and when the congestion externality is severe (that is, when a is large). The last of these results is not

surprising, but the first two are somewhat

counter-intuitive. The explanation is that when on-farm storage is cheap and queuing is expensive the private incentive to store yields a solution with high levels of storage. As noted in the previous section, it is the first increments to storage that yield the largest gains. Thus, if

74

SUPPORTING PAPER 6

on-farm storage is already extensive the gains from correcting the externality effects are much smaller.

Two sensitivity tests were also undertaken with different distributions of the harvest. In the first, output in the off-peak period 4 was increased to 10 000 tonnes. This reduced the severity of the externality effect somewhat but did not alter the nature of the solution. In the second, the peak in period 2 was reduced to 30 000 tonnes. This had the effect of altering the optimum pattern of storage in Solution 2. The new optimum was one in which grain was stored in periods 2 and 3 for delivery in period 4. The cost reduction from eliminating the interest incentive for early delivery was $0.20 per tonne and the additional cost reduction from congestion charges was $0.26 per tonne, about half the level observed in the main set of simulations. This is not surprising since the size of the potential loss depends directly on the variability of deliveries.

B.5 Concluding comments

The results from the model developed in this appendix are consistent with the hypothesis that there are significant potential gains from adopting a pricing system that takes time of delivery into account and eliminates the present

incentives for early delivery. The total gain could be of the order of $1 per tonne in areas where queuing is a

significant problem. Even where queuing problems are unimportant, there could be reductions in operating costs associated with a more uniform pattern of delivery.

It would be a mistake to focus primarily on the numerical estimates offered here. As the sensitivity tests presented indicate, the actual gains will depend on a variety of parameters that will vary over time and from place to place. The primary function of the model is to provide an

illustration of some of the processes that affect farmers' decisions about on-farm storage and immediate delivery and the way in that certain pricing structures may lead to decisions which increase the costs faced by farmers as a group. It follows from the results presented above that particular attention should be paid to the structure of pricing rules for individual receival points. The policy of charging a uniform average delivery fee is sub-optimal.

75

REFERENCES

Atkinson AB & Stiglitz JE 1980, Lectures on Public Economics, McGraw-Hill, Maidenhead, Berkshire.

Baumol WJ & Oates W 1975, The Theory of Environmental Policy, Prentice-Hall, New Jersey.

_____ & Willig RD 1985, 'Contestability developments since the book', Oxford Economic Papers, New Series, Vol. 38, November supplement.

Brindal D 1986, 'Long haul grain freight rates in Western Australia', Report No. 312, Department of Transport, Perth, October.

IAC 1983, 'The wheat industry', Report No. 329, AGPS, Canberra.

____ 1986, 'Certain petroleum products - taxation measures', Report No. 397, AGPS, Canberra.

Inter-State Commission 1987, A Review of Federal Registration Charges for Interstate Vehicles, AGPS, Canberra, October.

Jeffery R 1983, 'Discussion paper on the pooling concept', prepared for the Annual Conference of the Australian Wheatgrowers Federation, Adelaide, 18-19 April.

Kerin PD 1985, 'Optimal location, number and size of grain handling facilities in South Australia : (2) road and queuing costs at handling facilities: 1983-84 harvest survey, Technical Report No. 68, South Australian Department of Agriculture, Adelaide.

Lloyd AG 1986, Rural Economics Study : a report to the Victorian Minister for Agriculture and Rural Affairs, Melbourne, July.

Spriggs J, Geldard J, Gerardi W & Treadwell R 1987, 'Institutional arrangements in the Australian wheat distribution system', BAE Occasional Paper 99, AGPS, Canberra.

SRA 1986, Wheat Transport, Sydney, November 1986.

Taplin JHE & Waters WG 1985, 'Boiteux-Ramsey pricing of road and rail under a single budget constraint', Australian Economic Papers, December, 337-347.

76

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND TRANSPORT

COMPETITION AND CONTESTABILITY

Supporting Paper 7 February 1988

CONTENTS

Page

1. INTRODUCTION 1

2. FACTORS AFFECTING COMPETITIVE BEHAVIOUR 2

IN GRAIN STORAGE, HANDLING AND TRANSPORT

3. GRAIN STORAGE AND HANDLING 5

3.1 Country storage and handling 5

3.1.1 Economies of scale and scope 5

3.1.2 Contestability 10

3.2 Port terminal and ship-loading facilities 11 3.2.1 Economies of scale 11

3.2.2 Contestability 12

4. TRANSPORT 15

4.1 Rail services 15

4.1.1 Economies of scale 15

4.1.2 Contestability 16

4.2 Road haulage services 17

4.3 Potential road-rail competition 18

5. THE IMPACT OF MARKETING REFORM ON COMPETITION AND CONTESTABILITY IN THE STORAGE, HANDLING AND TRANSPORT SECTOR 20

6. CONCLUDING REMARKS 24

APPENDICES

A Cost curves for country storage and handling 26

REFERENCES 27

TABLES

3.1 Average total costs for combined transport 8

from farm to silo and silo storage and handling

FIGURES

3.1 Average costs for country storage and handling 6 facilities: New South Wales

iii

INTRODUCTION 1.

The results reported in Volume 1 and Supporting Paper 8 suggest that there is potential for improvements in the efficiency, cost-effectiveness and integration of the grain distribution system.

The purpose of this Supporting Paper is to consider whether these potential resource cost savings are likely to be realised in a deregulated storage, handling and transport environment. In preparing the Supporting Paper the Commission has drawn significantly on a consulting report prepared by a group led by Professor Brian Fisher of the University of Sydney.

If a natural monopoly exists in any particular area or areas of the grain distribution system, it is possible that the potential resource cost savings identified in Supporting Paper 8 may not be realised. Whether this is the case will depend upon the contestability of the activity of interest. A market is considered contestable if the threat of

competition exists and, because of this threat, incumbent firms behave in a competitive manner. Failure to behave in a competitive manner will attract other firms into the market and thus erode any monopoly profits. It is necessary to assess the degree of contestability within the grain storage, handling and transport system in order to obtain an

appreciation of the extent to which potential cost savings identified in Supporting Paper 8 can be achieved in a deregulated environment. At the same time, consideration must also be given to the alternatives for undertaking particular distribution tasks as there is frequently more than one possible means for providing storage, handling and transport services.

The remainder of this paper is presented in five chapters. In Chapter 2, the factors affecting the degree of competitive behaviour in a deregulated storage, handling and transport environment are outlined. This is followed by a discussion of the extent of natural monopoly and contestability in grain storage and handling (in Chapter 3) and transport (in Chapter 4). In Chapter 5, the impact of marketing reform on the contestability of storage, handling and transport is considered. Finally, in Chapter 6, some concluding remarks are presented.

1

2. FACTORS AFFECTING COMPETITIVE BEHAVIOUR IN GRAIN STORAGE, HANDLING AND TRANSPORT

In the event that the sole receival rights of the bulk

handling agencies are withdrawn, restrictions on road transport of grain are removed and port service and sea transport costs are disaggregated, the market structure that would emerge is of particular interest. One possibility is that there would be vigorous competition between storage and handling operators and between road and rail transport. If this was the case, growers and other participants in the distribution system would face competitive prices and the potential resource cost savings from alternative systems for storage, handling and transport identified in Volume 1 and Supporting Paper 8 would probably be realised.

On the other hand, there may well be little competition: storage, handling and transport of grain could be dominated by a few operators possessing significant monopoly power. Under these circumstances, it is unlikely that the potential resource cost savings would be realised.

Whether the outcome is one of these or some intermediate position is an issue that was canvassed in submissions and during the Commission's discussions with inguiry

participants. Overall, a wide range of views were put forward, although few were based on comprehensive analysis. The Commission believes that, to a significant extent, such analysis has not been possible because of the unavailability of the relevant data prior to the establishment of the Royal Commission.

The extent of competition that is likely to emerge will be determined by several factors.

First, it is necessary to establish the extent to which conditions of natural monopoly are likely to apply in the storage, handling and transport sectors. With a natural monopoly, the lowest average cost of production can be

achieved by having a service provided by a single supplier. The extent of natural monopoly will depend upon whether economies of scale or economies of scope are present.

(Economies of scale occur when the average cost of the storage, handling or transport activity declines as the level of production is increased; economies of scope occur when it is possible to produce a service in combination with other services at a lower cost than is incurred by producing it alone). Should economies of scale or scope not be present, a natural monopoly is unlikely to emerge and conditions will be conducive to competition and pricing behaviour that reflect the resource cost savings in storage, handling and transport discussed in Volume 1 and Supporting Paper 8.

Second, the presence of economies of scale and/or scope, and therefore the possibility of a natural monopoly in storage, handling and transport, does not necessarily imply that, without regulation, excessive profits will be made.

2

SUPPORTING PAPER 7

A natural monopoly need not be subject to actual competition in order for it to behave efficiently: the threat of

competition may be sufficient to guarantee pricing behaviour that enables the resource cost savings of alternative systems for storage, handling and transport of grain to be realised. This would be the case if the markets for particular storage, handling and transport activities were contestable or, alternatively, if substitute services using different technology could be provided.

The degree of contestability of grain distribution markets will depend upon the extent to which the following conditions are met:

. There should be no barriers to entering the market. This implies that there be no restrictive legislation or costs imposed on entrants which are not also imposed on incumbent firms. High fixed costs do not constitute a barrier to entry.

. Exit from the market should be costless. This implies that there be no sunk costs involved in production. Note that there is a clear distinction between a sunk cost and a fixed cost since the latter can be recovered or redeployed on leaving a market whereas the former

cannot. For example, the purchase of a primer mover to service a particular market involves a high fixed cost but not a sunk cost because the prime mover is highly mobile and can be redeployed to another market or country. Conversely, the building of a dam wall may involve a high sunk cost because the dam may not be able to be used for anything else and there is limited scope to recover costs if the producer wishes to leave the market.

. New entrants should be able to match incumbent firms in all aspects of production and product loyalty. This ensures that the entrant is not at any technical

disadvantage.

. The pricing practices of the market should be such that the entrant has the prospect of making a profit. There must be a period in which the entrant can establish itself before an existing firm makes a price response. This condition implies relatively slow competitive responses from incumbent firms and the prevention of predatory pricing.

These conditions are quite rigid and, if achieved, would prevent any firm, even monopolists, from deriving excessive profits. If excessive profits were being earned another firm would see the opportunity of entering the market, pricing below the incumbent firm, earning a profit and then leaving

the market, all before the incumbent firm responded.

3

SUPPORTING PAPER 7

It follows that any assessment of the extent to which potential resource cost savings from alternative systems will be realised must first establish whether a natural monopoly is likely to be present and then evaluate the extent to which the natural monopoly is contestable. As there is frequently more than one possible means for providing storage, handling and transport services (for example, rail and road for transport of grain or vertical silos and horizontal sheds for storage of grain), consideration must also be given to the alternatives for undertaking distribution tasks.

4

3. GRAIN STORAGE AND HANDLING

3.1 Country storage and handling

3.1.1 Economies of scale and scope

Storage and handling of grain at a country receival point is likely to display economies of scale. Economies of scale are said to exist in the long run if larger facilities have a lower average total cost than smaller facilities. They may arise because of reductions in construction costs for storage or because of reduced unit operating costs as the volume of throughput increases, or for both reasons. Falling average construction costs per tonne are a common source of scale economies. Economies of scale in operating costs are likely to arise if there are a number of set tasks that must be performed regardless of the size of the storage facility or the volume of throughput.

The evidence presented in Supporting Paper 3 suggests that there are scale economies present in the bulk handling agencies' country storage and handling systems. In order to obtain an estimate of the total level of long-run scale economies, it is necessary to combine information on average operating costs with an estimate of capital costs. As a guide to the nature of the long-run average cost function, an estimated construction cost function was combined with an estimated average operating cost function.

Two problems arise in the estimation of such a long-run average cost curve. First, it is necessary to convert the capital costs to an annual flow. To make this conversion, a real discount rate of 5 per cent and a life span of 40 years

for infrastructure has been assumed. Second, it is necessary to determine an appropriate ratio of throughput to capacity. The ratio of throughput to capacity determines the absolute level of the cost curve and the point on the curve at which the facility is operating, but it does not affect the shape of the curve. For present purposes, an observed mean ratio of throughput to capacity in New South Wales of unity is used. The resultant cost function is presented in Appendix A but, as an illustration of the function's format, Figure 3.1 presents curves for the average capital costs, average operating costs and average total costs.

It can be seen from Figure 3.1 that the average cost curves for country storage and handling continually decrease. By itself, this would suggest that the maximum benefit from scale economies may be achieved by having a small number of large facilities. However, storage and handling is only one part of the farm-to-port path and the other elements, such as transport, must also be considered before concluding that a small number of large receival facilities may be optimal. A

lesser number of receival points means that growers will, on average, have greater distances to travel from farm to silo.

5

— · — Operating costs

8 - -

-o- Construction costs

Total costs

6 - -

to 5 - -

S 4 - -

Throughput (100 OOOt)

FIGURE 3.1 AVERAGE COSTS FOR COUNTRY STORAGE AND HANDLING FACILITIES: NEW SOUTH WALES

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 7

Since transport costs from farm to silo increase with distance (and hence the area served by a facility), it is possible to derive an optimal service taking into account transport costs, scale economies and delivery density (that is, the ratio of deliveries to the catchment area).

The cost function encompassing both storage and handling, and transport is contained in Appendix A, but the main point is that the function is not a continually decreasing one. That is, the additional transport costs associated with hauling

longer distances from farm to silo outweigh the savings achieved by having a larger receival facility; eventually, average total costs start to increase.

Using the cost curves derived in Appendix A and a transport cost of $0.20 per tonne-kilometre (an estimate of the resource costs of farm to country receival point trucking services), it is possible to make some numerical estimates of the trade-off involved. For example, the results reported in Table 3.1 suggest that, for a delivery density of 1000 tonnes per kilometre served by the facility, the optimal size of the

catchment area is in excess of 30 kilometres in diameter; for 5000 tonnes it is approximately 15 kilometres; and for densities between 20 000 and 40 000 tonnes it is

approximately 5 kilometres.

To illustrate this finding with an actual case study, consider the Moree to Boggabilla line in New South Wales. The diameter will be taken as the average rail distance between facilities. Deliveries on this line are of the order of 3500 tonnes per kilometre in an average season. The optimal diameter may then be computed as 18.3 kilometres.

Since there are currently five facilities serving

88 kilometres of track, this suggests that the current number of facilities on this line is close to the optimum, given the assumed transport cost.

On the other hand, in an area where the production density is lower than is the case for the Moree to Boggabilla line, it could be expected that the optimal diameter of catchment areas will be greater and the number of receival sites

fewer. For example, based on 1985-86 receivals on the Eugowra line in New South Wales, the optimal number of kilometres between receival points would be 40, compared with an actual figure of 11.4. It should be noted, however, that this analysis gives no immediate indication of whether

facilities that already exist should be closed down.

The fact that the combination of country storage and handling and the transport costs from farm to receival point yields a U-shaped cost curve suggests that there are limitations to the optimal size of any particular facility in a given

region. The number of firms able to compete in a given region will depend on the production density and the distance from a competitor's facility. Hence it is likely that any particular region will be characterised by a number of

service suppliers, each of which exerts monopoly power within its own region. Such monopoly power is, however, likely to

7

TABLE 3.1 AVERAGE TOTAL COSTS FOR COMBINED TRANSPORT FROM FARM TO SILO AND SILO STORAGE AND HANDLING

($/tonne)

Production Catchment area size (diameter in kilometres)

density in ___________________________________________________________________________

catchment area (t/km) 2.5 5-0 7-5 10.0 12.5 15-0 17.5 20.0 22.5 25.0 27-5 30.0

1 000 36.30 20.95 15.84 13.31 11.80 10.81 10.12 9-62 9.24 2 000 20.94 13.28 10.75 9.52 8.80 8.36 8.08 7.90 7-79

3 000 15.82 10.73 9.07 8.29 7.86 7.62 7.50 7.46 7.47

4 000 13.27 9.47 8.28 7.70 7.42 7.31 7.28 7.34 7.44

5 000 11.73 8.71 7.76 7.36 7.19 7.16 7.22 7.34 7.52

10 000 8.68 7-24 6.88 6.84 6.97 7.21 7-55 7.96 8.45

15 000 7.67 6.79 6.68 6.84 7.16 7.60 8.16 8.83 9.60

20 000 7.17 6.59 6.65 6.96 7.44 8.08 8.86 9-77 10.81

25 000 6.88 6.50 6.69 7.13 7-77 8.59 9.58 10.73 12.04

30 000 6.69 6.46 6.76 7-33 8.12 9.12 10.32 II.70 13.28

35 000 6.56 6.45 6.85 7.54 8.48 9-66 11.06 12.68 14.53

40 000 6.47 6.46 6.96 7-77 8.85 10.20 11.81 13.67 15.79

45 000 6.40 6.48 7.07 8.00 9.23 10.75 12.56 14.66 17.04

50 000 6.35 6.51 7.19 8.23 9.60 II.30 13.32 15.65 18.30

8.96 8.75 7.74 7-73 7.54 7.64 7-59 7-79

7-75 8.02 9.01 9.64 10.47 11.43 11.98 13.28 13.51 15.14 15.05 17.01 16.60 18.89 18.15 20.77 19.71 22.65 21.26 24.54

8.59 7.76 7.78 8.02

6.34 10.33 12.50 14.70 16.93 19.16 21.40 23.64 25.88

28.13

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 7

be limited by the quantity of grain any individual operator can capture in an environment in which transport costs increase as the catchment area expands.

Economies of scope arise if there are benefits from operating a number of facilities as part of a single concern. These benefits may arise either as a result of the sharing of resources or because of benefits from improved co-ordination

and information sharing. An example of shared resources arises with repairs and maintenance. Currently, in New South Wales, a number of receival points in a region draw on a central workshop. If this arrangement is in fact more cost-effective than maintaining separate repair staff for each receival point or hiring contract maintenance staff, then this is an example of economies of scope.

Co-ordination advantages could arise from the joint operation of a number of facilities. For example, periods of opening during the season could be co-ordinated between receival points in a given district in order to ensure that each receival point was open for the minimum period needed while providing some level of service during and after the harvest period.

Vertical integration of storage, handling, transport and marketing activities could also lead to economies of scope. To a significant extent, the current institutional environment excludes or discourages bulk handling agencies

from exploiting any efficiencies that may be possible through vertical integration of country storage and handling with other services. However, it is likely that such integration would occur in an environment where storage and handling

agencies were able to offer services on the basis of

commercial criteria. Some evidence for such an outcome was obtained from the Commission's survey of private grain handlers. In particular, it was found that storage and handling agents in New South Wales, Victoria and Queensland

are frequently involved in a range of grain distribution and marketing services. The results of the survey are discussed in Supporting Paper 3.

In summary, it appears that because the storage and handling function exhibits continuously declining costs, the number of firms in a given region is likely to be limited. Although the cost curve does turn upwards when transport costs are added to storage and handling costs, it still appears that a single supplier within an area provides the optimal result. The cost of transport and the density of grain production within the catchment area will determine the size of the spatial monopoly.

9

SUPPORTING PAPER 7

3.1.2 Contestability

Given that competition is unlikely to occur within a given region because of the declining cost curve, the question of contestability becomes important. Addressing this, however, is complicated by the fact that there are three different storage technologies (vertical, horizontal and bunker), which have different cost functions, and the possibility of on-farm storage exists.

Vertical silo storage of grain is a technology that tends not to comply with the conditions for a contestable market outlined in Chapter 2. In particular, there are few, if any, alternative uses of vertical storage, such that any entrant into the storage and handling sector may find it difficult, upon exit, to obtain for the asset a salvage value equal to or even significantly less than its construction cost. In addition, vertical silos incur considerable capital costs.

In contrast to vertical storage, bunker storage has characteristics that are more compatible with the

requirements of a contestable market. The construction cost of the bunker itself is comparatively small and a significant portion of the associated equipment could be moved

elsewhere. Of course, such mobility is not achieved without cost, although there does appear to be significant

opportunity for entrants into grain storage and handling to invest in and use bunker technology without incurring major sunk costs. However, the lower construction cost of bunker

storage is offset by higher operating costs.

The storage of grain in horizontal sheds can be regarded as being in between vertical and bunker storage so far as contestability is concerned. According to WACBH, the construction cost is lower than for vertical storage but higher than for bunkers; the operating costs are lower than for bunkers but higher than for vertical storage. As with vertical storage, any investor in horizontal storage may have to incur sunk costs, although it may be less difficult to

find alternatives for horizontal storage than for vertical storage.

It appears therefore that the degree of contestability within the storage and handling sector is dependent upon the technology used. The co-existence of each type of storage technology in individual receival facilities suggests that all have advantages. It would appear that the lower

construction cost of bunker storages makes them more cost-efficient as a means of coping with fluctuations in the amount to be stored, while the lower operating cost of vertical storages makes them more efficient as a means of dealing with the 'base load'. A technically optimal design for a receival point would require a mixture of technologies and this confuses the issue of whether a particular site is contestable.

An alternative to these storage types is on-farm storage. At present growers are often inhibited from installing suitable

10

SUPPORTING PAPER 7

facilities on their farms, despite the potential benefits that may accrue in some circumstances if on-farm storage is used in conjunction with road transport of grain to a

sub-terminal or port. Under current institutional arrangements, the main inhibiting factors are the payment arrangements (payment is made only after delivery to the central receival system), limitations placed on road transport, and the requirement to pay the full storage and handling fee when only a sub-terminal and/or port facilities are required.

The Commission estimated the weighted average capital and operating costs of on-farm storage at around $7.40 per tonne stored (representing a variety of suitable types of storages, inclusive of all installation costs and assuming full utilisation each year). This is similar to average operating costs for storage at country sites by several of the bulk handling agencies.

In summary, it would appear that country storage and handling cannot be regarded as perfectly contestable. However, the use of horizontal, bunker and on-farm storage by potential

entrants into the storage and handling sector would provide a limit to any excess profits that may be appropriated by a monopoly storage and handling operator.

It is difficult to assess the extent of potential entry into the country storage and handling sector. Like a number of other activities in which scale economies are present, grain storage is currently organised as a public monopoly, either

directly by legislation or through agreements with statutory marketing boards. Under current statutory marketing arrangements, the preparedness or otherwise of the marketing

boards to appoint a number of licensed receivers in a

deregulated storage and handling environment will be a vital influence on the degree of new entry to country storage and handling. In addition, there are a number of exclusive contractual arrangements between bulk handling agencies and State railways. At present these work mostly to increase rail's share of the transportation market, at the expense of road. However, if entry to the grain storage and handling market were permitted, the terms of agreements between

railways and bulk handling agencies could have a major impact on the viability of entrants in some areas.

3.2 Port terminal and ship-loading facilities

3.2.1 Economies of scale

As described in Supporting Paper 3, there is evidence of economies of scale in operating large port terminal facilities. There is no statistical evidence that the estimated long-run average operating cost function rises and average costs continue to decline as terminal size and throughput increase. In addition, there do not appear to be any diseconomies in port terminal construction costs. It

11

SUPPORTING PAPER 7

follows that for a given region the provision of port terminal services constitutes a natural monopoly.

3.2.2 Contestability

In order to provide port storage, handling and loading services, major investments in receival, storage, out-turn and wharf facilities are necessary. This is the case regardless of whether the operator chooses to invest in a throughput terminal with minimal storage capacity (for example, Fisherman Islands) or a terminal with more extensive storage capacity (such as Kwinana).

Should an incumbent port terminal operator charge prices that are significantly higher than costs, any potential entrant could well be faced with a significant proportion of the investment irrecoverable upon exit. Given the existing grain marketing structure, with the majority of grain production under statutory arrangements, there is little incentive for investment by private enterprise in new port terminals for grain.

Despite the difficulties in satisfying the contestability conditions, some interest has been shown in recent times in investment in storage, handling and loading operations designed to deal with a range of commodities. For example, there have been proposals to develop facilities to handle bulk ore, woodchips and grain in New South Wales.

Furthermore, it is of interest to note that the ship loaders owned and operated by the Department of Marine and Harbors in South Australia are able to handle a number of bulk

commodities. Provided a suitable site is available, any entrant into a deregulated storage and handling market in South Australia would be able to avoid some capital

expenditure by using a conveyor from storage to the

Department's ship loader, although considerable investment in storage may still be necessary. At other ports (for example, Pinkenba in Brisbane), coal has been loaded at Maynegrain's port terminal and Bulk Grains Queensland has considered the loading of woodchips and mineral sands at the same site.

An additional consideration to new entry into port terminal operations is that there appears to be little or no shortage of capacity within the existing system, especially once current works are completed (for example, Port Kembla terminal) and proposals implemented (for example, the upgrading of Portland to handle larger vessels). Also, there

is no prospect in sight of major technological developments that would facilitate the adoption of new methods and enable new firms to enter the industry with a competitive

advantage. It has been suggested, however, that lower quality loading systems are less expensive than those used by the bulk handling agencies and that some limited competition may be feasible.

With regard to increasing competition in the supply of port terminal services two matters are of interest: first,

12

SUPPORTING PAPER 7

competition between adjoining ports; second, ensuring equitable access by all storers and handlers to a given port terminal.

Competition between ports would arise particularly in overlapping grain catchment areas and would depend on the costs encountered over the entire range of grain paths from

farm to port. Should a port terminal and loading operator significantly raise prices above the costs of service provision, growers and others may turn to another grain path to an alternative port although the opportunity may be limited for growers and country storage and handling agents located relatively close to any particular port.

Furthermore, potential competition between grain paths may be inhibited in the event that all alternative port terminal destinations are owned by the same operator. To some extent, competition between ports occurs under existing institutional

arrangements in the form of interstate deliveries, although the extent of such competition is limited by pooling of costs incurred at both country and seaboard facilities.

Although it appears likely that some competitive influences will bear on port terminal and loader operators in a

deregulated storage, handling and transport environment, it is evident that the market structure could not be regarded as contestable. The possession of monopoly power by a port terminal and loader operator is of significance for two reasons. First, any such monopoly power could be used to raise prices above levels justified by the underlying cost structure; that is, a port terminal and loader operator may price storage and handling services above the stand-alone cost in order to earn excess profits. Second, and perhaps more importantly, there is the problem of the monopoly power held by a port operator in conjunction with ownership of country storage and handling facilities.

If a port terminal operator were to discriminate against particular sources of grain or modes of delivery, the potential resource cost savings from alternative grain paths identified in Chapter 6 of Volume 1 would be jeopardised. This is not to suggest that some price differentiation between types of grain and modes of grain delivery is not justified at the seaboard. Indeed, it is likely that deliveries of the various grains will impose different costs on the storage and handling operation because of their respective characteristics (for example, volumetric properties) and varying quantities. Moreover, it is likely that the cost of receiving grain by road will differ from the cost of receiving grain by rail. In such circumstances it would be appropriate, from the standpoint of economic efficiency, to charge storage and handling prices that

reflect any differences in the costs of receival, storage and out-turn of the various grains. However, price

discrimination involving different charges for similar services, grains and quantities, will not generally be in the community's interest.

13

SUPPORTING PAPER 7

To overcome any anti-competitive behaviour that may emerge in a deregulated storage, handling and transport environment, the pricing practices of port terminal operators could be made subject to the scrutiny of the Trade Practices

Commission. A more detailed discussion of options to deal with anti-competitive behaviour in storage and handling is provided in Supporting Paper 3.

14

4. TRANSPORT

The primary focus of this chapter is the transport of grain destined for export markets. However, the analysis has general relevance and is also applicable to the transport of grain to domestic markets.

4.1 Rail services

4.1.1 Economies of scale

As noted in Supporting Paper 4, railways are characterised by declining cost curves. Consequently, it is likely that a single firm can produce the required output at lower average cost than could a combination of firms each serving only a proportion of the market. Although this finding applies to the entire railway operation it is possible that parts of the operation, such as the use of rolling stock, do not exhibit the same economies of scale as does the permanent way.

The operation of railways in Australia and overseas tends to indicate that railways are natural monopolies. Few examples are to be found of rail systems that compete directly with each other for major traffics. Within Australia, even where entry is allowed (Western Australia), there are only a small number of private lines constructed for specific,

non-competing purposes.

It is generally recognised that the substantial economies available in rail operations stem not from firm size (measured by total capacity or output produced), but rather from economies of traffic density over a given network (see, for example, Waters 1985 and Keeler 1983).

This partly reflects the gains from fully utilising indivisible plant that must be installed for any service to be provided; that is, single-line, light weight rail. For example, a single-line track costs around $6500 per kilometre annually to maintain in a condition suitable for use. A branch line of, say, 100 kilometres would entail $650 000 of fixed costs to be shared over grain traffic volumes which in many cases in Australia are no more than 50 000 to

70 000 tonnes per annum. This implies a fixed cost of

$9-13 per tonne (or , some 3.0-4.3 cents per net

tonne-kilometre when averaged over a total rail trip of 300 kilometres). In contrast, virtually all main lines carry upwards of 0.5 million tonnes of freight per annum (per single-track-kilometre) which implies a maximum of

approximately $3 per tonne for a main line haul of

250 kilometres. Usually, main line traffic volumes are around 1 million tonnes per annum, giving $1.60 per tonne for a 250 kilometre journey or 0.65 cents per net

tonne-kilometre.

15

SUPPORTING PAPER 7

The economies of traffic density also reflect the major increase in total carrying capacity that can be brought about by relatively minor additional investments in track. The addition of passing loops and rudimentary signalling, for instance, permits a proportionately larger increase in total train movements and substitution of heavier rail can enable a large increase in train loads.

Thus, single track can be built and operated to carry around 7 million tonnes of freight per annum, or some 4 million tonnes in the predominant direction of flow. Under these conditions the total provision of rail services, including grain transport, is clearly a natural monopoly, with costs declining as traffic density increases (see Supporting Paper 3).

4.1.2 Contestability

Overall, it is clear that rail transport exhibits features of a natural monopoly. Should rail authorities charge prices in excess of the efficient cost of providing the service it is unlikely that new rail services could be provided since State and federal agencies control entry under current industry arrangements. Even if the industry were open to new

entrants, the prospect of large capital investments becoming sunk costs would most probably inhibit effective competition.

There are, however, certain elements of the rail service that may be subject to multiple sources of supply and new entry. The most important of these is the provision and use of rolling stock, locomotives and perhaps, crews. These train running costs typically comprise as much as two-thirds of the total operating and capital costs associated with State rail grain tasks (see Supporting Paper 4).

It is technically feasible for bulk handling agencies to operate their own wagon fleets, as is commonly practised by oil and cement companies. In a deregulated transport environment, wagons might be leased out to different users from a pool owned by an independent company (enabling risks from traffic fluctuation to be minimised). Locomotives could be supplied in a similar way to supplement the railway's own fleet. Running rights could, in principle, be negotiated with the operating railway. The Commission understands that there are examples of this occurring in Western Australia and on British Rail's system (by Foster Yomans). The actual manning of the train with outside crews may present some

industrial relations problems but is technically feasible.

Outside supply of such resources is likely to be stimulated most where operational difficulties are encountered by the railway authority, where disagreements arise over the 'fairness' of charges or the costing methods underlying them, or where shortage of capital funds restrict planned replacement. Wagon supply is the most likely candidate for outside supply as maintenance could be put out to competitive tender or be done by the owners.

16

SUPPORTING PAPER 7

Provided tracks of the appropriate gauge are available, rolling stock is, by definition, highly mobile although, unlike aircraft, transfer overseas would be very costly. Thus, ignoring current institutional constraints, the degree of contestability in the rolling stock market would depend primarily on the number of operators within Australia and the compatibility of their track systems and rolling stock. It is likely that the difference in gauges from State to State in Australia would limit the scope for the development of a rolling stock market. Nevertheless, in some circumstances rail transport efficiency may be improved by bulk handling agencies supplying some rolling stock. There is substantial ownership of grain rolling stock by grain companies in the United States.

Despite these potential opportunities, existing railways will remain the sole suppliers of the permanent way. By itself, this would suggest that rail may be able to extract monopoly profits from grain transport and other activities in some

areas. However, the potential introduction and/or expansion of contract road haulage services would provide a potent means of exerting influence on rail efficiency and of bringing about an overall reduction of land transport costs.

4.2 Road haulage services

The road transport industry is characterised by almost constant returns to scale (see Supporting Paper 4). Studies have shown (for example, Winston 1985 and Bayliss 1986) that there are few economies of scale within the trucking industry and optimal firm size is small. Bayliss found that larger

firms may be able to operate a more efficient mix of vehicle sizes but fleet size has no influence on the operating costs (including corporate overheads) of specific vehicles.

There are no restrictions on entry into the trucking

industry, except for the normal operational regulations applicable to all operators (for example, special drivers licences and registration). When the industry was

deregulated in the mid-1950s the ease of entry was clearly demonstrated (see Joy 1964) by the widespread entry that occurred. One reason for the high level of entry is that road operators incur virtually no sunk costs. Unlike rail, where the operator incurs the cost of constructing the permanent way, the provision of roads is undertaken by governments and not the individual operators (that is, the sunk cost is incurred by governments).

The high turnover rate generally observed for hauliers (from business failure, especially inability to maintain vehicle repayments), both here and in other countries, is sometimes cited as a cause for concern. Whilst individual haulage firms may display instability, experience shows that the industry itself in its dealings with users is both stable, in that a service is continuously available, and efficient in technical operation.

17

SUPPORTING PAPER 7

Overall, the road transport industry appears to be

competitive: there is a large number of firms operating, there are constant returns to scale, the optimum firm size is relatively small, and prices charged reflect the operating cost structure. Because of its competitive nature, the road transport industry can be regarded as operating in a contestable market.

4.3 Potential road-rail competition

The competitive nature of the road haulage industry suggests that it can be expected to supply reliable, efficient services at charges approximating operator costs. Under certain conditions road haulage is likely to provide active competition for rail. Because of the critical importance of high volume loads for achieving a low cost rail operation, it is futile to try to establish a standard break-even distance below which road is likely to be superior or a clearly defined range of trip lengths over which competition between road and rail will occur.

Given the large variation in the size of the transport task across Australia, it is possible that road transport will prove to be competitive for long haul trips (in excess of 300 kilometres). In particular, road transport may provide a service at lower cost than rail where low volume branch lines are numerous or on routes with highly fluctuating volumes.

In contrast, where regular high volume flows occur, rail may have significantly lower costs than road and be preferred by shippers, even for distances of 50 to 150 kilometres - providing loading and unloading rates are good. It can be expected, therefore, that competition between road and rail will be widespread and not confined to the often quoted

200 to 300 kilometre range.

The competitiveness of road transport vis-a-vis rail is further complicated by the existence of back-haul

opportunities in some areas. Greater availability of back-haul opportunities would permit road operators to offer lower haulage rates (in both directions) and would increase the competitiveness of road transport.

For a deregulated transport market to be efficient, transport prices need to be at the incremental cost of service

provision. While this may not be a problem with respect to road transport operations (providing that road damage and other external costs such as congestion, pollution and road accidents are adequately covered), there may be economies of scale in regard to railway operations which represent an obstacle to incremental pricing of rail services. If rail services are priced at incremental cost in the presence of economies of scale, average costs will not be covered. In Supporting Paper 6, the Commission has examined a range of options, including direct subsidies and Ramsey pricing, that potentially could deal with such situations.

18

SUPPORTING PAPER 7

A further efficiency-related requirement for a deregulated transport market is the absence of 'destructive'

competition. Competition between road and rail may be destructive when it does not lead to lower costs but instead results in market instability. It has been suggested that in the grain transport market such competition may occur as a result of fluctuations in grain production. Road operators may enter the market and capture any excess profits when demand is relatively high or tonnages very low and thereby

limit a rail system's capacity to adjust its prices in response to seasonal variations in the size of the total transport task.

If rail tonnage decreases in such years then its fixed costs (for example, maintenance of the permanent way and corporate overheads) must be recovered from a lower volume base. In effect, this will move its average total cost curve upwards

and it may be forced to disinvest and leave the total

transport task in the hands of road transport, at an overall higher cost to the community. However, the probability of this occurring is relatively low because rail operating costs

are significantly below those of road transport in many areas. In some cases, transport contracts covering a number of years may overcome the problem. Moreover, it could be expected that the position of the rail cost curve will be influenced by the presence of potential competition from road transport (see Supporting Paper 4).

Overall, the Commission believes that in many areas road-rail competition will enable the potential resource cost savings identified in Chapter 6 of Volume 1 and Supporting Paper 8 to be substantially realised. There will, however, be areas where one of the two modes is decisively inferior in terms of the price at which it could offer an economic service. Where rail is inferior, competitive pressures within the road haulage industry and ease of entry will ensure that

competitive behaviour prevails.

Where road is inferior, on the other hand, some users have expressed the fear that in certain situations rail may price above stand-alone costs. The Commission regards this fear as largely unfounded. It is not unreasonable for a competitive rail authority to recoup its fixed and joint costs where it can. In any case, the local road price would provide an upper limit to the price rail could obtain.

Another concern relates to the possibility of predatory pricing; that is, where market power in one segment of the transport market is used to limit competition in another segment. The Commission notes that this was not a major

point of concern during the inquiry and, in any case, considers that such behaviour could be dealt with through provisions of the Trade Practices Act (see Supporting Paper 4 for a more detailed discussion).

19

5. THE IMPACT OF MARKETING REFORM ON COMPETITION AND CONTESTABILITY IN THE STORAGE, HANDLING AND TRANSPORT SECTOR

In this chapter, the impact of changes to domestic and export grain marketing arrangements is considered. The principal issues of interest are, first, the responsibility given to statutory marketing boards in an environment where storage, handling and transport services are deregulated and, second, whether domestic and/or export marketing of grain (wheat, in particular) is a necessary condition in order to obtain

sufficient competition and contestability in the distribution system.

Previously it has been argued that the grain storage, handling and transport task is likely to be contestable providing that certain obstacles (such as natural monopoly conditions at the seaboard) can be overcome. While it has not been necessary to discuss the competitiveness of sea transport (these prices are determined on world markets), it has been argued elsewhere (see Chapter 6 of Volume 1) that significant savings can also be made in this area through the disaggregation of port service and sea transport costs.

Given that the storage, handling and transport functions are, or can be made, contestable and therefore competitive, it appears that, under current marketing arrangements, the responsibility for capturing available cost savings clearly rests with the statutory and non-statutory marketing agencies.

In general, marketing agencies will be able to pursue two alternative courses of action in regard to the storage, handling and transport sector. First, at one extreme it would be possible, in an environment where sole receival rights are withdrawn and transport restrictions removed, for the marketing agencies to forego any potential resource cost savings by choosing not to use the services of any agents other than those that they currently employ. Second, at the other extreme, marketers may be prepared to authorise, under commercial contract, any suitable provider of grain storage, handling and transport services. If this were the case, it is likely that there would be sufficient competitive pressure to realise potential resource cost savings under the current marketing arrangements.

While the Commission is of the view that potential resource cost savings can largely be realised under current marketing arrangements, it also recognises that marketing reform, such as that being considered in the current IAC inquiry into wheat industry assistance, may inject additional competitive pressure into the market environment for storage, handling and transport. The Commission has not considered the overall desirability or otherwise of changes to export or domestic marketing arrangements: it regards this subject as being beyond the scope of its inquiry. However, it is concerned

with the impact of marketing reform on the efficiency of

20

SUPPORTING PAPER 7

storage, handling and transport of grain. In this regard, the central point of interest is that the incremental competition obtained by marketing reform may not be significant providing that marketers choose the second course of action, as outlined. Nevertheless, it is worth noting the major sources of competitive pressure that reform of domestic

and export marketing arrangements could bring to grain distribution. The discussion focusses primarily on wheat.

In its draft report, the Industries Assistance Commission (IAC) (1987) has proposed that the permit system for sales of feed wheat be extended to cover wheat for any domestic use. If implemented, this proposal would allow any grower or firm to trade wheat domestically providing that a permit is purchased from the Australian Wheat Board (AWB). Apart from the need to purchase a permit, the Commission understands that the IAC regards this proposal as equivalent to deregulation of the domestic market.

In an environment where the domestic market is deregulated, the Bureau of Agricultural Economics (BAE) (1987, p. 40) has pointed out that growers would be provided with a range of marketing options. In particular, it would be possible for growers to sell directly to end users such as flour millers

and stockfeed manufacturers as well as trade through a merchant or sell to the AWB. Similar options would be

available to end users. Overall, deregulation of the domestic market may see the emergence of a range of new storage, handling and transport options including the

following:

. an increase in sales direct from grower to end user, particularly between those buyers and sellers who are either currently, or will be in the future, in close proximity to one another - this development is likely to result in new handling, storage and transport options outside the central bulk handling system;

. an increase in the use of on-farm storage as growers develop their own marketing strategies;

. expansion in the activities of those private storage and handling agents currently engaged in the distribution of non-statutory grains, including vertical integration of storage, handling, transport and marketing of grain;

. extension of the services provided by existing bulk handlers, whereby additional warehousing is undertaken for private traders on the domestic market as well as for millers and growers.

In relation to the export market, the IAC has proposed that the AWB sell wheat to private traders for export to any market, other than a small number of specified markets reserved for the AWB. Furthermore, the IAC, (1987, p. 107) raised the possibility of allowing traders to accumulate wheat for export direct from growers and/or local merchants,

in which case there could be direct interaction between the

21

SUPPORTING PAPER 7

private trade and operators in the storage, handling and transport sector.

In the event that private traders of wheat have flexibility to negotiate with storage, handling and transport operators of their own choice, it could be expected that additional competitive pressure would be brought to bear on the grain distribution system. The significance of such pressure would depend upon the quantity of wheat that private traders are permitted to export.

One further option put forward by ACIL Australia Pty Ltd in its submission to the Royal Commission was that the

compulsory acquisition powers of statutory marketing boards (for domestic and export grain) should be removed.

Implications of such changes to the domestic market for storage, handling and transport have already been

considered. The major points of interest, so far as export market deregulation is concerned relate to the likely expansion in the activities of international grain traders, the possibility of vertical integration of marketing with storage, handling and transport of grain, and the possible emergence of a futures market that would allow all traders

(including those engaged in grain distribution) to accommodate any price risk confronted in the world and Australian wheat markets.

In regard to entry of international grain traders into export marketing, it is of interest to note that vertical

integration of marketing and storage, handling and transport of grain is an integral feature of other grain distribution systems such as those in North America. Such integration is likely to occur primarily because the marketer needs to be assured of access to grain.

Given a greater number of grain traders with export market deregulation and vertical integration of marketing with storage, handling and transport services, it is likely that additional competitive pressure (over and above that offered by regulatory control of wheat exports and domestic market deregulation) would be brought to bear. Each of the grain traders and their ancillary storage, handling and transport operations would put continuous effort into reducing margins to improve their competitive positions. However, the magnitude of this effect is difficult to ascertain. In any event, the Commission is of the view, that significant competitive pressures can be brought to bear on the storage, handling and transport sector under the existing marketing arrangements.

In regard to the possible emergence of a futures market in an environment where export marketing is deregulated, it is of interest to note that firms involved in storage, handling and transport may be able to spread the risks of their operations across speculators elsewhere in the market. In particular, firms would be able to acquire grain and hedge against subsequent price movements. This opportunity may also reduce

22

the need for firms entering the markets for distribution services to be vertically integrated.

SUPPORTING PAPER 7

23

6. CONCLUDING REMARKS

The various components of the grain storage, handling and transport system differ significantly in their natural monopoly and contestability characteristics. At one extreme is the road transport industry, which can be regarded as highly contestable; at the other, port terminals exhibit many of the characteristics of a natural monopoly and may not be contestable.

The lack of contestability exhibited by port terminals suggests that an incumbent operator may be in a position to exert influence over other elements in the storage, handling and transport chain. Any such monopoly power would permit the terminal operator to discriminate between firms operating storage in the hinterland. Should the owner of the port also own storage in the hinterland, it would be possible to give preferential treatment to its own country storage at the expense of competitors.

Although port terminals may be able to exercise some monopolistic powers, the extent of these powers is limited by the cost of alternative paths to another port. Of course, this will not prevent some port terminals from attempting to extract monopoly profits but it will limit the size of such profits.

The Commission has examined a number of ways in which potential pricing problems might be dealt with. These are discussed in Chapter 9 of Volume 1.

In the case of country storage and handling there is likely to be sufficient potential competition in a deregulated storage, handling and transport environment to limit the extent of monopoly power. In particular, there is scope for competition between different grain paths, as well as potential for entry by new and existing organisations using bunker and horizontal storage, and growers using on-farm storage.

It is likely, however, that in a deregulated grain

distribution setting, the country storage and handling system will develop into a number of spatial monopolies. The area covered by the monopoly will be determined by the density of grain production in the surrounding area and the cost of road transport. The level of excessive profits these spatial monopolies could derive would effectively be limited by the

cost of transporting grain to the closest competitor. Provided the area monopolised is relatively small the monopoly profits achievable will be small.

In the case of grain transport, rail can be regarded as a non-contestable natural monopoly and the road transport industry can be described as competitive. While the individual modes exhibit different degrees of contestability, the overall transport function does appear to be contestable because one mode can be substituted for the other. Even

24

SUPPORTING PAPER 7

though rail may enjoy cost advantages over road in many areas, the prices it can charge are effectively limited to what road would charge to perform the same task.

Under current marketing arrangments, which are dominated by statutory marketing boards, the achievement of potential savings in the storage, handling and transport industries by increasing competition and contestability is reliant upon the statutory marketing boards actively pursuing those savings. Under the Commission's preferred approach, the charter of

statutory marketing boards would be such that they have clear responsibility for minimising storage, handling and transport costs and so be required to pursue the identified savings.

Providing that adequate safeguards against anti-competitive behaviour are included in the distribution system and that marketers of grain actively pursue all commercial

opportunities in order to minimise storage, handling and transport costs, the Commission is of the view that

withdrawal of sole receival rights and removal of transport restrictions would result in a sufficient degree of

competitive pressure to ensure the realisation of most of the potential resource cost savings. Of course, a market solution is not the only means available to pursue such benefits: the other principal approach would be to use an

administered efficiency solution. This is discussed in Volume 1.

25

APPENDIX A COST CURVES FOR COUNTRY STORAGE AND HANDLING

Two problems arise in the estimation of a long-run average cost curve. First, it is necessary to convert the capital costs to an annual flow. To make this conversion a real discount rate of 5 per cent and a life span of 40 years for infrastructure has been used. Second, given the nature of the estimated operating cost function, it is necessary to determine an appropriate ratio of throughput to capacity. The ratio of throughput to capacity determines the absolute

level of the cost curve and the point on the curve at which the facility is operating, but it does not affect the shape of the curve. For present purposes, an observed mean ratio of throughput to capacity in New South Wales of unity is used. Based on analysis undertaken for Supporting Paper 3 the following long-run average cost curve can be derived:

(1) AC(Q) = 5.575 + 0.768/Q (A.l)

where

AC = average total cost of grain handling ($ per tonne), and ^

Q = throughput (10 tonnes)

The maximum benefits from scale economies may be achieved by having a small number of large facilities. However, these benefits must be offset against the cost of transporting grain from the point of harvesting to the facility. Since these costs increase with the area served by a facility, it

is possible to derive an optimal service, taking account of transport costs, scale economies and delivery density (that is, the ratio of deliveries to the area served by a

facility). The average cost, including transport costs, is given by

(2) AC = 5.575 + 0.768/OD + 0.25T OD2 (A.2)

where

AC = average cost of transport and handling ($ per tonne), D = diameter of^area served (kilometres); 0 = density (10J tonnes delivered per kilometre of D) and T = transport cost ($ per tonne-kilometre)

Using the cost curves, as derived, and a transport cost of $0.20 per tonne-kilometre (an estimate of the resource costs of farm to country receival point trucking services), it is possible to make some numerical estimates of the trade-off

involved. These are outlined in Chapter 3.

27

REFERENCES

BAE 1987, Wheat Marketing and Assistance: Submission to the IAC, AGPS, Canberra.

Bayliss BT 1986, 'The structure of the road haulage industry in the UK, and optimum scale', Journal of Transport Economics and Policy, 20(2), 153-172.

IAC 1987, Draft Report on the Wheat Industry, Canberra.

Joy S 1964, 'Unregulated road haulage: the Australian experience', Oxford Economic Papers, 2(2), 275-85.

Keeler TE, 1983, Railroads, Freight and Public Policy, Brookings Institute,

Waters WG, 1985, 'Rail cost analysis' in Button KJ & Pitfield DE, International Railways Economics, Gower, pp. 101-35.

Winston C, 1985, 'Conceptual developments in the economics of transportation: an interpretive study', Journal of Economic Literature, 57-94, March.

28

ROYAL COMMISSION INTO GRAIN STORAGE HANDLING AND TRANSPORT

EVALUATION OF ALTERNATIVE SYSTEMS

Supporting Paper 8 February 1988

CONTENTS

Page

1. INTRODUCTION 1

2. BACKGROUND TO THE MODELS 3

2.1 Alternative grain paths 2.2 User charges and resource costs 2.3 Input data for the alternative systems models

3. MODEL 1: COST-BUDGETING MODEL 11

3.1 Operation of the model 11

3.2 Results 15

3.2.1 Results: national perspective 15

3.2.2 State results 19

3.2.3 Results: New South Wales case 20

study areas

3.2.4 Results: Victorian case study 24

areas

3.2.5 Results: Queensland case study 27

areas

3.2.6 Results: Western Australian case 32 study areas 3.2.7 Results: South Australian case 36

study areas

3.3 Discussion of the cost-budgeting model 39

4. MODEL 2: NORTHERN NEW SOUTH WALES PROGRAMMING 42 MODEL

4.1 Model description 42

4.2 Results 44

5. MODEL 3: EASTERN AUSTRALIA MODEL 48

5.1 Introduction 48

5.2 Model description 48

5.2.1 Nature of the model 48

5.2.2 Input data 51

5.3 Applications of the model 52

5.3.1 Results reported in Blyth 52

et al. (1987)

5.3.2 Results using Commission's 54

assumptions

5.4 Discussion of the eastern Australia model 62

iii

C O id C O

6 . DISTRIBUTIONAL IMPACT OF A COMPETITIVE ENVIRONMENT 64

6.1 Introduction 64

6.2 Approach 64

6.3 Analysis 65

APPENDICES

A Specification of case study areas for cost- 73

budgeting and northern New South Wales programming models

B Details of data used in cost-budgeting model 85

C A spatial equilibrium model of regional grain 109 flows: Details of methodology and data used for northern New South Wales programming model

D Northern New South Wales programming model 126

results

REFERENCES 185

TABLES

2.1 Alternative physical grain paths for export 4 grain

2.2 Input data for alternative systems 10

3.1 Contribution of efficient resource costs to 18 national resource cost savings: 1986-87

3.2 New South Wales grain paths with lowest total 21 charges to growers and resource cost savings from choosing those paths: 1986-87

3.3 Victorian grain paths with lowest total 25

charges to growers and resource cost savings from choosing those paths: 1986-87

3.4 Queensland grain paths with lowest total 29

charges to growers and resource cost savings from choosing those paths: 1986-87

3.5 Western Australian grain paths with lowest 33 total charges to growers and resource cost savings from choosing those paths: 1986-87

iv

3.6 South Australian grain paths with lowest 37

total charges to growers and resource cost savings from choosing those paths: 1986-87

4.1 Grain flows from the Moree case study area in 46 northern New South Wales programming model

5.1 Inland grain movements under the equilibrium 56 base model and in the absence of regulations

5.2 Road movements under the equilibrium base 57

model and in the absence of regulations

5.3 Rail movements under the equilibrium base 58

model and in the absence of regulations

5.4 Tonnage of grain received at eastern State 61

ports in base case and alternative case

6.1 Frequency distribution of savings in eastern 69 Australia production regions

A. 1 Main features of case study areas 77

B. l Range of rail operating cost data used in 87

cost-budgeting model: 1986-87

B.2 Rail freight deductions paid by growers: 88

1986-87

B .3 Road charges for farm to local silo 90

deliveries: 1986-87

B .4 Long distance road haulage charges: 1986-87 92

B .5 Current storage and handling charges for 94

wheat: 1986-87

B .6 Capital costs for different storage types: 96

1986-87

B.7 Capital costs for grain storage and handling: 97 1986-87

B.8 Storage operating costs for country silos in 98 different case study areas: 1986-87

B .9 Summary of operating costs for port grain 100

assembly: 1986-87

B.10 Port storage costs: 1986-87 100

B.ll Costs of on-farm storage: 1986-87 102

v

SUPPORTING PAPER 8

B.12 Charges for port services: 1986-87 104

B .13 Grain shipments and sea transport costs 106

from Australian ports

B .14 Sea transport charges: 1986-87 107

B. 15 Pooled charges for Australian wheatgrowers: 108 1986-87

C. l Demand functions used in the model 114

C.2 Supply balance sheet for system quantities: 116 1985-86

C .3 Derived supply response functions for 117

model sites

C.4 Average cost function coefficients for local 118 receival points and exogenous variables

C.5 Average cost functions for the sub-terminals 119 at Moree and Werris Greek and the ports of Newcastle and Brisbane

C .6 Farm to local receival point transportation 120 cost estimates: 1985-86

C.7 Farm to seaboard terminal road cartage rates 121 and resource costs: 1985-86

C.8 Rail freight rates 122

C.9 Receival site storage capacities: 1985-86 123

C.10 Characteristics of the representative farms 123

C. ll Land area, labour availability and shire rates 124 for representative farms

D. l Summary of base run results for the 128

programming model

D .2 Scenario specifications 130

D.3 Shipments between receival points, 132

sub-terminals and ports with cost pooling versus disaggregated charging

D.4 Receivals at each site with cost pooling 136

versus disaggregated charging

D.5 Cost margins at each site with cost pooling 137 versus disaggregated charging

vi

D. 6 Prices at each site with cost pooling versus 138 disaggregated charging

D.7 Actual opening and closing stock levels 140

D.8 Farm income charges with cost pooling 141

versus disaggregated charging

D .9 Shipments between farms, receival points, 142 sub-terminals and ports with cost pooling versus an efficient handling system, disaggregated charging and road shipment

to Newcastle

D.10 Receivals at each site with cost pooling 146

versus an efficient handling system, disaggregated charging and road shipment to Newcastle

D.ll Cost margins at each site with cost pooling 147 versus an efficient handling system, disaggregated charging and road shipment to Newcastle

D .12 Prices at each site with cost pooling versus 148 an efficient handling system with disaggregated charging and road shipment to Newcastle

D .13 Farm income changes with cost pooling versus 150 an efficient handling system, disaggregated charging and road shipment to Newcastle

D.14 Shipments between farms, receival points, 152 sub-terminals and ports with cost pooling versus efficient handling and farm to ports by road

D .15 Receival at each site with cost pooling 156

versus efficient handling and farm to ports by road

D.16 Cost margins at each site with cost pooling 157 versus efficient handling and farm to ports by road

D.17 Prices at each site with cost pooling versus 158 an efficient handling system and farm to ports by road

D .18 Farm income changes with cost pooling versus 160 efficient handling system and farm to ports by road

vii

D .19 Shipments between farms, receival points, 162 sub-terminals and ports with cost pooling versus efficient transport, road shipments to ports and cost pooling

D .20 Receivals at each site with cost pooling 166

versus efficient transport, road shipments to ports and cost pooling

D.21 Cost margins at each site with cost pooling 167 versus efficient transport, road shipments to ports and cost pooling

D.22 Prices at each site with cost pooling versus 168 efficient transport, road shipments to ports and cost pooling

D.23 Farm income changes with cost pooling versus 170 efficient transport, road shipments to ports and cost pooling

D.24 Shipments between farms, receival points, 172 sub-terminals and ports with cost pooling versus an efficient transportation and handling system with port competition

D.25 Receivals at each site with cost pooling 176

versus an efficient transportation and handling system with port competition

D.26 Cost margins at each site with cost pooling 177 versus an efficient transportation and handling system with port competition

D.27 Prices at each site with cost pooling versus 178 an efficient transportation and handling system with port competition

D.28 Farm carryover levels with cost pooling versus an 180 efficient transportation and handling system with port competition

D.29 Farm income changes with cost pooling versus an 180 efficient transportation and handling system with port competition

D .30 Transport of grain to port from farms: 181

modal split

viii

1. INTRODUCTION

The Commission's terms of reference require it to determine the most efficient and cost-effective integrated system for the provision of grain storage, handling, transport and port services. The aim of this supporting paper is to identify alternatives to the current system, document the methodology and results of analyses, and provide some estimates of the potential resource cost savings.

The alternatives to the current system considered, reflect the removal of constraints, or the adoption of practices which would increase competition. More specifically the changes to the current system are:

. removal of the requirement that the current bulk

handlers have sole receival rights for the major grains;

. removal of restrictions constraining the road transport of grain; and

. disaggregation of port services and sea transport costs.

The Commission has identified four alternative systems likely to result from various combinations of the above policy options. These are:

System (A) removal of sole receival rights for storage and handling;

System (B ) removal of restrictions on road transport;

System (C) a combination of (A) and (B) above; and,

System (D) a combination of (A) and (B ) above, and also disaggregation of port services and sea transport costs.

An evaluation of these alternative systems requires the complexities of grain distribution to be addressed. First, the impact of the alternative systems on the costs of providing services and the charges which would be set for those services needs to be assessed. Since there are important inter-relationships and dependencies between the different elements of the grain paths, a change to one aspect of the system will often have important ramifications for other parts of the system. Second, the grain paths that users will select need to be determined. This will depend upon the charges facing those users. Users are assumed to choose the path with the lowest overall charge, which may not necessarily be the least-cost path in resource cost terms.

Finally, the resource cost of the chosen path is compared with the resource cost of the current system, the difference being either a resource cost saving or an increase in

resource costs.

1

SUPPORTING PAPER 8

The Commission utilised three types of models of varying complexity to quantify the potential efficiency gains which could be achieved under each of the alternative systems. The first is a cost-budgeting model of various case study areas which is used to evaluate the effects of changed policies on typical grain growing areas. The second model provides a more detailed analysis of one particular case study area in order to gain a greater understanding of some of the dynamic interactions involved. The third model is aimed at providing a broader assessment of grain flows and resource cost savings, by considering all the grain production areas in New South Wales, Victoria, Queensland and eastern South Australia.

The Commission is aware that the results of simulation modelling will only reflect the input data that is employed, and that in a dynamic environment the use of static cost estimates can only provide a snapshot of possible outcomes at a particular point in time. For example, if there was a dramatic rise in fuel prices, there would be a readjustment of both road and rail charges and costs, and since fuel comprises a lower proportion of rail's input costs, rail costs may increase by less than road costs and therefore alter the competitive position of the two modes.

Nevertheless, a modelling approach to the assessment of the alternative Systems A, B, C and D does facilitate the recognition of the many complex interactions that occur in the grain storage, handling and transport system.

The Commission recognises that its grain distribution models will not be able to capture all of the diverse features of the grain distribution systems which currently exist throughout Australia. However the Commission believes that the models do reflect the broad opportunities for resource cost savings which exist in the current system, and provide a good indication of the extent of the potential savings likely to be achieved under the alternative systems.

The remainder of this Supporting Paper discusses the methodology and results of the three models. Chapter 2 outlines the general approach which the models adopt, emphasising, in particular, the alternative grain paths, and the different charges and resource costs associated with each system. Chapters 3 to 5 provide more detail on each of the three models and in Chapter 6 the distributional impact of a competitive environment is examined. A number of appendices are included which provide detailed information about the case study areas, the input data, and the results obtained from application of the models.

2

2. BACKGROUND TO THE MODELS

2.1 Alternative grain paths

When considering the range of possible alternative systems there are a number of potential paths along which grain can flow from the farm to the end user. Figure 2.1 indicates the alternative grain paths for export grain between the farm paddock and the overseas customer.

The Commission has identified thirteen different paths and Table 2.1 lists the physical storage, handling and transport characteristics of each path. Where a grower has the choice of two or more ports (for example, Newcastle and Fisherman Islands) each of these paths is potentially available to each of the ports.

The table does not specifically refer to central receival point (CRP) country silos which are used in the Victorian grain distribution system. As CRPs can be considered to have similar operating characteristics to sub-terminals, the

sub-terminal stage of the grain path is considered to include CRPs.

The table refers to movements from 'farm' to silo,

sub-terminal and port, and also to movements from

'on-farm-storage' to sub-terminal and port. The difference between 'farm' and 'on-farm storage' as the origin of these flows is important. Grain paths originating from farm are assumed to involve grain movement either directly from the paddock, or with only minimal short-term storage. The

resource cost of this short-term storage is assumed to be nil. As a consequence grain flows originating from farm (paddock) will be highly peaked at some point along the grain path, since the harvest period in most States is short, and

the absence of on-farm storage will necessitate storage elsewhere along the grain path.

On the other hand, paths which have grain originating from 'on-farm storage' are assumed to involve storage for a longer period of time - up to twelve months. Grain held in on-farm storage is assumed to be ' called-in' to a sub-terminal or a port for cargo assembly at the convenience of either the sub-terminal, port operator or marketer. It is assumed that there is no carryover from season to season. As a result there is no ' harvest peak' of deliveries for grain paths originating from on-farm storage.

All on-farm storage that currently exists is assumed to be fully utilised already, and so grain paths that involve the use of on-farm storage require the construction of new facilities. Consequently the resource costs of on-farm storage include the capital and operating costs of permanent

farm silos and augers, and make provision for insect control. On-farm storage costs also include the costs of random inspection of grain received from longer term on-farm storage. These costs have been included in the model to

3

TABLE 2.1 ALTERNATIVE PHYSICAL GRAIN PATHS FOR EXPORT GRAIN

Path No . Movement Mode

1. Farm to Silo:

Silo to Sub-Terminal: Sub-Terminal to Port: Port to Overseas Market:

Road Rail Rail Ship

2. Farm to Silo:

Silo to Sub-Terminal: Sub-Terminal to Port: Port to Overseas Market:

Road Rail Road Ship

3. Farm to Silo:

Silo to Sub-Terminal: Sub-Terminal to Port: Port to Overseas Market:

Road Road Rail Ship

4. Farm to Silo:

Silo to Sub-Terminal Sub-Terminal to Port: Port to Overseas Market

Road Road Road Ship

5. Farm to Silo:

Silo to Port: Port to Overseas Market

Road Rail Ship

6. Farm to Silo:

Silo to Port: Port to Overseas Market

Road Road Ship

7. Farm to Road Silo (without rail facilities) Road Silo to Rail Silo Rail Silo to Port: Port to Overseas Market

Road Road Rail Ship

8. On-Farm Storage to Sub-Terminal: Sub-Terminal to Port: Port to Overseas Market

Road Rail Ship

9. On-Farm Storage to Sub-Terminal: Sub-Terminal to Port: Port to Overseas Market

Road Road Ship

10. On-Farm Storage to Port: Port to Overseas Market

Road Ship

11. Farm to Sub-Terminal

Sub-Terminal to Port Port to Overseas Market

Road Rail Ship

12. Farm to Sub-Terminal

Sub-Terminal to Port Port to Overseas Market

Road Road Ship

13. Farm to Port:

Port to Overseas Market

Road Ship

Source: Royal Commission into Grain Storage, Handling Transport. and

Paddock

FIGURE 2.1 ALTERNATIVE PATHS FOR EXPORT GRAIN

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 8

allow for any initiatives marketers may take to ensure a continuation of the current levels of grain hygiene. This is discussed further in Appendix B of this paper, and in Supporting Paper 9.

If grain is held in on-farm storage for a considerable period, and if the payment for the grain is the same

regardless of when the grain is delivered, there will be a significant opportunity cost for a grower associated with the deferred payment. In a competitive environment, growers could expect to have the opportunity cost of holding grain in on-farm storage fully taken into account in the price paid

for the grain, whereas under the current institutional arrangements there is an opportunity cost to growers of holding grain in on-farm storage. The Commission has attempted to model a system which is neutral in terms of the impact of time of payment on storage and handling

alternatives. Consequently, it is assumed that growers holding grain on-farm will be adequately compensated for income foregone through a deferred delivery scheme which meets the complete opportunity cost of the time delay in the payment.

It is apparent from inspection of Table 2.1 that road transport is a significant element of all grain paths. Road transport of grain necessarily incurs some waiting time while trucks are loaded and unloaded, and usually also incurs a queuing delay when trucks are waiting at a silo, sub-terminal or port before they can be unloaded. Usually the length of the queue is greater at harvest time than when grain is

'called in' during the year. Some estimates of queuing costs are presented in Appendix B and in Supporting Paper 4.

2.2 User charges and resource costs

Each element of the grain paths identified in Table 2.1 can be considered as having both a charge to users and a resource cost associated with the provision of the service.

The user charges depend on the pricing practices adopted by the organisation or firm providing the service. In a regulated environment, the prices of individual services do not generally correspond with costs, an example being the pooling of storage and handling costs in each State. Charges to users are not the same as the costs of providing the service, because of the cross-subsidy inherent in cost pooling. In an environment in which there is perfect competition, prices will equal (marginal) costs. Where there is competition, but it is not perfect, discriminatory pricing may be practised, with the result that prices will not necessarily equal costs in any particular place or for any particular service. These issues are discussed in more detail in Supporting Paper 6.

There are also resource costs associated with each element of the grain paths identified in Table 2.1, and it is possible to calculate the overall resource cost of each grain path.

6

SUPPORTING PAPER 8

Resource costs are the full cost to society of providing the service in question, and include indirect costs such as road damage, which may result from road haulage of grain. Resource costs exclude taxes and subsidies, since these are

actually transfer payments within society and are not related to the amount of resources used in providing the service.

In a regulated environment user charges may be higher or lower than resource costs, for example as a result of pooling. In addition, charges may diverge from resource costs in a competitive environment if taxes or subsidies are

imposed on storage, handling or transport services; or if providers of those services do not face the full social costs.

The concept of resource costs is closely related to economic efficiency, which is achieved when no further reallocation of resources in the grain storage, handling and transport sector would be more beneficial to the community. This will occur when the lowest resource cost path(s) for grain movement are being utilised.

A central issue is whether the current resource costs of the bulk handling authorities and rail authorities are the most efficient attainable for the different elements of the grain paths. The current resource costs reflect the existing technology and operating practices of the bulk handling

authorities or rail authorities. However, given a highly competitive environment, both bulk handlers and rail authorities would have a strong incentive to lower resource costs.

There are several reasons why the Commission believes that there is scope for reductions in storage and handling operating costs in the short term. Most of the bulk handling authorities have indicated in submissions and in public hearings that further efficiency gains are possible, although unlike some rail authorities, they have declined to provide

estimates. The Commission has also undertaken an analysis of the costs of private storage and handling operators in the eastern Australian States, which suggests that the costs of private operators are lower than the costs of the bulk handling authorities. This is discussed in Supporting Paper 3. Further, the Centre for Transport Policy Analysis has identified a number of restrictive work and management practices in the storage and handling operations of the bulk handling authorities. Changes in existing practices would provide scope for reducing the costs of current storage and handling operations. This is discussed in Supporting

Paper 10. Finally, the study by MacDonald Wagner which reviewed the operating costs of some NSW facilities (discussed in Supporting Paper 3) indicated that there was significant scope to lower existing storage and handling operating costs.

Similarly, the Commission notes that several rail authorities have identified scope for efficiency improvements which would result in lower operating costs. These cost reductions focus

7

SUPPORTING PAPER 8

around the improved use of existing capital facilities (for example, greater use of unit trains), more intensive scheduling of trains, improved manning, work and management practices, and in some cases capital investment to obtain greater efficiency gains.

Some of the bulk handling authorities and rail authorities have plans to achieve these productivity improvements under the current administered efficiency approach. However in a competitive environment, it is likely that these plans would be brought forward, and further dynamic efficiency gains

achieved in the longer term, through adjustment of capital stock and infrastructure, and continued pressure for productivity improvement.

2.3 Input data for the alternative systems models

It will be recalled that there are four alternative systems to be modelled, and in order to compare their output with the current arrangements, the current system also needs to be modelled. Consequently the required simulation runs are as

follows:

(1) the current system;

(2) System A: removal of sole receival rights for storage and handling, but retention of current institutional arrangements for road transport, and port services and sea transport;

(3) System B : removal of restrictions on road transport, but retention of current institutional arrangements for storage and handling, port services and sea transport;

(4) System C: a combination of (2) and (3) above;

(5) System D: a combination of (2) and (3) above and

disaggregation of port services and sea transport costs.

In order to identify as clearly as possible the impact of more competitive storage and handling services on their own, simulation run (2) above maintains the current restrictions on road transport, and the current pooling practices for port services and sea transport charges. Similarly, simulation run (3) is a combination of the current arrangements for storage and handling, road transport competing freely with rail transport, and a continuation of the current pooling arrangements for port services and sea transport charges. Simulation run (4) involves the introduction of a more competitive storage and handling system and the removal of restrictions on road transport, while still maintaining the current pooled port services and sea transport charges. In New South Wales there are currently no regulations

constraining the road transport of grain and so there is no difference between run (2) and run (4). Simulation run (5) is the same as simulation run (4) except that it introduces

8

SUPPORTING PAPER 8

charges for port services and sea transport which reflect the actual cost of these activities to growers and other

participants in the grain distribution system.

The combinations of charges and resource costs that are used in each of these simulations are indicated in Table 2.2. Where there is removal of regulations it is assumed that there will be competition, and that resource costs will

reflect efficiency improvements. Similarly, under competition, the charges to growers are assumed to be equal to the efficient resource costs of providing the services

after allowing for transfers to and from governments through taxes and subsidies. Where regulations remain, on the other hand, resource costs are assumed to remain at their current (1986-87) levels, while charges reflect current pricing practices.

9

TABLE 2.2 INPUT DATA FOR ALTERNATIVE SYSTEMS

Model Run Charges Resource Costs

Current System Current pooled charges Current resource for storage and handling costs, based on and port services and current operating sea transport. Current practices, road and rail charges.

System A Removal of sole receival rights for storage and handling.

Charges for storage and Resource costs for handling which are based storage and handling on efficient resource to be lower,

costs. All other charges reflecting as for status quo. efficiency improvements. All other resource costs

based on current operating practices.

System B Removal of road transport restrictions.

Charges for rail transport of grain to be based on efficient rail resource costs. Road charges based on resource costs. All other charges as for status quo.

Resource costs for rail to be based on efficient operating practices. All other resource costs to be based on current operating practices.

System C Charges for both Resource costs for

Removal of storage and handling both storage and sole receival and rail to be based handling and rail to rights for on efficient resource be based on storage and costs. Road charges efficient operating handling, and based on resource practices. Port removal of costs. Pooled charges services and sea transport for port services transport resource

restrictions. and sea transport. costs still based on Pooled port current operating

services and practices.

sea transport costs.

System D Charges for both Resource costs for

Removal of storage and handling both storage and sole receival and rail to be based handling and rail to rights for on efficient resource be based on storage and costs. Road charges efficient operating handling, and based on resource practices. Port removal of costs. Charges for services and sea

transport port services and transport resource

restrictions. sea transport costs based on

Disaggregated disaggregated across efficient operating port services ports. practices.

and sea transport cost.

Source: Royal Commission into Grain Storage, Handling and Transport.

3. MODEL 1: COST-BUDGETING MODEL

The first model to be considered has been developed by the Commission from work undertaken by its consultant Travers Morgan Pty Ltd. It is applied to export grain produced in the following case study areas:

. Moree in northern New South Wales; . Tottenham in central New South Wales; . Tocumwal in southern New South Wales (sub-divided into two case study areas);

. Ouyen in Victoria (sub-divided into three case study areas); . Quambatook in Central Victoria; . Emerald in central Queensland; . Miles in southern Queensland; . Narrogin in Western Australia; . Wongan Hills in Western Australia; . Gladstone in South Australia (sub-divided into two case

study areas).

The average annual production in the case study districts is about 2 million tonnes of grain, which is approximately ten per cent of average Australian export grain production. (Appendix A provides the exact production in recent years for each case study area.)

The case study areas were chosen as broadly representative of typical grain growing regions in the States concerned. As the Commission believed it was important to investigate whether port switching (which in some cases involved interstate grain flows) was an important source of resource cost savings, most of the case study areas have an effective choice of ports. However, the Commission recognises that

some grain growing areas do not have an effective choice of port destinations, particularly those areas in close proximity to a specific port.

In general, the Commission is not suggesting that the case study areas in each State are perfect representations of all the grain producing areas in that State, but rather, are sufficiently similar to other grain producing areas to enable broad conclusions to be drawn. Appendix A provides more details about the case study areas.

The input data used in this model are based on the

information presented in Supporting Papers 3, 4 and 5, and take account of the particular characteristics of each case study area. Appendix B provides detailed information about the charges and resource costs used as inputs to the

simulation runs.

3.1 Operation of the model

Each simulation of the alternative systems identified in Section 2.3 is tested on each of the case studies in two

11

SUPPORTING PAPER 8

stages. The first stage involves predicting the likely choices growers would make between the alternative grain paths leading from farm to port. These choices will be based on a comparison of the charges for using the different paths,

assuming that service quality is the same for each path. Growers are assumed to choose the grain path with the lowest total charges.

The second stage of the model compares the resource costs of the chosen path with the resource costs of the path used under the current arrangements. This comparison yields estimates of the potential resource costs savings likely to result from introducing the alternative systems. The two-stage approach ensures that the behavioural choices of growers are taken into account when calculating the resource cost savings.

Where there is incomplete deregulation, growers will be faced by a mixture of charges reflecting efficient resource costs and pooled charges. In this situation, the path with the lowest resource costs frequently does not have the lowest charges. In such cases, growers will choose the path with the lowest charges rather than the most efficient path. Unless a two-stage approach is adopted, such as is used in

this model, this effect is not accounted for.

The number of different paths potentially available to growers depends on the extent of deregulation assumed. For example, where the alternative system does not include the removal of road transport restrictions, grain paths which depend upon road transport to port or sub-terminal will not be available.

When determining the charges and resource costs for the different paths, an allowance has been made for the capital costs of constructing additional storage or of undertaking other forms of investment to handle increased grain flows. Consequently, there are no capacity limitations on the paths, and all the grain will be attracted to the path with the lowest total charge to growers, although in reality a number of grain paths will be used.

Figure 3.1 provides a sample page of the output of the model for one of the simulation runs in the Gladstone North case study area, indicating the total charge to growers for each of the paths to the port of Wallaroo.

Clearly the size of the resource cost saving obtained from switching paths will depend on which path is currently used. The cost-budgeting model has been applied to case study areas in which the predominant path is usually delivery to a country silo. Similarly, the model has assumed that this grain is subsequently exported, rather than being consumed domestically. These assumptions have been made because these patterns of grain distribution are particularly significant throughout Australia's grain producing areas.

12

GRAIN EVALUATION MODEL: STORAGE, HANDLING AND TRANSPORT CHARGES

STUDY AREA: GLADSTONE NTH TONNES: 91000

PORT A: PT PIRIE PORT B: WALLAROO PORT C: PT ADELAIDE SUBTERM A: NA SUBTERM B: NA SUBTERM C: NA

POLICY OPTION: SYSTEM D

TRACK COST PER KM: 6500

SUMMARY OF CHARGES, PORT B:

CHARGE s/TONNE NA

PATH NO. 1

ROUTE F-S: Road S-T: Rail T-P: Rail

F-S: Road S-T: Rail T-P: Road

3

F-S: Road S-T: Rail T-P: Rail

F-S: Road S-T: Rail T-P: Road

F-S: Road F-S:Road F-S: Road S-P:Road S-S: Road

S 9

OFS OFS

F-T: Road F-T: Road T-P: Rail T-P: Road

10

OFS

F-P: Road

11

F-T: Road T-P: Rail

FIGURE 3.1 OUTPUT OF COST-BUDGETING MODEL, SHOWING ALTERNATIVE GRAIN PATHS Source: Royal Commission into Grain Storage, Handling and Transport.

12

F-T: Road T-P: Road

13

F-P: Road

SUPPORTING PAPER 8

The Commission recognises that under the current system some grain is already being delivered to CRPs or sub-terminals for storage, or is already being delivered directly to port for

storage. For example, in the Victorian case study areas some of the current grain production is already delivered directly to CRPs, and so will be achieving many of the resource cost savings attributable to path switching which are identified by the model. However, the absence of competition in the current institutional environment will usually result in price signals which do not reflect resource costs, and this will prevent these paths from being widely chosen as paths which involve the lowest charges. Furthermore the absence of competition will also prevent all of the efficiency gains which the Commission believes are possible from being

achieved.

Treatment of capital costs The cost-budgeting model assumes that the existing capital facilities in the grain distribution system are sunk and have no opportunity cost. By way of contrast, the capital which is needed to expand the capacity of a grain path is new

investment (by definition) and therefore receives the fully annuitised value.

New investment in the cost-budgeting model is limited to additional grain storage facilities either on-farm at a sub-terminal, or at a port.

The treatment of capital which replaces existing storage and handling assets as they wear out can be viewed in either of two ways, depending on the time period of the analysis. In the very short term replacement of facilities at the existing storage and handling sites is assumed to either be

unnecessary, or alternatively to be able to be deferred. Consequently, from a short term perspective, capital costs will be zero. In the longer term there will be a need to

replace facilities, and in the very long term replacement expenditure can be considered to be continuing in

perpetuity. Consequently, from the long term perspective, the fully annuitised value of the replacement investment is the appropriate estimate of capital costs.

The long term estimate of capital does not take into account the useful life remaining in the existing storage and handling asset, since it allocates an annuitised replacement cost for the asset even though replacement may not be needed

for some years. To this extent, the long term estimates of capital will overstate the resource costs attributable to the use of an existing facility in the short term. On the other hand, when the short term treatment of capital is adopted, there is no provision for replacement of the existing stock of storage and handling facilities. This situation could not continue indefinitely, but while it does, the use of zero capital costs enables the total charges and costs for the current storage and handling facilities to be reduced.

14

SUPPORTING PAPER 8

The Commission believes that the long term estimates of replacement costs for storage and handling facilities are more appropriate in the cost-budgeting model, and

consequently the results presented in the remainder of this chapter incorporate the replacement cost of the existing storage and handling facilities. One implication of this approach is that the cost of on-farm storage and storage in the bulk handling systems are treated on equal terms. That

is, both storage alternatives incorporate fully annuitised capital as well as operating costs. Appendix B provides further information about the treatment of capital costs in the cost-budgeting model.

3.2 Results

This section presents the results of the cost-budgeting model for the different case study areas, treating the results for each system in turn. The overall national pattern of results is presented first, and then subsequently the results of the model runs for each State are presented in more detail.

Throughout this discussion reference is made to Systems A, B, C and D, the details of which were given in previous sections and in Table 2.2.

3.2.1 Results: national perspective

System A . The most frequently chosen (lowest charge) path involves direct delivery from the paddock to the port, with additional storage being constructed at port. This was

the lowest charge path in Victoria, Western Australia and South Australia. In New South Wales, the lowest charge path involves direct delivery to sub-terminals by road (with additional storage being constructed)

followed by rail transport to port. In Queensland, primarily because of the existence of road regulations, the choice of path is very constrained, and the lowest charge path is the path currently utilised, namely use of the existing local silo, with rail transport to port.

. The second lowest charge path involves delivery from on-farm storage to port in a majority of the case study areas, with delivery from on-farm storage to a

sub-terminal also being a second choice of path, principally in the New South Wales case study areas.

. When the resource cost savings which result from the choice of the grain paths with the lowest total charges are weighted by the production figures for each of the case study areas, (see Appendix A), the national estimate of potential resource cost savings for System A is $4.87 per tonne.

15

SUPPORTING PAPER 8

System B . The lowest charge path is predominantly delivery from the farm paddock to a sub-terminal, with additional storage being constructed at the sub-terminal, and then

rail transportation to port. In a minority of cases the lowest charge path is to deliver to the local silo.

. The second choice of path frequently involves the use of sub-terminals for either assembly of grain or storage. Paths involving silos are also an important second choice.

. The national weighted average of the case study

estimates of potential resource cost savings for System B, are $6.42 per tonne.

System C . The path with the lowest charge involved delivery from the farm paddock to the sub-terminal (where available) for storage, and then rail transport to port for

assembly into ship cargoes. For those case study areas in which sub-terminals were not included in the model, road delivery direct from the paddock to port (for storage) was the lowest charge path.

. The second choice of path was predominantly on-farm storage with subsequent delivery to sub-terminals for assembly into unit trains of grain for the rail journey to port.

. The frequency with which the sub-terminal storage, rail to port path is chosen, is of particular interest. This path enables growers to avoid both expensive branch-line operations, and moderately expensive farm to silo road transport operations. The short distance road transport operations from farm to silo are more expensive on a cents per net tonne-kilometre basis than the longer distance road haulage operations incurred for road transport from farm to sub-terminal. This path involves the construction of new storage facilities at

sub-terminals to replace the existing storage at country silos.

. When both deregulation of storage and handling and transport are implemented simultaneously there are more savings than for either policy on its own, as there is considerable interaction between the policy measures. For example, direct delivery from farm paddock to a sub-terminal for storage and then rail transport to port, provides an efficient alternative to the current grain path in many cases. However, this alternative will only be adopted if there are no transport

restrictions (in order to permit the road haulage to sub-terminal), and if storage and handling charges are disaggregated (which could be expected in a competitive

16

SUPPORTING PAPER 8

environment), allowing sub-terminals to reflect all of the efficiency gains potentially available.

The weighted average of the case study estimates of potential resource cost savings for System C is $7.77 per tonne.

System D . For most of the case study areas there is no difference in choice of path between System C and System D.

. However in Western Australia and South Australia there is an important difference. In both States, when port services and sea transport costs are pooled, growers choose to send their grain to ports which have higher resource costs but lower charges. By reflecting the actual resource costs of the ports in the charges which growers face, growers choose the path which has the

lowest charges overall, rather than choosing the path which has the lowest land-based charges.

. The weighted average of the estimates of potential resource cost savings for System D is $8.64 per tonne. This reflects the resource cost savings found for System C, plus the additional resource cost savings in Western Australia and South Australia referred to above, plus the impact of productivity improvements in waterfront practices resulting from more effective

competition between ports.

Contribution of efficient resource costs . The question that naturally arises is how much of the potential resource cost savings for the different systems can be attributed to the use of efficient

resource costs rather than the current costs? Table 3.1 quantifies the impact of these efficiency gains for each system.

. Inspection of Table 3.1 indicates that approximately a quarter of the resource cost savings can be attributed to the use of efficient resource costs. The remainder of the potential resource cost savings arise from a change in the choice of grain distribution paths.

. At the State level, under System D, the contribution of efficient resource costs to the State average estimates of potential resource cost savings are $3.02 per tonne for New South Wales, $2.54 per tonne for Victoria, $2.39 per tonne for Queensland, $1.05 per tonne for Western Australia and $0.88 per tonne for South

Australia. For New South Wales, Victoria and

Queensland, the influence of efficient resource costs in the rail system alone account for more than half of the above figures. The actual contribution of efficient

17

System D

Removal of sole receival rights for storage and handling, and removal of road

transport restrictions. Disaggregated port service and

sea transport costs

SUPPORTING PAPER 8

rail resource costs to the State average of resource cost savings (for System D) is $2.19 per tonne for New South Wales, $1.39 per tonne for Victoria and $1.94 per tonne for Queensland.

3.2.2 State results

In the discussions about the individual State results which follow, the results of the model runs are presented in a series of tables. For each case study area the tables

present the currently used path and then for each of the alternative systems the path with the lowest charges (first choice), the path with the second lowest charges (second choice), the difference in charges to growers between these two paths, and the estimate of the potential resource cost

savings from using the lowest charge path.

An example may assist the interpretation of these tables. Inspection of Table 3.2, which presents the results for New South Wales, indicates that under the current system the majority of growers in the Moree case study area deliver

their grain to local silos, for example North Star, from where the grain is transported by rail to Newcastle (path 5N). Under all of the alternative systems, the grain path with the lowest charges to growers involves road delivery

from the farm paddock to the sub-terminal at Goondiwindi, where the grain would be stored for as long as necessary before it was railed to Fisherman Islands (path 11F). The second path with the second lowest charges for Systems A, C

and D involves long term on-farm storage, followed by road delivery to the sub-terminal at Goondiwindi for assembly into unit train loads to be sent to Fisherman Islands (path 8F). Alternative System B has a second choice of path which

involves use of the sub-terminal at Moree for storage, and subsequent rail transportation to Newcastle (path 11N). If the lowest charge path was utilised there would be potential resource cost savings of about $12.00 per tonne, although this does not imply that all of these resource cost savings would be passed back to growers. For example - in the Moree case study area, service providers such as Queensland Railways could increase their prices by at least $3.00 per tonne before the paths which use the Queensland rail system became uncompetitive with alternative paths to port.

More generally, the difference in price between the path with the lowest charges and the path with the second lowest charges is an indication of the minimum opportunity that service providers have to exercise discriminatory pricing in order to recover some joint costs. It is the minimum

opportunity because the difference of $1.45 between first and second choices reported in Table 3.2 for Systems A, C and D in the Moree case study area involves two paths both of which

use Queensland Railways to transport the grain from

sub-terminal to port. In fact for these systems, the

cheapest path which does not involve Queensland Railways uses the SRA to haul grain from the Moree sub-terminal to

Newcastle. For Systems A, C and D the total charges

19

SUPPORTING PAPER 8

associated with that path (Moree to Newcastle) are more than $3.00 per tonne higher than the Goondiwindi to Fisherman Islands path.

3.2.3 Results: New South Wales case study areas

Table 3.2 presents the results of the cost-budgeting model for the four New South Wales case study areas: Moree, Tottenham, Tocumwal North and Tocumwal South.

System A . The path with the lowest charges for each of the case study areas involves delivery of grain from the farm paddock to a sub-terminal for storage, with the grain

subsequently being transported by rail to port.

. The path with the second lowest charges for each of the case study areas involves the long-term storage of grain on the farm, with assembly of grain at the sub-terminal into unit train loads which are then railed to port.

. The difference between these two path choices is a

constant $1.45 per tonne, which partly reflects the difference between the cost of new storage at the sub-terminal, versus new storage on-farm. It also takes into account slightly higher road transport costs at harvest time, which arise from longer queuing delays.

. It is interesting to note that for New South Wales

alternative Systems A and C are identical. As there are currently no transport regulations in New South Wales, System A will lead to an increased demand for road transport services to both sub-terminals and ports in order to take advantage of the disaggregated storage and handling charges. In response, it is assumed that the rail authorities concerned (principally the SRA, but

also V/Line and Queensland Railways), will adopt more efficient operating procedures.

. The disaggregated storage and handling prices enable growers to bypass local silos and avoid the use of rail branch lines, which are expensive to maintain unless there is a considerable tonnage of grain or a shared traffic on the line. (For a discussion of the treatment of track maintenance costs, see Appendix B). These results lend support to the Option 3 strategy of the SRA, which involves closure of uneconomic branch lines.

. Table 3.2 indicates that for Moree, Tottenham and Tocumwal South, both the chosen path and the second choice of path involve switching from the current port to an alternative port. In the Moree and Tocumwal South areas this involves an interstate flow of grain.

20

TABLE 3.2 NSW GRAIN PATHS WITH LOWEST TOTAL CHARGES TO GROWERS AND RESOURCE COST SAVINGS FROM CHOOSING THOSE PATHS: 1986-87

System A System B System C System D

Removal of

receival Removal of

Removal of sole

receival rights for storage and handling and removal of road transport

restrictions. Pooled port

Removal of sole

receival rights for storage and handling, and removal of

road transport restrictions.

Disaggregated

rights for road service and sea port service

Current storage and transport transport and sea transport

system handling restrictions costs costs

MOREE First choice 5N 11F 11F 11F 11F

Second choice 8F 11N 8F 8F

Charge Difference $/t 1.45 2.07 1.45 1.45

Resource Cost 12.34 11.81 12.34 12.59

Savings $/t

TOTTENHAM

First choice 5N 11PK 11PK 11PK 11PK

Second choice 8PK 11N 8PK 8PK

Charge Difference $/t 1.45 1.19 1.45 1.45

Resource Cost 11.47 10.94 11.47 11.57

Savings $/t

TOCUMWAL NORTH First choice 5PK 11PK 11G 11PK 11PK

Second choice 8PK 3G 8PK 8PK

Charge Difference $/t 1.45 3.34 1.45 1.45

Resource Costings 5.59 0.07 5.59 5.69

Savings $/t

TOCUMWAL SOUTH First choice 5PK 11G 11G 11G 11G

Second choice 8G 13G 8G 8G

Charge Difference $/t 1.45 5.04 1.45 1.45 1.45

Resource Cost 8.48 7.14 8.48 8.98

Savings $/t

Note: Path numbers are as for Table 2..1. The letters identify the ports thus:

PK = Port Kembla, G = Geelong, F = Fisherman Islands, N = Newcastle.

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 8

The estimates of potential resource cost savings for System A range from $12.34 per tonne for Moree and $11.47 per tonne for Tottenham, to $8.48 per tonne for Tocumwal South and $5.59 per tonne for Tocumwal North.

The reason for the lower potential resource cost savings in Tocumwal North is that the current grain distribution path is assumed to use the Port Kembla terminal (it actually uses Sydney terminal at present but will switch to Port Kembla when opened) . There is thus no

opportunity for resource cost savings arising from switching to a more efficient port.

System B . The paths with the lowest charges in each of the case

study areas involve storage of grain at a sub-terminal, and then rail delivery to port, as for System A,

although for Tocumwal North, the port destination is not the same as for System A.

. The second choice of path also involves the use of

sub-terminals sending grain to port in three of the four case study areas, while for the Tocumwal South case study area the second choice of path involves direct delivery of grain from the farm paddock to the port of Geelong for storage.

. Since the current pooled storage and handling charge is maintained regardless of whether the grain is delivered to a local silo, a sub-terminal or a port, the

attractiveness of some paths could be expected to be reduced. It is interesting to observe that grain in the Tocumwal North area flows to Geelong under this system, reflecting the lower Victorian storage and handling charge compared to New South Wales.

. Because three of the case study areas have the same

first choice of path under System B as for System A, the resource cost savings in these three areas are very similar to the savings for System A. They are slightly less, because it is assumed that lack of competition for the provision of storage and handling services does not provide sufficient incentives to ensure that the bulk handling authorities will achieve all of the potential efficiency gains which are possible. In Tocumwal North the resource cost savings are negligible, because in resource cost terms the port of Geelong is not as

efficient as the new facility at Port Kembla.

Consequently, any resource cost savings in the storage and handling and land transport components of the path are counteracted by the difference in port services and sea transport costs.

22

SUPPORTING PAPER 8

The actual estimates of resource cost savings are $11.81 per tonne for Moree, $10.94 per tonne for Tottenham, $0.07 per tonne for Tocumwal North and $7.14 per tonne for Tocumwal South.

System C . The results for System C are identical to those for

System A, since there are currently no road transport restrictions for grain in New South Wales.

System D . The paths with the lowest charges and second lowest charges are the same as for Systems A and C in New South Wales. The difference between Systems C and D is the

introduction of competition between ports through the disaggregation of port services and sea transport charges. As a result the ports with the lowest resource costs are able to reflect those advantages back to growers through the prices they charge. In New South Wales, path selection is not influenced by the

introduction of disaggregated pricing, though it is important to note, in this regard, that the port

terminal for southern New South Wales is Port Kembla rather than Sydney.

. In resource cost terms the estimates of potential

resource cost savings are almost the same as for Systems A and C. The only difference arises as a result of the Commission's assumption that increased port competition (resulting from the disaggregated charges) will lead to

the achievement of some gains in waterfront

productivity, ranging from $0.10 per tonne to $0.50 per tonne.

. The actual estimates of potential resource cost savings are $12.59 per tonne for Moree, $11.57 per tonne for Tottenham, $5.69 per tonne for Tocumwal North, and $8.98 per tonne for Tocumwal South.

State average of potential resource cost savings When the estimates of potential resource cost savings found in each of the case study areas are weighted by the

proportion of grain produced in each area, relative to the total production for all four case study areas in New South Wales, the overall estimates of potential resource cost savings for the State are $10.18 per tonne for Systems A

and C, $8.81 per tonne for System B, and $10.43 per tonne for System D.

23

SUPPORTING PAPER 8

3.2.4 Results: Victorian case study areas

Table 3.3 presents the results of the cost-budgeting model for the four Victorian case study areas: Ouyen West, Ouyen East, Ouyen South and Quambatook.

System A . The path with the lowest charges for the three Ouyen case study areas involves delivery directly by road from the farm (paddock) to Port Adelaide, with additional

storage being constructed at the port as necessary. In the Quambatook area the path with the lowest charges involves delivery from the farm (paddock) to a CRP for storage, and then transport by rail to Portland.

. The paths with the second lowest charges for the three Ouyen case study areas involve storing the grain in long-term, on-farm storage, and then transporting it by road to Port Adelaide when it is ' called in' for cargo assembly. In the Quambatook area the path with the second lowest charges involves use of the CRP at

Quambatook for storage, with subsequent rail transport to the port of Geelong.

. The reason why the paths to Port Adelaide have the

lowest charges in the Ouyen case study areas is that the charges for assembly at the Port Adelaide terminal are low, and the cost of road transport to Port Adelaide, which involves an interstate movement, is based on competitive road rates. Victorian transport on the other hand is not deregulated under System A. Rail operating costs are assumed to remain at current levels, and the road restrictions which only permit farm trucks to cart grain further than 60 km are assumed to

continue. Since most farm trucks in Victoria would be two or three axle vehicles, the cost of transporting grain by road is quite high, and it is not surprising that the road regulations have the effect of directing Victorian grain to Port Adelaide. In reality it is highly likely that any marked swing towards road transport into South Australia would provide the necessary stimulus for V/Line to introduce more competitive charges and efficient working practices. However, the model does not capture this effect in System A.

The resource cost savings for System A are lower than for Systems B, C and D for each of the case study areas, and in two cases there are negative resource cost savings. This arises because growers have a restricted choice of paths under current road transport

restrictions, and the resource costs associated with the use of different ports and rail services are not

reflected back to growers in the charges which they

24

TABLE 3.3 VICTORIAN GRAIN PATHS WITH LOWEST TOTAL CHARGES TO GROWERS AND RESOURCE COST SAVINGS FROM CHOOSING THOSE PATHS: 1986-87

System A System B System C System D

Removal of

receival Removal of

Removal of sole receival rights for storage and handling

and removal of road transport restrictions. Pooled port

Removal of sole receival rights for storage and handling, and

removal of road transport restrictions. Disaggregated

rights for road service and sea port service

Current storage and transport transport and sea transport

system handling restrictions costs costs

OUYEN WEST First choice 5G 13PA 11PA 11PA 11PA

Second choice 10PA SPA 8PA 8PA

Charge Difference $/t 1.60 3.29 1.23 1.23

Resource Cost 4.66 8.87 9.45 9.95

Savings $/t

OUYEN EAST First choice 5G 13PA 5G 11G 11G

Second choice 10PA 11G 5G 8G

Charge Difference $/t 1.60 0.34 0.68 1.45

Resource Cost -6.33 1.35 2.83 3.33

Savings $/t

OUYEN SOUTH First choice 7G 13PA 11G 11G 11G

Second choice 10PA IIP 8G 8G

Charge Difference $/t 1.60 2.77 1.45 1.45

Resource Cost 0.83 9.94 10.62 11.12

Savings $/t

QUAMBATOOK First choice 5G IIP 11G(K) 11G(K) 11G(K)

Second choice 11G(Q) 11G(Q) 11G(Q) 11G(Q)

Charge Difference $/t 0.95 0.96 0.96 0.96

Resource Cost -1.32la> 3.68 4.36 4.86

Savings $/t

a. Negative resource cost savings.

Note: Path numbers are as for Table 2.1. The letters identify the ports thus:

PA = Port Adelaide, G = Geelong, P = Portland. In the Quambatook case study the letter (Q) or (K) after a path indicates whether the CRP at Quambatook or Kerang was used.

Source: Royal Commission into Grain Storage. Handling and Transport.

SUPPORTING PAPER 8

face. For example, the rail charge from the CRP at Quambatook is the same to both Portland and Geelong (because of the radial rating policy), so growers choose to direct their grain to Portland (because terminal charges are slightly lower than at Geelong) even though the overall resource costs of sending the grain from Quambatook through Portland are higher than the resource costs of sending the grain through Geelong.

The estimates of potential resource cost savings for System A are $4.66 per tonne for Ouyen West, of -$6.33 per tonne for Ouyen East, $0.83 per tonne for Ouyen South and of -$1.32 per tonne for Quambatook.

System B . The path with the lowest charges for three of the four case study areas is to deliver grain from the farm (paddock) to a sub-terminal or CRP for storage, followed

by rail transport to port. The path with the lowest charges in the case study area which is an exception (Ouyen East) is the same as the path used under the current system, and involves delivery to a country silo on a main line (Kiamal), where the grain is stored before being railed to Geelong. It is interesting to note that the total charges on this path are only $0.34 per tonne less than the path which involves delivery from the paddock to the CRP at Ouyen for storage.

. The path with the second lowest charges in each case study involved the use of a sub-terminal or CRP. In Ouyen West a (new) sub-terminal at Pinnaroo in South Australia was used for assembly, while in the other three case study areas a CRP was used for long-term

storage of grain. As charges for rail services under System B reflect the resource costs of those services, the paths with the lowest charges are those which avoid journeys along uneconomic rail branch lines.

. The estimates of potential resource cost savings for System B are $8.87 per tonne for Ouyen West, $1.35 per tonne for Ouyen East, $9.94 per tonne for Ouyen South and $3.68 per tonne for Quambatook. The resource cost savings in the Ouyen East case study area are solely attributable to efficiency improvements in rail operating practices, which are assumed to occur as a result of the removal of road transport restrictions.

System C . The path with the lowest charges for each of the case study areas is to deliver grain directly from the farm (paddock) to a sub-terminal or CRP for storage, then by

rail to port.

. The path with the second lowest charges for all of the case study areas except Ouyen East is to store grain on the farm for as long as necessary until it is ' called

2 6

SUPPORTING PAPER 8

in', at which time the grain would be delivered by road to a CRP for assembly into unit train loads. Ouyen East has delivery of grain to the local silo as the second choice of path. However, this result is quite

consistent with the increased use of sub-terminals, as it is the ability to avoid branch line costs which is producing much of the change in the model. Since Kiamal is a main-line silo, there are no branch line costs

associated with delivery to the local silo in the Ouyen East case study area.

The general emphasis of the model results on

sub-terminals and CRPs supports the strategy currently being followed in Victoria of developing CRPs throughout the grain producing areas of the State. However, the

effectiveness of this strategy will depend on the lower costs of these facilities being passed back to growers to attract increased quantities of grain to these sites.

The estimates of potential resource cost savings for System C are $9.45 per tonne for Ouyen West, $2.83 per tonne for Ouyen East, $10.62 per tonne for Ouyen South and $4.36 per tonne for Quambatook.

System D . The results for System D are virtually identical to those for System C. The paths with the lowest charges are the same for each case study area, as are nearly all

the second choices of path. In Victoria, land based costs dominate path selection, and in these case study areas the most efficient port is selected independently of whether port service and sea transport charges are pooled or disaggregated. The difference in resource cost savings between Systems C and D arises from the efficiency gains achieved through port operating practices, which are assumed to occur with increased competition between ports. These efficiency

improvements increase all of the resource cost savings for System D by $0.50 per tonne.

State average of potential resource cost savings When the estimates of potential resource cost savings for each case study area are weighted by the proportion of grain produced in each case study area, relative to the total production of all four areas in Victoria, the overall estimates of potential resource cost savings for the State

are -$0.86 per tonne for System A, $5.53 per tonne for System B, $6.40 per tonne for System C and $6.91 per tonne for System D.

3.2.5 Results: Queensland case study areas

The results of the two Queensland case study areas are presented in Table 3.4. Inspection of this table indicates that the Emerald area currently sends grain in approximately

27

SUPPORTING PAPER 8

equal proportions to Mackay and Gladstone, while the Miles case study area currently sends grain through Fisherman Islands. The Emerald area does not currently operate any sub-terminals, and the model does not assume that any would be established. However, in the Miles case study area the model assumes that the current storage and handling

facilities at Miles could be used a a sub-terminal, with additional storage capacity being provided as necessary.

System A . Because of the current restrictions on road transport of grain in Queensland, there is very little choice available between paths, and as a result, both the

chosen path and the second choice of path in both case study areas involve the delivery of grain to the country silo system, with transport from the silo to the port by rail.

. In the Emerald case study area under System A all grain delivered to the country silos is sent to Gladstone, to take advantage of terminal charges which are lower than those at Mackay. This can be contrasted to the current system which sends grain from this area in roughly equal proportions to both Mackay and Gladstone.

. In the Miles case study area, Gladstone is only an

alternative port option where road transport is permitted, and so, while the country silo to Fisherman Islands path is still available, there are no

alternative paths permitted in this case study area under System A.

. The estimates of potential resource cost savings for both Queensland case study areas for System A are only small, $1.67 per tonne for the Emerald area and $0.88 per tonne for the Miles area.

System B . The path with the lowest charges for the Emerald case study area is to deliver to the country silo, and then transport grain by rail to Mackay. The reversal of

chosen paths between System B and System A occurs because storage and handling costs are pooled under System B, so growers do not face higher charges at the Mackay terminal, and instead respond only to the cost of rail transport.

. In the Miles case study area, the familiar path of

delivery from the farm (paddock) to a (new) sub-terminal for storage, followed by rail delivery to port (Fisherman Islands) is used. The second choice of path also involves the use of the sub-terminal, but for assembly of grain after initial storage at a country silo. Since storage and handling charges are pooled,

28

TABLE 3.4 QUEENSLAND GRAIN PATHS WITH LOWEST TOTAL CHARGES TO GROWERS AND RESOURCE COST

SAVINGS FROM CHOOSING THOSE PATHS: 1986-87

System A

Current system

Removal of

receival rights for storage and handling

EMERALD First choice 5GL/5M 5GL

Second choice 5M

Charge Difference $/t 0.98

Resource Cost 1.67

Savings $/t

MILES First choice 5F 5F

Second choice NA

Charge Difference $/t -

Resource Cost 0.88

Savings $/t

System B System C System D

Removal of sole Removal of sole receival rights receival rights for storage for storage and and handling handling, and

and removal of removal of

road transport road transport restrictions. restrictions.

Removal of Pooled port Disaggregated

road service and sea port service

transport transport and sea transport restrictions costs costs

5M 13M 13M

5GL 10M 5GL

1.13 (a)

3.40 1.46

-0.03 6.21 6.46

11F 11F 13GL

IF 8F 11F

4.75 1.46 2.00

14.61 15.14 17.39

a. Negative resource cost savings.

Note: Path numbers are as for Table 2.1. The letters identify the ports thus: GL = Gladstone, M = Mackay, F = Fisherman Islands.

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 8

the triple handling of grain which this path involves (grain is received and stored at country silos, is assembled at sub-terminals, and is then railed to port for cargo assembly) is not passed back to growers in the form of higher charges.

It is interesting to observe that the path with the lowest charges in the Miles area which entails

sub-terminal storage, then rail to port for cargo assembly, would utilise the existing terminal facilities at Fisherman Islands in a manner which is very similar to the current method of operation. The terminal at Fisherman Islands has a relatively small storage capacity, and currently operates as a short-term storage/grain assembly facility. This role would be continued if the sub-terminal storage path was utilised, and grain which is 'called in' to the Fisherman Islands terminal would need to continue to be carefully

scheduled when shipping cargoes were being assembled.

The estimate of the potential resource cost savings for the Emerald area is -$0.03 per tonne with the increase in resource costs arising because of the higher costs at the Mackay terminal, which growers do not face.

The estimate of the potential resource cost savings for the Miles area is $14.61 per tonne. This is quite a large resource cost saving, and it can be attributed to avoiding the use of expensive country silos, avoiding the relatively high cost of transporting grain from farm to silo, and utilising unit trains on the main line between Miles and Fisherman Islands. If grain was taken

from the Wandoan silo to Fisherman Islands directly, a more expensive type of train operation would have to be used because of the branch line operations between Miles and Wandoan.

System C . The path with the lowest charges for the Emerald case study area is delivery by road directly from the farm paddock to the port of Gladstone, with additional

storage being constructed at Gladstone, as necessary.

. The path with the second lowest charges in the Emerald area involves the use of long-term on-farm storage, then road transport directly to port (Mackay) for assembly of grain into shipping cargoes.

. Both of these paths enable growers to avoid the use of expensive country silo storage, although both paths use Mackay which has more expensive terminal operations.

. For the Miles case study area the path with the lowest charges involves storage at sub-terminal then rail to Fisherman Islands, while the second choice of path involves on-farm storage, assembly at sub-terminals, and rail transport to port.

30

SUPPORTING PAPER 8

The estimates of potential resource cost savings are $6.21 per tonne for the Emerald area and $15.14 per tonne for the Miles area.

System D . Even though Mackay has more expensive sea transport costs than Gladstone, the path with the lowest charges in the Emerald area is the same as for System C, namely

delivery directly from the farm paddock to Mackay for storage.

. The second choice path in the Emerald area is to deliver grain to the country silo and then rail the grain to Gladstone. This path becomes more attractive than other paths to Mackay because of Gladstone's lower terminal charges and sea transport charges. However, the validity of the estimates of sea transport charges for Gladstone is questionable, (this is discussed below),

so the second choice of path for the Emerald area in System D may not be reliable.

. In the Miles area the result for System D is rather

surprising and unlikely. The path with the lowest charges is identified as direct delivery by road from the farm (paddock) to Gladstone, with additional storage being constructed at Gladstone. This result occurs primarily because of the very low sea transport charge

for Gladstone, which is approximately $5.00 per tonne less than for Fisherman Islands. The estimates of sea transport are explained in more detail in Appendix B, but very briefly they are based on a continuation of the pattern of shipping to overseas markets which has occurred over the past three years. Gladstone has shipped a greater proportion of its grain to Asian markets than Fisherman Islands over this time, and because the sea transport rates to Asian markets from Queensland ports are considerably lower than to Middle Eastern markets, Gladstone has a lower average sea transport charge than Fisherman Islands.

. However this pattern of grain shipment should not be expected to continue if Gladstone was to receive grain that would otherwise have been sent to Fisherman Islands. In fact, there is no reason to suspect that these two ports should have a different mix of export opportunities in the long term. As a result, it seems unlikely that there would continue to be a $5.00 per tonne sea transport differential in favour of

Gladstone. If the differential in favour of Gladstone was to fall by $2.40 per tonne, the sub-terminal path to Fisherman Islands would become the path with the lowest charges. This seems a much more likely outcome.

. The estimate of potential resource cost savings in the Emerald case study area is $6.46 per tonne, while in the Miles case study area it is $17.39 per tonne, if the

31

SUPPORTING PAPER 8

current sea transport charges for Gladstone are accepted as realistic. If the chosen path for the Miles area under System D is assumed to be 11F (which is likely to be more realistic, for the reasons discussed above), the potential resource cost saving will be $15.39 per tonne.

State average of potential resource cost savings When the estimates of potential resource cost savings found in the two case study areas are weighted by the proportion of grain produced in each area, relative to the total production of both areas in Queensland, the overall estimates of potential resource cost savings for the State are $1.30 per tonne for System A, $5.85 per tonne for System B, $10.41 per tonne for System C, and $10.65 per tonne for System D

(assuming that grain from the Miles case study area is sent to Fisherman Islands).

3.2.6 Results: Western Australian case study areas

Table 3.5 presents the results of the cost-budgeting model for the two Western Australian case study areas: Narrogin and Wongan Hills. The path used under the current system in the Narrogin area is delivery of grain to local silos, then rail transport to Kwinana. In the Wongan Hills area the present path for 60 per cent of the grain is from the local

silo on a narrow gauge branch line to a transfer station at Avon where the grain is transferred to a standard gauge unit train for delivery to Kwinana, while 40 per cent travels directly from the local silo to Kwinana by narrow gauge train.

System A . For both case study areas the path with the lowest

charges is road delivery direct from the farm paddock to the port of Kwinana, with additional storage and road receival facilities being constructed at Kwinana, as necessary.

. The second choice of path for both case study areas is delivery from long-term on-farm storage to Kwinana, with the grain being 'called in' as required.

. The Commission is aware that the Kwinana intake

facilities are designed for the rapid unloading of large quantities of grain from rail and that unscheduled grower deliveries of grain would create some handling inefficiencies. The Commission has included an allowance for provision of road unloading facilities, including marshalling yards, weighbridge and other road receival requirements at Kwinana for grain paths which involve assembly of grain at port in conjunction with

'calling in' grain from on-farm storage. Although the capital cost of these road receival facilities is significant (approximately $1.7 million), when this cost is annuitised (at 5 per cent) over the life of the

32

TABLE 3.5 WESTERN AUSTRALIAN GRAIN PATHS WITH LOWEST TOTAL CHARGES TO GROWERS AND RESOURCE COST SAVINGS FROM CHOOSING THOSE PATHS: 1986-87

Current system

System A System B System C System D

Removal of sole Removal of sole receival rights receival rights for storage for storage and and handling handling, and

and removal of removal of

Removal of road transport road transport

sole restrictions. restrictions.

receival Removal of Pooled port Disaggregated

rights for road service and sea port service

storage and transport transport and sea transport

handling restrictions costs costs

NARROGIN First choice 5K 13K 5A 5A 13K

Second choice 10K 5K 13K 5K

Charge Difference $/t 1.60 0.98 0.59 0.39

(a) (a)

Resource Cost 2.95 -1.55 -0.84 3.20

Savings $/t

WONGAN HILLS First choice 1K/5K 13K U K U K U K

Second choice 10K 3K 8K 8K

Charge Difference $/t 1.60 2.70 1.95 1.95

Resource Cost 4.71 6.59 7.17 7.42

Savings $/t

a. Negative resource cost savings.

Note: Path numbers are as for Table 2.1. The letters identify the ports thus:

K = Kwinana, A = Albany.

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 8

facilities (20 years) and spread over an annual

throughput of about a million tonnes, the cost per tonne of grain delivered is very small (14 cents per tonne). For paths which involve direct deliveries by growers to port without the use of on-farm storage, the Commission has made an allowance for the construction of additional permanent storage at the terminal, as well as for the provision of road receival facilities referred to above.

The estimate of potential resource cost savings for the Narrogin area under System A is $2.95 per tonne, while for the Wongan Hills area it is $4.71 per tonne.

System B . For the Narrogin area the path with the lowest charges is to deliver grain to the local silo and then transport it by rail to the port of Albany, while for the Wongan

Hills area the path with the lowest charges involves storage at a (new) sub-terminal at Avon and then rail transport to Kwinana on the standard gauge line. The Wongan Hills area has a large amount of grain dedicated branch line, and the path that uses sub-terminal storage at Avon enables growers to avoid the expensive

operations on these lines.

. The second choice of path for both case study areas is storage of grain at country silos, followed by rail transport to Kwinana, although in the case of Wongan Hills the path involves road transport from the country silo to the sub-terminal at Avon, where the grain is assembled into unit train loads. As was pointed out in the Queensland case study areas, under System B the resource costs of storage and handling services are pooled, and so growers do not have any incentive to

avoid paths which involve double or triple handling of grain.

. The estimates of the potential resource cost savings for the Narrogin case study area is -$1.55 per tonne. The resource costs increase under System B even though the rail transport to Albany is less than to Kwinana because the resource costs of the terminal operations and the port service and sea transport costs are greater for Albany than Kwinana, and these cost increases outweigh the rail transport savings. Since the grain is

transported to Kwinana under the current system, the use of the path leading to Albany results in an overall increase in the amount of resources needed to move the grain from farm to port.

The estimate of the potential resource cost saving in the Wongan Hills case study area is $6.59 per tonne.

System C . The paths with the lowest charges for both the Narrogin area and Wongan Hills area are the same as for System B,

34

SUPPORTING PAPER 8

namely, delivery to country silos and then rail to Albany for the Narrogin area, and delivery to Avon (for storage), and then rail to Kwinana for the Wongan Hills area.

The second choice of path at Narrogin is road delivery directly from the farm paddock to Kwinana, while at Wongan Hills the second choice of path is long-term on-farm storage followed by assembly at the Avon

sub-terminal, and rail to Kwinana.

The estimated potential resource cost savings in the Narrogin area continues to be negative (-$0.84 per tonne), reflecting the importance of disaggregating port service and sea transport costs in order to obtain all of the potential resource cost savings available. The path to Albany is chosen on the basis of pooled port

service and sea transport charges, while the resource cost savings are based on the actual resource costs which are incurred.

The estimate of potential resource cost savings in the Wongan Hills area is $7.17 per tonne.

System D . The path with the lowest charges for the Narrogin case study area is the same as under System A, namely road delivery directly from the paddock to Kwinana, with

additional storage being constructed at Kwinana as necessary. The second choice of path in the Narrogin area is the path which is currently used, involving

storage at the country silo, followed by rail transport to Kwinana.

. For the Wongan Hills area the first and second choice of path under System D is the same as for System C.

. The inclusion of disaggregated port service and sea transport charges in the path selection process produces a choice of path which has a positive potential resource cost saving of $3.20 per tonne for the Narrogin area under System D.

. The estimate of the potential resource cost saving for the Wongan Hills area is $7.42 per tonne, which is $0.25 per tonne more than for System C. This increase is attributable to the improvements in waterfront productivity which are assumed to occur once ports start competing for grain by offering charges which reflect the resource costs of port services and sea transport costs.

State average of potential resource cost savings When the estimates of potential resource cost savings from the two case study areas are weighted by the proportion of grain produced in each area relative to the total production

35

SUPPORTING PAPER 8

of both areas in Western Australia, the overall estimates of potential resource cost savings are $4.43 per tonne for System A, $5.29 per tonne for System B, $5.89 per tonne for System C and $6.74 per tonne for System D.

3.2.7 Results: South Australian case study areas

The results for the two South Australian case study areas, Gladstone North and Gladstone South, are presented in Table 3.6. The present path in each case study area is actually a combination of two paths. Rail delivery from country silo to port (Caltowie for Gladstone North and Gulnare for Gladstone South) accounts for about 55 per cent of the grain produced in each case study area, while direct delivery by growers to the port terminal at Port Pirie accounts for about 45 per cent of grain production.

Sub-terminals are not currently used in these South

Australian case study areas, because of their proximity to port, and the model did not make provision for paths which include sub-terminals. In similar fashion to New South Wales, South Australia does not have any transport

restrictions which prevent growers from using road haulage contractors to move their grain. However, there is a $2.50 surcharge per tonne on the road transportation of grain between country silos and ports which are served by rail. Under System A the surcharge has been assumed to remain in place, while under Systems B, C and D, the surcharge is removed.

System A . The path with the lowest charges for both case study areas is delivery direct from the farm (paddock) to Port Pirie, with additional storage being constructed at Port

Pirie as necessary. The second choice of path in both case study areas is long-term on-farm storage, with road delivery direct to Port Pirie when the grain is 'called in' for cargo assembly.

. The estimate of potential resource cost savings for the Gladstone North area is $2.25 per tonne, while for the Gladstone South area it is $1.11 per tonne.

. The port of Wallaroo has significantly lower sea

transport costs than Port Pirie, but under System A the sea transport costs are pooled, and so growers react only to the land transport and storage and handling costs. As a result, growers in the Gladstone South area switch their grain from Wallaroo (where 55 per cent of their grain is currently sent), to Port Pirie, and consequently the resource cost savings under System A are small. The same behavior also occurs under

Systems B and C, and it is only in System D, which has disaggregated port service and sea transport charges, that all the potential resource cost savings are realised.

36

TABLE 3.6 SOUTH AUSTRALIAN GRAIN PATHS WITH LOWEST TOTAL CHARGES TO GROWERS AND RESOURCE COST SAVINGS FROM CHOOSING THOSE PATHS: 1986-87

System A System B System C System D

Removal of

receival Removal of

Removal of sole

receival rights for storage and handling and removal of road transport

restrictions. Pooled port

Removal of sole receival rights for storage and handling, and

removal of road transport restrictions. Disaggregated

rights for road service and sea port service

Current storage and transport transport and sea transport

system handling restrictions costs costs

GLADSTONE NORTH First choice 5PP/13PP 13PP 13PP 13PP 13W

Second choice 10PP 5PP 10PP 10W

Charge Difference $/t 1.60 0.70 1.60 1.60

Resource Cost Savings $/t

2.25 1.87 2.25 6.52

GLADSTONE SOUTH First choice 5W/13PP 13PP 13PP 13PP 13W

Second choice 10PP 13W 10PP 10W

Charge Difference $/t 1.60 3.23 1.60 1.60

Resource Cost 1.11 0.73 1.11 5.79

Savings $/t

Note: Path numbers are as for Table 2.1. The letters identify the ports thus:

PP = Port Pirie, W = Wallaroo.

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 8

System B . The path with the lowest charges for both case study areas is to deliver grain directly from the farm

(paddock) to Port Pirie for storage.

. The second choice of path in the Gladstone North area is to store the grain at the country silo and then use rail transport to Port Pirie.

. The second choice of path in the Gladstone South Area is to deliver grain directly by road from the farm

(paddock) to Wallaroo, for storage at the port.

. The estimate of the potential resource cost savings for the two case study areas under System B are $1.87 per tonne for Gladstone North, and $0.73 per tonne for Gladstone South.

System C . The choice of paths and the estimates of potential

resource cost savings for System C are identical to the results for System A for both of the South Australian case study areas.

System D . The path with the lowest charges for both case study areas is to transport grain directly from the paddock to Wallaroo for storage. The second choice path for both

case study areas is to store grain on-farm until it is ' called in', and then to deliver it to Wallaroo for assembly into shipping cargoes.

. The estimates of potential resource cost savings are $6.52 per tonne for Gladstone North and $5.79 per tonne for Gladstone South. The significant increase in resource cost savings between System D and Systems A, B and C for both case study areas can be attributed solely to the introduction of disaggregated port services and sea transport charges. It is only in System D that growers are faced by the resource costs of port services and sea transport, and as a result, growers choose a path which minimises total resource costs.

State average of potential resource cost savings When the estimates of potential resource cost savings from the two case study areas are weighted by the proportion of grain produced in each area relative to the total production of both areas in South Australia, the overall estimates of potential resource cost savings for South Australia are

$1.65 per tonne for Systems A and C, $1.27 per tonne for System B, and $6.13 per tonne for System D .

38

SUPPORTING PAPER 8

3.3 Discussion of the cost-budgeting model

All models are simplifications of a more complicated situation in the real world, and the cost-budgeting model is no exception. In particular, it has been necessary to make a number of simplifying assumptions which must be borne in mind when interpreting the results outlined in the previous

sections. Some observations concerning the assumptions and interpretation of the results follow.

1. The resource cost savings identified are potential savings in the short term. Various assumptions have been made about the efficiency improvements which would result from competition following deregulation. For example, it has been assumed that the operating costs

for storage and handling, rail transport and port services would be reduced in a deregulated environment. The contribution of these assumptions about efficiency

savings to the national estimate of potential resource cost savings is shown in Table 3.1, and ranged from $1.36 per tonne for System B to $2.04 per tonne for System D.

The input data for the current system used estimates of current operating costs for the rail authorities. However, some of the rail authorities, for example, V/Line, Westrail and AN, have identified a number of efficiency improvements they plan to undertake over the next two to three years which will lower their operating costs for grain haulage. The rail authorities have

argued that in the absence of any change to the

institutional arrangements (that is, with no removal of transport restrictions) they will still achieve significant efficiency gains in rail operations. If this claim is accepted for all States, the estimates of potential resource cost savings for the different

systems will be reduced by the amount shown in Table 3.1 which is attributable to efficiency improvements in rail operations.

The extent to which rail authorities would be able to achieve the efficiency gains outlined in their business plans within the current institutional arrangements is a difficult matter to judge. However, it could be argued that potential efficiency gains in rail transport will be more enduring, and will be achieved more quickly and completely following removal of transport restrictions. This is likely to be the case particularly for those rail systems for which grain is a major traffic, namely V/Line, the SRA and Westrail. It could be expected that removal of transport restrictions will induce these rail

authorities to make every effort to implement efficiency improvements as soon as possible in order to maintain their current volume of grain traffic.

2. In the cost-budgeting model, it is assumed that for each case study area all grain will flow along one path (the path with the lowest charges), with a constant resource

39

SUPPORTING PAPER 8

cost. The resource costs and charges used for the different services included in the grain path make an allowance for the expansion of capacity (particularly storage capacity), so that all of the grain in the area can be accommodated on that path. For example, a grain path from paddock direct to port would encounter a significant queuing cost for road transport as well as increased costs to allow for necessary port storage. Together, these costs are frequently around $10 per tonne, which is sufficient, in most instances, to prevent the direct paddock-to-port path being chosen.

In practice, the costs for using a grain path would not be constant. To the extent that resource costs are increased along the path to provide unlimited capacity, the potential savings from choosing the path will be reduced. For example, in at least some States, a small increase in direct deliveries from paddock to port could be accommodated using the existing port terminal facilities. Hence the resource costs for some grain on these paths would be lower than the resource costs used in the Commission's analysis. To this extent, the cost-budgeting model will underestimate the potential resource cost savings.

3. Examination of the results suggests that, once transport restrictions are removed, growers will avoid country silos and rail branch lines and instead principally use road delivery directly from farm paddocks to

sub-terminals or ports where additional storage will be constructed. There are several reasons why paths other than to local silos are chosen.

First, it is assumed that all grain is transported to silos at contract haulage rates, which are significantly higher for farm to silo movements than for other movements. This simplifying assumption was made because

cost estimates for grower delivery of grain to a silo vary significantly. One possibility is that members of the grower's family may deliver the grain in a

second-hand truck which is used extensively for other farm work. The resource cost of this operation would be very low. On the other hand growers with a large

production of grain may employ a driver and have a dedicated six-axle grain truck. The resource cost of this operation could be expected to be similar to the

costs of contract road hauliers.

Second, the shortest distance in a case study area from farm to silo is 8 km, with an average distance of 16 km. In reality, many farmers will be closer to local silos and therefore have lower transport charges. These lower transport charges may make it profitable for some growers to continue to use their local silo rather than deliver elsewhere.

Finally, the case study areas usually represent regions which have a higher proportion of grain-dedicated branch

40

SUPPORTING PAPER 8

lines. The maintenance costs on these branch lines are high (an estimated $6 500 per km per annum) and since use of the country silo facility usually involves a

subsequent rail journey on one of these grain-dedicated lines, the cost associated with grain paths which include country silos is also high. If more case study districts had been chosen that had silos on main lines, this cost disadvantage would not have been incurred since main line maintenance is a joint cost.

Consequently, the Commission is not suggesting, on the basis of the cost-budgeting model, that country silos would no longer be used in the event that storage, handling and transport restrictions are removed and port

service and sea transport costs are disaggregated. Rather, it is likely that introduction of System D will result in some shift of grain away from paths that include local silos towards paths utilising storage at

sub-terminals and ports.

4. Finally, as resource cost savings will result in greater returns to growers, there may well be an increase in the production of grain and a related increase in net farm income. The increased production may reduce unit costs

for some services, leading to further resource cost savings. To the extent that this occurs, the

cost-budgeting model will underestimate resource cost savings.

41

4. MODEL 2: NORTHERN NEW SOUTH WALES PROGRAMMING MODEL

In order to supplement its cost-budgeting model, the Commission engaged a research consultancy group, consisting of Dr T.G. MacAulay, Dr R.L. Batterham and Professor B.S. Fisher, to develop a programming model of the Moree district in northern New South Wales. The model has a number of

advantages over the cost-budgeting model. In particular, it captures the effects of economies of scale which exist in storage and handling; allows for a production response by growers to changes in the cost of storage, handling and transport and other dynamic feedback effects; and permits a number of paths to be used concurrently to send grain to the

final end-user. However, the model is concerned with immediate impacts of alternative systems in that it does not allow for investment in new transport links or new storage and handling sites, and tends, therefore to under-estimate resource cost savings.

This section is divided into two parts. In Section 4.1 the model is described, with more detail provided in Appendix C. This is followed in Section 4.2 with an outline of the

results of the analysis. Further details concerning the results obtained from application of the model are provided in Appendix D.

4.1 Model description

The northern New South Wales programming model consists of a combination of sub-models. There is a model of the grain storage, handling and transport system from farm gate to the buyer, and a set of five farm models which represent farms producing grain in the case study area. The programming model was designed on the basis of two six-month periods

('summer' and 'winter') with grain production and flows based on the year 1985-86. Hence, the observed levels of

deliveries, opening and closing stocks and grain outloadings for the model sites for 1985-86 were used to ensure the model adequately represented grain flows in the case study area.

The model of the system consists of five representative farms each with the choice of delivering wheat by road to the three nearest country receival points or directly to Brisbane, Newcastle, Goondiwindi or Moree. Additional grain supplies were also allowed to the latter four locations as well as Werris Creek sub-terminal to allow for grain produced outside the case study region. The country receival points within the region were those sites on the Moree to Boggabilla railway line (Boggabilla, North Star, Croppa Creek, Crooble and Milguy).

The model aims at adjusting prices to ensure that market supplies and demands are equated throughout the system. Prices are set such that the services supplied are adjusted to meet the services demanded while ensuring that the costs of providing those services are at least covered. It also

42

SUPPORTING PAPER 8

ensures that the paths chosen will minimise costs to the community and growers subject to any constraints which may be in place (for example, transport restrictions). The model does not, as mentioned, allow for long-term investment decisions to take place. In particular, closure of country sites and branch lines is allowed, but the construction of new country sites, sub-terminals, rail lines or roads is not.

Demand for wheat from the system derives from two sources, namely export demand and domestic demand. The export demand is assumed to be very responsive to price fluctuations, as found in a study by Myers, Piggott and MacAulay (1985). This

study found that a one per cent increase in Australian wheat prices relative to world wheat prices would reduce the demand for Australian wheat by over six per cent. It is assumed that the export of grain from the ports is evenly spread between the two six-month periods. Furthermore, domestic

demand for wheat for human consumption is assumed to be relatively unresponsive to changes in price (based on a range of demand elasticities cited in Myers 1982). Very little wheat was sold for feed in the model base year of 1985-86. The amount of feed wheat sold from country sites is assumed to be fixed, while that sold directly from farms is

determined within the farm models.

Based on data provided by the Grain Handling Authority of New South Wales (GHA), local supplies at each of the country receival points are apportioned to each of the five

representative farms. The actual supplies from these farms are determined within these models and are based on prices generated in the system model. Estimates of supply were also prepared for Newcastle, Brisbane, Goondiwindi, Moree and Werris Creek to account for grain delivered to those receival points from outside the case study area. This supply is permitted to vary with the price received by farmers outside the case study area.

Where available, opening and closing stocks are specified according to the levels reported at the beginning and end of the 1985-86 crop year. The cost of storing grain is assumed to be largely the interest cost of the funds tied up in the grain evaluated at the appropriate price (a real interest rate of 5 per cent per year was used).

Estimates of costs for storage and handling throughout the system were derived from cost functions based on actual and engineering data described in Supporting Paper 3. Details of values of functions used are set out in Appendix C. In the runs of the model which included efficient storage and handling of grain, the set of cost functions was revised so that there was a 10 per cent reduction in the cost curves for country receival points and a 20 per cent reduction for sub-terminals and ports. Estimates of costs for transport throughout the system were derived from methodology outlined in Supporting Paper 4. Details of costs used are set out in Appendix C.

43

SUPPORTING PAPER 8

Constraints are placed on local receival points in terms of their actual physical storage capacity. However, such restrictions are not placed on the Moree and Werris Creek sub-terminals because of their relatively large capacity compared to the volume of grain delivered from the

representative farms, and because in some cases they would only be assembling grain received for shipment to port rather than storing it for long periods.

The costs of rail and road transport are based on the

methodology used for the cost-budgeting model. The latter includes an allowance for additional road damage that heavy trucks may cause to the roads in the region in response to

removal of storage, handling and transport restrictions. However, no account is taken of the congestion costs and scheduling costs which might arise as a result of any large movements of grain direct to port from farms by road

(although some allowance is made for queuing costs).

The representative farm models, are based on the physical characteristics of actual farms delivering grain in the Moree area. Information on the areas of farms, distance from receival point, and the apparent area of wheat grown on each

farm were estimated using average shire yields (ABS 1985) to ensure the models adequately represented farms in the area. The objective of the representative farms is assumed to be maximisation of net farm income (total gross margin minus

fixed costs). The activities included in the models are two winter cereal crops (wheat and barley); two summer crops (sorghum and sunflower); a sheep activity (wethers); a cattle activity (breeding weaners); two pasture activities (on arable and non-arable land); and fodder sorghum and oat activities. The major constraints in the models are land, labour and crop rotation. The possibility of storing wheat on-farm after harvest for subsequent delivery in the

following period is also included in the model. Finally, it is assumed that wheat being delivered directly from farm to port during the first period would need to be stored on-farm for an average period of three months.

4.2 Results

As with the cost-budgeting model, the programming model calculates the least cost paths of grain flow based on the charges which are imposed at various stages in the system. However, the programming model allows for the simultaneous use of a number of grain paths from each farm in order to maximise gains from economies of scale and cost advantages

available in various parts of the system. A number of alternative systems are evaluated in terms of the potential savings to growers in the case study area from moving from the current to alternative systems.

This section concentrates on the results obtained when comparing the base run of the model with the run which is consistent with alternative System D (that is deregulated storage, handling and land transport and disaggregated port

44

SUPPORTING PAPER 8

services and sea transport costs). The results obtained from a number of other runs of the model are detailed in

Appendix D .

As with the cost-budgeting model, in the base run (current system), grain paths are determined by the pooled storage and handling charge, existing rail rates, restrictions on road deliveries from farm direct to port, and pooled port service

and sea transport costs. The storage and handling charge used was calculated as the average operating cost over all local receival sites plus the average operating costs for ports (in total $10.11 per tonne). The charge actually imposed by the GHA in 1985-86 was $17.15, but this included

an amount for capital cost recovery.

The base run of the model was also used to verify whether the model was a valid representation of the system. Validation of the model was found to be satisfactory in terms of

quantities and prices obtained from the base run being consistent with those actually prevailing in 1985-86.

Given the present institutional arrangements, transport prices play the dominant role in determining the patterns of delivery and transport of grain. With pooled storage and handling charges there is a strong incentive for growers to transport grain to locations which minimise their transport costs. There is no incentive for growers to deliver to locations with lower than average storage and handling costs or to avoid sites with higher than average costs.

The assumptions underlying alternative System D have been outlined in detail in earlier sections. In summary they are as follows: no cost pooling of storage and handling

charges - rather charges are based on efficient costs developed in Supporting Paper 3; rail charges are based on efficient resource costs; direct delivery by road transport from farm to port is permitted; interstate grain flows are permitted; and port services and sea transport costs are disaggregated for Brisbane and Newcastle. In such a system,

assuming adequate competition exists, the charges are set equal to the resource costs (except where capacity

constraints apply).

In contrast to the cost-budgeting model, the results obtained from the northern New South Wales programming model feature the simultaneous use of a number of paths under the

alternative institutional setting. In particular, some grain is delivered to silos direct from the farm and then railed to port, while other grain is delivered direct to the

sub-terminal at Moree prior to being railed to the seaboard. At the same time, some grain is stored on-farm until the winter months when it is delivered to the sub-terminal, while other growers minimise their total distribution costs by hauling grain direct from the farm to the seaboard.

While a number of paths are used simultaneously in both the base run and alternative system, there are some changes in the quantities of grain which flow down each path. These

45

SUPPORTING PAPER 8

changes in pathways, as well as the road-rail modal split are shown in Table 4.1. Some of the changes of particular

significance are discussed below.

TABLE 4.1 GRAIN FLOWS FROM THE MOREE CASE STUDY AREA IN THE NORTHERN NEW SOUTH WALES PROGRAMMING MODEL ________________________ ( '000 tonnes )____________________

Base case Alternative

road rail road rail

Farm to NSW silos 103.6 N/A 36.9 N/A

Farm to Moree 0 N/A 210.3 N/A

Farm to Newcastle 0 N/A 0 N/A

Farm to Goondiwindi 154.7 N/A 0 N/A

Farm to Brisbane 0 N/A 11.2 N/A

Silo to Newcastle 0 85.4 0 18.8

Moree to Newcastle 0 0 0 210.3

Goondiwindi to Brisbane 0 154.7 0 0

N/A Not applicable, pathway unavailable.

Source: Royal Commission into Grain Storage, Handling and Transport.

As is apparent from the table, there is a large increase in deliveries from farm to the Moree sub-terminal with

consequent reductions in farm to silo movements. This largely reflects two factors; the disaggregation of storage and handling charges, and the avoidance of branch line maintenance costs by delivering to Moree (which is on a mainline). Disaggregation of storage and handling charges results in growers facing the resource cost of delivering to particular locations rather than paying the pooled change. This not only results in increased deliveries to Moree, but also some silos no longer receive grain from farms - in particular Boggabilla, Crooble and Milguy. This implies that these sites are unlikely to be competitive under System D in seasons such as that represented in the model.

Further inspection of the results show a reduction in grain flows from the case study area to Queensland, in particular flows from farm to Goondiwindi fall to zero, although there is an increase in direct deliveries from farm to Brisbane. The choice of Newcastle or Brisbane as the seaboard

destination is highly sensitive to the relative storage, handling and transport pricing practices. In practice, the prices charged for the various distribution services will be critical, under alternative institutional arrangements, to the competitiveness of the two ports.

There is some increase predicted in long-term on-farm storage, although it is not widely used. The relative infrequency with which this option is chosen may reflect a

46

SUPPORTING PAPER 8

number of factors, one of which is the cost, under current marketing arrangements, of foregoing payment for grain produced until it is received by a licensed bulk handling agency.

As a result of the changes described above, it was found that prices received by growers at the farm gate on the five representative farms were between $8.76 and $13.58 higher after current institutional arrangements were removed. On average, these changes represented a gain of $11.79 per tonne at the farm gate. Farm incomes were also substantially increased with an average increase of 8.3 per cent. The greatest increases in prices and income occurred for those

farms closest to Newcastle. Although the model allows for farm production to respond to income changes there is no additional grain from the five farms because wheat production represented the most profitable use of land under the conditions modelled and was already limited by the available land.

47

5. MODEL 3: EASTERN AUSTRALIA MODEL

5.1 Introduction

In contrast to the cost-budgeting model, and the northern New South Wales programming model, which focus on least cost grain paths for particular regions, the eastern Australia model developed by the Australian Bureau of Agricultural and Resource Economics (ABARE) and the South Australian Department of Agriculture (SADA) is concerned with broad grain flows in eastern Australia. The model is documented in a discussion paper by Blyth, Noble and Mayers (1987).

Whilst the eastern Australia model lacks the regional detail of the other models, it has the advantage of dealing with a much greater proportion of national grain flows. With its wider scope, it provides an overall perspective on

inter-state grain flows, competition between transport modes, competition between ports and overall cost savings from alternative systems.

This section is presented in three parts. In Section 5.2 the model including its nature, input data used and applications is described. This is followed in Section 5.3 with a summary of the results reported in Blyth et al. (1987) as well as a detailed outline of the results obtained from simulations carried out by the Commission using assumptions consistent with those employed elsewhere in the Commission's modelling work. Finally, in Section 5.4 a brief discussion of the results is presented.

5.2 Model description

5.2.1 Nature of the model

As outlined in Blyth et al. (1987), the model is concerned with the grain storage, handling and transport systems in eastern Australia (that is, New South Wales, Victoria, Queensland and South Australia excluding Eyre Peninsula). It is an inter-regional transportation model with the objective of minimising the sum of all storage, handling and transport costs for grain from the farm gate to domestic and export markets, subject to economic and physical constraints.

The model is designed to address a broad range of issues within the grain storage, handling and transport system rather than focus on any particular part of the system. In developing the model, particular regard was given to simplicity of design, given that little previous modelling had been done in this area. In particular, the various grain types are converted to wheat tonne equivalents and a single harvest period or grain year is assumed. Data were collected on production, stocks and demand for the years 1981-82,

1982-83 and 1983-84, representing average, low and high production years respectively, and these data were used as

48

SUPPORTING PAPER 8

the basis for the simulations conducted. It is a short-term model, and therefore no capital investment decisions are considered. For most runs of the model the existing grain storage and handling infrastructure (as at 1984-85), together with the current marketing arrangements, are assumed to be

present.

The model allows for grain to be transported from farms by road either to country silos or sub-terminals, or directly to port terminals. In contrast to the other modelling

approaches, the model does not provide for on-farm storage, thus grain cannot be transported directly from farm to the domestic market, and no grain paths using on-farm storage are

included.

At a country silo grain may be stored, or it may be

trans-shipped, by road or rail, to another silo, a

sub-terminal, a domestic market or a port terminal. In general, it is assumed that road movements originating at a farm are by farm vehicle and silo-based road movements of grain are by road transport contractors. An exception is

that growers delivering from farms in northern New South Wales to Queensland ports were assumed to use road transport contractors. Transport links also exist between seaboard

terminals and both domestic and export markets.

Unlike the cost-budgeting model, grain can flow along a number of pathways from any given supply region, as fixed capacity constraints are imposed on storage and handling facilities, on outloading at port, and on rail capacity. In particular, receival capacity for storage and handling

facilities is fixed at the larger of:

. 70 per cent of vertical and horizontal storage capacity plus 100 per cent of bunker storage capacity; or

. the actual level of grain receivals in 1983-84 [the high production year]. (Blyth et al. 1987 p. 16)

The maximum outloading capacity of a port is based on the smaller of:

. a capacity derived from the technical outloading rate per hour and normal weekly hours of operation for that port; or

. a capacity derived on the assumption that grain can be shipped uninterrupted for 48 weeks a year in vessels of the maximum size capable of loading at that port. (Blyth et al. 1987 p. 17)

Rail capacity is limited to annual tonne-kilometres available for grain freight in each State.

Carryover of grain at the commencement of the harvest period is specified outside the model, but the quantity and location of any grain carried over at the end of the period is

49

SUPPORTING PAPER 8

determined internally. However, as there is no on-farm storage of grain, carryover is only permitted at country silos, inland sub-terminals, central receival points, and port terminals.

The model may be readily modified in order to analyse particular issues. For instance, Queensland and Victorian regulations which restrict the distance grain may be transported by road can be represented by excluding any road links exceeding the permitted distance limits.

Farm supply regions Farms are defined as point locations in grain producing supply regions in each State, based on regions used by the Australian Bureau of Statistics in compiling annual grain production statistics from the Integrated Agricultural Commodity Census. Altogether, 199 such supply regions, and associated farm locations, were identified.

Production data for the years 1981-82, 1982-83 and 1983-84 were gathered for each farm supply region, reflecting grain availability in each of an average, a low and a high

production year, respectively. The three grains considered - namely wheat, barley and Queensland sorghum - are treated as a single homogeneous commodity, with volume measured in wheat-tonne-equivalents.

Demand locations The small and geographically dispersed domestic demands for malting and stock feed barley, milling and stock feed wheat, and sorghum have been amalgamated into each of the five domestic demand locations. Two domestic demand sites are located in New South Wales, and one in each of the other three eastern States.

Three export demand locations are defined. These correspond to an eastern export market (Pacific region countries and South America), a northern export market (south-east Asia and eastern Russia) and a western export market (Middle East, Asia, Africa, Europe and western Russia). In this way, the distance related costs of shipping from each port to each of the major export markets was incorporated into the model.

Trans-shipment locations Country silos, sub-terminals and ports are all sites where grain is both inloaded and outloaded, or trans-shipped. Ports and sub-terminals are identified within the model as separate sites. There are five sub-terminals in New South Wales, three in Victoria, one in South Australia and none in Queensland. The model does not specifically identify central receival points in Victoria; however growers have a choice of delivering to a number of country silos, some of which are large mainline silos with similar characteristics to central receival points. The ports which are specified in the basic model are Mackay, Gladstone, and Pinkenba in Queensland;

50

SUPPORTING PAPER 8

Newcastle and Sydney in New South Wales; Geelong and Portland in Victoria; and Port Adelaide, Port Giles, Ardrossan, Wallaroo and Port Pirie in South Australia. Fisherman Islands (Queensland) and Port Kembla (New South Wales) port terminals are included in additional simulation runs of the model.

Country silos are grouped together into storage regions. In most cases three or four silos form such a region. There are 67 storage regions in New South Wales, 64 in Victoria, 23 in Queensland and 20 in South Australia. Within each region a midpoint is defined for distance measurement purposes, usually situated at an on-rail silo location.

5.2.2 Input data

Given the size and scope of the model, a substantial volume of input data are required, the detail of which is provided in Blyth et al. (1987). The main data components are

summarized below.

The objective of the model is to minimise the total cost (in 1984-85 dollars) of storing, handling and transporting grain from farm gate to final markets. The following cost

components are relevant:

. grain storage and handling costs; . road transport costs for both farm vehicles and road contractors ; . rail transport costs; and . port and sea transport costs.

The grain storage and handling costs relate operating costs to the volume of grain receivals at a facility. Limited differentiation between sites is made, with a different cost applying in each State, and separate costs for each type of facility according to whether it is classified as a silo, a sub-terminal or a port. Different costs apply depending on whether grain received at a facility is sourced from a farm or from another grain handling facility.

Vehicle operating costs are derived for both farm trucks and contractor vehicles. Growers are assumed to operate a 10 tonne capacity truck, and contractors a six-axle articulated truck with a capacity of 23 tonnes. Road damage costs are also included reflecting the social cost of road usage. The estimates used are based on analysis by Luck and Martin

(1987). It was assumed any over - or under-recovery of road damage costs would not be reflected in road transport charges but rather adjustments are made to the total cost of each system to reflect the cost of road damage to the community.

For rail, efficient costs are used based on the CANAC (1984) study of the Victorian rail system. Unit costs are applied to specific physical data on train type, track type, distance and other operational characteristics of each State. Separate costs are identified for branch and main lines in

51

SUPPORTING PAPER 8

each State. For branch lines used solely for grain

transport, the full fixed cost of track maintenance (based on annual cost of $6712 per kilometre) is attributed to grain haulage. On main lines, it is assumed fixed track

maintenance costs were not attributable to grain traffic. The unit (per kilometre) rail costs apply across a whole State, and the cost characteristics of different operations on specific line sections are not identified.

The shipping cost used in the model is made up of wharfage, port and stevedoring charges, and voyage costs. A cost from each port in the model to each of the eastern, northern and western export markets is calculated based on the distance and the average size of vessel loaded at each port during 1984-85. No allowance is made for two port loading or

unnecessary loading delays. Voyage costs were estimated using an approach developed by the Bureau of Transport Economics (1982).

5.3 Applications of the model

Blyth et al. (1987) identify four major issues where the model can provide useful insight:

. the effects of competition between road and rail and the costs of regulation of road transport;

. the effects of disaggregation of storage and handling costs between country silos, sub-terminals and ports;

. a consideration of interstate movements of grain to achieve the least cost route for grain transport; and

. the effects of competition between export terminals.

The model is able to trace grain paths, determine any changes to port catchment areas and interstate grain flows, and identify changes in transport mode and usage patterns that may occur when the market environment for storage, handling, transport and port services is modified. Results from the model may also provide some insight into potential long term efficiency gains by identifying locations which are at full capacity or which receive no grain.

In this section, the results obtained by Blyth et al. (1987) are summarised. In addition, the results of some additional simulations of the model undertaken by the Commission are reported.

5.3.1 Results reported in Blyth et al. (1987)

The results reported by Blyth et al. (1987) focus, first, on validation of the model and, second, on the short term effects of removing existing regulations in grain storage, handling and transport. It should be kept in mind that the dynamic impacts of policy changes cannot be captured by the

52

SUPPORTING PAPER 8

eastern Australia model. Therefore, the dynamic effects dealt with by the northern New South Wales programming model are beyond the scope of the eastern Australia model. The following discussion centres on three sets of runs of the model of most interest to the Commission; validation of the model, the base simulation, and the simulation in which

storage, handling, port and sea transport costs are disaggregated, and road transport restrictions are removed for an average production year (1981-82).

Validation of the model Validation of the model, reflects the need to ensure that the model represents a realistic and accurate view of the existing grain storage, handling and transport system.

Therefore, validation runs were aimed at representing grain flows and their costs under the existing regulations and arrangements. The assumptions used included:

. . . no road movements to ports in New South Wales; limited options for grain transfers between Victoria and South Australia (movements are restricted to specific storage regions in each State, although interstate movements direct from farms are not constrained); no road links from Queensland farms for distances greater than 120 km unless to the nearest storage facility; in Victoria, no road movements from storage regions and no road movements by contractors over distances greater than 60 km; no differentiation of storage and handling charges between country sites,

subterminals and terminals; and no shipping costs (reflecting the indifference of farmers regarding choice of terminal, under the present cost pooling system). Shipping costs are added to the cost solution outside the model. Regional production is fixed at historic levels. (Blyth et al. 1987 p. 23)

The validation runs generated patterns of receivals, grain shipments, grain flows and port utilisation for the years 1981-82, 1982-83 and 1983-84 generally consistent with the observed historical patterns. There were some discrepancies arising from the nature of model and, in some cases, the data used. In particular, the model is fairly broad in that it aggregates ... 'production, storage and handling facilities and demand centres into discrete regions, ... [and thus] cannot pick up fine details of the grain distribution system' (Blyth et al. 1987 p. 27). However, on the basis of the model validation runs conducted, it was concluded that the model ... 'does allow a general assessment of the impacts and costs of existing, and hence alternative arrangements'

(Blyth et al. 1987 p. 27).

Results The validation run for the average production year (1981-82) was not used as the base case to be compared with alternative systems. As the model represents only a single period and a

53

SUPPORTING PAPER 8

single commodity, the base case assumed grain demand is in equilibrium with supply and there was no carryover.

Export demand was assumed to equal the difference between total supply and domestic demand for the average production year (1981-82). The grain flow patterns derived reflected actual charges given the existing regulations and

arrangements. The costs of the system were then derived by fixing the predicted grain flows and substituting resource costs for charges in a similar manner as in the

cost-budgeting model.

Having established the base case, Blyth et al. then examined disaggregation of storage, handling, port services and sea transport costs, and removal of road transport restrictions. It is assumed that growers determine grain flow paths based on the disaggregated costs and are not constrained by institutional restrictions.

Blyth et al. summarises the results as follows:

. increased road movements relative to rail (although not necessarily increased road movements from farms to port terminals);

. greater utilisation of sub-terminals;

. increased interstate rail movements of grain, but a reduction in total movements between States

(especially from New South Wales to Queensland and Victoria to South Australia) due to the differences in shipping costs from the ports;

. overall reductions in system operating costs of

approximately $5/t if existing capacity constraints are assumed; of $7/t if physical receival and outloading capacity constraints are relaxed (neglecting added capital costs) or if port terminals are included at Fisherman Islands and Port Kembla and of $9/t if both these changes are assumed; and

. if constraints on grain receival capacity at country sites, sub-terminals and ports are removed (again, neglecting the capital costs of doing so), greater consolidation of grain receivals into fewer and larger storage facilities located on main lines.

(Blyth et al. 1987 p.54)

5.3.2 Results using Commission's assumptions

The Commission took the opportunity, with the assistance of the Australian Bureau of Agricultural and Resource Economics, to carry out additional simulations of the eastern Australia model using assumptions and input data which, while broadly

similar to Blyth et al., put the model on a similar basis to the Commission's other modelling work. This section outlines

54

SUPPORTING PAPER 8

the variations which were made to the input data and

assumptions and discusses the results

Assumptions The Commission distinguished between current and efficient storage, handling and transport costs in the base case and alternative system respectively.

In Blyth et al. (1987) storage and handling costs are

estimates of current costs. The Commission allowed for improvements in costs of 10 per cent at country silos and 20 per cent at sub-terminals and ports for the alternative system while using current costs for the base case.

Rail costs were adjusted to reflect current costs which are used in the base case of the model. Efficient rail costs as used by Blyth et al. are used in the alternative system. The estimates of current rail costs are based on increasing efficient rail operating costs for each State by a margin which reflects differences found in current and efficient

rail costs used in the cost-budgeting and northern New South Wales programming models. The Commission also assumed branch line maintenance costs of $6 500 per kilometre in the current system and $4 900 per kilometre in the alternative system,

compared to $6 712 per kilometre used in all runs of the eastern Australia model by Blyth et al.

In all model runs conducted for the Commission, Port Kembla and Fisherman Islands are included. Therefore, the base run predicts grain movements under current institutional arrangements with these two ports in operation and any

savings which result from the removal of regulations relate to costs savings from this predicted base.

Finally, the Commission retained the Blyth et al. assumptions with respect to capacity constraints and equilibrium of grain supply and demand.

Results The changes in grain flows predicted by the model under the Commission's assumptions are broadly similar to those obtained by Blyth et al., although there are some important differences. The results are presented in Tables 5.1 to

5.4. The results and the cost savings obtained are discussed below.

Inland transport movements In contrast to the results obtained by Blyth et al. the Commission found only small changes in the overall quantities of grain transported by road and rail, with rail gaining

slightly relative to road movement. There was an increase in road deliveries to main line storage and handling facilities, in particular to sub-terminals, reflecting the lower cost of

sub-terminals compared to silos, and the cost savings from avoiding branch line maintenance costs. Grain was generally

55

railed to port from these mainline sites. Farm to port movements were predicted to fall by 30 per cent under the deregulated scenario (which, in part, reflects the assumption that all movements from farm are in 10 tonne trucks). Overall, rail transport retains an 84 per cent share of grain transport (in terms of number of tonne kilometres hauled). As a result of these changes the average road haul distance

falls, although the average rail haul distance remains almost unchanged. A comparison of the quantities of grain

transported by road and rail under the base and deregulated runs is presented in Table 5.1. In Tables 5.2 and 5.3, the source and destination of the road and rail movements respectively under each run are presented.

SUPPORTING PAPER 8

TABLE 5.1 INLAND GRAIN MOVEMENTS UNDER THE EQUILIBRIUM BASE MODEL AND IN THE ABSENCE OF REGULATIONS _____________________________ ( 'OOP wte) _____________________

Base Run a

Deregulated Run

Road Rail Road Rail

Intrastate New South Wales 5680 (49) 4595 (500) 5564 (48) 5010 (451 ) l Victoria 2571 (27) 2648 (290) 3047 (34) 2886 (325 >

Queensland 2714 (49) 2632 (344) 2714 (58) 2669 (360)1

South Australia 2365 (51) 919 (146) 2671 (65) 617 (187)|

Interstate New South Wales to Queensland 152 (161) 0 (-) 257 (98) 0 (-1

New South Wales to Victoria 648 (316) 0 (-) 381 (177) 161 (339)

South Australia to Victoria 0 (-) 18 (162) 0 (-) 18 (162)

Victoria to South Australia 332 (317) 19 (491) 71 (276) 50 (349 )

Total 14462 (65) 10832 (380) 14706 (55) 11411 (381 J

a. Average distance hauled (km) in parentheses.

Note: wte = wheat tonne equivalents

Source: Royal Commission into Grain Storage, Handling and Transport using eastern Australia model

In Queensland, in the absence of regulations, the total quantity of grain transported by road and rail remains relatively unchanged. However, there is an increase of 107 kt in the quantity of grain transported by road direct from

farm to port. This mainly resulted from the imposition of fixed track maintenance costs on branch line journeys as well as capacity limits on main line silos restricting deliveries to these silos.

56

TABLE 5.2 ROAD MOVEMENTS UNDER THE EQUILIBRIUM BASE MODEL AND IN THE ABSENCE OF REGULATIONS ____________________________________________ ('OOP wte)____________________________

New South Wales Altern- Base ative

____ Victoria Altern- Base ative

Queensland Altern-

Base ative

South Australia Altern- Base ative

Intrastate3 Farm to country silo 4522 3997 2373 2476 2472 2365

Farm to sub-terminal 610 1216 73 214 NA NA

Farm to port terminal 0 0 77 93 50 157

Country silo to country silo 0 0 45 0 0 0

Country silo to sub-terminal 0 218 0 234 NA NA

Country silo to port 0 0 0 0 0 0

ioi4 948

166 254

843 821

0 0

0 0

0 388

Interstate3 Farm to country silo 175

Farm to port terminal 544

Country silo to country silo 80

494 34 17

144 297 54

0 0 0

0

0

0

0

0

0

0 0

0 0

0 0

a. Not including road movements to the domestic market. b. From State shown above column.

Note: wte = wheat tonne equivalents.

Source: Royal Commission into Grain Storage, Handling and Transport using eastern Australia model.

TABLE 5.3 RAIL MOVEMENTS UNDER THE EQUILIBRIUM BASE MODEL AND IN THE ABSENCE OF REGULATIONS ____________________________________________ (' 000 wte)____________________________

New South Wales Altern- Base ative

____ Victoria Altern- Base ative

Queensland Altern-

Base ative

South Australia Altern- Base ative

Intrastate5 Country silo to sub-terminal 0 0 47 0 NA NA

Country silo to port 3508 2779 1947 1898 2632 2669

Sub-terminal to port 535 1265 15 438 NA NA

0 0

588 116

166 254

Interstate5,13 Silo to port 0 96 19 50 0 0 18 18

a. Not including rail movements to the domestic market. b. From State shown above column.

Note: wte = wheat tonne equivalents

Source: Royal Commission into Grain Storage, Handling and Transport using eastern Australia model.

SUPPORTING PAPER 8

In Victoria, the model predicts large increases in road movements to sub-terminals from farms and country silos and there is some increase in farm to port deliveries. Despite these increases, the tonnage hauled by rail also increases by 3 per cent due to a predicted increase in rail movements

from sub-terminal to port as a result of increased road movements to sub-terminals and a reduction in inter-state movements of grain from Victoria to South Australia.

In South Australia there are also increased road movements with an associated 33 per cent fall in tonnage transported by rail. These increased road movements are mainly from farm to sub-terminal and from country silo to port terminal. Farm to port movements remain relatively unchanged from the level predicted in the base run. The increased road movements are

the result of the removal of the penalty surcharge on road movements between rail-based country silos and sub-terminals, and the imposition of branch line maintenance costs on rail

users.

Finally, in New South Wales, the model predicts a slight decline in road movements, but there is almost a 10 per cent increase in rail movements. Although road movements show a slight decline, increased road movements from farm to sub-terminal (82 per cent increase) and also from country silo to sub-terminal are predicted. However, despite allowing road receivals at port terminals the model predicts that none would occur. This results mainly from the

assumption that all movements from farms are in 10 tonne farm trucks. Rail movements are greater in the absence of

regulations reflecting increased movements from sub-terminals and a reduction in interstate grain flows from New South Wales as discussed below.

Interstate movements The model predicts an overall decrease in interstate movements in the deregulated run as compared with those in the base run. However, there is a 69 per cent increase in grain movements from New South Wales to Queensland and movements from South Australia to Victoria remain relatively unchanged. Grain movements from New South Wales to Victoria

and Victoria to South Australia show, a 16 per cent and, a 65 per cent decrease respectively.

While movements from New South Wales to Victoria and from Victoria to South Australia decreased overall, in both cases increased rail transport between States was predicted. The major source of the reduction in flows in each case was reduced direct farm to port movements.

The pattern of grain shipments from ports The eastern Australia model allows grain to be exported to a number of destinations. When shipping and storage and handling costs are pooled, growers decisions regarding choice of port are based only on land transport costs . However, disaggregation of shipping costs leads to greater choice by

59

SUPPORTING PAPER 8

growers between ports. This is of particular importance in South Australia where many growers have a choice between delivering to a number of ports. Table 5.4 presents the results obtained on port switching under the base and deregulated systems. There are increased shipments predicted from Wallaroo and a significant decrease in those from Port Pirie. As Ardrossan and Port Giles are supplied by the same

farm region within the model, least cost grain movements resulted in only one of the two ports receiving grain. It was therefore decided to treat these two ports jointly in respect of grain receivals and shipments. Exports from Port Adelaide remain relatively unchanged. In Victoria, port

switching occurs from Portland to Geelong reflecting the higher shipping costs from Portland (this is partly due to Portland being used for topping up vessels). In New South Wales there is a shift from Sydney and Newcastle to Port Kembla reflecting lower shipping costs at Port Kembla. In Queensland, Fisherman Islands exports increased quantities of grain previously exported through Pinkenba, and to a lesser extent, Gladstone and Newcastle.

Finally, the shipping profile from port to various export destinations are similar to those obtained by Blyth et al. in runs including Fisherman Islands and Port Kembla. In particular, grain exported from Queensland ports switches from supplying the western market to supplying the northern market while grain exported from South Australian ports switches from the northern to the western market. In New South Wales, Port Kembla supplies grain to the western market under the deregulated scenario while Newcastle and Sydney supply the northern market. Finally, in Victoria, all grain goes to the northern market in the deregulated scenario compared to a mix of northern and western markets in the base run.

Cost savings O v e r a l l , the estimated cost savings from removal of

regulations under the assumptions used by the Commission were $9.56 per tonne. The majority of these savings resulted from a $5.31 per tonne reduction in rail costs and a $3.98 per

tonne reduction in shipping costs, although disaggregation of storage and handling costs are central to the realisation of the estimated savings. Savings on a State basis ranged from $4 per tonne in eastern South Australia to $15 per tonne in Queensland. Estimated resource cost savings in New South Wales and Victoria were $8 per tonne and $11 per tonne respectively.

Summary In summary, the model runs by the Commission predicted little overall change in the modal split between road and rail. Increased road deliveries from farm and country site to sub-terminal were identified with a consequent increase in rail movements from sub-terminals to ports. Interstate movements between New South Wales and Queensland increased

60

SUPPORTING PAPER 8

TABLE 5.4 TONNAGE OF GRAIN RECEIVED AT EASTERN STATE PORTS IN BASE CASE AND ALTERNATIVE CASE ('000 wte)

Base Deregulated

NEW SOUTH WALES - Newcastle 2 073 1 081

- Sydney 310 86

- Port Kembla 1 661 2 877

- TOTAL 4 044 4 045

V IC T O R IA - Portland 578 135

- Geelong 2 503 3 070

- TOTAL 3 081 3 205

QUEENSLAND - Mackay 0 0

- Gladstone 735 707

- Pinkenba 2 034a 34 - Fisherman Islands 2 133 - TOTAL 2 769 2 874 SOUTH A U S T R A L IA - Port Adelaide 734 726

- Ardrossan/ , Port Giles 275 275

- Wallaroo 384 703

- Port Pirie 608 68

- TOTAL 2 001 1 772

TO TAL 11 896 11 896

a. Combined receivals for Pinkenba and Fisherman Islands in base case.

b. Ardrossan and Port Giles are combined as they are served by one production region in the eastern Australia model.

Note: wte = wheat tonne equivalents.

Source: Royal Commission into Grain Storage, Handling and Transport using eastern Australia model.

but there were generally declines in other interstate movements. Within States, there was some redirection of grain shipments to lower cost ports. This reflected the relative advantages of some ports in proximity to export markets, or in the size of vessel able to be loaded. Some

switching also occurred between export markets to which various ports ship grain. Overall, cost savings of $9.66 per tonne were identified.

61

SUPPORTING PAPER 8

5 .4 D is c u s s io n o f th e e a s te r n A u s t r a l i a m odel

The results reported in Blyth et al. (1987) are based on a number of simplifying assumptions. For example, a single grain type is assumed which implies markets are indifferent between grain types sourced from different States.

While the model provides considerable insight into a number of issues, the estimated savings found by Blyth et al. of between $5 and $9 per tonne can be regarded as conservative for a number of reasons. These include:

. The model does not allow for on-farm storage, and

therefore, cannot represent permit wheat sales and grower-to-buyer sales. This also means that capacity constraints at country silos must be binding as growers cannot delay delivery. Hence, less efficient pathways will be used when capacity constraints on a more efficient path are reached.

. The model only distinguishes between silo,

sub-terminal and port terminal costs. Storage and handling costs for country silos are not individually distinguished which restricts the choices available to growers under System D.

. Blyth et al. do not include any gains in operational efficiency likely to be attained in a deregulated environment.

. Growers are restricted to using 10 tonne farm trucks to transport grain. This may have limited the extent to which grain is transported directly from farm to port in the model. Silo to port road movements showed a significant increase reflecting the use of six-axle articulated trucks by contractors.

. The model solutions only give short term responses to changes. In reality the world is more dynamic and grain production and the infra-structure of the industry is likely to change as investment and disinvestment occurs.

. It should also be noted that the base case of the

model represents the optimal grain flows which would occur under current incentives facing participants in the system. To the extent that participants do not act in an optimal manner additional resource cost savings are potentially available.

The Commission obtained savings of $9.66 per tonne when it attempted to address the limitation imposed by the absence of short term operational efficiency gains. This figure can be compared to the $7 per tonne savings found by Blyth et al. in runs which included Fisherman Islands and Port Kembla.

62

SUPPORTING PAPER 8

Therefore additional savings of approximately $2.66 per tonne were found when operational efficiency gains were considered.

63

6. DISTRIBUTIONAL IMPACT OF A COMPETITIVE ENVIRONMENT

6.1 Introduction

The analyses contained in previous sections of this

supporting paper have concentrated on resource cost savings on a national, State or case-study basis. Particular emphasis has been given to the estimated $9 per tonne

resource cost saving that could potentially be achieved at the national level under System D where sole receival rights are withdrawn, transport restrictions are removed and port service and sea transport costs are disaggregated. These resource cost savings represent the average potential saving across all growers in the particular geographical areas considered.

Providing that a competitive environment for storage, handling and transport emerges, it could be expected that there would be some degree of variation in savings between individual growers within these geographical areas. There are two principal reasons underlying this likely outcome:

. the change in financial costs borne by growers will reflect the difference between the current price of storage, handling and transport services and the price paid for these services under System D. This is in contrast to the change in social costs that will result from a move to System D which will reflect the

difference between the resource costs of the current and alternative institutional arrangements; and

. the financial costs of storage, handling and transport faced by growers will differ depending on the choice of distribution paths available to them. In particular, the various storage, handling, transport and port options have a range of cost characteristics.

These financial cost savings (or losses) accruing to individual growers represent the distributional impact on grain growers of the proposed changes. This section provides discussion and analysis of the distributional impact of moving from the current system to System D.

6.2 Approach

While the Commission is of the view that a resource cost reduction of $9 per tonne is the primary factor that must be considered when contemplating administrative or regulatory changes to the grain distribution system, it is also interested in the distributional consequences of change.

In economic terms, the approach taken by the Commission is to regard a policy change as improving social welfare if those who gain from the change could, in theory, compensate those who lose and still be better off (Kaldor Principle). It is not suggested that this compensation should actually occur,

64

SUPPORTING PAPER 8

but rather only that the gains to certain individuals more than offset the losses to others. The Commission has not adopted the strict (Pareto) criterion that social welfare is improved after the policy change only if no individuals are worse off and at least one individual is better off.

While it is necessary to determine overall cost and benefits of a policy change before a policy is implemented, it is also important to give some consideration to the effect of any system changes on individual growers or at least on

particular supply regions. In its April submission to the Commission, ACIL Australia Pty Ltd argue that it is possible for every grower to be better off under a deregulated system. They maintain that the fear that some growers would be worse off is usually based on two invalid assumptions, namely that

... 'new (post deregulation) charges would be based on

existing costs' and that ... 'gains for one group of growers can only be achieved at the expense of others' (ACIL

submission, April 1987, submission p. 132). ACIL argues that the first assumption is not valid because operating practices and market valuations of assets would change under a deregulated environment compared to those currently

existing, and the second assumption is not valid because it does not allow for the ... ' dynamic gains which flow from a competitive market' (ACIL submission, April 1987, p. 133).

However, given the extent of cross-subsidisation occurring under the current system as a result of the current pricing practices (see Supporting Paper 6), it is likely that some growers, at least in the short term, will be worse off as a result of implementation of a more competitive pricing

structure despite any overall cost reductions as a result of efficiency improvements. In the longer term, as suggested by ACIL 'dynamic gains which flow from a competitive market' may

offset these losses and result in all growers achieving gains.

6 .3 A n a ly s is

In order to examine the distributional consequences for growers of a move to a competitive institutional setting based on System D, the Commission has examined the

distribution of gainers and losers by analysing in greater detail the results of the eastern Australia model. This model includes all grain supply regions in the eastern States plus those in the eastern part of South Australia. While the model does not include grain supply regions in Western Australia, the Commission is of the view that the results obtained for eastern Australia would also be representative of the Western Australian situation. In total there are 199 supply regions included in the model. These regions are shown in Figure 6.1. The supply regions are:

... ' defined in terms of local government areas for New South Wales, Victoria and Queensland, and of counties for South Australia. Areas of zero or very low

production were amalgamated with adjoining areas in such

65

SUPPORTING PAPER 8

a way as to ensure that every supply region has a total grain production of at least 3000 tonnes in an average year (specifically, 1981-82) (Blyth et al. 1987, p. 60).

The Australian Bureau of Agricultural and Resource Economics has provided the Commission with a breakdown of the prices paid by growers in each of these supply regions under the base run (current system) of the model and of the prices assumed to be charged under System D. The form of the model used was that which included the Commission's assumptions, as detailed in Chapter 5. The total charge for storage, handling, transport and port services facing growers in individual supply regions under each system (current and System D) are compared to obtain an estimate of the savings or losses accruing to growers on average in each of these regions. In order to make a valid comparison, the capital component of current bulk handling agency charges has been deducted from the storage and handling charges in the base run of the model.

It should be noted that under System D it is assumed that prices are set according to a competitive market outcome (that is, they are set equal to marginal resource costs). The relationship between prices and costs will depend upon the underlying market structure that emerges in the system, an issue which is discussed in Supporting Paper 7. To the extent that a perfectly competitive environment does not emerge in an institutional environment based on System D, it can be expected that prices will diverge from costs and the distribution of savings will change accordingly.

The distribution of savings to supply regions obtained from the analysis is shown in Figure 6.2. Growers in the majority of the supply regions (67 per cent) obtain savings of between $0 and $15 per tonne. Growers in some 24 per cent of supply regions make savings in excess of $15 per tonne. However, growers in some 9 per cent of supply regions across the eastern States of Australia make losses ranging up to $6.85 per tonne, although most of these losses are no more than $1 per tonne.

The distribution of savings accruing to supply regions in each State is presented in Table 6.1. All of the supply regions which experience losses are in South Australia and Queensland while the supply regions which record major gains (in excess of $15 per tonne) are mainly located in New South Wales and Victoria. The pattern of savings at the State level arises primarily as a result of differences between pooled and actual port services and sea transport costs faced by growers under the current system and System D. Under the current institutional arrangements, (as represented in the model), virtually all port service and sea transport costs,

66

FIGURE 6.1 SUPPLY REGIONS IN EASTERN AUSTRALIA MODEL

Source: ABARE.

< ~ 5 -5 to Ο 0 to 5 5 to 10 10 to 15

Savings ($)

FIGURE 6.2 FREQUENCY DISTRIBUTION OF SAVINGS TO GROWERS

Source: Royal Commission into Grain Storage, Handling and Transport.

TABLE 6.1 FREQUENCY DISTRIBUTION OF SAVINGS IN EASTERN AUSTRALIA PRODUCTION REGIONS

> $20 TOTAL

No.

$15 to $20 $10 to $15 $5 to $10 $0 to $5 -$5 to $0

TOTAL

Source : Royal Commission into Grain Storage, Handling and Transport, using eastern Australia model.

SUPPORTING PAPER 8

except wharfage, are pooled nationally and all growers in the eastern States face a similar charge. However, under System D, growers face the cost of grain shipments made from the port to which their grain is delivered and face no port service or sea transport cost if their grain is delivered to the domestic market. In particular, actual costs from ports in South Australia and central Queensland are higher than the pooled charge, while those from ports in Victoria and New South Wales are lower than the pooled charge. There are a number of other reasons for gains and losses made in

particular States as discussed below.

In Queensland, losses are made by some 20 per cent of supply regions. The majority of these regions are located in central Queensland and reflect the high port services and sea transport cost of grain exported from Gladstone in the competitive system compared to the pooled charge currently faced by growers. Some loss also arises from higher rail costs faced by growers in these regions due to the removal of the subsidisation which occurs under current rail pricing practices. Growers in southern Queensland make relatively large gains as a result of port switching from Pinkenba to Fisherman Islands. The gains here reflect, in part, the low cost of Fisherman Islands port terminal when compared to the pooled charge.

In New South Wales, some 35 per cent of supply regions make savings in excess of $15 per tonne. These regions tend to be scattered throughout the major grain growing areas of the State. The disaggregation of port services and sea transport charges is again the principal reason for these savings. In particular, growers delivering to the domestic market in New South Wales avoid these charges altogether, while growers delivering to port gain the advantage of such costs being less than the previously pooled charge. Gains are also obtained from increases in grain receivals at Port Kembla with consequent reductions in grain exported through Sydney

and Newcastle.

As in New South Wales, there were no supply regions in Victoria found to make losses. Some 36 per cent of supply regions were predicted to make savings in excess of $15 dollars per tonne and some 18 per cent make savings in excess of $20 per tonne. The major gainers (those with savings in excess of $20 per tonne) are mainly in the New South

Wales-Victoria border regions. This can be attributed to the removal of port services and sea transport costs on

deliveries made to the domestic market. Gains are also made in Victoria due to grain being transported to Geelong rather than Portland which reflect the lower port services and sea transport costs from Geelong.

Finally, in South Australia 37 per cent of supply regions were predicted to lose under the deregulated system. Most of these losses were predicted to be relatively small. These losses can again be attributed to port services and sea transport costs in South Australia being higher than the pooled charge, particular with respect to those regions

70

SUPPORTING PAPER 8

located close to ports which have little opportunity to make significant gains from improved efficiency in inland storage, handling and transport. Some outer regions which are predicted to make losses do so as a result of disaggregation of rail charges. Those regions which make relatively large gains in South Australia ($10-15 per tonne) are those which deliver grain to the domestic market and thus avoid port

services and sea transport costs.

71

APPENDIX A SPECIFICATION OF CASE STUDY AREAS FOR COST­ BUDGETING AND NORTHERN NEW SOUTH WALES PROGRAMMING MODELS

In this appendix the main features of the case study areas investigated with the cost-budgeting and northern New South Wales programming models are outlined. All of the case study areas were examined using the cost-budgeting model, while the northern New South Wales programming model used the Moree case study area.

Each case study consists of a grain growing area of some 50-100 kilometres in radius, with routes to one or more port terminals. The areas are:

. Moree, northern New South Wales.

. Tottenham, central New South Wales.

. Tocumwal, southern New South Wales (sub-divided into two areas).

. Ouyen, north-west Victoria (sub-divided into three areas).

. Quambatook, central Victoria.

. Emerald, central Queensland.

. Miles, southern Queensland.

. Narrogin, Western Australia.

. Wongan Hills, Western Australia.

. Gladstone, South Australia (sub-divided into two areas).

In total, these areas produce approximately two million tonnes of grain in an average harvest season. The

characteristics of each of the areas are shown in Table A.l. The locations of the areas are shown in Figure A.l.

In the cost-budgeting model, a representative farm has been chosen in each of the case study areas and a simplifying assumption has been made that all of the grain in the case study area originates from that farm. In the current system the grain produced in the case study area is usually

delivered to a country silo and is then railed to port. Under the alternative systems the grain may be delivered, unless restrictions apply, to the nearest silo, to a

sub-terminal, or to a port. The road distances from the representative farms to the local silos are consistent with those encountered, on average, by growers in the case study areas.

In the Northern New South Wales programming model five representative farms were chosen in the Moree case study area. It is assumed that all grain grown in the area

73

SUPPORTING PAPER 8

originates from these five farms. Growers have the option of delivering grain by road to the three nearest country receival points or directly to Brisbane, Newcastle,

Goondiwindi or Moree. Again, typical road distances from farm to various receival points are assumed.

It is useful to highlight the main alternatives which growers would have if contract road haulage is allowed and if

disaggregated pricing is in place for all grain distribution services. In some case study areas these potential choices are already available, but are not chosen because of the prices which currently face growers, principally the pooled

storage and handling charges. In other case study areas regulations currently prevent the full range of alternative choices from being available.

Moree (NSW) . Option of delivery to a sub-terminal (Moree or

Goondiwindi) as well as a local silo. The sub-terminal option is currently available but is not chosen because of both the pooled storage and handling charges and the current rail charges.

. Port option of Fisherman Islands as well as Newcastle.

Tottenham (NSW) . Option of delivery to Parkes sub-terminal as well as a local silo. Again the sub-terminal option is not currently chosen because of the current storage and

handling and rail charges which face growers.

. Port option of Port Kembla as well as Newcastle.

Tocumwal (NSW) . Option of delivery to Junee sub-terminal or Oaklands CRP as well as a local silo. Although some grain is

currently delivered directly to these sub-terminals, the majority is delivered to local silos and is then railed directly to port, again primarily because growers are not confronted by prices which reflect the resource costs of providing the services being used.

. Port option of Geelong as well as Port Kembla.

Ouyen (Vic) . For the Ouyen West case study area there is the option of delivery to the CRP at Underbool or a (new)

sub-terminal at Pinnaroo as well as the local silo.

. For the Ouyen East area there is the option of delivery to the Ouyen CRP as well as the local silo.

74

SUPPORTING PAPER 8

For the Ouyen South area there is the option of delivery to the CRPs at Speed, Hopetoun or Ouyen, as well as the local silo.

In all of the Ouyen case study areas the port options are Port Adelaide, Geelong and Portland.

While there is already some delivery of grain to CRPs in Victoria, a combination of pooled storage and handling charges and a radial rating rail transport charge currently provides a limited incentive for growers to

transport grain beyond their local silo. Regulations restricting contract road haulage of grain to 60 km in Victoria further reduces the options for growers under the current system. This situation applies to both the Ouyen and Quambatook case study areas.

Quambatook (Vic) . Option of delivery to CRPs at Quambatook or Kerang as well as the local silo.

. Portland is an alternative port to Geelong, although it is some 120 km further from both the local silo and the relevant CRPs.

Emerald (Qld) . Road transport provides an alternative to rail transport to both Mackay and Gladstone. (There are no

sub-terminals or CRPs in this case study area).

. Port options are Mackay and Gladstone, both of which are currently used, although historically Gladstone has been the only port available.

. Queensland regulations currently prevent road transport of most grains beyond 40 km from farms or 120 km from point of Board origin. (Usually a BGQ facility, but in the case of direct sales from growers to users, the point of Board origin is the farm.)

Miles (Qld) . Option of delivery to Miles which could act as a

sub-terminal, instead of the local silo.

. Port options are Gladstone by road delivery as well as Fisherman Islands by road or rail.

. There is currently no sub-terminal at Miles, and road delivery is restricted by transport regulations.

Narrogin (W A ) . Road transport is an alternative to rail transport to both Kwinana and Albany. The road distance to Kwinana is 135 km less than the rail distance, and road receival

75

SUPPORTING PAPER 8

facilities would need to be developed at Kwinana. Under current arrangements growers are able to deliver grain in their own trucks to Fremantle (and the grain is then transported by rail to Kwinana), or to Albany. Road contractors cannot be used to transport grain to port.

Port options are Kwinana and Albany.

Wongan Hills (WA) . Road transport is an alternative to rail transport to Kwinana, (but in the current system only for growers using their own trucks, because of regulations).

. Avon could be used as a sub-terminal since it is

connected to Kwinana via a standard gauge rail line.

. Kwinana is the only port option.

Gladstone (SA) . Road haulage from farm to port is an option, since case study areas are close to terminals (60 km to Port Pirie, 130 km to Wallaroo).

. Port options of using Wallaroo, Port Adelaide, or Port Pirie. Wallaroo is more distant than Port Pirie, but allows use of Panamax ships (topping up at Port

Lincoln). Port Adelaide is further than Wallaroo and is unable to berth Panamax ships.

. These options are available under the current system, but as for New South Wales, the current pooled storage and handling and port service and sea transport charges reduce the incentive for growers to transport grain further than their local silo. Nevertheless, under the current arrangements about 45 per cent of the grain produced in this case study area is delivered directly

from farm to port.

Table A.l which follows identifies the local silos, sub-terminals (or CRPs) and ports for each area, along with average grain receival figures. The local silo to which the representative farm is assumed to currently deliver is shown in bold type.

76

TABLE A.1 : MAIN FEATURES OF CASE STUDY AREAS

| Study Area | Grain Task Farm to Inland | Alternative|

1 | '000 Tonnes Local Silo | Sub-Terminals | Ports

1 | (All grains) Distance 1

1 1 Km 1

1 -

1 |MOREE

1 1 Model

1

1

1 1 1 2 (a l

1 |Existing

1 |Average for 1

|Silos : 5 |7 years to 1

1 |1986-87 1

1 |Boggabilla

1 1 34 38 1

|North Star | 84 22 19 1

|Croppa Creek | 63 15 1

|Crooble 1 42 15 1

|Milguy 1 29 8 1

1

1 | Total

1 | 252 (70min |Moree (NSW) |Newcastle

1 | 400max) 1 |(used in

1 1 1 |current path)|

1 1 |Goondiwindi |Fisherman

1 1 | (QLD) |Islands

i - - -

1 1 TOTTENHAM

1 1

1 1

1 |Existing

1 |Average for I

|Silos: 8 |5 years to 1

1 |1985-86 1

1 |Tottenham

1 | 48 8 1

|Albert 1 18 1

|Yethera 1 21 1

|Tullamore 1 io 1

|Gobondery 1 9 1

|Kadungle 1 io 1

|The Troffs 1 io 1

|Trundle 1 30 1

1 | Total

1 | 156 | Parkes |Newcastle

1 | (1 min. 1 |(used in

1 337 max)| 1 |current path)|

1 1

|Port Kembla |

(a) distance to nearest receival point.

1 Study Area Grain Task | Farm to 1 Inland | Alternative!

1 | * 0 0 0 Tonnes | Local Silo | Sub-Terminals| Ports

1 | (All grains) | Distance 1 1 1

1 1 1 Km 1

1 1 1

1 |TOCUMWAL

1

1 i

1 1

1 1

1 1

1

- - ----------- ----|

1 1

1 1

1 1

1 1 NORTH

1 1

1 1

1 1

1 1

1 1

1 |Existing

1 1

|Average for

1 1 ! ! i

|silos : 7 |7 years to 1 1 1

1 11986-87 | i 1 !

1 |Morundah

1 1

1 13 |

1 1

1 1

1 1

|Corobimilla 1 4 1 1 1 1

|Narrandera 1 22 | 1 1 1

|Boree Creek 1 21 | 16 1 1 1

|Yuluma 1 8 1 1 1 1

|Cullivel 1 0 1 1 1 1

|Urana I

1 19 I

I I

1

| Total | 87(25 min |

1 1 1

|Junee (NSW) |Port Kembla |

1 1 1 1 1 1

| 140 max)|

1 1

1 1

1 1

1 1

1 1

1 i

1 1 1 1

|(would be |used in |current path | |from 1989/90 | |under exist- | |ing policies)|

1 1

1 1

1 1

|Oaklands (GEB)|Geelong

1 1 1

1 1 SOUTH

1

1 !

1 1

|Average for

1 1 1

1 1

i 1

1 1

Existing | 5 years to 1 ! i

silos : 10 11985-86 | 1

Tocumwal

1 1

1 32 |

1 1

1 1

1 1

Finley 1 18 | 1 1 1

Berrigan 1 24 | I 1 1

Jerilderie 1 15 | 20 1 1 1

Oaklands

1 1

1 34 |

1 1

1 1

1 1

Wangamong 1 8 | 1 1 1

Sanger 1 iO 1 1 1 1

Rennie 1 6 I 1 1 1

Warragoon 1 12 | 1 1 1

Sloane 1 i 1 1 1 1

Total

1 1

| 163 (40 min|

1 1 1

|Oaklands (GEB)|Geelong (used|

| 280max)|

1 1

1 1

1

1

1

|in current |path) |

|Portland

1 1 | Junee (NSW) |pt Kembla |

1 Study Area ' Grain Task Farm to | Central | Alternative)

j '000 Tonnes Local Silo | Receival | Ports |

| (All grains) Distance | Points 1 1

1 Km 1 1 1

|OUYEN

1 1 1

1 1 1

------- - |

1 1

1 1

1 1

| WEST

1 1

1 1

1 1

1 1

|Existing

1 |Average for

1 1

1 1

1 1

| silos : 7 |5 years to 1 1 1

|1985-86 1 1 1

|Panitya

1 1 7 1

1 1

1 1

|Carina | 6 1 1 1

|Murrayville 1 13 1 1 1

|Cowangie 1 9 1 1 1

|Tutye 1 12 15 1 1 1

|Linga 1 7 1 1 1

|Underbool 1 12 1 1 1

| Total

1 1

1 66 (10 mini

1 1

1 1

1 1

105 max) |Underbool |Geelong (used|

1 1 |in current

1 1 |path) |

1 1 |Portland |

1 |Pinnaroo |Port Adelaide|

| EAST

- I--------------

1 1

1 1

1 1

1 1

I I

|Existing

1 |Average for

1 1 1 1

|silos : 8 |5 years to 1 1 1

|1985-86 1 1 1

| I

|Torrita

1 1 6

1 1 1 1

|Walpeup 1 8 1 1 1

|Galah 1 io 1 1 1

|Ouyen 1 9 1 1 1

|Kiamal 1 ii 10 1 1 1

|Nunga 1 7 1 1 1

|Kulwin 1 7 1 1 1

|Mittyack 1 io 1 I 1

|(allowance fox 1 1 1 1

|barley & oats 1 Λ 1 1 1

I I

| Total

1 | 77(15 min | Ouyen 1 Geelong (used|

| 135 max) 1 |in current j

1 1 |path) |

1 1 |Portland j

1 1

1 1

|Port Adelaide|

1 1

1 Study Area Grain Task Farm to | Central | Alternative|

| '000 Tonnes | Local Silo ; Receival | Ports |

| (All grains) ! Distance 1 Points 1 1

| Km 1 1

|SOUTH

1 1

1 1

|Existing |Average for

1 1

1 1

| silos : 8 |5 years to 1 1

11985-86 1 1

I I

|Tempy 1 6 1 1

|Speed 1 6 1 1

|Turriff 1 8 1 1

|Patchewollock 1 15 1 io 1 1

|Yarto 1 3 1 1

|Pier Millan 1 3 1 1

(Nandaly 1 6 1 1

|Nyarrin 1 7 1 1

|(allowance for 1 1

|barley & oats) 1 _z 1 1

I I

| Total | 61(10 min 1 1

| 105 max)| |Speed |Geelong(used |

|in current |

|path) |

|Hopetoun |Portland |Port Adelaide|

1 1

_ I_________ _ I

|QUAMBATOOK

1 1

1 1

I I

|Existing |Average for 1 1

|silos : 5 |5 years to I 1

|1986-87 1 i

|Lalbert 1 24

1 1

1 1

|Cannie 1 8 1 12 1 1

|Quambatook | 46 1 1

|Oakvale 1 7 1 1

|Gredgwin 1 _6 1 1

I |

| Total | 91(1 min. 1 1

! 340 max) |Quambatook |Geelong (usedj

|in current |

j path) |

1 1 I ___ . . .

|Kerang

1 I . . _ . . . .

|Portland |

1 1

1 1

|Study Area | Grain Task

1 | '000 Tonnes

1 1

| (All grains)

1

| EMERALD 1

1 |Existing

1 |Average for

| silos : 5 |5 years to

1 |1985-86

1 |Clermont

1 | 50

| Nanya 1 5

| Retro 1 ii

|Capella | 64

|Emerald 1 32

1 | Total 1 162(102 min

1 1 1 1

1

| 242 max)

1 1 1 1

1 |MILES 1

1 |Existing

1 |Average for

| silos : 3 |5 years to

1 |1985-86

1 |Wandoan/

1 1 81

| Wugabul 1

|Guluguba 1 4

|Miles 1 61

| Total | 146(75 min.

1 1

1 1 1

| 181 max)

1 1 1 1

|NARROGIN 1

1 |Existing

1 |Average for

| Silos: 6 |5 years to

1 |1985-86

1 |Yornaning

1 | 10 )

|Narrogin 1 9 )

|Highbury 1 7 )

|Normans Lake | 14 )

|Wickepin | 27 )

|Williams 1 Λ )

1 | Total | 76 (65min

1 1 1

| lOOmax)

1 1

Farm to Local Silo Distance Km

Inland Sub-Terminals Alternative

Mackay Gladstone (both ports

used equally in current paths)

(could act as sub-terminal

Gladstone Fisherman Islands (used in

current path)

Kwinana (used in current path) Albany

1 Study Area | Grain Task Farm to Inland Alternative)

1 | '000 Tonnes Local Silo Sub-Terminals | Ports |

1 1

| (All grains)

1

Distance

Km

1 1

1 1

WONGAN HILLS 1 1 1 1

Existing

1

Average for

1 1

1 1

1 1

Silos: 11 5 years to 1 1 1

1986-87 | 1 1 1

Miling

1

59 |

1 1

1 1

Bindi Bindi 23 | 1 1 1

Piawaning 47 | 1 1 1

Yerecoin 25 | 1 1 1

Calingiri 36 | 1 1 1

McLevie 28 | 1 1 1

Pithara 42 | 1 1 1

Ballidu 38 | 1 1 1

Kondut 26 | 19 1 1 1

Wongan Hills 45 | 1

Konnongorring 32 | I 1 1

Total 401(352 min,| | Avon

1 1

|Kwinana

430 max)| | (could be |(used in

1 |used as sub- |current path)|

1 |terminal) 1 1

GLADSTONE

1 1 1

1 1 1

" 1------------ 1

1 1

1 1

1 1

NORTH

1 1

1 1

1 1

1 !

Existing

1

Average for

1 1

1 1

1 1

silos : 5 years to 1 1 1

1986-87 | 1 1 1

Melrose

1

9 ) |

1 1

1 1

1 1

Booleroo Centre 28 ) | 1 1 1

Wirrabara 12 ) | 1 1 1

Caltowie 12 ) | 12 1 1 1

Jamestown 30 ) | ! 1 1

Total |

1

91 (35min |

1 | None

1 1

|Port Pirie |

1 130max) | 1 |(used in

1 1 1 |current path)|

1 1 1 |Wallaroo i

1 1

L

1 1

1

1

1 1

|Port Adelaide|

1 1

1 1

Study Area Grain Task

'000 Tonnes (All grains)

Farm to Local Silo Distance

Inland Sub-Terminals A11 ernat ive Ports

Km

SOUTH

Existing |Average for silos : 3 |5 years to

|1986-87

Gladstone

1 1 54

Gulnare 1 18

Crystal Brook 1 31

Total 1 103 (40min

j 150max)

Port Pirie (used in current path for direct delivery to port) Wallaroo

(used in current path

delivery from silo to port) Port Adelaide

E M ERALD

.G la d s to n e

____L . _

MILES

BRISBANE F is h e rm a n Is la n d s

M O REE

M W O N G A N W, h i l l s P o rt P irie

P § G L A D S T O N E

• W a lla ro o

PERTH l· K w in a n a Γ

N e w c a s tle TO TTE N H A M

N A R R O G IN

SYDNEY

adela

TO C U M W A L

P o rt K e m b la

Q U A M B A TO O K ^ A lb a n y

MELBOURNE -G e elon i LEGEND P o rtla n d Case study area

FIGURE A.1 CASE STUDY DISTRICTS

-SffliKe· Rpval Commissioninto Crain Clnrane ^ ani lim n a n rU ra n sm rt

APPENDIX B DETAILS OF DATA USED IN COST-BUDGETING MODEL

In this appendix details of the input data used in the cost-budgeting model are provided. There are four main areas for which data were required: rail transport; road

transport; grain storage and handling; and port operations and sea transport. For each of these areas information has been collected on current charges, current resource costs and efficient resource costs, as well as certain physical data such as the capacity of receival points and transport distances. Further information about the costs of storage and handling, road and rail transport, and port services and sea transport is presented in Supporting Papers Nos 3, 4 and 5. Much of the information in this appendix has been drawn from the work of the Commission's consultants, Travers Morgan Pty Ltd and Australian Shipping Consultants Pty Ltd.

It should be noted that some information included in Working Paper No. 7, released in conjunction with Discussion Paper No. 5, has been revised for inclusion in this paper,

following comments received from inquiry participants.

B .1 Rail transport

Rail operating costs have been calculated for the different case study areas using both general information such as rolling stock maintenance costs, and specific data concerning characteristics of the case study areas. All costs are expressed in terms of 1986-87 dollars. In each case study area three variables are of particular interest. These are:

(i ) Current charges - these are the observed freight rates that were deducted from growers in 1986-87.

(ii) Current resource costs - these estimates are based on cost and operational data supplied by the rail

authorities and have been adjusted where necessary to reflect 1986-87 operating practices such as train size and manning practices. The estimates have been translated into resource costs by excluding any transfers to or from governments (taxes and excises - principally on diesel fuel - as well as subsidies applicable to the rail transport of grain).

(iii) Efficient resource costs - these estimates reflect plans and proposals for achieving efficiency

improvements in operating costs developed by the respective railways' managements, such as greater use of unit trains, better train scheduling and improved manning practices. Efficient resource costs are

assessed on a long term avoidable cost basis and so reflect the marginal cost of grain freight. Efficient resource costs exclude transfers to and from

governments as outlined in point (ii) above.

85

SUPPORTING PAPER 8

The estimates for current resource costs and efficient resource costs include allowance for the use of signalling infrastructure and corporate overheads. The allowance for track maintenance costs varies, depending on the case study area.

Track maintenance costs have been divided into variable and fixed components. The variable component reflects incremental costs associated with running an additional train over any line. As such it is incurred by all trains in all case study areas over the entire journey length and is based on gross tonne kilometres. By comparison, fixed costs reflect the unavoidable costs associated with keeping a line in a condition adequate to carry a train. These costs would be incurred irrespective of whether one train or one thousand trains traversed the line. The allocation of these fixed costs varies between case study areas based on the volume of grain traffic compared with other traffics. Where grain is the predominant traffic the entire fixed cost is allocated to grain; where grain and other freight traffic are in roughly equal proportions the fixed costs have been allocated on a tonne kilometre basis; and where grain is a minor traffic or the line would be kept open for other traffics (assuming there was no grain traffic), no fixed cost has been

allocated. The allocation of fixed maintenance costs is central to the distinction made in the cost-budgeting model between main and branch lines. In particular, grain

dedicated branch lines are those which principally carry grain, and which would be closed in the absence of the grain traffic; while main lines carry a variety of traffic, and would not close in the absence of grain traffic.

The Commission's estimates of the current and efficient resource costs have not been presented for each case study area. However, Table B.l does indicate the range in cents per net tonne kilometre (c/ntk) of the current and efficient resource costs for various rail haulage distances. Note that

fixed track maintenance costs are not included. Table B.2 lists the actual rail freight deductions 'which were paid by growers in the case study areas in 1986-87.

86

SUPPORTING PAPER 8

c/ntk

TABLE B.1 RANGE OF RAIL OPERATING COST DATA USED IN COST-BUDGETING MODEL: 1986-87

Distance (km)

Current resource costs

Efficient resource costs

0- 99 3.4-8.5 2.9-7.1

100-199 4.3-5.1 3.8-4.0

200-299 2.6-3.4 2.3-2.9

300-399 2.8-4.4 2.4-3.6

400-499 3.0-4.2 2.6-3.5

500-599 3.1-3.8 2.7-3.0

600+ 3.3-3.4 2.8-2.9

Note: Estimates represent costs over all case study areas, excluding fixed track maintenance.

Source: Royal Commission into Grain Storage, Handling and Transport

87

TABLE B . 2 RAIL FREIGHT DEDUCTIONS PAID BY GROWERS: 1986-87

Case study- area

Origin Destination Grower

deduction $ per tonne

MOREE North Star Newcastle 26.02

Moree Newcastle 24.73

Goondiwindi Fisherman Is. 17.16

TOTTENHAM Tottenham Port Kembla 26.87(a)

Tottenham Newcastle 28.53

Parkes Port Kembla 20.80(a)

Parkes Newcastle 23.00

TOCUMWAL NORTH Boree Creek Port Kembla 23.93(a)

Junee Port Kembla 20.49(a)

Oaklands Geelong 23.85

TOCUMWAL SOUTH Jerilderie Port Kembla 21.40(a)

Junee Port Kembla 20.49(a)

Oaklands Geelong 23.85

OUYEN WEST Tutye Geelong 21.20

Underbool Geelong 23.00

Underbool Portland 23.00

Tutye Portland 21.20

Tutye Port Adelaide 22.00

Pinnaroo Port Adelaide 16.58

OUYEN EAST Kiamal Geelong 24.45

Ouyen Geelong 23.95

Kiamal Portland 24.45

Ouyen Portland 23.95

OUYEN SOUTH Speed Geelong 24.45

Hopetoun Portland 23.10

QUAMBATOOK Cannie Geelong 22.20

Quambatook Geelong 22.20

Cannie Portland 22.20

Quambatook Portland 22.20

Kerang Geelong 22.20

EMERALD Capella Mackay 17.17

Capella Gladstone 17.17

MILES Wandoan Fisherman Is. 17.13

Miles Fisherman Is. 16.47

NARROGIN Wickepin Kwinana 13.66

Wickepin Albany 19.12

WONGAN HILLS Kondut Kwinana 17.34

Avon Kwinana 11.05

GLADSTONE NORTH Caltowie Port Pirie 6.61

Caltowie Wallaroo 11.68

Caltowie Port Adelaide 10.50

GLADSTONE SOUTH Crystal Brook Port Pirie 4.86

Gulnare Wallaroo 6.90

(a) Estimated cost to Port Kembla assuming the port was open in 1986-87.

Source: State rail authorities, personal communications, 16 December 1987.

88

SUPPORTING PAPER 8

B.2 Road transport

B.2.1 Charges

Current road charges have been estimated for System A, while for Systems B, C and D, which involve removal of the

transport restrictions, road charges are set to equal the resource costs of road transport, since it is assumed that removal of transport restrictions will be accompanied by continuing reform of current (road) cost recovery practices to ensure that any additional road damage costs are covered. Supporting Paper 4 refers to this issue as ensuring that there is a 'level playing field' between the alternatives of road and rail transport.

In this section a distinction is drawn between movements from farm to local silo and all other journeys by road transport.

Farm to local silo movements Contract rates for these hauls are typically higher, per ntk, than those for other tasks (farm to sub-terminal or port, and

silo to sub-terminal or port). This is partly due to the influence of the 'fixed' overheads of loading/unloading and queuing at the local silo. It also reflects the high

proportion of the total trip which is made on gravel or poorer quality roads - which increases fuel consumption, driver time and other elements of vehicle operating cost compared to journeys on high quality roads. Quotes for farm

to local silo movements are typically around $4.50 per tonne to $6 per tonne for trips of 10 to 20 kilometres (one-way).

The Commission recognises that many farmers cart grain to local silos in their own two or three-axle farm trucks, sometimes using family members to provide cheap labour. It can be argued, however, that in the peak harvest period the opportunity cost of any farm labour is high, and that for this reason it is appropriate to assume that the opportunity cost of the farm work force is the same as the truck

contractors. Consequently the Commission has used road transport charges in the cost-budgeting model which are based on observed rates charged by contractors. A function which fits these freight rates was used to calculate the current

short-distance road transport charges for all of the case study areas. The function has the following form:

C 1.00 + Q + 0.12k (1 )

where:

C Q k

current charge, measured in dollars per tonne queuing cost, (discussed later in this section) one-way distance travelled, in kilometres.

89

SUPPORTING PAPER 8

Typical road transport charges for farm to local silo movements of grain for the different case study areas are listed in Table B.3.

TABLE B.3 ROAD CHARGES FOR FARM TO LOCAL SILO DELIVERIES: 1986-87

Case study area

Distance to silo

km

Cost per tonne

$1986-87

Moree 22 6.14

Tottenham 8 4.46

Tocumwal Nth 16 5.42

Tocumwal Sth 20 5.90

Ouyen West 15 5.30

Ouyen East 10 4.70

Ouyen South 10 4.70

Quambatook 12 4.94

Emerald 12 4.94

Miles 36 7.82

Narrogin 12 3.94

Wongan Hills 19 4.78

Gladstone Nth 12 4.94

Gladstone Sth 9 4.58

Note: Includes queuing charges.

Source: Royal Commission into Grain Storage, Handling and Transport.

All other movements It is assumed in the model that the majority of grain

transported by road to sub-terminals and ports is undertaken by six-axle articulated vehicles, though some use of 'B Doubles' and road trains has been incorporated in Western Australia, South Australia and Queensland.

The rates used in the model reflect existing back-loading opportunities. The scope for obtaining back-loads from ports to country areas is generally very limited. At present, most crop growing regions receive only a small proportion of the tonnage transported out. It is assumed that backhaul opportunities are limited to 5 to 10 per cent of grain

tonnage transported to the seaboard. The main opportunities occur with respect to backhauls of fertiliser and are concentrated in the March to May period. There is virtually no opportunity for backloading from sub-terminals or silos.

In order to standardise the longer distance road haulage charges used in the model, the following function has been used to calculate the road transport charges for six-axle articulated vehicles:

90

SUPPORTING PAPER 8

C 1.00 + Q + 0.0575k (2 )

where:

C Q k

current charge, measured in dollars per tonne queuing cost (discussed below) one-way distance travelled, in kilometres.

The road charges for use of 'B-Doubles' and road trains are generally some 10 to 15 per cent lower than the charge resulting from application of the six-axle vehicle function. It has been assumed that 'B-Doubles' and road trains account

for half of the potential road movements of grain in the States where their use is permitted (Queensland, Western Australia and South Australia).

A more detailed discussion of road charges is provided in Supporting Paper 4.

The queuing costs imposed on hauliers are substantial and consist of the opportunity cost of the use of the truck, and the driver's time. Based on evidence presented in Supporting Paper 4, it has been assumed that the cost of queuing is $1 per tonne per hour. Since queues at many local silos are typically of 2 to 3 hours duration during the harvest season, the queuing component of the road transport charge will be $2 to $3 per tonne delivered. Accordingly, a charge of $2.50 per tonne is assumed to apply (as part of the overall haulage rate) for deliveries made during harvest for all States except Western Australia. In Western Australia queuing times

at country silos are significantly less, and a queuing charge of $0.50 per tonne has been assumed for these journeys.

After the harvest period the queuing time would generally be less. To simplify the model, deliveries to sub-terminals or ports that originate from on-farm storage and are made outside the peak harvest period have been assigned a queuing charge of $2.00 per tonne. Where road deliveries from a bulk handler's site, to a sub-terminal or port are made, a queuing charge of $1.50 per tonne has been assumed, since in this case deliveries should be easier to co-ordinate than deliveries from on-farm storage.

Table B . 4 uses the charging formula provided previously to calculate road rates for some arbitrary distances, in order to provide an indication of the road haulage charges used in the model. These calculations include a queuing charge of $2.00 per tonne. Of course the road charges used in the model use both the actual road distances which are applicable

for each case study area, and the appropriate queuing charge, as discussed above.

91

TABLE B .4 LONG DISTANCE ROAD HAULAGE CHARGES: 1986-87

Distance km

Charge

$ per tonne

50 5.88

100 8.75

150 11.63

200 14.50

250 17.38

300 20.25

350 23.13

400 26.00

450 28.88

500 31.75

Note: Includes a queuing charge of $2.00 per tonne

Source: Royal Commission into Grain Storage, Handling and Transport.

B.2.2 Resource costs

Resource costs for road transport consist of the direct costs of operating the truck and the indirect or external costs of road use. Supporting Paper 4 discusses both of these issues, as well as the question of whether government taxes levied on road transport operations meet the resource costs associated with road damage.

Examination of the results of the case studies reported earlier in this Supporting Paper suggests -that the principal truck task will be the movement of grain from farms to

regional sub-terminals (by-passing local silos and railway branch lines). This implies, first, that the amount of urban running will generally be of minor importance and, second, that the use of unsealed access roads, in getting from farms onto the main rural system, will continue to be important.

The implications of these results is that the impact of noise and pollution from increased road transport is not likely to be significant, since there is little evidence of increased road transport of grain in urban areas.

The Commission has estimated the following resource cost functions for the road transport of grain:

92

SUPPORTING PAPER 8

Short distance

R

Long distance

R

where:

R

Q k

1.00 + Q + ,121k (3)

1.00 + Q + .0538k (4)

resource costs for measured in dollars per queuing cost one-way distance

kilometres.

road transport, tonne

travelled, in

Comparisons of equations (1), (2), (3) and (4) indicate minor differences between charges and resource costs for road transport. The short distance functions show resource costs to be slightly greater than the current transport charges, while the long distance functions show the opposite relationship. Supporting Paper 4 discusses the issues of road damage costs and road user cost recovery which underlie the resource cost equations used in the model.

B.3 Grain storage and handling

Storage and handling costs have been estimated for the different case study areas using both general information, such as the replacement costs of particular types of facilities (vertical, horizontal or bunker storage), as well as specific data concerning characteristics of the case study areas. All costs are expressed in terms of 1986-87 dollars.

In each case study area two cost variables have been

estimated, namely:

(i) Current resource costs, reflecting current operating practices.

(ii) Efficient resource costs, which in a competitive environment will equal efficient charges to growers. The Commission has assumed that efficient resource costs will be achieved through productivity increases

arising from the adoption of more efficient operating practices, and that the stimulus to the adoption of these efficient practices will be a competitive environment.

B.3.1 Storage and handling charges

The current (pooled) storage and handling charges used in the cost-budgeting model are those deducted from wheat-growers in 1986-87. They are set out in Table B.5.

93

TABLE B.5 CURRENT STORAGE AND HANDLING CHARGES FOR WHEAT: 1986-87

$ per tonne

State Bulk handling

authority

New South Wales 16.70

Victoria 14.63

Queensland 17.04a

Western Australia 14.89b

South Australia 13.18b

(a) Storage and handling charge for Queensland is the weighted average of the BGQ charges for domestic and export wheat.

(b) Includes toll. In South Australia the toll for wheat was $0.74 per tonne in 1986-87, while in Western Australia the toll for wheat was $1.84 per tonne.

Source: Australian Wheat Board, personal communication, 1987.

B.3.2 Resource costs for storage and handling

The resource cost data used in the model have been drawn from the responses to questionnaires as well as from other information supplied by the bulk handling agencies. While much of the data was originally provided for 1985-86

operations, the Commission has decided to use this data as the best estimate of 1986-87 costs, measured in 1986-87 dollars. The Commission appreciates that there was a Consumer Price Index rise of 9.3 per cent between these two years, and that over the same period average weekly earnings

(which directly measures the cost of labour, a major input for the bulk handling agencies), rose by 6 per cent. However the bulk handling agencies would also have been pursuing efficiency gains and productivity improvements over this year, and in the absence of more detailed information, the

Commission has assumed that any inflationary increase in costs is offset by improved productivity.

As was explained in chapter two of this Supporting Paper, estimates of resource costs for storage and handling have been prepared on the basis of two levels of efficiency: first, costs which reflect existing operating practices; second, reductions to present operating costs to reflect efficiency gains that may be attainable in the short term in

94

SUPPORTING PAPER 8

a deregulated storage and handling environment. Supporting Paper 3 outlines the basis on which the estimates of

'efficient' operating costs for storage and handling services have been prepared.

Grain storage and assembly costs A distinction is made between grain storage costs and grain assembly costs in the analysis of alternative systems. Grain

is assumed to be stored for the season (that is, until being ' called-up' ) at either a farm, a local silo, a regional sub-terminal or in the vicinity of the port itself. En route to the port, it may be put through a sub-terminal (or CRP)

(that is, 'assembled'); in addition, it will pass through the terminal ship loader. Consequently, a sub-terminal could, for example, be used to receive grain at harvest time and store it until it is sent to port to be shipped.

Alternatively, grain could be stored on-farm and then delivered by road to a sub-terminal where it would only be held for a short period of time before being loaded into a unit train for delivery to port. The distinction between grain storage at sub-terminals and ports, which involves construction of new storage facilities, and grain assembly at

sub-terminals and ports, which involves only the handling of grain as train loads or ship loads are being formed, is the reason why two sets of costs are provided for storage and handling at sub-terminals and ports.

Capital costs of storage and handling facilities There are three types of capital costs considered for grain storage and handling. These are the cost to be attributed to existing capital; the cost of replacement investment as existing capital depreciates; and the cost of capital investment to expand the capacity of a grain path. These are considered in turn.

It is quite difficult to accurately determine the capital value of existing storage and handling sites. One approach would be to use the depreciated historical capital value of these sites. This approach does not, however, necessarily

reflect the current economic value of storage and handling assets. For example, if operating procedures had changed since the facility was constructed, due to technological

change, the facility may now be more costly to operate, and in an extreme case may be obsolete. In this case the

facility's book value may not accord well with its economic value. .

Ideally, the capital value of the existing storage and handling facilities would be determined by reference to a market valuation of storage and handling sites. However, since the existing institutional environment largely precludes the trading of storage and handling sites, it would be exceedingly difficult to accurately estimate the capital values of the existing facilities.

95

SUPPORTING PAPER 8

In the cost-budgeting model it has been assumed that the capital in the existing storage and handling sites, both in the country and at port, has a zero opportunity cost. In other words this capital is assumed to be sunk, and the capital value of the existing assets is assumed to be zero. While the Commission recognises that in many cases this

assumption will not be valid, it is important to point out that the cost-budgeting model treats both the current system and the alternative systems in the same way, and it is the difference in resource costs between the alternative systems and the current system that is used to estimate potential resource cost savings.

Turning to the capital cost of the investment to replace depreciated existing facilities, the Commission has estimated replacement costs for different types of storage, and these

are shown in Table B.6.

These estimates are consistent with the capital costs identified in Supporting Paper 3. Inspection of the table indicates that capital costs are smallest for bunker storage and highest for vertical concrete cells. The costs

identified in the table represent a medium to large capacity facility. For example, the horizontal storage shed has a 27,000 tonne capacity.

TABLE B.6 CAPITAL COSTS FOR DIFFERENT STORAGE TYPES: 1986-87

Storage type

Installed cost

$ per tonne capacity

Economic life

years

Annuitised cost at 5% (a)

$ per tonne

Vertical - concrete 280 40 16.32

- steel 125 40 7.28

Horizontal 65 30 4.23

Bunkers (b ) 20 20 1.60

(a) Based on an assumed single throughput per annum (b ) Includes cost of conveyor loading system.

Source: CBHWA submission, 21 April 1987, pp 106-117

In the very short term, replacement of facilities at the existing storage and handling sites is assumed to be either unnecessary, or capable of deferral. Consequently, from a short term perspective, capital costs incurred for

replacement purposes will be zero. In the longer term there will be a need to replace facilities, and in the very long term replacement investment can be considered to be continuing in perpetuity.

96

SUPPORTING PAPER 8

The Commission's overall position is that the long term estimate of storage and handling capital costs for the replacement of existing facilities is more appropriate, and this approach has been incorporated into the cost-budgeting

model. The disadvantage of the short term approach is that it is inadequate with respect to replacement investment decisions: because of the varying ages of the facilities in the existing system, these decisions will be required progressively, with the first decisions about replacement being needed quite soon. If replacement investment is

approached on a piecemeal basis there will be many small incremental changes to the existing distributiuon system which may prevent an overall rational approach to investment and disinvestment decisions being taken. The long term

approach avoids this problem by requiring all of the costs of the distribution pathways to be considered at the one point of time. Table B .7 indicates the capital costs estimated by the Commission for the model.

TABLE B .7 CAPITAL COSTS FOR GRAIN STORAGE AND HANDLING: 1986-87 ($ per tonne)

Type of facility Long term

estimate of capital

Country Silo 4.25

Sub-terminal/CRP used for assembly 0.35(a)

Sub-terminal/CRP used for storage 4.25

Port-terminal used for assembly 2.65

Port-terminal used for storage 4.25

(a) Based on the assumption that grain which was assembled in sub-terminals would be small tonnages, stored for only short periods of time, principally using vertical storage.

Source: Royal Commission into Grain Storage, Handling and Transport

With regard to the cost of capital investment required to expand the capacity of a grain path, the cost-budgeting model requires all grain in the case study area to flow along the single least expensive path from farm to port. Consequently in the event of a widespread shift in the grain distribution system towards storage at either sub-terminal or port, new storage facilities would need to be built. The new

facilities are assumed to be horizontal sheds, with a capital cost of $65 per tonne, a useful life of about 30 years, and, on average, one throughput per year. The estimate of the capital cost of a port terminal performing the grain assembly

97

SUPPORTING PAPER 8

function is based on an average capital replacement cost of $48.50 per tonne handled (the mid-point of estimates made in respect of Fisherman Islands and Port Kembla), annuitised at 5 per cent over a life expectancy of 50 years.

Operating costs for country silos As outlined in the previous section, there are three basic types of storage - vertical silos, horizontal sheds, and bunkers. The mix of these three types of facility varies between States and also within each State. The operating costs of the country silos in the case study areas are based on cost and receivals data provided by the bulk handling

agencies. The receivals data, as indicated in Appendix A, is for a five or seven year period up to 1985-86 or 1986-87, while the cost data is, as mentioned earlier, based on data representing 1986-87. Where the total capacity of storage facilities exceed the average receivals, it is assumed that vertical storage is used first, followed by horizontal storage, and then bunkers. Estimates of current operating costs for country silos are presented in Table B.8.

Allowance has been made in deriving the estimates for the mix of storage and handling facilities in each case study area. Efficient operating costs are the current costs less an estimate of the efficiency gain attributable to the introduction of a more competitive environment. The basis of this estimate is set out in Supporting Paper 3.

TABLE B.8 STORAGE OPERATING COSTS FOR COUNTRY SILOS IN DIFFERENT CASE STUDY AREAS: 1986-87 ($ per tonne handled)

Case study area Current

operating cost

Efficient

operating cost

Mcree 5.45 4.70

Tottenham 5.10 4.35

Tocumwal (North and South) 4.35 3.60

Ouyen (West, East and South) 4.95 4.45

Quambatook 5.30 4.80

Emerald 7.30 6.55

Miles 6.60 5.85

Narrogin 4.65 4.15

Wongan Hills 5.80 5.30

Gladstone (North and South) 3.90 3.70

Source: Royal Commission into Grain Storage, Handling and Transport

Operating costs for sub-terminals/CRPs As indicated above, sub-terminals (or CRPs) can be used to either store grain, or to assemble it into unit train loads. Where grain is to be stored at CRPs or sub-terminals it is

assumed that additional (horizontal) storage will be required. The current operating costs of these new

98

SUPPORTING PAPER 8

facilities are estimated to be $3.80 per tonne, and since more or less identical facilities could be constructed, this cost is the same for all of the case study areas. The

efficient operating costs of sub-terminals used for storage are estimated to be $3.40 per tonne.

Where grain is to be assembled at CRPs or sub-terminals it is assumed that the cost is the same for all the case study areas in which this activity occurs. The rationale behind this assumption is that grain assembly at sub-terminals would involve only short term storage, using vertical storage wherever possible. There would be no application of

insecticides or fumigation. Furthermore grain assembly would principally only involve storage of small tonnages which would be ' called in' from on-farm storage to be assembled into unit train loads. The Commission has estimated that the

current operating cost for grain assembly, including an allowance for 'calling in' the grain from on-farm storage would be about $1.65 per tonne. This estimate is similar to the costs for the West Australian transfer stations at Avon

and Merredin of about $1.50 per tonne handled. The efficient operating costs of sub-terminals used for grain assembly are estimated to be $1.45 per tonne.

Operating costs for port-terminals Bulk handling agency operating costs currently differ between ports. This mainly reflects differences in labour and management practices, industrial stoppages, and differences

in the relative scale of storage and assembly activities. Information on operating costs of port storage was provided to the Commission by the bulk handling authorities. From these costs the Commission has estimated 'assembly' costs for storage and handling at port-terminals. These estimates are presented in Table B.9.

Estimates of storage costs at port terminals for 'direct' deliveries of grain from farm to ports, (that is, deliveries made during the harvest period for storage at the export port) are presented in Table B.10. For some ports there will not be any opportunity to construct new horizontal sheds near the current facilities, and in this case the storage will need to be constructed nearby. This will necessitate a subsequent transport cost to deliver the grain to the ship-loader. For simplicity this has been assumed to be the most common situation, and so Table B.10 includes a charge

for the local cartage to the ship-loader.

99

TABLE B.9 SUMMARY OF OPERATING COSTS FOR PORT GRAIN ASSEMBLY: 1986-87 ($ per tonne handled)

Port Existing

operating costs

Efficient operating costs

Kwinana 2.00 1.80

Albany 2.00 1.80

Geelong 3.00 2.70

Portland 2.20 2.00

Wallaroo 2.00 1.80

Port Adelaide 2.00 1.80

Port Pirie 2.00 1.80

Fisherman Islands 1.50 1.35

Gladstone 3.00 2.70

Mackay 4.00 3.60

Newcastle 3.80 3.05

Port Kembla 1.50 1.35

Source: Royal Commission into Grain Storage, Handling and Transport

TABLE B.10 PORT STORAGE COSTS: 1986-87 ($ per tonne handled)

Cost item Existing

practices

Storage capital costs ( for additional construction) 4.25

Storage operating cosjfcs 3.80a

Local cartage to gorr 1.00

Loading onto ship 1.50

Total 10.55

a. 'Efficient' operating costs have been estimated to be $3.40 per tonne. b . Based on rates for Mackay (4 kilometre trip). c . Based on rates at the Western Australian transfer

terminals.

Source: Royal Commission into Grain Storage, Handling and Transport

SUPPORTING PAPER 8

B.3.3 On-farm storage costs

It is assumed that existing on-farm storages are already fully utilised holding grain for private marketing and farm use such as stockf eed and seed. The cost-budgeting model examines whether any resource cost gains are achievable from redirecting the grain which is currently being delivered to

local country silos. Consequently if this grain is to be stored on-farm, new facilities will be needed.

To assess the costs of on-farm storage, three representative types of storage have been examined. These are a 60 tonne elevated cone based silo, a 160 tonne flat bottomed on-ground silo and a 530 tonne flat bottomed on-ground silo. It is assumed that on-farm storage is used once only each year, and that the mix of these three storage types will reflect both the need for segregation capability and the financial cost of the silo. The Commission's assessment is that the small, and to a lesser extent, medium, capacity silos are likely to be the most common form of on-farm storage used by growers,

although some larger capacity silos will also be used. Table B.ll lists the capital and operating costs of the three types of on-farm storage referred to above. The weighted average of the capital and operating costs of these three types of

storage is $7.39 per tonne.

In order to achieve an acceptable level of grain hygiene in the on-farm storage, there may be some additional costs to those presented in Table B.ll.

In Supporting Paper 9 estimates of the costs of alternative grain hygiene control measures are outlined. This includes a number of system-wide options, which are not included in the model, as well as a pathway option. The pathway option is a

random inspection scheme for testing for the presence of chemical residues on receival of grain. This option has been included purely for modelling purposes, and is aimed at addressing any grain hygiene problems which may emerge with use of longer term on-farm storage. Supporting Paper 9

addresses this issue in more detail. The cost of this grain hygiene option is 43 cents per tonne, and when it is added to the weighted average cost of on-farm storage, the total cost of on-farm storage is $7.82 per tonne.

Although growers receive a tax concession for the

installation of on-farm storage, this benefit has not been included in the calculation of charges to growers, and so on-farm storage charges are equal to on-farm storage resource costs. The tax concession for on-farm storage arises because of the disparity between the current annual depreciation

allowance for on-farm storage (20 per cent of the capital outlay, giving the storage a five year life for accounting purposes), compared with the actual economic life of on-farm storage, which would be closer to 30 years.

101

TABLE B.11 COSTS OF ON-FARM STORAGE: 1986-87 ($ per tonne)

Silo type

60 tonne 160 tonne 530 tonne

Costs elevated prefabricated prefabricated

transportable flat bottomed flat bottomed

Capital costs Silo 45.00 28.00 22.08

delivery, site preparation, erection and sealing 29.10 17.84 19.70

74.10 45.84 41.78

. Annuitised 4.80a 2.98a 2.72a

Auger . Annuitised

9.00b 0.72C

9.00b 0.72°

9.00d 0.72°

Operating costs labour 0.31 0.31 0.24

maintenance 0.23 0.17 0.13

auger 0.23 0.23 0.23

insecticide transport

0.50 0.48 0.46

from paddock 1.00 1.00 1.00

2.27 2.19 2.06

Total cost (e) 7.79 5.89 5.50

Weight (f ) 0.80 0.15 0.05

a. Annuitised over 30 years at 5 per cent real interest rate. b. Use of medium capacity auger with a capital cost of $4500, to transfer 500 tonnes of grain per year. c. Annuitised over 20 years at 5 per cent real interest

rate.

d. Use of large capacity sweep auger with a capital cost of $9,000, to transfer 1000 tonnes of grain per year. e. Total cost is the sum of the annuitised silo capital cost, the annuitised auger capital cost, and operating

costs.

f. Weights are based on existing pattern of use. (Personal communication, 24 November 1987, New South Wales Department of Agriculture.)

Sources: Benson et al 1987, Royal Commission into Grain Storage, Handing and Transport.

102

SUPPORTING PAPER 8

B.4 Port services and sea transport

In estimating the port services and sea transport costs contained in the cost-budgeting model, the Commission has drawn upon the work of its consultant Australian Shipping Consultants Pty Ltd. Supporting Paper 5 provides more information about ports and shipping.

B .4.1 Port services

Port services comprise a number of ship related services, including towage, pilotage, conservancy dues and berthage, and also some cargo related services such as wharfage and stevedoring. Estimates of the charges currently applying to grain vessels at individual ports are summarised in Table B . 12. The Commission made estimates of charges for two representative ship sizes - Panamax (61,500 dwt), and Handimax (31,400 dwt). The figures reported in Table B . 12 are for Panamax ships as long as ships of this size can be

fully or partly loaded at a port. Where a Panamax vessel cannot be berthed, the figures are for a Handimax ship.

Existing charges for these services will include an allowance for a number of financial expenditures which are joint between different types of shipping (for example, harbour dredging, lighthouses), and to some extent these charges overstate the avoidable expenditures for grain vessels. However, this factor applies to all ports and should not distort the resulting choice of grain paths. No data are available on the resource costs for port services, so that it

has been necessary for the Commission to assume that these costs are equal to port service charges.

Reductions in port service costs The Commission has estimated the impact on costs of

restrictive waterfront practices. This estimate is based on an assessment undertaken by the Commission's consultants, the Centre for Transport Policy Analysis, at Wollongong

University. Supporting Paper 10 discusses the basis of these estimates in more detail, but the overall conclusion from this study is that more efficient waterfront practices should enable the following savings to be made:

. New South Wales port service costs could potentially be reduced by 10 cents per tonne;

. Victorian port service costs could potentially be reduced by 40 cents per tonne;

. Queensland port service costs could potentially be reduced by 25 cents per tonne;

. Western Australian port service costs could potentially be reduced by 25 cents per tonne; and,

103

SUPPORTING PAPER 8

South Australian port service costs could potentially be reduced by 50 cents per tonne.

The Commission has assumed that under alternative System D, which involves disaggregation of port service and sea transport charges, there will be increased competition between the ports, and as a result efficient waterfront practices will be introduced, lending to the savings in port service charges referred to above.

TABLE B .12 CHARGES FOR PORT SERVICES: 1986-87 ($ per tonne)

Port Stevedoring Total

Port Wharfage Disbursement (a) (rounded)

Newcastle 1.78 0.85 0.46 3.10

Port Kembla (c) 1.78 0.85 0.50 3.15

Geelong (b) 1.00 1.35 0.50 2.80

Portland 1.00 0.83 0.53 2.35

Fisherman Is. 2.00 0.79 0.58 3.35

Gladstone 0.90 0.86 0.66 2.40

Mackay 0.90 1.37 0.66 2.95

Kwinana 0.11(d) 0.66 0.29 1.05

Albany 0.95 1.17 0.50 2.60

Port Adelaide 1.23 1.23 0.50 2.95

Port Pirie 1.23 1.14 0.60 2.95

Wallaroo (b ) 1.23 0.93 0.73 2.90

(a) These charges represent the rates quoted in advance for specified tasks. In practice, payments for stevedoring are often higher (up to a total level of around $1.30 per tonne). (b ) Assuming two port loading, topping up at Portland for

Geelong or Port Lincoln for Wallaroo. (c) Based on charges in Sydney. (d ) Total annual charge $300,000. Cost per tonne depends upon total tonnage shipments.

Source: Royal Commission into Grain Storage, Handling and Transport

B.4.2 Sea transport

Estimates of charges for sea transport have been based on representative time charter costs for Panamax or Handimax vessels from each of the relevant Australian ports to a range of overseas ports which reflect typical Australian grain markets. These estimates include port disbursements at the

discharging port, the time charter cost of the vessel for the loading and discharging operations and the laden and ballast voyages, fuel expenses, and expenses associated with the transit of canals.

104

SUPPORTING PAPER 8

The overseas destinations used in the analysis have been selected on the basis of information supplied by the statutory marketing boards. Over the last three years the

principal markets for Australian grain have been the Middle East, the North Asian region, and to a lesser extent, the South Asian region. Representative ports have been chosen in each of these regions. For the Middle East the time charter costs to the ports of Damietta (Egypt), Aqaba (Iraq via Jordan), and Bandar Abbas (Iran) have been averaged in order to obtain a general estimate of the average cost of sea transport to various Middle Eastern markets. Similarly for the North Asian region the time charter costs to Shanghai and Yokohama have been averaged to obtain a general estimate of the cost of sea transport to North Asian markets. For the

South Asian region, the time charter cost to Johor (Malaysia) has been used as a general estimate of the sea transport costs to South Asian markets.

The time charter costs that are used are for either Panamax or Handimax vessels, depending on the characteristics of the origin and destination ports. Where a destination port has restrictions which prevent it from accepting Panamax ships

(Bandar Abbas, Karachi and Johor), the time charter cost for a Handimax vessel is used. Where an Australian port has restrictions preventing a Panamax vessel from berthing (Port Adelaide, Port Pirie, Mackay) the time charter cost for a Handimax vessel is also used. In all other cases the time

charter costs used are for Panamax vessels. The time charter costs are converted to sea transport costs expressed in Australian dollars per tonne shipped. This conversion takes into account the reduced tonnages in Panamax vessels which

sail partly loaded from some ports. For Geelong and

Wallaroo, two port loading of Panamax vessels is assumed.

Some Australian ports send grain in approximately equal proportions to Middle East and North Asian markets (including Vladivostock which takes most of Australia's grain sales to the Soviet Union) while other Australian ports send grain principally to only one of the regions. The sea transport costs from the Australian port to the destination ports have been estimated on the basis of the historical shipping pattern for the major grain exports over the previous three years. Table B . 13 indicates the total tonnage shipped from Australian ports to the principle overseas market regions

during the last three years, as well as the general estimates of sea transport costs from the Australian port to those regions.

The time charter costs used by the Commission in this analysis are those which occurred most frequently during the period 1977 to 1986. This approach has been adopted to overcome the significant fluctuations in world shipping markets which are characteristic of time charter costs.

Table B . 14 indicates the average sea transport charges from the Australian ports which are relevant to the case studies, based on the destinations and the representative sea transport costs identified in Table B .13. The differences

105

SUPPORTING PAPER 8

between the Australian ports reflect the size of the ship used, the destination ports to which cargoes are sent, the length of the voyage to those destination ports, and the delays in both Australian and destination ports which are usually experienced.

TABLE B.13 GRAIN SHIPMENTS AND SEA TRANSPORT COSTS FROM AUSTRALIAN PORTS

Port North Asia South Asia Middle East

Tonnage

kt

Time

charter Cost

A$/t

Tonnage

kt

Time

charter Cost

A$/t

Tonnage

kt

Time

charter cost

A$/1

Newcastle 1924 13.51 533 15.20 2076 25.46

Pt. Kembla (a) 3402 13.09 138 14.81 2404 24.91

Geelong 2089 15.90 139 13.76 2528 25.01

Portland 1188 15.90 128 13.53 1384 24.93

Fisherman Is. 1237 12.54 394 13.83 1834 25.97

Gladstone 1448 13.93 106 13.37 105 27.13

Mackay 211 18.80 31 14.49 - 35.33

Kwinana 4520 12.90 938 9.04 2244 20.80

Albany 1041 15.67 590 10.19 1138 23.51

Port Adelaide 559 21.46 11 13.33 515 30.81

Port Pirie 319 22.23 25 13.87 408 31.47

Wallaroo 252 14.73 21 12.61 178 23.21

(a) Port Kembla estimates are based on shipments from Sydney.

Note: Grain shipments are for the period 1984-85 to 1986-87 (inclusive).

Source: Australian Wheat Board, NSW Barley Marketing Board, Grain Pool of Western Australia, Central Queensland Grain Sorghum Marketing Board, Barley Marketing Board (Queensland), personal communications,

18 November 1987, and Royal Commission into Grain Storage, Handling and Transport.

While the average sea transport charges presented in Table B.14 are generally in accordance with expectations, the difference in average charges between Gladstone and Fisherman Islands is larger than expected. The very low estimate for Gladstone arises because 93 per cent of grain being shipped

from Gladstone currently goes to North or South Asian markets, while Fisherman Islands sends about 50 per cent of its grain to the Middle East.

106

SUPPORTING PAPER 8

The sea transport charges from either Gladstone or Fisherman Islands to the Middle East are approximately twice those for voyages to North and South Asian destinations. If the historic pattern of destinations for grain shipments from Gladstone and Fisherman Islands did not change in the future, the sea transport costs estimated in Table B.14 would be a realistic estimate of sea transport costs. If, on the other hand, more grain was sent through Gladstone, and there was an increased shipment of this grain from Gladstone to the Middle East, the average sea transport cost from Gladstone would

increase, and may eventually become higher than the estimate of sea transport costs for Fisherman Islands, since for any given destination, the sea transport costs from Fisherman Islands are lower than from Gladstone. In the Commission's view the latter possibility is the more likely outcome.

Since the supply of shipping services is competitive, the long-run estimates of freight rates are assumed to

approximate resource costs.

TABLE B.14 SEA TRANSPORT CHARGES: 1986-87 (A$ per tonne)

Port Average sea

transport charges

Newcastle 19.34

Port Kembla 18.19

Geelong 20.83

Portland 20.96

Fisherman Islands 20.17

Gladstone 14.96

Mackay 18.29

Kwinana 14.97

Albany 17.80

Port Adelaide 26.29

Port Pirie 26.79

Wallaroo 19.43

Source: Royal Commission into Grain Storage, Handling and Transport

B.4.3 Pooled charges

At present, growers delivering statutory grains to a marketing board are not confronted with the differential charges presented in Tables B .12 and B.14. For example, the AWB pools sea transport charges for wheat on a national basis

(except for a reduction of approximately $2 per tonne provided to Western Australian queues. Cargo related charges (such as wharfage) are pooled on a State basis for wheat growers. Because of the availability of data, and because of

107

SUPPORTING PAPER 8

the significance of wheat in the overall composition of the Australian grain industry, the estimates of pooled charges for the model simulations are based on figures obtained from the AWB. The charges shown in Table B . 15 are used in

alternative Systems A, B and C.

TABLE B.15 POOLED CHARGES FOR AUSTRALIAN WHEATGROWERS: 1986-87 (A$ per tonne)

States (all ports) Wharfage (a)

Premium for

Two-Port Loading (b ) Voyage charges (c)

NSW 1.78 27.50

VIC 0.88 0.47 27.50

SA 1.05 1.11(d) 27.50

WA 0.50 0.30 25.55

QLD 1.40 27.50

(a) Less than figures in Table B.13 because of pooling over domestic grain as well as export grain. (b ) Representing additional port disbursements for the second berthing of the vessel as a result of two port

loading.

(c ) Based on average c.&.f. rates for wheat shipments by AWB during 1986-87, of US$19.23 per tonne (converted at A$1.00=US$0.70). Western Australian estimates are reduced by the average value of the Western Australian

freight differential, which was A$1.95 per tonne for 1986-87. (d) Includes additional land transport charges.

Source: Australian Wheat Board, personal communication, 18 December 1987.

108

APPENDIX C A SPATIAL EQUILIBRIUM MODEL OF REGIONAL GRAIN FLOWS: DETAILS OF METHODOLOGY AND DATA USED FOR NORTHERN NEW SOUTH WALES PROGRAMMING MODEL

In this appendix a more detailed outline is provided of the programming model reported in Chapter 4 and of the data used in that model. The discussion is based on material prepared by Dr T.G. MacAuley, Dr R.L. Batterham and Professor

B.S. Fisher in a consultancy conducted for the Commission. The model is a characterisation of the storage, handling and transport system based around the Moree to Boggabilla railway line in north-western New South Wales and should not be viewed as an attempt to represent all the detailed aspects of the system. Rather, it should be viewed as short run in

character because the possibility of construction of new sites, sub-terminals or transport links was not captured within the model. However, the temporary or permanent closure of sites was allowed.

The model was constructed in two separate parts, a farm production model, and a spatial eguilibrium model of the grain distribution system. After testing as separate models, the farm production model and the spatial equilibrium model of the handling and transport system were combined. The result was a non-linear model of grain production,

transportation, storage and shipping. The model was designed to be half-yearly in character and to represent the year 1985-86. Hence, the observed levels of deliveries, opening and closing stocks and grain outloadings for the model sites for 1985-86 were used to calibrate the model. The components of the model are described below.

C.1 The spatial equilibrium model

The spatial equilibrium model was designed to cater for eight grain handling sites (Boggabilla, North Star, Croppa Creek, Crooble, Milguy, Moree, Werris Creek and Goondiwindi) and the two ports of Newcastle and Brisbane (Fisherman Islands and Pinkenba). The port-level demands were represented by linear

functions. Associated with the sites on the Moree to

Boggabilla railway line were five representative farms. Each of these farms was assumed to have six or seven destinations to which wheat could be sent by road: the three nearest sites and Brisbane, Goondiwindi, Moree and Newcastle. For the farms at the ends of the railway system it was assumed that only six routes were possible. To take into account the

supply of grain from outside the area represented by the five representative farms, additional supplies were allowed for Moree, Werris Creek, Newcastle, Goondiwindi and Brisbane. These additional exogenous supplies were assumed to be

sensitive to price and, by consideration of the data on the 1985-86 actual flows through the system, supply functions were derived. Demand functions representing wheat for human consumption were also specified for some of the sites.

For a variety of reasons, the price form of the net social monetary gain spatial equilibrium model was chosen (Takayama

109

and Judge 1971, p . 256) and adapted to include quadratic cost functions. The reasons for using this form of the spatial model included its small size under regular conditions (that is, prices not sufficiently high to generate negative demand quantities and prices not sufficiently low to generate non-positive supply quantities) and the fact that both prices and quantities enter the solution.

SUPPORTING PAPER 8

C.1.1 Model specification

In what follows the competitive spatial equilibrium model is outlined. Modifications to this standard model to take into account the cases of a fixed grain handling charge and quadratic cost functions will be discussed.

Following Takayama and Judge's (1971) notation for n regions, let:

2

vector of (η x 1) net trade

region i to region j;

flows, x ij" from

vector of (2n x 1) non-negative demand prices in region i P.. , and non-negative supply prices such that p = [p ρχ ] ' ; • ■ · i ’ j in region j , pJ 2 vector of (n x

regions i and j ;

vector of region i;

vector of region i;

(n x

(n x

1) transfer costs, t^j,

1) quantities demanded,

1) quantities supplied,

between

1 ’

vector of (η x 1) demand prices, p^, in region i;

vector of (η x 1) supply prices, p'i, in region j;

vector dimension (2n x 1) slack

variables such that p y

non-negative and positive when pi is negative - w where w_. is

and, v^, variables such that

px + V

where v^ is non-negative and positive when p-^ is negative so that V = [w v] ' . The vectors w and v are used to prevent the market prices in the

vector becoming negative as described in the

irregular cases in Takayama and Judge but will subsequently be omitted from the formulation.

110

The typical demand function will be represented as:

Yi = ai " Pi pi' i = 1, ··., n; (C.l)

and the typical supply function as:

xi = θϊ + Yi P1' 1 = 1 ’ ··*' n (C.2)

SUPPORTING PAPER 8

where and are the intercepts and and Y^

are the absolute slope coefficients for n regions.

In matrix form, the supply and demand functions may be represented as:

γ = a

= a

(C.3)

B ( Py - w);

and

θ + Γ p (C.4)

θ + Γ ( Ρχ + v)

where a and Θ are (η x 1) vectors of demand and supply intercepts, respectively; B is an (n x n) matrix of the

demand slope coefficients β^; and Γ is an (n x n)

matrix of the supply slope coefficients Y^ (both B and Γ may be asymmetric).

Net social monetary gain or 'net revenue' is defined as total social revenue less total social costs less transfer costs, so that:

NSR = p ' y - p ' x - T'X,

y x

(C.5)

and, by substituting (C.3) and (C.4) into (C.5), the following objective function is obtained:

NSR

Γ cT ' B G y - B P y P y

- Θ r G x Γ Ρ χ Ρ χ

- T -

~Gy — G x X X

— a - B B W W

L - θ . Γ Γ V V

(C.6)

where G and G are defined below. y x

A competitive spatial equilibrium solution may be obtained when the quadratic objective function (C.6) is maximised subject to a set of linear constraints (see Takayama and Judge (1971), p. 162 and elsewhere in their text for a

detailed justification of the formulation): (C.7)

B G y

Γ G x

- g ; - g ;

- B

Γ

B '

[ P y ]

Γ Ρ χ

X

B W

Γ V .

< 0

1 1 1

SUPPORTING PAPER 8

and

The (n x )

shipments into structured so

follows:

w ' ν') > O'.

matrix G is

Y

a region and

is to sum the

structured so the (n x n

shipments out

(C.8)

as to sum the

) matrix G is

x

of a region as

G Y

1 1

1 1 1

1 1 1

-1 - 1 .. . -1 -1 - 1 .. . -1

-1 -1 . .

(C.9)

(C.10)

To simplify the mathematical notation, the vectors w and v will be ignored in the subsequent discussion since they make no difference to the logic of the formulation and are only included to deal with certain irregular cases. As outlined in Takayama and Judge, a modified formulation can be defined which accommodates this simplification:

Maximise

T'X

(C.ll)

subject to

- g v - g ;

< 0

(C.12)

(C.13)

( P ' y P ' x X ' ) < 0 '

(C .14)

112

SUPPORTING PAPER 8

This formulation may be further simplified to:

Maximise

d'p-p'Hp-T'X

(C.15)

subject to

d - Hp - GX < 0 (C.16)

T + G'p < 0 (C .17 )

(p' x')>0' (C.18)

where:

G = combined matrix of G and G ; x Y d = combined intercept vectors;

p = combined supply and demand price vectors; and

H = matrix of demand and supply slope coefficients.

The conditions for an optimum solution to this problem and their interpretation are set out in Takayama and Judge (1971).

C.1.2 Components of the spatial equilibrium model

Objective function The model was based on a net social revenue objective function with which the farm models were linked. This type of objective function is suitable for linking directly to

farm models which have maximisation of net profit as their objective function.

Demand functions Little, if any, information was available on the demand for wheat faced by exporters from individual ports around Australia. Hence, it was necessary to make a judgement as to the likely elasticities of demand at the ports and to use these to derive linear demand functions. Myers, Piggott and MacAulay (1985) estimated an elasticity of export demand of

-6.17 based on a price flexibility of -0.162. Given the elasticity value, the volumes of grain outloaded from Newcastle and Brisbane, together with an export price for Australian Standard White wheat of $175 per tonne, the demand

functions were calculated. To derive the demand functions for each of the ports, it was assumed that they had the same

113

SUPPORTING PAPER 8

slope as the national demand function with the implication that the elasticities were much larger in absolute value than the national export demand elasticity. It was assumed that the export of grain from the ports was evenly spread between the two six-month periods. The six-monthly functions were calculated by dividing the intercept and slope coefficients of the quantity-dependent demand functions by two. The functions used in the majority of model runs are provided in Table C.l. Some model solutions were obtained which allowed for differences in prices among ports reflecting the impact of differences in voyage costs and port charges. This was done by allowing the demand function facing each port to shift to the right or left to reflect differences in voyage costs.

TABLE C.l DEMAND FUNCTIONS USED IN THE MODEL

Location

Out-

loadings kt

Price8 Elasticity $ per tonne Intercept Slope

Port demands

Newcastle 1 993 173.22 -48.9 99 478 --562.78

Brisbane 1 364 173.00 -71.4 98 726 -■562.78

Mill demands*3

North Star 7.1 199.75 -0.3 9.246 -0.0107

Croppa Creek 3.3 199.64 -0.3 4.249 -0.0049

Moree 47.9 198.49 -0.3 62.283 -0.0724

a. FOB price with port prices reduced from $175 for wharfage. b. Wheat used for human consumption.

Source: Royal Commission into Grain Storage, Handling and Transport.

The demand for wheat for human consumption was specified in a similar way. Again, very little information could be obtained on the elasticities of demand faced by individual terminals. For the purposes of the study an elasticity of demand of -0.3 was assumed. This is consistent with the range of elasticities cited in Myers (1982, p. 46). The observed shipments from country sites for local demand were quite small in the base year. It follows that the model solutions will be insensitive to assumptions about the elasticity of demand for wheat for human consumption. The price used to derive the demand functions was $213.89 (free on rail). To keep the size of the model as small as

possible, it was assumed that the margin between the domestic

114

SUPPORTING PAPER 8

consumption price of $213.89 and the port price less

transportation to the port was constant so that the demand by mills could be represented in terms of a ' silo-door' price for Australian Standard White wheat. To obtain the human

consumption price from the model, this margin ($15.40 for Moree) can be added back to the 'silo-door' price.

Very little wheat was sold for feed in the model base year. In 1985-86, a total of 2648 tonnes was outloaded from Werris Creek. This is not to imply that wheat was not used for

feed. Some feed wheat would have been shipped directly from farms while some would have been retained for use in other farm enterprises. This movement was partly taken into account in the farm models. The 2648 tonnes shipped out of Werris Creek was treated as a fixed demand.

Farm supplies The supply of grain to the local sites in the base year was derived from inloading data provided by the New South Wales Grain Handling Authority (GHA). These supplies were then

apportioned to the individual farm models as discussed below.

The supplies from the farm models are endogenous. However, the model farms represent an area which supplies grain that can be shipped to various receival points. The relative contributions of each of these areas was set according to their observed shares in the base year.

The supplies on which these calculations were based are provided in the form of a balance sheet as presented in Table C.2. The farm supplies were based on an allocation of

the deliveries to the nearest local delivery site. The local supplies at each of the country receival points were assumed to be only from the five representative farms.

The individual farm supplies were weighted by appropriate aggregation factors so that the total supply equaled 334 136 tonnes. This was the total amount delivered by farms to the five receival points in the 1985-86 crop year.

The supplies to each of the sub-terminals at Moree and Werris Creek consisted of deliveries by rail from country receival points and by road from farms outside the case study area. In the case of Goondiwindi, the supply was other than that delivered from country receival points in the case study area.

The supply at Newcastle consisted of deliveries from points other than the case study area, Werris Creek and Moree. In this way the grain movements through each of the receival points and the sub-terminals could be approximated.

115

TABLE C.2 SUPPLY BALANCE SHEET FOR SYSTEM QUANTITIES: 1985-86 __________________ (tonnes )_________________

Opening Local Local, Closing Balance

Location stocks supply demana stocks

(1) (2) (3) (4) (3 + 4- 1-2)

Newcastle 76 430 1 382 994 1 993 173 178 615 712 364

Brisbane 0 1 248 857 136 433 0 115 476

Goondiwindi 0 104 315 0 0 -104 315

Boggabilla 13 893 0 27 1 272 -12 594

North Star 32 957 0 7 245 40 096 14 384

Croppa Creek 13 962 0 3 329 32 700 22 067

Crooble 18 555 0 26 12 891 -5 638

Milguy 552 0 12 0 -540

Moree 85 220 185 980 47 909 47 209 -176 082

Werris Creek 170 507 200 614 2 868 137 267 -230 986

Farm supply : Farm 1 37 502 -37 502

Farm 2 104 314 -104 314

Farm 3 88 014 -88 014

Farm 4 66 160 -66 160

Farm 5 38 146 -38 146

Total 334 136

Total 412 076 3 456 896 3 418 922 450 050 0

a. Local supply refers to supply from representative farms to the nominated receival points and supply to

sub-terminals and ports from outside the model region.

b . Local demand at the country receival points and

sub-terminals was largely grain supplied to mills, insurance and dust except for Werris Creek for which 2868 tonnes was supplied for feed. In the cases of Newcastle and Fisherman Islands, the local demand is the quantity exported.

c. Since detailed data were not available for Goondiwindi, it was assumed to have the same receivals as North Star of 104 315 tonnes. The supply to Brisbane from outside the case study area was calculated by deducting from the throughput for Pinkenba and Fisherman Islands the 11 161 tonnes supplied from the Moree line. Goondiwindi stocks data were not available. The throughput data for

Fisherman Islands were for 9 months and hence was

adjusted to cover the 12 months period.

Source: Data supplied to the Royal Commission into Grain

Storage, Handling and Transport by the GHA.

116

SUPPORTING PAPER 8

To provide for price sensitive supply response at the various sites, estimates of supply functions were prepared for Newcastle, Brisbane, Goondiwindi, Moree and Werris Creek. The addition of these supply functions completed the supply side of the model. The linear programming models generated the necessary supplies for the receival points on the Boggabilla to Moree line and the additional supply functions provided for the interaction with the rest of the regions' wheat production. To obtain the functions a supply

elasticity of 0.8 was assumed. This estimate is consistent with those for the wheat-sheep zone made by Vincent, Powell and Dixon (1982) and Wall (1987). The supply function estimates used in the model are presented in Table C.3.

TABLE C.3 DERIVED SUPPLY RESPONSE FUNCTIONS FOR MODEL SITES

Location Receivals kt Price3 $/tonne

Elasticity Intercept Slope

Newcastle 1 382.99 156.07 0.8 276.59 7.089

Brisbane 1 248.56 155.85 0.8 249.71 6.409

Goondiwindi 104.32 138.69 0.8 20.86 0.602

Moree 186.98 132.58 0.8 37.40 1.128

Werris Creek 200.61 138.34 0.8 40.12 1.160

a. Prices derived by deducting the GHA charge, wharfage costs and transport costs from the export price of $175. Receivals represent receivals supplied from other than the five farms or the Moree to Boggabilla rail

line.

Source: Royal Commission into Grain Storage, Handling and Transport

Carryover stocks The levels of opening and closing stocks in the system were specified according to the levels reported at the beginning and end of the 1985-86 crop year. In some instances, these

levels were zero or negative because of drying and other losses. In the case of zero or negative levels, a very small amount (5 tonnes) was used so that suitable prices resulted from the model solutions. In the case of Goondiwindi stock levels were not available. The cost of storing grain was assumed to be largely the interest cost of the funds tied up in the grain evaluated at the appropriate price. The carryover charge was endogenous to the model. A real interest rate of 5 per cent per annum was used. The

carryover charge was applied to end-of-period stocks.

Cost functions The handling and storage cost functions for local receival points, sub-terminals and port terminals were based on the estimates reported in Supporting Paper 3. The values of the

function for each of the country receival points considered

117

SUPPORTING PAPER 8

in the model are presented in Table C.4 and the values for the sub-terminals and port terminals are given in Table C.5.

TABLE C.4 AVERAGE COST FUNCTION COEFFICIENTS FOR LOCAL RECEIVAL POINTS AND EXOGENOUS VARIABLES

______________Coefficients3 Capa- Dummy Error

city for adjust-

Location Intercept 1/Q Q Q**2 bunker ment

kt

Boggabilla 7.581 0.012 -75.964 364.206 49.55 1 -0.4 Crooble 7.331 0.012 -92.255 537.173 40.80 1 -0.65 Croppa Creek 7.381 0.012 -51.774 169.186 72.70 1 -0.6 Milguy 4.969 0.012 -78.993 393.830 47.65 0 -0.31

North Star 6.881 0.012 -50.287 159.617 74.85 1 -1.1

Goondiwindi*3 6.881 0.012 -50.287 159.607 74.85 1 -1.1

a. The dependent variable in each case is average operating cost (1985-86 $ per tonne); Q is throughput measured as 0.5*(inloadings plus outloadings) in thousands of tonnes. The equations have been scaled to be in

thousands of tonnes to be consistent with the rest of the model. The intercept terms include an adjustment factor which is the average prediction error over the four year estimation period for each site.

b. Because no estimates of cost functions were made for Goondiwindi this site was assumed to be identical to North Star for purposes of the model.

Source: Royal Commission into Grain Storage, Handling and Transport.

Transportation costs Two main sets of transportation rates were required for the model. These were the rates from the farm gate to local receival points and from receival points to another receival point, sub-terminal or port. The farm to receival point rates were derived by considering a representative location for each of the five farms, calculating the distance and applying a trucking rate obtained after discussion with local farmers and transporters.

In locating each representative farm it was necessary to limit the number of possible delivery routes available to each farm so as to keep the dimensions of the model to a reasonable size. It was decided that delivery to the nearest receival point and the two points north and south of the nearest point would be allowed. In addition, delivery was

allowed by road to Moree, Goondiwindi, Brisbane and Newcastle for each farm. No deliveries by road from the five farms to Werris Creek were allowed.

118

SUPPORTING PAPER 8

TABLE C.5 AVERAGE COST FUNCTIONS FOR THE SUB-TERMINALS AT MOREE AND WERRIS CREEK AND THE PORTS OF NEWCASTLE AND BRISBANE 3

Coefficients Exogenous Variables

Location Intercept Q Q**2 Age Depth3

Sub-terminals Moree 3.539 -18.251 70.900 8.12 -

Werris Creek 5.672 -31.810 70.900 11.59 -

Ports Newcastle 9.172 -10.192 6.720 10.5 11.30

Brisbane 8.633 -6.048 1.520 23.2 10.00

a. The dependent variable is average operating cost (1985-86 $ per tonne). Q represents throughput measured in terms of 0.5*(inloadings plus outloadings) in thousands of tonnes.

b. Depth of water at grain berth.

Source: Royal Commission into Grain Storage, Handling and Transport.

The truck rates used in the model were based on the formulae used in the cost-budgeting model. The rates used are

detailed in Tables C. 6 and C.7. There was some evidence of lower cartage charges in the region in low-yielding years and carriers operating large trucks also appeared to charge less. It would seem reasonable to suggest that the cost of transporting grain to the local silo would be greatest during harvest and that out-of-season discounts would apply. However, no information was available on seasonal variations

in transport charges. Thus the same rates were used for both time periods in the model.

The rail freight rates used in the model are reported in Table C.8.

Storage capacities The setting of storage capacities for the model proved to be difficult because of the absolute nature of programming model restrictions. For the purposes of carrying out experiments with the model, it seemed that the sub-terminals at Moree and Werris Creek should not cause restrictions on the flow

through the system because of their relatively large capacity in relation to the volume of grain delivered from the

representative farms. Hence, very large capacities were specified for these sites. In the case of the local receival points, the actual physical capacity of vertical, horizontal and bunker storage was specified. The possibility of a

119

SUPPORTING PAPER 8

turnover rate greater than 1.0 within a six month period was not allowed. Even though the effective annual turnover rate was specified at 2.0 the rate allowed for in the model was less because the major deliveries take place within a short part of the summer period. The capacities used for each of the sites are reported in Table C.9.

TABLE C.6 FARM TO LOCAL RECEIVAL POINT TRANSPORTATION COST ESTIMATES, 1985-86

Farm number Silo Distance

km $

Financial cost

per tonne

Resource cost3

$ per tonne

FI Goondiwindi 49 9.38 9.43

FI Boggabilla 39 8.18 8.22

FI North Star 40 8.30 8.34

FI Moree 80 7.60 7.30

F2 Goondiwindi 60 10.70 10.76

F2 Boggabilla 50 9.50 9.55

F2 North Star 19 5.78 5.80

F2 Croppa Creek 42 8.54 8.58

F2 Moree 90 8.18 7.84

F3 Goondiwindi 72 12.14 12.21

F3 North Star 20 5.90 5.92

F3 Croppa Creek 15 5.30 5.32

F3 Crooble 35 7.70 7.74

F3 Moree 85 7.84 7.57

F4 Goondiwindi 120 17.90 18.02

F4 Croppa Creek 35 7.70 7.74

F4 Crooble 15 5.30 5.32

F4 Milguy 30 7.10 7.13

F4 Moree 70 7.03 6.77

F5 Goondiwindi 120 17.90 18.02

F5 Crooble 25 6.50 6.53

F5 Milguy 8 4.46 4.47

F5 Moree 50 5.88 5.69

a. The estimates of farm to silo movements have been

calculated using a fixed charge of $3.50 plus 12 cents per net tonne kilometre for the financial cost and $3.50 plus 12.1 cents per net tonne kilometre for the resource costs. Rates for the winter period included an

additional $1.75 per tonne as the per unit cost of storage of grain for an average of 3 months. Estimates of farm to sub-terminal movements were based on the formula in note (a) of Table C.7.

Source: Royal Commission into Grain Storage, Handling and Transport.

120

SUPPORTING PAPER 8

TABLE C.7 FARM TO SEABOARD TERMINAL ROAD CARTAGE RATES AND RESOURCE COSTS, 1985-86® ____________________________________ ( $ per tonne ) ___________

Destination

Origin Brisbane Newcastle

Cash Resource Cash Resource

Cost Cost Cost Cost

Farm 1 27.09 25.54 36.93 34.74

Farm 2 27.73 26.13 37.50 35.28

Farm 3 28.42 26.78 37.21 35.01

Farm 4 31.18 29.36 36.35 34.20

Farm 5 33.02 31.11 35.20 33.13

a. Estimates based on a queuing cost of $2 per tonne, a fixed charge for loading/unloading of $1 per tonne and 5.75 cents per net tonne kilometre foi: financial costs and 5.38 cents per net tonne kilometre for resource costs.

Source: Royal Commission into Grain Storage, Handling and Transport.

C.2 The farm models

The wheat supplied to the five receival points on the Moree to Boggabilla railway line was assumed to be produced on five representative farms in the model. The representative farm models were based on the physical characteristics of actual

farms delivering wheat in the Moree area. Farms delivering wheat to Milguy, Crooble, Croppa Creek, North Star and Boggabilla were identified from GHA delivery records for the 1984-85 season. Where possible, each farm was given a

location on maps of the local government areas. Information on the areas of farms, distance from receival point and the apparent area of wheat grown on each farm (estimated using average shire yields, Australian Bureau of Statistics 1985) was used to calibrate the mathematical programming models. A

summary of the main characteristics of the representative farms is given in Tables C.10 and C.ll.

In common with all mathematical programming models, the representative farm models have an objective function, a series of activities (columns) that contribute directly or indirectly to the objective function and a series of resource constraints (rows) that restrict the possible activity

levels. The objective of representative farmers in the model was assumed to be maximisation of net farm income (total gross margin minus costs). Details of constructing such models are provided in Rickards and McConnell (1967).

121

TABLE C.8 RAIL FREIGHT RATES ________________________________ ($ per tonne)

Origin

1985-86 Current

freight resource

rate costs

Efficient resource costs

To Newcastle

Boggabilla 26.55 23.17 19.48

North Star 26.02 21.46 18.14

Croppa Creek 25.94 20.15 17.17

Crooble 25.27 19.52 16.56

Milguy 25.27 18.96 16.13

Moree 24.73 15.54 13.49

Werris Creek 18.66 8.05 7.03

To Brisbane

Goondiwindi 17.16 16.33 13.46

To Moree

Boggabilla 13.60 7.61 6.03

North Star 11.05 5.91 4.64

Croppa Creek 8.12 4.71 3.67

Crooble 7.05 3.97 3.07

Milguy 5.89 3.41 2.64

To Werris Creek

Boggabilla 22.45 15.10 12.49

North Star 21.86 13.41 11.11

Croppa Creek 21.26 12.21 10.14

Crooble 20.40 11.46 9.54

Milguy 20.10 10.91 9.11

Moree 18.66 7.49 6.47

Source: SRA, Royal Commission into Grain Storage, Handling and Transport

122

SUPPORTING PAPER 8

TABLE C.9 RECEIVAL SITE STORAGE CAPACITIES, 1985-86 ______________ ( 000 tonnes )_________________

Site Capacity

Boggabilla 79.550

North Star 154.850

Croppa Creek 122.700

Crooble 60.800

Milgu^ 54.450

Moree 184.800

Werris Crgeka 322.100

Newcastle*1 _ 143.880

Goondiwindi3 290.754

Brisbane 125.800

a. Large values assumed in the model.

Source: Royal Commission into Grain Storage, Handling and Transport.

TABLE C.10 CHARACTERISTICS OF THE REPRESENTATIVE FARMS

Farm Nearest Distance to Number of Wheat Total wheat No. receival nearest farms in delivered deliveries point receival sample represented

point km tonnes tonnes

FI Boggabilla 38 30 1 116 37 502

F2 North Star 19 45 2 111 104 314

F3 Croppa Creek 15 40 2 846 88 014

F4 Crooble 15 22 4 809 66 160

F5 Milguy

Total

8 20 2 065 38

334 146 136

Source: Royal Commission into Grain Storage, Handling and Transport.

The activities included in the representative farm models were two winter cereal crops (wheat and barley); two summer crops (sorghum and sunflower); a sheep activity (wethers); a cattle activity (breeding weaners); two pasture activities

(on arable and non-arable land); and fodder sorghum and oat activities. The data for these activities were based on that in O'Sullivan (1985; 1987) and Rickards and Passmore (1977). Some of the farm activities spanned two periods. The

possibility of storing wheat on-farm after harvest for subsequent delivery in the following period was included in the model. Storage costs were based on Benson at al. (1987).

123

TABLE C.ll LAND AREA, LABOUR AVAILABILITY AND SHIRE RATES FOR REPRESENTATIVE FARMS

Farm number

Arable area ha

Non-arable area ha

Labour Shire rates hours per half year $

FI 1 490 1 598 4 320 11 117

F2 1 818 515 4 320 8 398

F3 1 672 1 479 4 320 11 343

F4 2 918 343 4 320 11 740

F5 1 328 205 4 320 5 518

Source: Royal Commission into Grain Storage, Handing and Transport.

The wheat selling activities form the major link between the representative farm models and the spatial equilibrium model. Wheat prices are determined in the spatial

equilibrium model and they are the basis for supply decisions in the farm models.

A common rotation in the area is four years of wheat (or wheat and barley) followed by two years of other crops (often sorghum). To reproduce the pattern, a rotational constraint, requiring that for every two hectares of wheat or barley grown there must be at least one hectare of sorghum,

sunflower, fodder oats or sorghum or native pasture on arable land, was included in the models. However, it was assumed that this constraint could be relaxed by undertaking an additional weed spraying activity.

On the representative farms it was assumed that three people were available to work up to 60 hours per week each. No cost allowance was made for operator labour.

For each representative farm fixed costs were assumed to be $4000 per year. Local government rates were assumed to vary with the size of the farm and were set at $3.60 per hectare. The assumed areas of arable and non-arable land, the cost of rates and the availability of labour for each representative

farms are shown in Table C.ll above.

Each of the modelled farms represents a number of similar farms stratified by size. The aggregation factors were calculated using delivery records for each receival point for the 1984-85 season and represent the factor by which the output from each representative farm is multiplied to give sub-regional output.

C.3 The farm to buyer model

The farm and spatial equilibrium models were linked through the prices generated by the spatial equilibrium component and

124

SUPPORTING PAPER 8

the supply of wheat generated by each of the five farm models. The model spans two time periods: summer and

winter. The farm models are essentially single-period models except for the supply of grain. Activities were included which permitted deliveries in summer or winter. If grain was held until winter a per unit variable cost of storage was

incurred of $2.50 per tonne. Further, if grain is to be delivered directly to port from farm during the summer period it was assumed that it would be stored on-farm on average for three months. In this way implications of changes to the

system for on-farm storage could be assessed. In addition to this cost, the opportunity cost of holding the grain for an average of six months was charged at a real interest rate of

5 per cent per annum. The total cost of storage was

endogenous to the model. The costs of carryover grain within the bulk handling system itself were treated in a similar manner.

The distribution of the ' external' or 'fixed' demands and supplies of grain between the six month periods was based on the patterns of delivery to the various receival points. In the case of demand at Newcastle and Brisbane, it was assumed to be divided equally between the two time periods. This was also assumed to be the case for the demand by mills for wheat and the supplies of grain going to both Newcastle and

Brisbane. In the case of the sub-terminals at Moree and Werris Creek, data on the timing of receivals indicated that almost all grain was received in the summer period. The same pattern was used for Goondiwindi.

125

APPENDIX D NORTHERN NEW SOUTH WALES PROGRAMMING MODEL RESULTS

In this appendix results from a series of experiments with the northern New South Wales programming model are presented and discussed. The appendix is based on material prepared by Dr T.G. MacAulay, Dr R.L. Batterham and Professor B.S. Fisher in a consultancy conducted for the Commission. In the first part of the appendix a base scenario is considered and then the outcomes of various experiments are presented. The base scenario is designed to approximate the system as it exists at present. The experiments are designed to illustrate the effects of possible changes to the current system. A number of questions are considered:

(a) What are the effects on the system of disaggregated charging for handling and storage services?

(b ) What are the effects of the introduction of a rail rate structure which more closely approximates resource costs than the current rates?

(c) What are the effects of a more efficient handling and storage system?

(d) What are the effects of allowing competition in pricing between ports?

The model presented is a characterisation of the region in north-western New South Wales centred on the Moree-Boggabilla railway line. An effort has been made to ensure that the relative magnitudes of prices, costs and volumes were appropriately set using 1985-86 as the base year. The model is partial in the sense that a boundary had to be drawn around the region. As a consequence, the links to other sites outside the area are incomplete. In addition, available data appropriate for the construction of such a model are somewhat incomplete. These limitations should be kept in mind when interpreting the results. Such models are useful in conceptualising the consequences of various changes to the system and should not be interpreted as a precise calculation of the likely changes that might result from implementation of particular policies.

The current situation in the grains industry is one in which statutory authorities control, for the most part, storage, handling and transportation of grain once it has been delivered to local receival points. For many of the services involved a pooled charge is levied on a per tonne basis for all receivals into the system. It is apparent that some producers gain in money terms from the pooled charge and others lose. The nature and extent of these gains and losses is complicated but some of the factors involved have been taken into account in the specification of the model reported in Appendix C and used to generate results reported in this appendix.

126

SUPPORTING PAPER 8

D. 1 The b ase ru n

The base run for the study was designed to model the existing situation in north western New South Wales. In this case the New South Wales Grain Handling Authority was assumed to impose a pooled charge for handling and storage on every tonne of grain entering the system. This charge was

calculated as the average operating cost over all local receival sites plus the average operating cost for the ports. The value of the charge was assumed to be $10.11 per tonne. The charge actually imposed by the Grain Handling Authority in 1985-86 was $17.15 but this charge included an amount for capital cost recovery. It was also assumed that the receivals into Newcastle and Brisbane, other than those from the Moree area which was modelled in detail, were evenly spread between the two six-month periods and that receivals at all other sites were in the summer period. In addition, no road delivery to Newcastle or Brisbane from the model farms was allowed for the base run. The rail freight rates were taken to be the freight rates ruling in the base year.

A large volume of information on the system was obtained for any given model run. For the purposes of the discussion in this chapter, the focus will be on export quantities and changes in prices at the farm gate and on the demand prices at receival points for grain shipped between receival points. For the export terminals the relevant price is the export price. For any given run, information is obtained on the prices at the end of the year for grain that has to be stored and the demand and supply prices at the silo door (for a given receival point the demand and supply prices will be equal). On the farm side of the system, offer prices at the silo door together with farm gate prices are obtained along with production levels for the various farm activities. If

capacity constraints are effective a shadow value for these constraints is obtained. This value reflects the difference in price per tonne for deliveries at the next most profitable delivery point for farmers. This may well be only the

difference in transportation costs for a given farm between the two receival points. In addition to price information, trade flow information, such as shipments from farm to receival point and shipments from receival point to port, are obtained. The level of stocks held at each of the receival points at the end of each six month period is also obtained. Some of this information is summarised in Table D.l for the base run scenario.

Verification of the model is assisted by one of its special features. Since the model is primal-dual in character it can be shown that the objective function value must be zero at the optimum. This provides a strong test that the

coefficients have been entered accurately and that the structure of the model is correct.

TABLE D.l SUMMARY OF BASE RUN RESULTS FOR THE PROGRAMMING MODEL

Stock Farm Between Grower

demand offer season and other

Site price (end ___________price transfer _____ receivals ________Demand

of year) summer winter summer winter summer winter

______________________$/t_______%J_t _______$/t_______OOOt_______OOOt OOOt_______OOOt OOOt

Newcastle

Brisbane

Goondiwindi

Boggabilla

North Star

Croppa Creek

Crooble

Milguy

Moree

Werris Creek

179.20 162.07

177.45 162.09

162.89 144.93

153.00 135.62

156.33 138.69

155.70 138.09

154.34 136.80

154.34 136.80

154.91 137.34

161.29 143.41

164.72 0.00

163.01 0.00

148.81 0.00

139.16 1.28

142.41 43.90

141.80 34.45

140.47 12.90

140.47 0.01

141.02 72.87

147.24 138.70

712.75 722.15

644.28 647.24

262.78 0.00

0.00 0.00

14.77 0.00

22.50 0.00

42.13 0.00

24.49 0.00

192.35 0.00

206.49 0.00

1290.32 543.54

907.80 647.23

0.00 0.00

0.01 0.01

3.83 3.81

1.76 1.75

0.01 0.01

0.01 0.01

25.80 25.67

1.43 1.43

Source : Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 8

The model was considered a valid representation of the system in the sense that prices were close to the 1985-86 level of the Australian Standard White price of $175 per tonne for export. The farm gate prices of about $135 per tonne were consistent with the price of $175 per tonne after deduction of the appropriate charges. In terms of volumes shipped through the system, the total supply and demand quantities were reasonably close to those specified in Table D. 2 when the two seasons are added together. Validation at this point would seem to be satisfactory but the performance of the system over a range of prices and quantities in relation to the real world is unknown.

The stock demand prices reflect the price that would have to be paid at each of the sites to enable the carry-over of the closing level of stock at the end of the year (end of the winter period). This price includes the cost of storage represented as an interest charge (at 5 per cent) on the value of the grain held in storage valued at market prices.

These prices will be somewhat higher than the market prices reported in subsequent tables.

The farm offer price is the price offered to farmers at the receival point door. This is the price that would be paid to a farmer at the point of delivery to the receival point. The difference between the summer and winter prices reflects a number of factors in the system including the interest cost involved in the carry-over of grain from summer to winter and the different delivery patterns and their consequent interaction with the supply and demand functions in the system.

Grower and other receivals represent the receivals at each of the sites (double handling was not permitted at any of the sites because there were effectively no capacity constraints given the six-monthly time periods represented in the model

and the large capacities available at each of the sites in relation to the volume of grain supplied to the system in 1985-86).

The demand quantities indicated in the last two columns of Table D.l reflect the quantities taken out of the system at each of the sites. At Newcastle and Brisbane these reflect the quantities exported. At North Star, Croppa Creek and Moree the quantities reflect mill demands and at the other

sites very small quantities represent fixed quantities of losses to the system.

D .2 The scenarios

An overall view of the structure of the various scenarios which were run with the model is provided in Table D.2. The pairwise comparison of various scenarios permits an analysis of the various questions outlined in the introduction to this

chapter. The comparisons for each scenario are made with the base run.

129

3a

Efficient transport, road to ports and

4a

Efficient transport, handling and port

pooling competition

SUPPORTING PAPER 8

D.3 Pooled versus disaggregated charging for handling and storage

The aim in comparing scenarios la and lb was to illustrate the effects of charging for the services of country receival points according to the actual costs incurred rather than charging a pooled cost across all grain receival points. In this case a set of estimated cost functions (see Supporting Paper 3) were incorporated into the model so that each receival point faced a cost which depended on the volume of its receivals. For the purposes of the modelling exercise it was assumed that receivals were equivalent to throughput as defined for the cost functions in Supporting Paper 3. The results of the disaggregated charging scenario (no cost pooling) were then compared with the case of pooling under which the Grain Handling Authority was assumed to charge an

average of $10.11 for each tonne of grain received by the system.

The results of the two runs are provided in detail in Tables D.3 to D.8. Shipment volumes are presented in Table D.3 where the total columns on the right of the table represent

the outloadings (receival point supplies) and the total rows at the bottom of each section of the table represent demand quantities used at that site (exports, mill demand and losses). Figures on the diagonal represent local demand from each site. The amounts of opening and closing stocks must be taken into account when comparing the values in this table with those of receival volumes (inloadings) given in Table D.4. The relationship connecting the various quantities for North Star, taken as an example, are as follows:

Summer

Opening Stock + Receivals = Closing Stock + Outloadings 32.957 14.77 43.90 3.83

Winter

Opening Stock + Receivals = Closing Stock + Outloadings 43.90 0 40.10 3.80

The levels of opening stocks in the summer and closing stocks in the winter were fixed for all runs of the model

(Table D . 7) but the carry-over from summer to winter was endogenously determined.

The consequences of disaggregating the charges for handling and storage for the system are broadly a higher volume of exports in both the summer and winter with an overall larger volume of exports by 3.0 per cent (Table D.4). This overall

increase in volume arises because for a number of sites the cost of handling and storage is lower than the average charge of $10.11 imposed through pooled charging, particularly in summer (Table D.5). This is not so for all sites.

131

TABLE D.3 SHIPMENTS BETWEEN RECEIVAL POINTS, SUB-TERMINALS AND PORTS WITH COST POOLING VERSUS DISAGGREGATED CHARGING ___________________________________________________________ (OOP tonnes)_____________________________________________________________

To New- Bris- Goon- Bogga- North Croppa Crooble Milguy Moree Werris Total

From castle bane diwindi billa Star Creek Creek

Scenario la)--With cost pooling, winter shipments

Newcastle Brisbane Goondiwindi Boggabilla

North Star Croppa Creek Crooble Milguy Moree Werris Creek

543.542

0.000 0.000 0.000 0.000 0.000 0.000

0.000

647.231 0.000 0.001 0.014 3.808

1.752

0.013

Total 543.542 647.231 0.001 0.014 3.808 1.752 0.013

543.542 647.231 0.001

0.000 0.000 0.014

0.000 0.000 3.808

0.000 0.000 1.752

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.669 0.000 25.669

1.434 1.434

0.006 25.669 1.434 1223.470

Scenario la)— With cost pooling, summer shipments

Newcastle 789.181 Brisbane 644.282

Goondiwindi 262.798 0.001

Boggabilla 12.596 0.014

North Star 0.000 3.828

Croppa Creek 0.000 1.761

Crooble 47.767 0.013

Milguy 25.023

Moree 178.887

Werris Creek 236.864

Total 1290.318 907.080 0.001 0.014 3.828 1.761 0.013

0.000 0.000

789.181 644.282 262.799 12.610

0.000 0.000 3.828

0.000 0.000 1.761

0.000 0.000 47.780

0.000 0.000 25.029

25.803 0.000 204.689

1.434 238.298

25.803 1.434 2230.256

TABLE B . j (continued)

To New- Bris- Goon- Bogga- North Croppa Crooble Milguy Moree Werris Total

From castle bane diwindi billa Star Creek Creek

Scenario lb)--Disaggregated charging, winter shipments

Newcastle Brisbane

561.968 6 6 9.661

Goondiwindi Boggabilla 0.000

0.000 0.001 0.014

North Star 0.000 3.813

Croppa Creek 0.000 1.754

Crooble 0.000 0.013

Milguy 0.000

Moree 0.000

Werris Creek 0.000

Total 561.968 669.661 0.001 0.014 3.813 1.754 0.013

561.968

669.661 0.001

0.000 0.000 0.014

0.000 0.000 3.813

0.000 0.000 1.754

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.784 0.000 25.784

1.434 1.434

0.006 25.784 1.434 1264.447

Scenario lb)--Disaggregated charging, summer shipments

Newcastle 814.062 Brisbane 669.070

Goondiwindi 264.315 0.001

Boggabilla 12.596 0.014

North Star 0.000 3.833

Croppa Creek 0.000 1.763

Crooble 5.640 0.013

Milguy 0.537

Moree 248.590

Werris Creek 242.031

Total 1323.456 933.385 0.001 0.014 3.833 1.763 0.013

0.000 0.000

814.062 669.070 264.316 12.610

0.000 0.000 3.833

0.000 0.000 1.763

0.000 0.000 5.653

0.000 0.000 0.543

25.914 0.000 274.505

1.434 243.465

25.914 1.434 2289.819

TABLE D.3 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario la)--Farm shipments with cost pooling, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0 .000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0 .0 0 0 0 .0 0 0 0 .0 0 0 0 .0 0 0 0 .0 0 0

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000 0.000

Scenario la)--Farm shipments with cost pooling, summer shipments

Farm 1 0.000 0.000 49.739 0.000

Farm 2 0.000 0.000 89.743 0.000

Farm 3 0.000 0.000 15.247

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 154.729 0.000

0.000 0.000

0.000 0.000 0.000

14.773 22.249 0.000 0.000

0.000 42.127 0.000 0.000

0.000 24.486 0.000

14.773 22.249 42.127 24.486 0.000

49-739 89.743 52.269 42.127

24.486

0.000 258.364

TABLE D .3 (continned)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Total

Creek

Scenario lb)— Farm shipments with disaggregated charging, summer shipments

Farm 1 0.000 0.000 49.739 0.000

Farm 2 0.000 0.000 89.743 0.000

Farm 3 0.000 0.000 15.233

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 154.714 0.000

0.000 0.000

0.000 0.000 0.000

14-783 22.253 0.000 0.000

0.000 0.000 0.000 42.127

0.000 0.000 24.486

14.783 22.253 0.000 0.000 66.613

49.739 89.743 52.269 42.127 24.486

0.000 258.364

Scenario lb)— Farm shipments with disaggregated charging, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0:000

0.000 0.000 0.000 0 .000 0.000 0.000

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE 0.4 RECEIVALS AT EACH SITE WITH COST POOLING VERSUS DISAGGREGATED CHARGING ____________________________________________________ (000 tonnes)__________________________

Site

_________________ Winter Receivals ______

Pooling Disag- Per cent Pooling

(base) gregated difference (base)

charging

_______ Summer Receival Disag- Per cent

gregated difference charging

Newcastle port 543·54

Brisbane port 647-23

Total 1190-77

561-97 669-66

1231.63

3.39 1290.32

3.47 907.08

3.43 2197.40

1323.46

933-38

2256.84

2-57

2.90

2.71

Newcastle 722.16 740.58 2.55 712.75

Brisbane 647-24 669.67 3.47 644.28

Goondiwindi 0.00 0.00 0.00 262.80

Boggabilla 0.00 0.00 0.00 0.00

North Star 0.00 0.00 0.00 14.77

Croppa Creek 0.00 0.00 0.00 22.25

Crooble 0.00 0.00 0.00 42.13

Milguy 0.00 0.00 0.00 24.49

Moree 0.00 0.00 0.00 192.35

Werris Creek 0.00 0.00 0.00 206.49

737.63 3.49

669.06 3.85

264.32 0.58

0.00 0.00

14.78 0.07

22.25 0.02

0.00 -100.00

0.00 -100.00

262.28 36.36

211.66 2.50

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.5 COST MARGINS AT EACH SITE WITH COST POOLING VERSUS DISAGGREGATED CHARGING ______ __ ________________________________________ $/ tonne_____________________________________

Winter Receivals

Site Pooling

(base)

Disag­ gregated charging

Per cent difference

Pooling (base)

Newcastle port 0.00 4.85 * 0.00

Brisbane port 0.00 3.03 # 0.00

Newcastle 10.11 0.00 -100.00 10.11

Brisbane 10.11 0.00 -100.00 10.11

Goondiwindi 10.11 7.33 -27.50 10.11

Boggabilla 10.11 8.03 -20.57 10.11

North Star 10.11 7-33 -27.50 10.11

Croppa Creek 10.11 7-83 -22.55 10.11

Crooble 10.11 7-78 -23.05 10.11

Milguy 10.11 5.42 -46.39 10.11

Moree 10.11 3-99 -60.53 10.11

Werris Creek 10.11 6.12 -39.47 10.11

________Summer Receival

Disag- Per cent

gregated difference charging

2.97

#

2.28 *

0.00 -100.00

0.00 -100.00

5.19 -48.66

8.03 -20.57

6.62 -34.52

6.76 -33.14

7.78 -23.05

5.42 -46.39

4.08 -59.64

2.57 -74.58

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.6 PRICES AT EACH SITE WITH COST POOLING VERSUS DISAGGREGATED CHARGING _________________________________________________ ($/tonne)______________________________

Site

__________________ Winter Prices ______

Pooling Disag- Per cent Pooling

(base) gregated difference (base) charging

______ Summer Prices Disag- Per cent gregated difference charging

Demand prices

Newcastle 174.83 174.76 -0.04 172.18

Brisbane 173.12 173-04 -0.55 172.20

Goondiwindi 174.83 169.92 -2.81 172.18

Boggabilla 173.12 170.01 -I.80 172.20

North Star 158.92 156.48 -I.53 155-04

Croppa Creek 149.27 146.10 -2.12 145.63

Crooble 152.52 151.55 -Ο.63 148.80

Milguy 151.91 151.08 -Ο.54 148.40

Moree 150.58 147.41 -2.10 146.91

Werris Creek 150.58 147.41 -2.10 146.91

172.06 -0.07

i7 2 .ll -0.05

169.09 -1.79

169.83 -1.38

152.67 -I.53

142.54 -2.12

147.86 -Ο.63

147.40 -I.54

143.82 -2.10

143.82 -2.10

Supply prices

Newcastle 174.83 169.92 -2.81 172.18

Brisbane 173.12 170.01 -1.80 172.20

Goondiwindi 158.92 156.48 -1.53 155.04

Boggabilla 149.27 146.10 -2.12 145.63

North Star 152.52 151.55 -Ο.63 148.80

Croppa Creek 151.91 151.08 -Ο.54 148.20

Crooble 150.58 147.41 -2.10 146.91

Milguy 150.58 147.41 -2.10 146.91

Moree 151.13 147.96 -2.10 147.45

Werris Creek 157.35 154.19 -2.10 153.52

169.09 -1.79

169.83 -I.38

152.67 -1.53

142.54 -2.12

147.86 -Ο.63

147.40 -Ο.54

143.82 -2.10

143.82 -2.10

144.36 -2.10

150.43 -2.01

TABLE D.6 (continued)

Site

______________________Winter Prices _______

Pooling Disag- Per cent Pooling

(base) gregated Difference (base)

charging

________Summer Prices

Disag- Per cent

gregated Difference charging

Farm offer prices at silo door

Newcastle 164.72 169.92 3.16 162.07

Brisbane 163.01 170.01 4.29 162.09

Goondiwindi 148.81 149.15 0.23 144.93

Boggabilla 139.16 138.47 -0.78 135.52

North Star 142.41 144.22 1.27 138.69

Croppa Creek 141.80 143.25 1.03 138.09

Crooble 140.47 139.63 -0.60 136.80

Milguy 140.47 141.99 1.08 136.80

Moree 141.02 143.98 2.09 137.34

Werris Creek 147-24 148.06 0.56 143.41

169.09 4.33

169.83 4.77

147.48 1.76

134.50 -0.75

141.24 1.84

140.64 1.84

136.03 -Ο.56

138.40 1.17

140.28 2.14

147-86 3.11

Farm gate prices

Farm 1 137.68 138.02 0.25 135.55

Farm 2 136.36 136.70 0.25 134.23

Farm 3 134.92 136.57 1.23 132.79

Farm 4 133-42 135.20 1.33 131.50

Farm 5 134.26 136.35 1-55 132.34

138.10 136.78 135.34 133.25 134.40

1.88 1.90 1.92 1.33 1.56

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.7 ACTUAL OPENING AND CLOSING STOCK LEVELS (000 Tonnes)

Site

Opening stocks (fixed)

Carryover Solution la)

stocks Solution lb)

Closing stocks (fixed)

Newcastle 76.430 0.00 0.00 178.615

Brisbane0 0.005 0.00 0.00 0.005

Goondiwindi 0.005 0.01 0.01 0.005

Boggabilla 13.893 1.28 1.28 1.272

North Star 32.957 43.90 43.91 40.096

Croppa Creek 13.962 34.45 34.45 32.700

Crooble 18.555 12.90 12.90 12.891

Milguy 0.552 0.01 0.01 0.005

Moree 85.220 72.88 72.99 47.209

Werris Creek 170.507 138.70 138.70 137.267

a. Since stock levels were not available a notional level of 5 tonnes was used. Source: Royal Commission into Grain Storage, Handling and Transport.

Note that the port charge must be added to the receival point charge and consideration must be given to the route by which the particular receival point ships grain (Newcastle or Brisbane) when comparing the storage and handling cost with the pooled charge. The net result of the changes in the storage and handling charges is lower demand and supply prices and generally higher farm offer prices and farm gate prices (Table D.6). The exceptions were Boggabilla and Crooble for which receivals were either small or zero thus imputing a high average cost of storage and handling so that farm level prices were higher.

A more detailed consideration of each of the sites indicates that Boggabilla was not used either with pooled charging or without pooled charging and Milguy and Crooble switch in and out of use depending on the season (Table D.4). The farm

shipment matrices in Table D.3 reflect this pattern. In the case of Goondiwindi, by assumption supply from outside the model region was only available in summer. However, sufficient grain was carried over from the summer to meet the

arbitrary 5 tonne closing stock level. In a similar way the sub-terminals of Moree and Werris Creek were assumed to only receive grain from outside the group of five model farms in

summer. Delivery by road from the five farms to Moree was possible in summer or winter. Thus the option to hold grain in on-farm storage was included in this model. In the cases of cost pooling and disaggregated charging scenarios no grain was carried over on-farms to the winter period.

The consequences for farm returns to land, labour and management were to increase the returns for each of the farms by between 1.5 and 2.1 per cent (Table D.8). It follows that there are redistributive effects of such a change in charging

140

SUPPORTING PAPER 8

as well as improved aggregate returns to producers. The final result of such a change would depend heavily on the nature of the cost functions at each of the receival points and the location of farms in relation to the receival points. In interpreting the results of the model it needs to be remembered that only a very small number of farms could be included because of size limitations and that the particular sites chosen for the farms could only be representative of an area.

TABLE D.8 FARM INCOME CHANGES® WITH COST POOLING VERSUS DISAGGREGATED CHARGING

Farm Pooling

(base)

$/farm

Disag­ gregated Charging $/farm

Difference

per cent

Farm 1 149 500 151 707 1.48

Farm 2 88 190 90 032 2.09

Farm 3 82 608 84 048 1.74

Farm 4 88 066 89 387 1.50

Farm 5 58 431 59 510 1.85

Average 93 359 94 937 1.69

a. Return to land, labour and management.

Source: Royal Commission into Grain Storage, Handling and Transport.

D.4 Efficient handling with possible delivery from farm to Newcastle by road: Scenarios 1(a) versus 2(a) and 2(b)

In this section the effects of lowering the costs of handling grain at each of the receival points is considered. This was done by comparing the outcomes of scenarios la and 2a. In addition, the effect of allowing for the possibility of delivery of grain by road to Newcastle is considered. The results are included in this section since the solutions are the same for scenarios 2a and 2b.

The changes to the model that were made involved lowering the quadratic average cost functions for each receival point. The estimated average cost functions reported in Supporting Paper 3 were reduced at their minimum points by 10 per cent

in the case of country receival points and 20 per cent for sub-terminals and ports. In all other respects this scenario (scenario 2a) remained the same as scenario lb. To implement the reductions in the cost curves equivalent to a percentage change at the minimum point of the curve a new intercept was calculated. The results are reported in Tables D .9 to D.13.

141

Newcastle Brisbane

543.542 647.231

Goondiwindi Boggabilla 0.000

0.000 0.001 0.014

North Star 0.000 3.808

Croppa Creek 0.000 1.752

Crooble 0.000 0.013

Milguy 0.000

Moree 0.000

Werris Creek 0.000

Total 543.542 647.231 0.001 0.014 3.808 1.752 0.013

543.542 647.231 0.001

0.000 0.000 0.014

0.000 0.000 3.808

0.000 0.000 1.752

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.669 0.000 25.669

1.434 1.434

0.006 25.669 1.434 1223.470

Scenario la)--With cost pooling, summer shipments

Newcastle Brisbane Goondiwindi

789.181

Boggabilla 12.596 North Star 0.000

Croppa Creek 0.000 Crooble 47.767

Milguy 25.023

Moree 178.887

Werris Creek 236.864

Total 1290.318

644.282 262.798

907,Q8Q

0.001

0,001

0.014

Q.Ql't

3.828

3.828

1.761

1.761

0.013

n.on

0.000 0.000

789.181 644.282 262.799 12.610

0.000 0.000 3.828

0.000 0.000 1.761

0.00 0.00 47.780

0.000 0.000 25.029

25.803 0.000 204.689 1.434 238.298

fim 1 434 ??3n ?5fi

From To New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris

Creek

Total

Scenario 2a) and 2b)— Efficient handling system and road to Newcastle, winter shipments

Newcastle Brisbane

564.083 671.056

Goondiwindi Boggabilla 0.000 0.000 0.001

0.014

North Star 0.000 3.811

Croppa Creek 0.000 1.753

Crooble 0.000 0.013

Milguy 0.000

Moree 0.000

Werris Creek 0.000

Total 564.083 671.056 0.001 0.014 3.811 1.753 0.013

564.083 671.056 0.001

0.000 0.000 0.014

0.000 0.000 3.811

0.000 0.000 1.753

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.762 0.000 25.762

1.434 1.434

0.006 25.762 1.434 1267.933

Scenario 2a) and 2b)--Efficient handling system and road to Newcastle, summer shipments

Newcastle 816.102 Brisbane 670.450

Goondiwindi 264.774 0.001

Boggabilla 12.596 0.014

North Star 0.000 3.831

Croppa Creek 0.000 1.762

Crooble 5.640 0.013

Milguy 0.537

Moree 249.890

Werris Creek 243.294

Total 1328.060 935-224 0.001 0.014 3.831 1.762 0.013

0.000 0.000

816.102 670.450

264.775 12.610

0.000 0.000 3.831

0.000 0.000 1.762

0.000 0.000 5.653

0.000 0.000 0.543

25.894 0.000 2 7 5·784

1.434 244.728

25.894 1.434 2296.237

TABLE D.9 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario la)— Farm shipments with cost pooling, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000 0.000

Scenario la)— Farm shipments with cost pooling, summer shipments

Farm 1 0.000 0.000 49.739 0.000 0.000

Farm 2 0.000 0.000 89.743 0.000 0.000

Farm 3 0.000 0.000 15.247 14.773

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 154.729 0.000 14.773

0.000 49-739

0.000 0.000 89.743

22.249 0.000 0.000 52.269

0.000 42.127 0.000 0.000 42.127

0.000 24.486 0.000 24.486

22.249 42.127 24.486 0.000 258.364

TABLE D .9 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario 2a) and 2b)— Efficient handling system and road to Newcastle, winter

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0 .0 0 0 0 .0 0 0 0 .0 0 0 0 .0 0 0 0 .0 0 0 0 .0 0 0

Scenario 2a) and 2b)— Efficient handling system and road to Newcastle, summer

Farm 1 0.000 0.000 49.739 0.000 0.000

Farm 2 0.000 0.000 89.743 0.000 0.000 0.000

Farm 3 0.000 0.000 15.239 14.779 22.251 0.000

Farm 4 0.000 0.000 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000 0.000

Total 0.000 0.000 154.721 0.000 14.779 22.251 0.000

0.000 49.739

0.000 89.743

0.000 52.269

0.000 42.127 42.127

0.000 24.486 24.486

0.000 66.613 0.000 258.363

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.10 RECEIVALS AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT HANDLING SYSTEM, DISAGGREGATED CHARGING AND ROAD SHIPMENT TO NEWCASTLE _________________________________________________ (OOP tonnes)________________________________________________ _______

_________________ Winter Receivals _______

Site Pooling Efficient Per cent Pooling

(base) Handling Difference (base)

& road to Newcastle

________ Summer Receival

Efficient Per cent Handling Difference & road to Newcastle

Newcastle port 543·54

Brisbane port 647-23

Total 1190-77

564.08

671.05

1235.14

3.78 1290.32

3.68 907.08

3.73 2197.40

1328.06

935-22

2263.28

2.93 3-10

3.00

Newcastle 722.16 742.7 2.84 712.75

Brisbane 647.24 671.06 3.68 644.28

Goondiwindi 0.00 0.00 0.00 262.80

Boggabilla 0.00 0.00 0.00 0.00

North Star 0.00 0.00 0.00 14.77

Croppa Creek 0.00 0.00 0.00 22.25

Crooble 0.00 0.00 0.00 42.13

Milguy 0.00 0.00 0.00 24.49

Moree 0.00 0.00 0.00 192.35

Werris Creek 0.00 0.00 0.00 206.49

739.67 3.78

670.44 4.06

264.77 0.75

0.00 0.00

14.78 0.04

22.25 0.01

0.00 -100.00

0.00 -100.00

263.53 37.01

212.92 3.11

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.11 COST MARGINS AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT HANDLING SYSTEM, DISAGGREGATED CHARGING AND ROAD SHIPMENT TO NEWCASTLE ___________________________________ ($/tonne)________________________________________

___________________ Winter Margins ______

Site Pooling Efficient Per cent Pooling

(base) handling difference (base) & road to Newcastle

________ Summer Margins

Efficient Per cent handling difference & road to Newcastle

Newcastle port 0.00 4.24 - 0.00

Brisbane port 0.00 2.59 - 0.00

Newcastle 10.11 0.00 -100.00 10.11

Brisbane 10.11 0.00 -100.00 10.11

Goondiwindi 10.11 6.99 -30.82 10.11

Boggabilla 10.11 7.62 -24.59 10.11

North Star 10.11 6.99 -30.82 10.11

Croppa Creek 10.11 7.44 -26.37 10.11

Crooble 10.11 7.40 -26.82 10.11

Milguy 10.11 5-27 -47.85 10.11

Moree 10.11 3.43 -66.11 10.11

Werris Creek 10.11 5.61 -44.50 10.11

2.38 -

1.84 -

0.00 -100.00

0.00 -100.00

4.87 -51.84

7.62 -24.59

6.29 -37.83

6.38 -36.94

7.40 -26.82

5.27 -47.85

3.54 -64-98

2.05 -79.70

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.12 PRICES AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT HANDLING SYSTEM WITH DISAGGREGATED CHARGING AND ROAD SHIPMENT TO NEWCASTLE __________________________________________ ($ / tonne)____________________________________________________ ____________

_____________________ Winter prices _______

Site Pooling Efficient Per cent Pooling

(base) handling difference (base)

& road to Newcastle

_________ Summer prices

Efficient Per cent

handling difference & road to Newcastle

Demand prices

Newcastle 174.83 170.52 -2.47 1 7 2.I8

Brisbane 173.12 170.45 -1.55 172.20

Goondiwindi 158.92 156.92 -I.25 155.04

Boggabilla 149.27 146.69 -1.73 145.63

North Star 152.52 151.98 -0.35 148.80

Croppa Creek 151.91 151.46 -0.29 148.20

Crooble 150.58 148.00 -I.71 146.91

Milguy 150.58 148.00 -1.71 146.91

Moree 151.13 148.55 -I.71 147.45

Werris Creek 157.35 154.78 -1.64 153.52

169·66 170.26 153.10

i4 3 .ll 148.27 147.76

144.39 144.39 144.93 151.00

-1.46 -1.13 -I.25 -1.73 -0.35 -Ο.29

-I.71 -1.71 -I.71 -1.64

Supply prices

Newcastle 174.83 170.52 -2.47 172.18

Brisbane 173.12 170.45 -1.55 172.20

Goondiwindi 158.92 156.92 -1.25 155.04

Boggabilla 149.27 146.69 -1.73 145.63

North Star 152.52 151.98 -0.35 148.80

Croppa Creek 151.91 151.46 -0.29 148.20

Crooble 150.58 148.00 -1.71 146.91

Milguy 150.58 148.00 -I.71 146.91

Moree 151.13 148.55 -1.71 147.45

Werris Creek 157.35 154.78 -1.64 153.52

1 6 9.66 170.26 153.10 143.11

148.27 147.76 144.39 144.39 144.93 151.00

-1.46 -1.13 -1.25 -1.73 -0.35

-0.29 -I.71 -1.71 -I.71 -1.64

TABLE D.12 (continued)

__________________ Winter prices _______

Site Pooling Efficient Per cent Pooling

(base) handling difference (base)

& road to

. Newcastle

________Summer prices

Efficient Per cent handling difference & road to Newcastle

Farm offer prices at silo door

Newcastle 164.72 170.52 3.52 162.07

Brisbane 163.01 170.45 4.56 162.09

Goondiwindi 148.81 149.93 0.76 144.93

Boggabilla 139.16 139.07 -0.07 135.52

North Star 142.41 144.99 1.81 138.69

Croppa Creek 141.80 144.01 1.56 138.09

Crooble 140.47 140.60 0.10 136.80

Milguy 140.47 142.73 1.61 136.80

Moree 141.02 145.13 2.91 137.34

Werris Creek 147.24 149.16 1.30 143.41

169.66 4.69

170.26 5-04

148.23 2.28

135.49 -0.02

141.99 2.38

141.39 2.39

136.99 0.14

139.12 1.70

141.39 2.95

148.95 3.86

Farm gate prices

Farm 1 137.68 138.80 0.82 135.55

Farm 2 136.36 137-48 0.82 134.23

Farm 3 134.92 137.34 1.79 132.79

Farm 4 133-42 136.35 2.20 131.50

Farm 5 134.26 137.50 2.41 132.34

138.85 137.53 136.09 134.36 135.51

2.43 2.46 2.48 2.18 2.40

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.13 FARM INCOME CHANGES® WITH COST POOLING VERSUS AN EFFICIENT HANDLING SYSTEM, DISAGGREGATED CHARGING AND ROAD SHIPMENT TO NEWCASTLE

Farm Pooling

(base)

$/farm

Efficient handling & road to Newcastle

$/farm

Difference

per cent

Farm 1 149 500 152 359 1.91

Farm 2 88 190 90 577 2.71

Farm 3 82 608 84 474 2.26

Farm 4 88 066 90 229 2.46

Farm 5 58 431 60 094 2.85

Average 93 359 95 547 2.34

a. Return to land, labour and management.

Source: Royal Commission into Grain Storage, Handling and Transport.

The effect of the reductions in the levels of the average operating cost functions was to increase total exports by 3.25 per cent, and increase the level of exports in both summer and winter and at both Newcastle and Brisbane (Table D.9 and D.10). Delivery of grain from all the farms was made in summer. The major change in the location of deliveries was to greatly increase the importance of Moree and slightly

increase deliveries to North Star and Croppa Creek and cease deliveries to Crooble and Milguy which, at low volumes, had relatively high unit costs or margins (Table D.ll). In seeking an explanation for the change in the direction of the shipments it is necessary to take into account both the cost of transportation from farm to receival point and the unit costs of handling. Another view of the reason for the change in direction of shipment is given by comparing the farm offer prices for Moree, Milguy and Crooble in Table D.12 where the $145.13 at Moree is higher than both Crooble and Milguy. It is worth noting that Boggabilla was not used under either scenario.

With the opportunity to minimise the cost of storage and handling by shipping sufficiently large volumes in summer to cause a move down the average operating cost function there were no winter shipments from farms in the case of the

efficient handling system scenario (scenario 2a). The reason for this is that with the reduction in the margins and the costs of handling it is more profitable to sell wheat off-farm in summer and not incur the on-farm storage charges. In addition, as the value of the grain rises, so does the total interest charge thus increasing the cost of storage. If farm prices rise relatively more than demand prices then it is better to store the grain in the storage

and handling system rather than on-farm.

150

SUPPORTING PAPER 8

The effect on prices of lower average operating cost functions was to lower the export prices slightly (very little because of the elastic demand functions). In accord with theoretical predictions (see Fisher 1981) it is noticeable that more of the price effect of the cost

reductions is passed back to growers than is passed on to overseas buyers (Table D.12). At Newcastle the export price was reduced by 1.46 per cent in summer while the farm gate price increases ranged from 2.2 to 2.5 per cent. It is also apparent from Table D.13 that farm incomes have increased by a little over 2.3 per cent on average with the farms closest to Goondiwindi gaining least.

D .5 Efficient handling with the possibility of road transport to all ports: Scenarios 1(a) and 2(c)

In this section the question of whether or not shipment by road to Newcastle and or Brisbane is economically viable at rates estimated to apply if six-axle articulated vehicles were used is examined. For this particular run of the model

financial costs were used which included a component of $2.00 per tonne for queueing costs, $1.00 per tonne for loading and unloading and 5.75 cents per net tonne kilometre as the variable cost. Scenario 2c is closely related to 2b in the

sense that the only change was to allow shipment by road to Brisbane. Results are reported in Tables D.14 to D.18.

The overall effect of allowing road movement to both

Newcastle and Brisbane was an increase in exports of 3.3 per cent (Table D.15) and shipment of 221 000 tonnes of grain from each of the five model farms direct to Brisbane in the summer period (Table D.14 last section of table). No grain was shipped from the farms directly to Newcastle and grain

was not held on-farms for shipment in the winter period. There was no grain received at Boggabilla, Crooble or Milguy under scenario 2c as is indicated in Table D.15. The

throughput at Brisbane was increased significantly while throughput and receivals at Goondiwindi were reduced because of the additional New South Wales grain shipped to Brisbane by road. Compared with scenario 2a (Table D.ll) the cost margin at Brisbane was reduced from $1.84 per tonne to $1.77 per tonne in the summer period. Economies were thus gained

at Brisbane by shipping larger quantities through the Brisbane port as well as gains from the lower transport costs by road.

The effect of the change on prices was to increase the

Newcastle price and reduce the Brisbane price. In addition, where the throughput through a receival point was reduced the demand and supply prices at these receival points (North Star and Croppa Creek) rose. Farm offer prices and farm gate

prices also rose in comparison to the base scenario la. Increased farm incomes by up to 6.7 per cent were obtained.

151

TABLE D.14 SHIPMENTS BETWEEN FARMS, RECEIVAL POINTS, SUB-TERMINALS AND PORTS WITH COST POOLING VERSUS EFFICIENT HANDLING AND FARM TO PORTS BY ROAD _______________________________ (000 tonnes)_________________________________________________________

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris

Creek

Total

Scenario la)--With cost pooling, winter shipments

Newcastle Brisbane

543-542 647.231

Goondiwindi Boggabilla 0.000 0.000 0.001 0.014

North Star 0.000 3.808

Croppa Creek 0.000 1.752

Crooble 0.000 0.013

Milguy 0.000

Moree 0.000

Werris Creek 0.000

Total 543.542 647.231 0.001 0.014 3.808 1.752 0.013

543.542 647.231 0.001

0.000 0.000 0.014

0.000 0.000 3.808

0.000 0.000 1.752

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.669 0.000 25.669

1.434 1.434

0.006 25.669 1.434 1223.470

Scenario la)— With cost pooling, summer shipments

Newcastle 789.181 Brisbane 644.282

Goondiwindi 262.798 0.001

Boggabilla 12.596 0.014

North Star 0.000 3.828

Croppa Creek 0.000 1.761

Crooble 47.767 0.013

Milguy 25.023

Moree 178.887

Werris Creek 236.864

Total 1290.318 907.080 0.001 0.014 3.828 1.761 0.013

0.006

0.006

0.000 0.000

789.181 644.282 262.799 12.610

0.000 0.000 3.828

0.000 0.000 1.761

0.000 0.000 47.780

0.000 0.000 25.029

25.803 0.000 204.689

1.434 238.298

25.803 1.434 2230.256

TABLE D. 14 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble Milguy

castle bane diwlndi billa Star Creek

Moree Werris Creek Total

Scenario 2c)--Efficient handling system and road transport to ports, winter shipments

Newcastle Brisbane Goondiwindi Boggabilla North Star

Croppa Creek Crooble Milguy

Moree Werris Creek

564.083

0.000 0.000 0.000

0.000 0.000 0.000 0.000

671.056 0.000 0.001

0.014

3.780

1.740

0.013

0.006

Total 564.083 671.056 0.001 0.014 3.780 1.740 0.013 0.006

564.083 671.05

0.000 0.000 0.001 0.014

0.000 0.000 3.780

0.000 0.000 1.740

0.000 0.000 0.013

0.000 0.000 0.006

25.754 0.000 25.754

1.434 1.434

25.754 1.434 1267.881

Scenario 2c)--Efficient handling system and road transport to ports, summer shipments

0.000 0.000

816.930 891.350 110.852 12.610

0.000 0.000 3.801

0.000 0.000 1.749

0.000 0.000 5.653

0.000 0.000 0.537

25.885 0.000 210.510

1.434 245.000

25.885 1.434 2298.996

TABLE D.l4 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario la)--Farm shipments with cost pooling, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.0 0 0 0.000 0.000

Scenario la)--Farm shipments with cost pooling, summer shipments

Farm 1 0.000 0.000 49.739 0.000

Farm 2 0.000 0.000 89.743 0.000

Farm 3 0.000 0.000 15.247

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 154.729 0.000

0.000 0.000

0.000 0.000 0.000

14.773 22.249 0.000 0.000

0.000 42.127 0.000 0.000

0.000 24.486 0.000

14.773 22.249 42.127 24.486 0.000

49-739 89.743 52.269 42.127 24.486

0.000 258.364

TABLE I). 14 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario 2c)— Farm shipments with an efficient handling system and road transport to ports, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000 0.000

Scenario 2c)— Farm shipments with an efficient handling system and road transport to ports, summer shipments

Farm 1 0.000 49.739 0.000 0.000

Farm 2 0.000 89.743 0.000 0.000

Farm 3 0.000 37.551 0.000

Farm 4 0.000 19.902 0.000

Farm 5 0.000 24.486 0.000

Total 0.000 221.420 0.000 0.000

0.000 0.000

0.000 0.000 0.000

14.719 0.000 0.000 0.000

22.225 0.000 0.000 0.000

0.000 0.000 0.000

14.719 22.225 0.000 0.000 0.000

49.739 89.743 52.269

42.127 24.486

0.000 258.364

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.15 RECEXVAL AT EACH SITE WITH COST POOLING VERSUS EFFICIENT HANDLING AND FARM TO PORTS BY ROAD ___________________________________ (000 tonne)_______________________________________________

Site

_________________ Winter Receivals ______

Pooling Efficient Per cent Pooling

(base) handling difference (base)

& road to ports

________Summer receival

Efficient Per cent handling difference & road to ports

Newcastle port

Brisbane port

Total

543.54 564.08

64?.23 671.05

1190.77 1235.14

3.78 1290.32

3.68 907.08

3.73 2197.40

1263.89

1002.20

2266.09

-2.05

10.49

3.13

Newcastle 722.16 742.70 2.84 712.75

Brisbane 647·24 671.06 3.68 644.28

Goondiwindi 0.00 0.00 0.00 262.80

Boggabilla 0.00 0.00 0.00 0.00

North Star 0.00 0.00 0.00 14.77

Croppa Creek 0.00 0.00 0.00 22.25

Crooble 0.00 0.00 0.00 42.13

Milguy 0.00 0.00 0.00 24.49

Moree 0.00 0.00 0.00 192.35

Werris Creek 0.00 0.00 0.00 206.49

740.50 3.89

891.34 38.35

110.85 -57.82

0.00 0.00

14.72 -0.37

22.23 -0.11

0.00 -100.00

0.00 -100.00

198.25 3.07

213.19 3.25

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.16

___________________________ ($/tonne)___________________________________________________

COST MARGINS AT EACH SITE WITH COST POOLING VERSUS EFFICIENT HANDLING AND FARM TO PORTS BY ROAD

Site

______________________ Winter margins _______

Pooling Efficient Per cent Pooling

(base) handling difference (base)

& road to ports

__________Summer margins

Efficient Per cent

handling difference & road to ports

Newcastle port 0.00 4.24 * 0.00

Brisbane port 0.00 2.59

* 0.00

Newcastle 10.11 0.00 -100.00 10.11

Brisbane 10.11 0.00 -100.00 10.11

Goondiwindi 10.11 6.99 -30.82 10.11

Boggabilla 10.11 7.62 -24.59 10.11

North Star 10.11 6.99 -30.82 10.11

Croppa Creek 10.11 7.44 -26.37 10.11

Crooble 10.11 7.40 -26.82 10.11

Milguy 10.11 5.27 -47.85 10.11

Moree 10.11 3-43 -66.11 10.11

Werris Creek 10.11 5.61 -44.50 10.11

Note: * indicates that the percentage change could not be calculated.

Source : Royal Commission into Grain Storage, Handling and Transport.

2.38 *

1.77

*

0.00 -100.00

0.00 -100.00

3.38 -66.56

7.62 -24.59

6.29 -37.80

6.38 -36.93

7.40 -26.82

5.27 -47.85

2.59 -74.34

2.05 -79.70

TABLE D.17

__________________________ ($/tonne)_____________________________________________

PRICES AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT HANDLING SYSTEM AND FARM TO PORTS BY ROAD

Site

_____________________ Winter prices _______

Pooling Efficient Per cent Pooling

(base) handling difference (base)

& road to ports

_________ Summer prices

Efficient Per cent handling difference & road to ports

Demand prices

Newcastle Port 174.83 174.76 -0.04 172.18

Brisbane Port 173.12 173-04 -0.05 172.20

Newcastle 174.83 170.52 -2.47 172.18

Brisbane 173.12 170.45 -1.55 172.20

Goondiwindi 158.92 156.76 -1.36 155.04

Boggabilla 149.27 146.93 -1.57 145.63

North Star 152.52 157.71 3-40 148.80

Croppa Creek 151.91 156.82 3.23 148.20

Crooble 150.58 148.24 -1.55 146.91

Milguy 150.58 148.24 -1.55 146.91

Moree 151.13 148.79 -I.55 147.45

Werris Creek 157.35 155.02 -1.49 153.52

172.27 0.05

171.86 -0.20

169.89 -1.33

170.09 -1.22

152.93 -I.36

143.34 -1.57

153.86 3.40

152.99 3.23

144.62 -1.55

144.62 -1.55

145.16 -1.55

151.23 -I.49

Supply prices

Newcastle 174.83 170.52 - 2 . 4 7 1 7 2 . 1 8

Brisbane 173.12 170.45 -1.55 172.20

Goondiwindi 158.92 156.76 -1.36 155.04

Boggabilla 149.27 146.93 -1.57 145.63

North Star 152.52 157.71 3.40 148.80

Croppa Creek 151.91 156.82 3.23 148.20

Crooble 150.58 148.24 -1.55 146.91

Milguy 150.58 148.24 -I.55 146.91

Moree 151.13 148.79 -1.55 147.45

Werris Creek 1 5 7 , 3 5 _ 155.02 -1.49 153,52

169.89 -1.33

170.09 -1.22

152.93 -1.36

143.34 -1.57

153-86 3.40

152.99 3-23

144.62 -1.55

144.62 -1.55

145.16 -1.55

151,23 -1,'H

TABLE D.17 Continued

Site

___________________ Winter prices ______

Pooling Efficient Per cent Pooling

(base) handling difference (base) & road to ports

________Summer prices

Efficient Per cent handling difference & road to ports

Farm offer prices at silo door

Newcastle 164.72 170.52 3.52 162.07

Brisbane 163.01 170.45 4.56 162.09

Goondiwindi 148.81 149.76 0.64 144.93

Boggabilla 139.16 139.30 0.11 135.52

North Star 142.41 150.72 5-83 138.69

Croppa Creek 141.80 149.37 5.34 138.09

Crooble 140.47 140.84 0.27 136.80

Milguy 140.47 142.97 1.78 136.80

Moree 141.02 145-37 3.08 137.34

Werris Creek 147.24 149.40 1.47 143.41

I69.89 170.09 149.55 135.72 147-57

146.61 137.23 139.35 142.57 149.18

4.83 4.94 3.19 0.15 6.4l 6.17 0.31

1.87 3.81 4.03

Farm gate prices

Farm 1 137.68 141.61

Farm 2 136.36 143.19

Farm 3 134.92 143.07

Farm 4 133.42 139.92

Farm 5 134.26 137.74

2.86 135.55 143.00

5-01 134.23 142.36

6.04 132.79 141.67

4.87 131.50 138.91

2-59 132.34 138.91

5-50 6.06 6.69 5.64 4.97

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.18 FARM INCOME CHANGES® WITH COST POOLING VERSUS AN EFFICIENT HANDLING SYSTEM AND FARM TO PORTS BY ROAD

Farm Pooling Efficient Difference

(base) handling

& road to Ports

$/farm $/farm per cent

Farm 1 149 500 155 963 4.32

Farm 2 88 190 94 078 6.68

Farm 3 82 608 87 636 6.09

Farm 4 88 066 93 667 6.36

Farm 5 58 431 61 878 5.90

Average 93 359 98 644 5.66

a. Return to land, labour and management.

Source: Royal Commission into Grain Storage, Handling and Transport.

D. 6 Efficient transport, road shipment to ports and cost pooling: Scenario 1(a) versus 3(a)

In this section the effects of charging the resource costs for road and rail transport is addressed. In addition to assuming road and rail transport charging on the basis of resource costs, it was assumed that cost pooling applied in the handling system and that a constant cost of $10.11 per tonne was charged at receival points. Resource costs are calculated by allowing for the taxes and subsidies associated with vehicle use and ownership. For scenario 3a resource cost estimates were used for both „ rail and road

transportation and it was assumed that grain could be shipped direct from farms to ports by road (the transport rates used are provided in Appendix C). The results are set out in Tables D .19 to D.23.

The overall effect of charging resource costs for

transportation combined with cost pooling was to increase exports by 0.6 per cent compared with the base scenario. Exports through Newcastle in the summer period increased substantially and at the same time exports through Brisbane were reduced. The generally lower transport costs for

shipment from farms to Moree and the pooled charge meant that most grain was moved from farms direct to Moree. Because of the fixed handling charge there was no incentive to seek

lower cost receival points so that transport costs dominate the pattern of shipment in this case. As illustrated in the lower part of Table D.19 farms 2 and 3 shipped grain to both North Star or Croppa Creek and Moree. This implies that the

farm offer prices less farm to receival point transport costs gave the same farm gate prices regardless of shipment to

160

SUPPORTING PAPER 8

Moree or North Star in the case of farm 2 and Croppa Creek in the case of farm 3.

With a larger volume shipped through Newcastle the demand price at Newcastle fell while, with reduced quantities shipped through Brisbane, the price rose (Table D .22). The effect of lower rail costs was to raise all the other prices in the system including the farm gate prices. At the farm

level prices rose from 2.2 to 6.0 per cent. It is also worth noting that the charging of resource costs for transportation was not sufficient incentive to encourage farmers to store grain on-farms for delivery in the winter period. In fact, higher grain prices provided a disincentive in the model to use on-farm storage since the interest cost involved in the holding of grain on-farms rose with the value of the grain.

Since the same pooled cost was charged for summer and winter periods there were no effects of the different volumes delivered to each of the sites in the different seasons impacting on the handling cost at receival points and thereby providing an incentive for on-farm storage.

If the solution for scenario 3a is compared with that of scenario 2c the effects of allowing for disaggregated charging versus allowing for different relative transport costs can be observed. Basically, in going from scenario 2c to 3a grain which was shipped to Brisbane by road is shipped to Moree by road under scenario 3a. This is a complete change in direction as opposed to the boundary for delivery from one port or the other moving up and down the Moree to Boggabilla line. In reality this is what would happen as transport rates are gradually changed. The boundary for shipment through Brisbane will move north the higher road transport rates are relative to rail rates. Thus, the charging policies of institutions involved in the handling of grain can have a very significant effect on the path by which grain is moved to port.

The effect on-farm incomes was to generate an average increase of 3.9 per cent (Table D .23). The largest increase was on-farm 5 which was closest to Moree. The reason for this can be seen in the 6.2 per cent increase in the farm offer

price at Moree for the summer period (Table D .22).

Overall, the effects of reducing rail rates and allowing freer road movement were to increase returns to farmers and to raise the prices in most parts of the system. This

occurred as a result of generally lower transport costs. It should be remembered that for the scenarios considered in this section constant handling and storage costs were imposed so that apart from the transport cost incentives there were no incentives to deliver to low cost receival points.

161

Werris Creek

Total

Scenario la)— With cost pooling, winter shipments

Newcastle Brisbane

543.542 647.231

Goondiwindi Boggabilla 0.000 0.000 0.001 0.014

North Star 0.000 3.808

Croppa Creek 0.000 1.752

Crooble 0.000 0.013

Milguy 0.000

Moree 0.000

Werris Creek 0.000

Total 543.542 647.231 0.001 0.014 3.808 1.752 0.013

543.542 647.231 0.001

0.000 0.000 0.014

0.000 0.000 3.808

0.000 0.000 1.752

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.669 0.000 25.669

1.434 1.434

0.006 25.669 1.434 1223.470

Scenario la)— With cost pooling, summer shipments

Newcastle Brisbane Goondiwindi Boggabilla North Star

Croppa Creek Crooble Milguy Moree Werris Creek

789.181

12.596 0.000 0.000

47.767 25.023 178.887 236.864

644.282 262.798 0.001

0.014

3.828

1.761

0.013

Total 1290.318 9 0 7 .0 8 0 _ 0.001 0,014 3.828 1.761 Π.ΠΤ3

m

0.000 0.000

789.181 644.282 262.799 12.610

0.000 0.000 3.828

0.000 0.000 1.761

0.000 0.000 47.780

0.000 0.000 25.029

25.803 0.000 204.689

1.434 238.298

23 a m 1 414 331Γ) 356

TABLE D.l9 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris

Creek

Total

Scenario 3a)— Efficient transport, road to ports and cost pooling, winter shipments

Newcastle Brisbane Goondiwindi Boggabilla

North Star Croppa Creek Crooble

Milguy Moree Werris Creek

543.542

0.000 0.000 0.000 0.000 0.000 0.000 0.000

647.231 0.000 0.001

0.014

3.780

1.738

0.013

Total 543.542 647.231 0.001 0.014 3.780 1.738 0.013

11.162 1.434

543.542

647.231 0.001 12.610

0.000 0.000 3.780

0.000 0.000 1.738

5.640 0.000 5.653

0.537 0.000 0.543

8.012 0.000 8.012

0.000 0.000

25.351 1.434 123.110

Scenario 3a)— Efficient transport, road to ports and cost pooling, summer shipments

0.006

3.800 1.747 0.013 0.006

0.000 0.000

786.983 646-015 108.895 0.014

0.000 0.000 3.800

0.000 0.000 1.747

0.000 0.000 0.013

0.000 0.000 0.006

25.492 0.000 453.440

1.434 251.322

25.492 1.434 2252.235

TABLE D.19 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario la) Farm shipments with cost pooling, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000 0.000

Scenario la) Farm shipments with cost pooling, summer shipments

Farm 1 0.000 0.000 49.739 0.000 0.000

Farm 2 0.000 0.000 89.743 0.000 0.000 0.000

Farm 3 0.000 0.000 15.247 14.773 22.249 0.000

Farm 4 0.000 0.000 0.000 0.000 42.127

Fabm 5 0.000 0.000 0.000 0.000

Total 0.000 0.000 154.729 0.000 14.773 22.249 42.127

0.000 0.000 0.000

0.000 0.000 24.486 0.000

24.486 0.000

49-739 89.743 52.269 42.127

24.486

0.000 258.364

TABLE D.19 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario 3a)— Efficient transport, road to ports and cost pooling, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000 0.000

Scenario 3a)— Efficient transport, road to ports and cost pooling, summer shipments

Farm 1 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000

0.000 4.739

14.717 0.000 75.026

0.000 22.221 0.000 30.048

0.000 0.000 0.000 42.127

0.000 0.000 24.486

14.717 22.221 0.000 0.000 221.425

0.000 89.743 52.269 42.127 24.486

0.000 258.364

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.20 RECEIVALS AT EACH SITE WITH COST POOLING VERSUS EFFICIENT TRANSPORT, ROAD SHIPMENTS TO PORTS AND COST POOLING __________________ ____ ________ ($/tonne)____________________________________________________

Site

_____________________Winter receivals ______________________Summer receival

Pooling Efficient Per cent Pooling Efficient Per cent

(base) transport difference (base) transport difference

road to ports road to ports

and pooling and pooling

Newcastle port

Brisbane port

Total

543.54 543.54

647.23 647.23

1190.77 1190.77

0.00 1290.32

0.00 907.08

0.00 2 1 9 7Λ 0

1464.82

754.91

2219.73

13.52

-16.78

1.02

Newcastle 722.16 722.16 0.00 712.75

Brisbane 647·24 647.24 0.00 644.28

Goondiwindi 0.00 0.00 0.00 262.80

Boggabilla 0.00 0.00 0.00 0.00

North Star 0.00 0.00 0.00 14.77

Croppa Creek 0.00 0.00 0.00 22.25

Crooble 0.00 0.00 0.00 42.13

Milguy 0.00 0.00 0.00 24.49

Moree 0.00 0.00 0.00 192.35

Werris Creek 0.00 0.00 0.00 206.49

710.55 -0.31

646.01 0.27

108.89 -58.56

0.00 0.00

14.72 -0.38

22.22 -0.12

0.00 -100.00

0.00 -100.00

423.44 120.15

218.08 5.61

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.21 COST MARGINS AT EACH SITE WITH COST POOLING VERSUS EFFICIENT TRANSPORT AND COST POOLING ____________________________ (000 tonne)_______________________________

ROAD SHIPMENTS TO PORTS

Site

___________________ Winter Receivals _____________________ Summer receival

Pooling Efficient Per cent Pooling Efficient Per cent

(base) transport difference (base) transport difference

road to ports road to ports

and pooling and pooling

Newcastle port 0.00 0.00 * 0.00

Brisbane port 0.00 0.00 * 0.00

Newcastle 10.11 10.11 0.00 10.11

Brisbane 10.11 10.11 0.00 10.11

Goondiwindi 10.11 10.11 0.00 10.11

Boggabilla 10.11 10.11 0.00 10.11

North Star 10.11 10.11 0.00 10.11

Croppa Creek 10.11 10.11 0.00 10.11

Crooble 10.11 10.11 0.00 10.11

Milguy 10.11 10.11 0.00 10.11

Moree 10.11 10.11 0.00 10.11

Werris Creek 10.11 10.11 0.00 10.11

Note: * indicates that the percentage change could not be calculated.

Source : Royal Commission into Grain Storage, Handling and Transport.

0.00

0.00

10.11

10.11

10.11

10.11

10.11

10.11

10.11

10.11

10.11

10.11

*

*

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0 .0 0

0.00

0.00

TABLE D.22 PRICES AT EACH SITE WITH COST POOLING VERSUS EFFICIENT TRANSPORT, ROAD SHIPMENTS TO PORT AND COST POOLING _________________________ ($/tonne)_________________________________________________

Site

___________________ Winter prices ___________________ Summer prices

Pooling Efficient Per cent Pooling Efficient Per cent

(base) transport difference (base) transport difference road to ports road to ports

& pooling & pooling

Demand prices

Newcastle Port 174.83 174.83 0.00 172.18

Brisbane Port 173.12 173.12 0.00 172.20

Newcastle 174.83 174.83 0.00 172.18

Brisbane 173.12 173.12 0.00 172.20

Goondiwindi 158.92 160.32 0.88 155.04

Boggabilla 149.27 152.31 2.04 145.63

North Star 152.52 157.83 3.48 148.80

Croppa Creek 151.91 157.61 3.76 148.20

Crooble 150.58 155-95 3.56 146.91

Milguy 150.58 156.51 3.94 146.91

Moree 151.13 159.92 5.81 147.45

Werris Creek 157-35 167.41 6.39 153.52

171.56 -0.36

172.74 0.31

171.56 -Ο.36

172.74 0.31

156.41 0.88

148.59 2.04

153.98 3.48

153.77 3.76

152.14 3-56

152.69 3.94

156.02 5.81

163.51 6.51

Supply prices

Newcastle 174.83 174.83

Brisbane 173.12 173.12

Goondiwindi 158.92 160.32

Boggabilla 149.27 152.31

North Star 152.52 157.83

Croppa Creek 151.91 157-61

Crooble 150.58 155-95

Milguy 150.58 156.51

Moree 151.13 159.92

Werris Creek 157.35 167.59

o.oo 172.18 171.56

0.00 172.20 172.74

0.88 155-04 156.41

2.04 145.63 148.59

3.48 148.80 153.98

3.76 148.20 153.77

3.56 146.91 152.14

3.94 146.91 152.69

5.81 147.45 156.02

6.51_________153.52________ 163,51

-Ο.36 0.31 0.88 2.04

3.48 3.76 3.56 3-94 5.81

6.51

TABLE D.22 (continued)

Site

______________________Winter prices _______

Pooling Efficient Per cent Pooling

(base) transport difference (base)

road to ports & pooling

_____________Summer prices

Efficient Per cent transport difference road to ports & pooling

Farm offer prices at silo door

Newcastle 164.72 164.72 0.00 162.07

Brisbane 163.01 163.01 0.00 162.09

Goondiwindi 148.81 150.21 0.94 144.93

Boggabilla 139.16 142.20 2.18 135.52

North Star 142.41 147.72 3.72 138.69

Croppa Creek 141.80 147.50 4.02 138.09

Crooble 140.47 145.84 3.82 136.80

Milguy 140.47 146.40 4.22 136.80

Moree 141.02 149.81 6.23 137.34

Werris Creek 147.24 157-48 6-95 143.41

161.45 162.63 146.30 138.48 143.87

143.66 142.03 142.58 145.91 153-40

-0.38 0.33 0.95 2.19

3-73 4.03 3.83 4.23 6.24 6.97

Farm gate prices

Farm 1 137.68 140.76 2.24 135.55

Farm 2 136.36 140.22 2.83 134.23

Farm 3 134.92 140.49 4.13 132.79

Farm 4 133-42 141.29 5.90 131.50

Farm 5 134.26 142.37 6.04 132.34

138.61 138.07 138.34 139.14 140.22

2.25 2.86 4.18 5.81 5.95

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.23 FARM INCOME CHANGES 3 WITH COST POOLING VERSUS EFFICIENT TRANSPORT, ROAD SHIPMENTS TO PORTS AND COST POOLING

Farm Pooling

(base)

$/farm

Efficient transport & road to

ports and pooling $/farm

Difference

per cent

Farm 1 149 500 152 150 1.77

Farm 2 88 190 90 966 3.15

Farm 3 82 608 85 746 3.80

Farm 4 88 066 93 834 6.55

Farm 5 58 431 62 560 7.07

Average 93 359 97 051 3.95

a. Return to land, labour and management.

Source: Royal Commission into Grain Storage, Handling and Transport

D.7 Efficient handling, transport and port competition: Scenarios la) versus 4a)

In the previous sets of experiments reported in this chapter the assumption was made that the price received for grain at the point of export was $175 for the actual volumes loaded at Newcastle and Brisbane (wharfage charges were then

deducted). These price-quantity combinations were used together with an assumed elasticity of demand to derive the port demand functions. The demand functions were then

included in the model and the port prices then allowed to vary accordingly.

To approximate the effect of competition between the ports in a spatial market allowance was made for voyage and other costs associated with the use of Brisbane being higher than for Newcastle. It follows that the price received at Newcastle would be higher than that at Brisbane under such a scenario. It was assumed that prices of $175 at Newcastle and $172.40 at Brisbane were applicable compared with the previous prices of $173.22 and $173 respectively. The port demand functions were re-calculated and used to modify the model used in scenario 3a to produce scenario 4a which therefore characterises competition between the ports. An alternative way of considering these changes is to view the demand function for Newcastle as having shifted to the right and that for Brisbane as having shifted to the left.

In addition, an efficient handling system was implemented in the same way as for scenario 2a. The set of estimated cost

170

SUPPORTING PAPER 8

functions reported in Chapter 2 were revised so that there was a 10 per cent reduction in the cost curves for country receival points and a 20 per cent reduction for sub-terminals and ports. As well as the reduced cost curves, resource costs were used for transportation rates and in the case of rail transport an ' efficient' resource cost was used (see Appendix C for the actual rates used). Shipment by road from each of the farms to the two ports was also allowed. This

scenario can be envisaged as representing a highly efficient storage, handling and transport system. The results of this model run are set out in Tables D.24 to D .29.

Comparing the base scenario la and 4a, the level of total exports was increased by 4.34 per cent with exports from Newcastle increased and exports from Brisbane decreased in summer and increased in winter (Table D.25). In scenario la grain was shipped into Queensland via Goondiwindi since

direct shipment to Brisbane by road was not allowed. In scenario 4a no grain was shipped from the five farms to Goondiwindi but farm 1, which was closest to Brisbane moved grain by road direct to Brisbane (Table D.24). Farm 2 moved grain to North Star, a small amount to Moree in summer and a

larger amount in winter. Farm 2 was therefore the only farm to use on-farm grain storage. Farm 3 delivered grain to Croppa Creek and the remaining farms delivered to Moree. The higher price in Newcastle and the efficient rail rates helped to make it more attractive to ship grain to Newcastle than to Brisbane. It is therefore clear that the dividing line between shipping to Brisbane or shipping to Newcastle changes

as the port prices or demands change. Other factors, such as changes in relative transportation rates and differential changes in cost functions, will also affect this boundary.

The effect on prices was to generally raise prices throughout the system compared with scenario la (Table D.27). However, because the demand function for Newcastle was shifted to the right the Newcastle port price rose but because there was a cost margin for handling grain at the port in scenario 4a and none in the case of scenario la (pooling) there was a

relative fall in the Newcastle supply prices. This fall was a result of increased volumes generated for export. For the case of Brisbane there was a fall in the port price as well as the supply price since the demand function was shifted to the left. In effect the export prices were lower and, as a result of lower transportation costs and more efficient handling, prices elsewhere in the system were higher. These higher prices generated a supply response which brought

forward additional supply. It is worth noting that there was no additional grain from the five farms because wheat production represented the most profitable use of land under the conditions modelled and was already limited by the

available land. Supply response functions were used to represent areas outside the five farms and it was assumed that for some farms there would be marginal changes that could be made as the price of wheat rose.

171

TABLE D.24 SHIPMENTS BETWEEN FARMS, RECEIVAL POINTS, SUB-TERMINALS AND PORTS WITH COST POOLING VERSUS AN EFFICIENT TRANSPORTATION AND HANDLING SYSTEM WITH PORT COMPETITION ___________________________________________ (OOP tonnes)______________________________________________________

To New- Brls- Goon- Bogga- North Croppa Crooble Milguy Moree Werris Total

From castle bane diwindi billa Star Creek Creek

Scenario la)— With cost pooling, winter shipments

Newcastle Brisbane

543.542 647.231

Goondiwindi Boggabilla 0.000 0.000 0.001 0.014

North Star 0.000 3.808

Croppa Creek 0.000 1.752

Crooble 0.000 0.013

Milguy 0.000

Moree 0.000

Werris Creek 0.000

Total 543.542 647.231 0.001 0.014 3.808 1.752 0.013

543.542 647.231 0.001

0.000 0.000 0.014

0.000 0.000 3.808

0.000 0.000 1.752

0.000 0.000 0.013

0.006 0.000 0.000 0.006

25.669 0.000 25.669

1.434 1.434

0.006 25.669 1.434 1223.470

Scenario la)--With cost pooling, summer shipments

Newcastle Brisbane Goondiwindi Boggabilla

North Star Croppa Creek Crooble Milguy Moree Werris Creek

789.181

12.596 0.000 0.000

47.767 25.023

178.887 236.864

644.282 262.798 0.001 0.014 3.828

1.761

0.013

Total 1290.318 907.080 0.001 0.014 3.828 1.761 0.013

0.000 0.000

789.181 644.282 262.799 12.610

0.000 0.000 3.828

0.000 0.000 1.761

0.000 0.000 47.780

0.000 0.000 25.029

25.803 0.000 204.689

1.434 238.298

25.803 1.434 2230.256

To

From

New- Bris- Goon- Bogga- North Croppa Crooble Milguy

castle bane diwindi billa Star Creek

Moree Werris

Creek

Total

Scenario 4a)— Efficient transport and handling and port competition, winter shipments

Newcastle Brisbane Goondiwindi

570.429 669-129 0.000 0.001

Boggabilla 0.000 0.014

North Star 0.000 3.770

Croppa Creek 0.000 1.733

Crooble 0.000 0.013

Milguy 0.000 0.006

Moree 0.000

Werris Creek 0.000

Total 570.429 669.129 0.001 0.014 3.770 1.733 0.013 0.006

0.000 0.000

570.429 669.129 0.001 0.014

0.000 0.000 3.770

0.000 0.000 1.733

0.000 0.000 0.013

0.000 0.000 0.006

25.366 0.000 25.366

1.434 1.434

25.366 1.434 1271.894

Scenario 4a)--Efficient transport and handling and port competition, summer shipments

Newcastle 819.636 Brisbane 680.338

Goondiwindi 112.948 0.001

Boggabilla 12.596 0.014

North Star 0.000 3.790

Croppa Creek 0.000 1.742

Crooble 5.640 0.013

Milguy 0.537 0.006

Moree 404.472

Werris Creek 259.387

Total 1502.268 793.285 0.001 0.014 3.790 1.742 0.013 0.006

0.000 0.000

819.636 680.338 112.949 12.610

0.000 0.000 3.790

0.000 0.000 1.742

0.000 0.000 5.653

0.000 0.000 0.543

25.451 0.000 429.922

1.434 260.821

25.451 1.434 2328.004

TABLE D.24 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario la)— Farm shipments with cost pooling, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.0 0 0 0.000 0.000 0.000 0.000

Scenario la)— Farm shipments with cost pooling, summer shipments

Farm 1 0.000 0.000 49.739 0.000

Farm 2 0.000 0.000 89.743 0.000

Farm 3 0.000 0.000 15.247

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 154.729 0.000

0.000 0.000

0.000 0.000 0.000

14.773 22.249 0.000 0.000

0.000 42.127 0.000 0.000

0.000 24.486 0.000

14.773 22.249 42.127 24.486 0.000

49-739 89.743 52.269 42.127

24.486

0.000 258.364

TABLE D.24 (continued)

To

From

New- Bris- Goon- Bogga- North Croppa Crooble

castle bane diwindi billa Star Creek

Milguy Moree Werris Creek Total

Scenario 4a)— Efficient transport and handling and port competition, winter shipments

Farm 1 0.000 0.000 0.000 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 0.000 0.000 0.000 0.000

0.000 0.000

0.000 74.008 74.008

0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000 0.000

0.000 0.000 0.000 0.000

0.000 0.000 0.000 74.008 0.000 74.008

Scenario 4a)--Efficient transport and handling and port competition, summer shipments

Farm 1 0.000 11.195 0.000 0.000

Farm 2 0.000 0.000 0.000 0.000

Farm 3 0.000 0.000 0.000

Farm 4 0.000 0.000 0.000

Farm 5 0.000 0.000 0.000

Total 0.000 11.195 0.000 0.000

0.000 38.544

14.697 0.000 1.038

0.000 22.211 0.000 3Ο.Ο58

0.000 0.000 0.000 42.127

0.000 0.000 24.486

14.697 22.211 0.000 0.000 I36.253

49.739 15.735 52.269 42.127 24.486

0.000 184.356

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D.25 RECEIVALS AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT TRANSPORTATION AND HANDLING SYSTEM WITH PORT COMPETITION __________________________________ (000 tonnes)_________________________________________________

Site

____________________ Winter receivals _______

Pooling Efficient Per cent Pooling

(base) transport difference (base)

handling and port competition

___________Summer receival

Efficient Per cent

transport difference handling and port competiton

Newcastle port 543.54 570.43 4.95 1290.32

Brisbane port 647.23 669.13 3.38 907.08

Total 1190.77 1239.56 4.10 2197.40

Newcastle 722.16 749.04 3.72 712.75

Brisbane 647-24 669.13 3.38 644.28

Goondiwindi 0.00 0.00 0.00 262.80

Boggabilla 0.00 0.00 0.00 0.00

North Star 0.00 0.00 0.00 14.77

Croppa Creek 0.00 0.00 0.00 22.25

Crooble 0.00 0.00 0.00 42.13

Milguy 0.00 0.00 0.00 24.49

Moree 0.00 74.01 * 192.35

Werris Creek 0.00 0.00 0.00 206.49

Note: * indicates that the percentage change could not be calculated.

Source : Royal Commission into Grain Storage, Handling and Transport.

1502.27

793-28

2295.55

743.21

680.33

112.95 0.00

14.70

22.21

0.00

0.00

344.70

227.58

16.43

-12.55 4.47

4.27

5.60 -57.02

0.00

-0.52

- ‘ 0.17 - 100.00

- 100.00

79.21

10.21

TABLE D.26 COST MARGINS AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT TRANSPORTATION AND HANDLING SYSTEM WITH PORT COMPETITION ________________________________________________(000 tonnes)________________________________________________ _______

Site

_____________________Winter receivals _______

Pooling Efficient Per cent Pooling

(base) transport difference (base)

handling and port competition

___________ Summer receival

Efficient Per cent

transport difference handling and port competiton

Newcastle port 0.00 4.21 * 0.00

Brisbane port 0.00 2.60 * 0.00

Newcastle 10.11 0.00 -100.00 10.11

Brisbane 10.11 0.00 -100.00 10.11

Goondiwindi 10.11 6.99 -30.82 10.11

Boggabilla 10.11 7.62 -24.59 10.11

North Star 10.11 6.99 -30.82 10.11

Croppa Creek 10.11 7.44 -26.37 10.11

Crooble 10.11 7.40 -26.82 10.11

Milguy 10.11 5-27 -47.85 10.11

Moree 10.11 2.46 -75-63 10.11

Werris Creek 10.11 5.61 -44.50 10.11

Note: * indicates that the percentage change could not be calculated.

Source : Royal Commission into Grain Storage, Handling and Transport.

2.54 *

2.16 *

0.00 -100.00

0.00 -100.00

3.35 -66.86

7.6 2 -24.59

6.29 -37.79

6.38 -36.92

7.40 -26.82

5.27 -47.85

5.56 -45.01

2.04 -79.78

TABLE D.27 PRICES AT EACH SITE WITH COST POOLING VERSUS AN EFFICIENT TRANSPORTATION AND HANDLING SYSTEM WITH PORT COMPETITION _____________________________________ ($/tonne)___________________________________________________

Site

_____________________Winter receivals _______

Pooling Efficient Per cent Pooling

(base) transport difference (base)

handling and port competition

___________Summer receival

Efficient Per cent

transport difference handling and port competiton

Demand prices

Newcastle Port 174.83 176.51 0.96 172.18

Brisbane Port 173.12 172.45 -0.39 172.20

Newcastle 174.83 172.31 -1.44 172.18

Brisbane 173.12 169.85 -1.89 172.20

Goondiwindi 158.92 160.30 0.87 155-04

Boggabilla 149.27 154.96 3-81 145.63

North Star 152.52 159.75 4.74 148.80

Croppa Creek 151.91 159.63 5.08 148.20

Crooble 150.58 157.95 4.90 146.91

Milguy 150.58 158.39 5.19 146.91

Moree 151.13 159.51 5-54 147.45

Werris Creek 157.35 165.98 5.48 153.52

173-20 172.01 170.66 169.85 156.39

151.18 155.86 155.74 154.10

154.53 157.17 163.63

0.60 - 0.11

- 0.88

-1.37 0.87 3.81 4.74

5.08 4.90 5.19 6-59

6.59

Supply prices

Newcastle 174.83 172.31 -1.44 172.18

Brisbane 173-12 169.85 -I.89 172.20

Goondiwindi 158.92 160.30 0.87 155-04

Boggabilla 149.27 154.96 3.81 145.63

North Star 152.52 159.75 4.74 148.80

Croppa Creek 151.91 159.63 5.08 148.20

Crooble 150.58 157.95 4.90 146.91

Milguy 150.58 158.39 5.19 146.91

Moree 151.13 159.51 5-54 147.45

170.66 169.85 156.39 151.18 155.86 155.74 154.10

154.53 157.17

- 0.88

-1.37 0.87 3-81 4.74

5.08 4.90 5.19

6.59

TABLE D.27 (continued)

Site

Winter receivals

Pooling (base)

Efficient transport handling and port competition

Per cent difference

Pooling (base)

___________ Summer receival

Efficient Per cent

transport difference handling and port coopetiton

Farm offer prices at silo door

Newcastle 164.72 172.31 4.60 162.07

Brisbane 163.01 169.85 4.19 162.09

Goondiwindi 148.81 153.30 3.02 144.93

Boggabilla 139.16 147-33 5.88 135.52

North Star 142.41 152.76 7.27 138.69

Croppa Creek 141.80 152.19 7-33 138.09

Crooble 140.47 150.55 7.18 136.80

Milguy 140.47 153.12 9.01 136.80

Moree 141.02 157.05 11.36 137.34

Werris Creek 147.24 162.11 10.09 143.41

170.66 169.85 153.04 143-55 149-57 149.36 146.70 149.26 151.61 161.58

5.30 4.79 5-59 5-93 7.84 8.16 7.24 9.11 10.39 12.68

Farm gate prices

Farm 1 137.68 148.00 7-50 135.55

Farm 2 136.36 147.46 8.14 134.23

Farm 3 134.92 147-73 9.50 132.79

Farm 4 133.42 148.53 11.32 131.50

Farm 5 134.26 149.61 11.43 132.34

144.31 143-77 144.04 144.84 145.92

6.46 7.11 8.47 10.15 10.26

Source : Royal Commission into Grain Storage, Handling and Transport.

TABLE D. 28 FARM CARRYOVER LEVELS WITH COST POOLING VERSUS AN EFFICIENT TRANSPORTATION AND HANDLING SYSTEM WITH PORT COMPETITION (tonnes per f a r m )

Farm Pooling

(base)

Efficient transport handling and port competition

Farm 1 Premium 0 0

ASW 0 0

Farm 2 Premium 0 29.14

ASW 0 44.87

Farm 3 Premium 0 0

ASW 0 0

Farm 4 Premium 0 0

ASW 0 0

Farm 5 Premium 0 0

ASW 0 0

Total 0 74.01

Source: Royal Commission into Grain Storage, and Transport

TABLE D.29 FARM INCOME CHANGES 3 WITH COST AN EFFICIENT TRANSPORTATION AND WITH PORT COMPETITION

Handling

POOLING VERSUS HANDLING SYSTEM

Farm Pooling Efficient Difference

(base) transport handling and port competition

$/farm $/farm per cent

Farm 1 149 500 157 094 5.08

Farm 2 88 190 95 805 8.64

Farm 3 82 608 88 974 7.71

Farm 4 88 066 98 140 11.44

Farm 5 58 431 65 548 12.18

Average 93 359 101 112 8.30

a. Return to land, labour and management Source: Royal Commission into Grain Storage, Handling and Transport

180

SUPPORTING PAPER 8

At the farm level prices rose substantially by from 6.5 per cent to 10.3 per cent (this amounted to $8.76 per tonne to $13.58 per tonne) in summer and by a larger amount in winter (Table D.27). On average these changes represented a gain of $11.79 per tonne at the farm gate. Farm incomes were also substantially increased with an average increase of 8.3 per cent. This would seem to imply that if transport and

handling costs can be reduced most of the benefit will be returned directly to farmers in terms of higher prices and higher incomes. In scenario 4a farm 2 held grain in on-farm storage for delivery in winter. A total of 74 kilotonnes was

carried over with 29 kilotonnes as premium wheat. The incentive to carry over such wheat came from the greater difference between summer and winter prices: a difference of $3.69 per tonne. This effect added to the fact that the interest cost of storage was lowest for farm 2 (since its winter price was lowest) which made it profitable for farm 2 to carry over grain in on-farm storage.

Overall, the effect of a more competitive and efficient system was to increase farmer incomes. Allowing competition between the ports will move the direction of shipment in favour of the highest priced port.

D .8 Changes in transport mode

To provide a summary of the way in which the various

scenarios have changed in terms of use of the transportation system a table indicating the mode of transportation used by the five farms is presented (Table D.30). The total volume of grain shipped from the five farms was constant over all the model runs but the use of road or rail to Brisbane

changed markedly as the scenarios were changed. With lower relative road rates direct road shipment to Brisbane was used. It is also worth noting that in no case were road

deliveries made to Newcastle.

T A B LE D.30 TRANSPORT OF GRAIN TO PORT FROM FARMS: MODAL SPLIT _________________________ (kilotonnes )_____________

Scenario

Mode la lb 2a 2b 2c 3a 4a

To Brisbane Rail 154.73

Road 0.00

154.71 0.00 154.72 0.00

154.72 0.00

0.00

221.42

0.00 0.00

0.00 11.20

To Newcastle Rail 103.63

Road 0.00

103.65 0.00 103.64 0.00

103.64 0.00 36.94 0.00

258.36 0.00 247.17 0.00

Source: Royal Commission into Grain Storage, Handling and Transport

181

SUPPORTING PAPER 8

D .9 C o n c lu d in g comment

D . 9 . 1 Summary o f r e s u l t s

The results reported in this appendix represent selected experiments with a spatial equilibrium model of a wheat growing area in north-western New South Wales with delivery possibilities to two ports. Summaries of the findings in relation to each of the questions outlined at the beginning of the appendix are outlined below.

The introduction of a system of disaggregated charging for grain handling and storage services would lead to an overall increase in exports. Demand prices would be lower than at present and farm gate prices would be higher because the

average cost for the receival points was lower with

disaggregated charging and the port demand functions were quite elastic. Boggabilla was not used as a delivery point. On average, the net returns to land, labour and management

increased. However, there is a possibility of a

redistribution of income if disaggregated charging is introduced.

The effect of introducing a more efficient handling system was again to increase the level of exports and to make use of the economies from a considerably increased throughput at Moree. By delivering grain by road to Moree a lower unit

cost could be obtained for handling and storage than by delivering to a local receival point. The same results were obtained if road transport from farms to Newcastle was allowed but no road transport from farms to Brisbane was permitted. The road transport costs were relatively higher than the rail costs.

With an efficient handling system and road transport to both Newcastle and Brisbane the road rates were such that it was profitable for all farms to deliver grain by road to

Brisbane. In this case exports from Brisbane were increased and from Newcastle decreased. As a result, export prices at Brisbane were reduced and those at Newcastle were increased. No grain was received at Boggabilla, Crooble or Milguy under this scenario.

The effect of introducing a more efficient rail and road system based on resource costing while maintaining cost pooling for handling and storage services was to cause only a slight increase in exports when compared with the base case. Exports through Newcastle increased substantially in the summer and decreased in Brisbane. The generally lower road transport costs from farms meant that farm deliveries were mainly to Moree rather than to local receival points. The

fixed handling charge have no incentive for delivery patters to be based on low-cost handling facilities. Prices at the farm level rose substantially as a result of the lower transportation costs.

182

SUPPORTING PAPER 8

The effect of introducing an efficient handling and transport system and port competition was to increase total exports substantially. Transportation costs were set at resource

costs for road transport and ' efficient' resource costs for rail delivery. As a result, much of the grain produced by the model farms was delivered to Moree by road rather than to local receival points. Farm gate prices were significantly increased and export prices were effectively reduced as a result of the more efficient handling and storage system and the larger volume of exports. The effect at the farm level was to provide farm 2 with an incentive to use on-farm

storage and winter delivery. The effects of the introduction of a more efficient system would seem to be largely passed back to the farm level in terms of higher prices and higher

incomes. The result of introducing competition between ports in a situation of efficient handling and transport services was to increase exports from Newcastle and decreased shipments from Brisbane because the price at Newcastle was

assumed to be higher than that at Brisbane. As expected, the prices for sites sending or potentially sending grain to Brisbane rose by a smaller amount compared with Newcastle. At the farm level the major change observed was

redistribution of income between farms with the greatest rise in income for farms closest to Newcastle.

D.9.2 Some implications

Given the present institutional arrangements, transportation rates play the dominant role in determining the patterns of delivery and shipment of grain. With pooled charges there is a strong incentive for growers to ship to locations which minimise their transportation costs. There is no incentive

for growers to deliver to sites with lower than average handing costs. The results indicate that there would be small redistributions of farm income associated with a move to disaggregated charging for grain handling services. However, it is worthwhile noting that the estimated redistributions are not large when compared with the

associated gains that might accompany a move towards disaggregated charging and a more efficient handling system.

The question of closing down a site is complicated by many factors but in the experiments conducted with the particular set of transportation costs it was more profitable for farmers to delivery grain to Goondiwindi and North Star than to Boggabilla. If the transportation rates used in the experiments are a good approximation to resource costs it follows that the receival points close to the ports would be used less intensively than under the current arrangements.

It should be noted that no account was taken of congestion and other costs that might arise as a result of large

shipments of grain direct to ports by road. As a result, the model estimates represent an under-statement of the system costs associated with direct road delivery to port. With this qualification in mind, the model can be used to provide

an estimate of the gains that might accrue at the farm level

183

SUPPORTING PAPER 8

if complete deregulation of the storage, handling, and transport sectors was to occur with increases in efficiency as outlined in the model scenarios being obtained. Gains of the order of $8 to $13 (with an average of $11.79) per tonne at the farm gate could be expected as a result of a move from the current institutional arrangements and efficiency levels to a deregulated environment with the efficiency levels as specified in scenario 4a.

184

REFERENCES

Australian Bureau of Statistics 1985, Crops and Pastures, NSW, Cat. No. 7321.1, Canberra.

Benson D, Espinas V, Andrews A, Johnston J, Price D & Small A 1987, 'On-farm storage from a policy

perspective - models, costs and utilisation', paper presented at the 31st Annual Conference of the

Australian Agricultural Economics Society, University of Adelaide, February.

Blyth M, Noble K & Mayers B 1987 'A model of the grain storage, handling and transport system of eastern Australia', Discussion Paper No. 87.6, ABARE, AGPS, Canberra.

BTE 1982, 'An estimate of operating costs for bulk ro-ro and container ships', BTE Information Paper No. 4, AGPS, Canberra.

1987, 'Competition and regulation in grain transport: Submission to Royal Commission', Occasional Paper No. 82, AGPS, Canberra.

CANAC 1984, Grain Handling and Transport in the State of Victoria, consultant's report prepared for the Grain Handling Review Group, Melbourne.

Fisher BS 1981, 'The impact of changing marketing margins on-farm prices', American Journal of Agricultural Economics, 63(2), 261-3.

Luck DP & Martin IJ 1987, 'Road pricing and cost recovery', paper presented at the 12th Australian Transport Research Forum, Brisbane, July.

Myers RJ 1982, 'An econometric evaluation of Australian wheat pricing policies', Agricultural Economics Bulletin No. 27, Department of Agricultural Economics and Business Management, University Of New England,

Armidale.

____ Piggot RR & MacAuley TG 1985, 'Effects of past Australian wheat price policies on key industry variables', Australian Journal___ of Agricultural Economics, 29(1), 1-15.

O'Sullivan S 1985, 'Enterprise budgets for the north west of NSW', Complan Handbook Number 6, University of New England.

____ 1987, 'Enterprise budgets for the north west of NSW', Complan Handbook Number 7, University of New England.

185

SUPPORTING PAPER 8

Rickards PA & McConnell DJ 1967, 'Budgeting, gross margins and programming for farm planning', Professional Farm Management Guidebook Number 3, University of New England.

____ & Passmore AL 1977, 'Planning for profit in livestock grazing systems', Professional Farm Management Guidebook Number 7, University of New England.

SRA 1986, Wheat Transport, November.

Takayama T & Judge GG 1971, Spatial and Temporal Price and Allocation Models, North Holland Publishing Company, Amsterdam.

Vincent DP, Powell AA & Dixon PB 1982, 'Changes in supply of agricultural products', in Williams DB (ed), Agriculture in the Australian Economy, Sydney University Press, Sydney.

Wall CA 1987, 'Modelling a multiple output production system: Australian sheep industry', unpublished PhD thesis, Department of Agricultural Economics, University of Sydney, Sydney.

186

.

'

ROYAL COMMISSION INTO GRAIN STORAGE HANDLING AND TRANSPORT

GRAIN HYGIENE

Supporting Paper 9 February 1988

CONTENTS

Page

a. INTRODUCTION 1

2. GRAIN HYGIENE ISSUES 3

2.1 Introduction 3

2.2 Principle grain hygiene issues 3

2.2.1 Grain insects 3

2.2.2 Chemical residues 4

2.2.3 Pesticide resistance in insects 6

2.3 Other grain hygiene issues 6

3. MAINTENANCE OF GRAIN HYGIENE STANDARDS IN THE CURRENT SYSTEM 8

3.1 Overview 8

3.2 Co-ordination and monitoring techniques 8 3.3 Control techniques used 12

3.4 Assessment of the system 15

3.4.1 Central system 15

3.4.2 Current private system 18

4. MAINTENANCE OF GRAIN HYGIENE STANDARDS IN THE COMMISSION’S PREFERRED SYSTEM 23

4.1 Background 23

4.2 Meeting grain hygiene requirements in the Commission's preferred system 24

4.3 Validity of comparisons with overseas systems 25

5. OPTIONS FOR MAINTAINING GRAIN HYGIENE 28

5.1 Background 28

5.2 Grain hygiene options 29

5.2.1 System options 29

5.2.2 Path options 31

5.2.3 Overview 34

5.3 Cost of options 34

5.3.1 Cost of system options 34

5.3.2 Cost of path options 36

5.3.3 Summary of options 38

APPENDICES

A Maximum residue limits 40

B Cost of testing for chemical residues 43

C Cost of testing for pesticide resistance 45

D Operating costs of on-farm certification scheme 50

iii

REFERENCES 53

TABLES

3.1 Western Australian properties inspected which were detected to have insect infestations, 1977-78 to 1985-87 21

5.1 Farm numbers, production and grain types 37

5.2 Cost of farm certification scheme 38

5.3 Cost of grain hygiene options 39

A. 1 Maximum residue limits for stored grain protectants 40

B. l Cost of testing for chemical residues 44

C. l Cost of testing for pesticide resistance 46

C.2 Equipment costs 47

C.3 Direct labour time and variable costs for resistance testing 48

C. 4 Variable costs of resistance testing 49

D. l Assumed time taken for inspection 50

D.2 Estimated cost of on-farm inspection: Bulk Grains Queensland 51

D .3 Estimated costs of on-farm inspection: Wellcome Australia Limited 52

iv

1. IN T R O D U C T IO N

A key element of the Commission's examination of alternative grain storage, handling and transport systems is the removal of sole receival rights of bulk handling agencies. A number of inquiry participants expressed concern about the ability of a less centralised system to maintain current grain hygiene standards. Grain hygiene standards refer to limits placed on the levels of various contaminants in grain, such as insects, chemical residues, weed seeds and other extraneous matter.

In this supporting paper, the problem of maintaining current standards of grain hygiene in a less centralised grain storage, handling and transport system is discussed. Of particular importance is the question as to whether there would be adequate incentives in such a system to ensure that

these standards are maintained. If this is not the case, then there will need to be options available to ensure that participants in the system have the correct incentives to maintain standards. These options should also be flexible and capable of adapting to changing marketing requirements.

Grain sold on domestic and overseas markets is required to meet certain hygiene standards established by various governments as well as the usual requirements set down in the purchase contract. In recent years Australia has enjoyed a good reputation with respect to grain quality, but the Australian Wheat Board (AWB) has argued that there is potential for adverse market reactions should grain quality

significantly deteriorate. In the short term, the

possibility of grain hygiene problems occurring in any particular load are often reflected in the contract conditions in the form of penalties to allow for the cost of reducing or removing the problem of concern. In some

instances the penalty may be rejection of the particular load of grain. The long-term effect of continual hygiene problems in grain shipments could be to reduce Australia's reputation

as a supplier of clean, high quality grain and this would affect prices and markets generally.

The discussion in this document is divided into five sections. The first three chapters provide background information on grain hygiene issues and the current strategies in place to address these issues: in Chapter 1, the subject is introduced, in Chapter 2, the principal areas of concern and the relevant standards currently in operation

are outlined, and in Chapter 3, the performance of the current storage, handling and transport system with respect to grain hygiene and the incentives present to maintain

standards are discussed. The maintenance of grain hygiene standards in the Commission's preferred system for storage, handling and transport is addressed in Chapter 4. Some consideration is also given to grain hygiene in other countries and the usefulness of overseas experience for the Australian grain industry. Finally, in Chapter 5, a number of options to remedy any grain hygiene problems that may

1

SUPPORTING PAPER 9

emerge in the Commission's preferred system and the current system for storage, handling and transport are outlined; the costs of these options are also evaluated.

In preparing this document, the Commission has drawn extensively on research undertaken by the New South Wales Department of Agriculture (NSWDA). It has also drawn on information contained in submissions, past research into the subject and discussions held with expert groups.

2

2 . GRAIN HYGIENE ISSUES

2 .1 I n t r o d u c t io n

In this chapter, an overview of grain hygiene is presented with particular attention being given to insects, pesticide resistance in insects, and chemical residues. The insect and chemical residue standards that Australian grain suppliers

are required to meet are outlined, and the basis of these standards and the problem of pesticide resistance in insects are discussed.

A number of other contaminants are briefly discussed in the final part of the chapter, including mycotoxins, rodents and moisture.

2 .2 P r i n c i p a l g r a in h y g ie n e is s u e s

2 . 2 . 1 G r a in in s e c t s

A large variety of mites and insects can infest grain. Of these, the lesser grain borer (Rhyzopertha dominica) and the rust red flour beetle (Tribolium castaneum) are the most frequently found in grain by export inspectors. Such infestations can cause significant damage in terms of loss of

food value and germination quality and can bring an adverse reaction from consumers. Where insects are concentrated in bulk grain, rapid population growth can occur thereby causing ' hot spots' in the grain. These ' hot spots' are areas of high temperature and moisture caused by the respiration of the insect population. Subsequently, they can become mouldy, producing offensive odours and, possibly, mycotoxins that are dangerous to human and animal health.

Australia has a 'nil tolerance' standard for insects in exported grain. This standard is set under the Export Control Act 1982 (Cwlth) and, as submitted by the Australian Quarantine and Inspection Service (AQIS), requires that

'... samples of grain drawn for export inspection purposes be completely free from live insects'. (AQIS submission, 1986, p. 3), this does not mean that all grain shipped from

Australia is free of insects: sampling rates (2.25 litres per 33 tonnes) are insufficient to detect all loads

containing insects and testing is not conducted for hidden infestations (that is, where insects are actually inside grain, particularly in the immature stages of insects).

The nil tolerance standard did not primarily arise from marketing problems caused by insect infestation: rather as a requirement under the Food and Agriculture Organisation (FAO) International Plant Protection Convention (1951), to which Australia is a signatory. The purpose of the convention is

' . .. to prevent the introduction and spread of pests and diseases through international trade'. (AQIS submission, 1986, p. 2). This convention was originally intended to

3

SUPPORTING PAPER 9

apply to plants designated for propagation, but its

requirements were extended to certification of export grains by means of ' . ..phytosanitary (or plant health) certificates [that] attest to inspection by appropriate means and practical freedom from pests'. (AQIS submission, 1986,p. 2)

Due to these requirements and some major buyers'

dissatisfaction with the high insect infestation levels found in Australian grain, the Export (Grain) Regulations were introduced in 1963 under the Commonwealth's Customs Act 1901 and Commerce (Trade Descriptions) Act 1905. Initially, these regulations applied only to wheat but they were later extended to barley (1968), oats (1968) and sorghum (1970). The regulations included powers to inspect storage and handling facilities and ships' holds.

The regulations were reviewed in 1982 and as a result the Customs Act and the Commerce (Trade Descriptions) Act were replaced by the Export Control Act 1982. Ministerial orders for grain, plants and plant products were developed to

replace the regulations and these were introduced on 1 December 1984. The orders continued existing inspection arrangements and there were a number of additions, including

the inclusion of lupins and dried field peas in the

definition of grain; the requirement that certain export establishments be registered; the application of trade description provisions to grain (allowing inspectors to withhold certification if grain does not meet the description of the product contained in anything that is written about an export in a contract, export documentation, letters of credit and other written communications between buyer and seller); and making inspection and clearance procedures for shipping containers consistent with those for ships' holds.

Although it is not a legislative requirement, marketers and the bulk handling agencies have set a nil tolerance standard for grain received from growers.

2 . 2 . 2 C h em ica l r e s id u e s

Chemical residues occur in grain as a result of direct application of pesticides to control insects; they can also occur for reasons such as the application of seed

protectants. The level of chemical residues in grain has become an increasingly important issue in recent years due to actual or perceived health risks to consumers and livestock. Concern has also been expressed by workers who are

inadvertently exposed to concentrations of chemicals or airborne particles.

The following compounds are commonly used on grain for insect control:

. organophosphorous compounds, including malathion, fenithrothion, dichlorvos, chlorpyriphos methyl, and pirimyphos methyl;

4

SUPPORTING PAPER 9

. synthetic pyrethroids, including bioresmethrin, deltamethrin, and d-phenothrin;

. natural pyrethrins;

. carbamates;

. fumigants, in particular, phosphine and methyl bromide.

Compounds which are not specifically intended for use for insect control in grain but are found include:

. chlorinated hydrocarbon compounds, including DDT, dieldrin, lindane, aldrin and heptachlor;

. heavy metals, including lead, mercury, and cadmium.

Concerns about levels of chemical residues have resulted in the setting of maximum residue limits for specific chemicals in grain. The setting of maximum residue limits on chemicals in internationally traded goods is determined by the joint FAO/World Health Organisation Codex Alimentarius Commission.

In addition, individual importing countries also set their own limits (for example, the Soviet Union and China limit residues from the use of Carbaryl). Within Australia, food laws prohibit the presence of a noxious substance in food unless it is specifically permitted. The National Health and Medical Research Council (NH&MRC) establishes maximum residue

limits. The limits are '... established to be as low as is consistent with proper use of a chemical in agriculture. Thus MRLs are defined in terms of accepted Good Agricultural Practice'. (NH&MRC submission, 1987, p. 4)

'Good Agricultural Practice' is defined as,

The officially recommended or authorised usage of pesticides under practical conditions at any stage of production, storage, transport, distribution and processing of food, agricultural commodities, and animal

feed bearing in mind the variation in requirements within and between regions, which takes into account the minimum quantities necessary to achieve adequate control applied in a manner so as to leave a residue which is

the smallest amount practicable and which is

toxicologically acceptable ... The 'officially recommended or authorised usage of pesticides' is that which complies with the procedures, including

formulation, dosage rates, frequency of application and preharvest intervals approved by the registration authorities. (NH&MRC submission, 1987, p. 7)

In addition to the maximum residue limits, the acceptability of a particular residue is also determined by comparison of the dietary consumption of that residue with the 'acceptable daily intake'. This is determined by extensive toxicological studies in animals or humans or both. The acceptable daily intake contains generous safety margins and relates to lifetime exposure. Occasional breaches of maximum residue

5

SUPPORTING PAPER 9

limits, unless excessive, are not usually considered hazardous. Limits imposed by the Codex Alimentarius Commission and the NH&MRC are shown in Appendix A.

2.2.3 Pesticide resistance in insects

Over time, grain insect populations are capable of developing resistance to insect control measures, particularly to pesticides (including chemical protectants and fumigants). The rate of development of this resistance is influenced by the degree of selection pressure placed on insects in terms of the intensity of control and the mix of control measures

used. The mix of control measures is important because insects become resistant to some control measures more readily than others and also because a mix of control

measures will tend to have a complementary effect 'in reducing selection pressure

Monitoring the build-up of resistance is a continuing task: it signals the need for the development of new control measures or the use of alternative existing control

measures. Inappropriate control measures can lead to resistance occurring more rapidly than otherwise would be the case. The build-up of insect resistance in any part of the system rapidly leads to problems in other parts of the system because of the capacity of insects to migrate. This will impose costs on the system as a whole in terms of the need to change to alternative, more expensive or less effective control measures or to develop new measures.

2.3 Other grain hygiene issues

There are a number of other less pervasive grain hygiene problems. In its submission, the Commonwealth Scientific and Industrial Research Organisation (CSIRO) Division of Wildlife Research noted occasional problems caused by rodent plagues

and infestations. Other problems include admixtures of grain with other crop and weed seeds for which specific tolerances and rejection procedures have been developed; moisture in grain due to premature harvesting, respiration by insects or

inadequate storage methods; and mycotoxins, which generally result from the presence of mould in grain.

Marketing boards set various standards for these contaminants based on market requirements. For example, the Barley Marketing Board of New South Wales sets maximum limits (some of which are nil) on items such as weed and other foreign

seeds, fungi, weather damage, screenings, sprouted grains and general rubbish (for example, sticks and stones).

In general, there is nil tolerance of all mycotoxins in Australia (except aflatoxin) for all foods. Most importing countries also have a nil tolerance level for mycotoxins

(although this possibly reflects a low level of research into the area). Some countries, including Japan, require certificates stating that grain is free of aflatoxin and

6

SUPPORTING PAPER 9

deoxynivalenol and this has led the AWB to conduct mycotoxin tests. High quality grain that is well stored and received at currently required moisture levels has a very low risk of fungal attack. Weather-damaged and high moisture grain is

susceptible to fungal attack. Such grain (particularly weather-damaged grain) is frequently used as stockfeed and if contaminated can lead to mycotoxicosis in animals.

7

3. MAINTENANCE OF GRAIN HYGIENE STANDARDS IN THE CURRENT SYSTEM

3 .1 O v e rv ie w

In this chapter, details are provided of the way in which grain hygiene standards are maintained in the present centralised system, which handles the majority of the statutory grains. The subject is discussed in two parts:

first, in terms of the co-ordination and monitoring

techniques used; second, in terms of existing and alternative insect control techniques. An assessment is then made of grain hygiene control within the current centralised system, including an examination of private storage and handling within the current system.

3 .2 C o - o r d in a t io n and m o n ito r in g te c h n iq u e s

Within the current centralised system the overall strategy for maintenance of grain hygiene has been to receive as much grain as possible directly from the paddock and hence confine hygiene control to a single bulk handling agency in each State. Long-term on-farm storage (that is, storage for greater than one or two months depending on the State) has, in general, been discouraged in order to avoid the perceived problems of receiving grain that has been subjected to unknown control measures or that is more likely to be

infested with insects.

Grain received directly from the paddock and grain out-turned from on-farm storage is tested by bulk handling agencies on receival. Some exceptions to this occur in South Australia and Western Australia. In South Australia, grain received outside the harvest period is inspected on-farm prior to delivery. In Western Australia, a scheme is to be introduced whereby growers delivering grain in the post-harvest period

(after 1 March) will be required to submit a one kilogram sample for chemical residue testing. This is in addition to a random sampling and traceback scheme (for chemical residues) which operated during the 1987-88 harvest.

However, grain is generally received directly after harvest or with only limited periods of on-farm storage, so emphasis has been placed on sampling for contaminants that are visually observable, in particular insects but also other

extraneous matter such as weed seeds. Sample sizes of approximately 0.5 litres (which is approximately 0.4 kilograms of wheat) are taken.

With such a small sample size, the probability of detecting insects is small, even in a relatively heavily infested load. For example, if a 0.4 kilogram sample is taken from a 10-tonne truck load of grain that is infested with 100 insects per tonne, then assuming insects are randomly distributed throughout the load, there is only a 3.9 per cent chance of detecting the presence of insects. With an

8

SUPPORTING PAPER 9

infestation density of five insects per tonne, there is less than a 0.2 per cent chance of detection.

Considering the lack of monitoring of on-farm control measures and the absence of incentives for growers to control insects at levels much below detectable levels, it is not surprising that high levels of insects are often found in

surveys conducted on farms. For example, in a submission the Queensland Government (May 1987) reported the results of a survey conducted of grain farms in the Darling Downs. The

survey found large numbers of insects on farms (an average of 260 000 per farm), particularly in grain stocks. However, the average was inflated by a small number of farms that had very large insect populations, with most farms having less than 50 000 insect pests. Recent results of a survey in the Grong Grong district in southern New South Wales (Price et al. 1987) tend to support these conclusions; large insect numbers were found on farms on average, the majority of growers tending towards lower density levels but a minority of growers having very large populations. Price et al. concluded that these growers can be identified within a routine farm inspection program.

Once grain is within the central system, routine sampling for insect infestation is undertaken at intervals of between one week and two months while grain is in storage, at out-loading from storage for transport to port or the domestic market,

and prior to loading onto ships for export. For example, Co-operative Bulk Handling Limited of Western Australia (WACBH) summarise their standard procedure as follows:

(a ) Prior to Receivals storages thoroughly cleaned, washed down and sprayed with pesticide.

(b ) During Receivals grain is sampled for insects on receival. Accurate treatment is carried out with pesticide at dosage rates as requested by marketing authorities. Samples are taken and analysed to monitor residues.

(c ) Post Receivals Grain in store is checked for insects on a weekly basis, unless a storage is under fumigation. This is necessary so that any infestation is found and treated as early as possible, which negates the need for more expensive remedial treatment of heavily infested grain. Residue samples are taken

and analysed on a monthly basis so that a complete, updated record is available to provide suitable grain to meet marketing specifications. Any

insects which may be found are subject to

resistance testing, conducted in the Company's laboratory facilities. (WACBH submission, 31 December 1987, p. 1)

Again, the size of the sample which bulk handling agencies take from their storage is relatively small, with only around

9

SUPPORTING PAPER 9

50 to 100 litres taken from a storage of 1000 tonnes (that is, a sampling proportion of around 0.0004 to 0.0008). At this sampling rate the Queensland Government estimated that less than one in ten infested storages with an infestation density of one insect per tonne would be detected.

All grain exported from Australia is examined for insects by inspectors from AQIS. The sampling method adopted when the regulations were introduced was a manual one, involving dipping sub-samples from a moving grain stream during out-loading to ship. This method is still in use in some terminals. However, due to the inefficiency and safety problems with such a method, which have arisen due to

increasing conveyor belt speeds, terminals with out-loading capacities of 400 tonnes per hour or more are now required to have automatic sampling and delivery of samples to an enclosed inspection room.

The sampling rate used is 2.25 litres of grain per 33

tonnes. This rate was not originally based on statistical or scientific considerations but has subsequently been accepted by two investigations under the Standing Committee on Agriculture. However, as noted in a number of submissions

(for example, Queensland Government submission. May 1987; NSWDA submission, 1987) the degree of sampling is relatively ineffective for low densities of infestation. AQIS submitted ' . . . the current inspection regime means that it is, of necessity, a monitoring exercise which cannot ensure that goods are free from infestation'. (AQIS submission, 1986, p.

8 )

Inspection, therefore, performs a monitoring role in terms of assessing the performance of current control measures. An increase in the number of detections from year to year indicates the development of resistance or a break-down in application techniques. This monitoring role is also reflected in the fact that, in general, when insects are detected all grain that has passed the inspector is allowed to be loaded and only that remaining in the shipping bin or silo cell is rejected subject to treatment. If grain is rejected due to the presence of one live adult insect, AQIS estimated that it is likely that there have been at least three mature insects per tonne already loaded from that source. To avoid this problem, grain would need to be inspected before loading by transferring grain from one bin to another (perhaps to a dedicated shipping bin) at a significant cost to handlers.

Given that export inspection performs only a monitoring role the Queensland Government suggested that '... records of the number of infestations detected by importers of Australian grain would serve just as validly for this purpose'.

(Queensland Government submission, May 1987, p. 11) However, the Queensland Government suggested that it is likely that export inspection does provide a political incentive to maintain high contaminant control. Further, the operation of

such a scheme is likely to enhance perceptions held by

10

SUPPORTING PAPER 9

importing countries of the grain quality control measures used in Australia.

AQIS also carries out inspections on ships and containers as well as at export terminals and other premises. Ship and container inspections are conducted to ensure grain is not contaminated en-route to importing countries by unclean vessels. This inspection occurs prior to loading and aims at

detecting insects, other pests, infestible and other residues, odours, structural damage, and other factors which would affect cargoes. Export terminals are also inspected to ensure infestation or contamination does not occur during

storage or loading. Registered premises are subject to a full annual inspection and irregular limited inspections at least four times a year. These limited inspections involve

inspection of commodity flow from sampling point to ship, inspection of past problem areas, and examination of cleaning and control records. Non-registered premises are inspected fully at intervals determined by the senior inspector in each

State based on the premises' past hygiene record. Limited inspection occurs prior to each export loading and involves the same procedures as for limited inspection of registered premises.

Sampling is generally conducted only for mature insects. Immature stages of insects can later create problems either in storage, or if insects mature during shipping, and may cause rejection of the shipment by an importing country. In order to monitor this problem, a sampling and trace-back

scheme operates in South Australia (such a scheme also operated in Victoria in the late 1970s). Under this scheme in each season random samples of grain are taken from

growers' first deliveries to receival points (about 3000 samples are collected throughout South Australia). These samples are incubated for three months to allow immature stages of insects to develop. Growers who have samples taken that are later found to contain insects are visited by inspectors from South Australia Co-operative Bulk Handling Limited (SACBH) or from the Australian Barley Board (ABB) and are advised on farm hygiene methods.

Incubation of samples is a relatively slow method of detecting hidden infestations since it takes a number of weeks for insects to develop to a detectable stage. Other, more rapid detection methods are available, however these

tend to be either less accurate in detecting all levels of infestation or more costly than the incubation method. Rapid methods of detection include 'determination of carbon dioxide production', which measures carbon dioxide produced in a sample of grain; the 'Ninhydrin method', which crushes a sample of grain against white paper impregnated with ninhydrin, which reacts to the amino acids in the body fluids of insects; 'flotation', which is based on immersing a sample of grain in a test solution and checking for insects in those grains which float (sound grains tend to sink); X-rays and a visual examination of the film for presence of insects; and the 'acoustic method' which involves inserting the sample in

11

SUPPORTING PAPER 9

a sound-proofed box with an acoustic vibrator sensor that amplifies the noise of feeding activity of hidden insects.

Testing for chemical residues is far less extensive than testing for insect infestation, mainly due to the difficulty and time involved in testing and the lack of market pressure on residue levels in the past. More emphasis is now being placed on minimising levels of chemical residues in food, and market pressure has increased for testing for chemical residue levels. There are two main organisations currently conducting these tests. The Bureau of Rural Science (BRS) administers the National Residue Survey which tests for a large range of chemical groups in a number of commodity groups including grains. The testing is conducted by the Australian Government Analytical Laboratories (AGAL). The AWB also regularly conducts tests for pesticide residues both on its own behalf and on behalf of State bodies such as Bulk Grains Queensland (BGQ) The AWB also conducts pesticides residue tests on all grain to be loaded for delivery to Australian flour mills.

In addition, bulk handlers, exporters, domestic grain sellers and buyers and importing countries test for residues. In particular, both stockfeed merchants and flour millers are becoming more involved in testing of grain, especially grain received from long-term on-farm storage. Further, the ABB collects random samples which are tested for certain banned chemicals (for example, DDT) and WACBH has a system in place

for sampling for pesticide residues in grain delivered after the normal harvest period.

The co-ordination of grain control measures and the development of new measures are overseen by a number of organisations, including: bulk handling agencies; State departments responsible for agriculture; the Commonwealth Department of Primary Industry and Energy (DPIE); marketers, including the AWB Working Party on Grain Protectants; and the CSIRO. Apart from an AWB Working Party, which is directed specifically at wheat, there is no national co-ordinating body for monitoring and advising on research and development into grain hygiene.

3 .3 C o n tr o l te c h n iq u e s used

Love et al. (1983) provide a history of the development of control techniques in Australia; a summary of this history follows.

Prior to the development of Malathion in the early 1960s Australia had a relatively poor record for insect-free grain. Malathion's cheapness and its ease of application dramatically improved this record and its use resulted in very few detections of insects in grain. Resistance to Malathion had become apparent in 1968 and it reached commercial significance in 1973-74, when detections of infested grain by importing countries became numerous.

12

SUPPORTING PAPER 9

Resistance also emerged within two years of the introduction of the related organophosphorus compound, dichlorvos.

There was thus a need to develop a new grain hygiene control strategy involving the use of new chemical protectants, and alternative methods of insect control. In 1971, the AWB in conjunction with the bulk handling agencies, CSIRO and the DPIE formulated a long-term Integrated Pest Control Plan. The main features of the plan are:

(a) upgrading of storages to provide for segregation, aeration, fumigation and sealability;

(b) provision of aeration facilities in horizontal stores together with an integrated system of fumigation capability;

(c) improvement of rail vehicle hygiene with specialist vehicles designed to minimise residues etc; and

(d) adequate fumigation capacity to all export

terminals. (AWB submission, April 1987, Appendices P- 12)

As a short term measure, the industry continued to rely on grain protectants. This resulted in the development and/or introduction of a number of chemical protectants for use in grain, the main two chemicals in use being bioresmethrin and

fenitrothion. A range of other chemical protectants have been approved, although they are not widely used; these include carbaryl, chlorphyrifos methyl and pirimiphos methyl.

In addition, two alternative categories of insect control methods exist: fumigation and 'physical' control methods. The two fumigants currently used are methyl bromide and phosphine. Phosphine fumigation using phosphine blankets or other techniques that do not require insertion of phosphine pellets in the grain does not leave harmful residues. Unfortunately the use of methyl bromide does leave residues

in the grain. Although resistance to fumigants has occurred it tends to develop much more slowly than resistance to protectants, particularly when the fumigants are used in sealed storages.

With the existing and potential development of resistance to chemical protectants, bulk handling agencies have placed increased emphasis on storage types suited to grain hygiene control. In particular, sealability of storages, ease of cleaning, rapid in-loading and out-loading, and the ability to aerate and segregate grain have been emphasised. Many physical control measures require sealed storages to be most effective or to help prevent further infestations.

Physical control measures are based on changes in grain temperature or changes in the balance of atmospheric gases within a grain storage. They include refrigerated aeration, controlled atmosphere techniques, and thermal

disinfestation.

13

SUPPORTING PAPER 9

Refrigerated aeration involves reducing the temperature of grain to a point sufficient to kill insects or slow their rate of growth. To kill insects, the temperature needs to be reduced (from about 30UC on receival) to less than 15UC in four weeks and then to 10UC or less, for the remainder of the storage period. Although this is technically

feasible, it is expensive. A less expensive alternative, for control rather than killing of insects, is ambient aeration. This involves blowing cool night air through the grain; it is frequently used to suppress insect growth, mould growth and moisture migration and allows safe storage of high moisture grain.

Controlled atmosphere techniques involve changing ' . . . the balance of gases inside a sealed storage in an attempt to achieve an atmosphere which is lethal to insects. Possible gas treatments include "low oxygen" (achieved by purging the storage with either nitrogen or exhaust gas) or CO^ [carbon dioxide] '. (Love et al. 1983 p. 37) A major cost in using controlled atmosphere techniques is the sealing of storages which must be gas tight, although this cost varies

significantly with storage type. The cost of transporting the gas is also high, but to reduce this, the CSIRO has developed a controlled atmosphere generator for on-site production of gas.

Thermal disinfestation techniques are still in the process of development although a pilot plant has been set up in Dunolly, Victoria, in a joint exercise between the CSIRO and Grain Elevators Board of Victoria (GEB). The unit developed is based on fluidised-bed heating of grain with air heated to 300 C. Grain is passed through the unit either as a batch or a continuous flow and is rapidly heated to 65°C. It is then rapidly cooled with a mixture of ambient air and water

(which evaporates). Originally, development was aimed at a continuous in-line process capable of disinfesting grain at rates that would match shipping rates at an export terminal (up to 2000 tonnes per hour). However, the capital cost of a unit of this size tends to make the process unattractive compared to other disinfestation methods. Development is therefore currently aimed at an off-line unit which disinfests grain at a low rate (200-500 tonnes per hour). Such a unit, while cheaper than an on-line unit, may require additional storage to hold grain before and after

disinfestation. The current pilot plant is a 200 tonne per hour unit and there are plans to introduce it to the port terminal at Portland to further assess its benefits and costs.

Two other control measures that do not create chemical residue problems are the use of sorptive dusts and the use of retentive dusts. Sorptive dusts are applied at a rate of

1 kilogram per tonne and control insects by physically dehydrating them. One such dust (Dryacide) has been developed in Australia and recently introduced to the market. It is composed almost entirely of amorphous silica and its non-toxic nature exempts it from listing in the

14

SUPPORTING PAPER 9

domestic and international pesticide standards. However, on the recommendation of the AWB, registration of this product is limited to on-farm protection of seed and feed grain. The limitation is based on physical handling problems with grain treated with sorptive dust which have been identified in a submission by Dryacide Australia. In particular, it has been suggested that sorptive dusts reduce the flow rate of grain, increase the bulk of grain (by 3 to 4 per cent) and increase the angle of repose of grain (by 7 to 8 degrees), which

affects utilisation of storage capacity, and increases dust problems.

The use of dusts (a clay carrier) impregnated with

insecticides (insecticide-retentive dusts) is currently being developed. The insecticides are more stable (that is, they degrade less rapidly) when carried on dust rather than when applied directly to grain, so retentive dusts are many times more effective than the same amount of grain protectant

applied to the grain. Residues on the grain tend to be minimal because little insecticide is transferred from the dust to the grain. Again, dust levels are a potential problem, although experimentation is under way to increase the particle size or reduce the amount of dust applied. Both

sorptive and retentive dusts can be readily removed from grain by normal cleaning operations.

3.4 Assessment of the system

3.4.1 Central system

Although in the past problems have existed in controlling grain insects, in recent years the central system has been relatively successful in controlling grain hygiene. Before the introduction of Malathion in the early 1960s, over 80 per cent of wheat shipments from Australia to the United Kingdom were found to have insect infestations (BRS submission,

1987). The detection of infestations declined to less than 5 per cent of shipments by 1970. Problems with pesticide resistance in insects during the mid-1970s resulted in increased levels of detection before alternative chemical protectants were introduced. Since then, it is estimated that less than 2 per cent of grain loaded at ports each year

is found to contain insects and there is a similar proportion of detections by importing countries (Love et al, 1983; NSWDA submission, December 1987). Given the sample rate, the Queensland Government estimated that this level of detection would suggest that the average density of insects in grain exports from the central system is of the order of 0.1

insects per tonne.

Very few submissions highlighted any drastic problems with grain insect control within the central system. An exception to this was the ACIL Australia Pty Ltd submission (May 1987), in which it was claimed that there have been a number of problems in the past, among them a claim by the Victorian Oat Pool (VOP) that it had lost markets because the GEB could not

15

SUPPORTING PAPER 9

guarantee to supply grain free of residues from approved pesticides and a claim that weevil-infested barley was being delivered to maltsters by the Grain Handling Authority of New South Wales (GHA).

There was also some criticism of the lack of emphasis on long-term control strategies. For example, the CSIRO submitted that '... even with the current centralised

industry structure, pest and quality control problems are sometimes still considered at a tactical, even parochial, level rather than at a strategic, long-term statewide or national level'. (CSIRO submission, March 1987, p. 15)

On the domestic markets, the Flour Millers' Council of Australia praised the efforts of bulk handling agencies and the AWB in supplying insect-free grain with low pesticide residues. However, the NH&MRC claimed in its submission

(1987) that

Although Australian dietary residue surveys generally indicate that actual levels of pesticide residues in food are well below the theoretical maximum, recent NH&MRC Market Basket Surveys have found significant residues in bread (white and wholemeal), infant cereal and unprocessed bran. These residues were almost universally present in Australian cereal foods at quantifiable levels.

The draft report of the 1985 NH&MRC Market Basket Survey . . . confirms the presence of fenitrothion residues in white and wholemeal bread, albeit at lower levels. The decreasing trend of these residues since 1983 is noteworthy, (p. 5)

However, the BRS noted that:

... the National Residue Survey (NRS) for 1986/87 ... shows that 25 of the 298 samples [of wheat] tested exceeded the Australian food standard for cadmium . . . The 1985 market basket (noxious substances) survey showd that the median values for cadmium in several wheat products ranged from 0.002 to 0.007 mg/kg. (The limit of detection for cadmium is 0.002 mg/kg). (BRS

submission, 1988, p.9).

These surveys indicate that cadmium is a problem in all States. However, in Victoria 26% of the samples tested were above the food standard. (BRS submission, 1988, p.l)

The domestic market has recently become much stricter about grain contaminants, in particular chemical residues. Recent problems with chemical residues in meat, in particular organochlorine residues, have resulted in increased pressure

from cattle lot feeders and other stockfeed users on suppliers of stockfeed grain. The installation of laboratory facilities for testing grain samples from farms has already occurred in at least one case (NSWDA submission, December

16

SUPPORTING PAPER 9

1987) and some stockfeed merchants are requesting that growers provide statutory declarations that their grain is free of organochlorine residues.

In addition, the NSWDA is conducting free testing of on-farm grain storages for organochlorine pesticide residues. In conjunction with the testing it offers advice on methods of decontamination of facilities. Such programs are being considered in other States. Changes in legislation to impose more stringent controls over the use of agricultural chemicals generally have also been proposed - for example, the Queensland Government recently released a Green Paper on proposed new legislation to tighten controls on the use of certain agricultural and veterinary chemicals. (QDPI, 1987)

The increasing importance of chemical residues in grain has also affected the central storage and handling system. The GEB stated

Grain protectants, or contact pesticides, have been successfully used to maintain a high level of grain hygiene in all parts of the world. However, their usefulness is now seriously limited due to growing

insect pest resistance, reduced buyer tolerance to residues, and increasing terminal workforce

disinclination to handle grain likely to have residues. (GEB submission, November 1987, p. 3)

In recent times the bulk handling agencies have been able to meet the grain hygiene standards required by marketers. However, the Commission has reservations regarding the incentive structures for maintaining grain hygiene and for

selecting control strategies. These incentive structures are dominated by technical and administrative concerns rather than market-based penalties and rewards.

Under the Grain Storage and Handling Agreement between the bulk handling agencies and the AWB, bulk handlers are required to ' . . . take all proper and reasonable precautions and do all things necessary to preserve and safeguard the wheat . . . against contamination, damage, destruction, deterioration, infestation, loss, theft and unauthorised

admixture' (clause 12.1). Where a problem arises the bulk handler must inform the AWB and ' . . . at their own cost take all reasonable steps to minimise the loss to the Board'. (clause 12.2 ( d ))

Penalties are imposed on the bulk handler in the case of defective out-turn. The amount payable by bulk handlers is, however, minimal. For defective out-turns other than those caused by insect infestation the penalty is set at whatever the AWB had to compensate the buyer up to a maximum of 10 per cent of the value of the shipment. Where defective out-turn is caused by insect infestation, the compensation payable by the bulk handler can vary from zero to 80 per cent of the amount payable for other types of defective out-turn. The level of compensation depends on the seriousness of the infestation and varies in accordance with a formula based on

17

SUPPORTING PAPER 9

rejection rates. Hence, quite often, the bulk handler will incur a penalty from the AWES which does not fully reflect the penalty imposed upon the AWB by the buyer. The incentives faced by bulk handlers to maintain grain hygiene are therefore not fully based on market penalties associated with defective out-turns, but rather on administratively based penalties and pressure. The effectiveness of such penalties can also be questioned when bulk handlers simply pass on any costs incurred to all growers within the State by way of the pooled handling charge.

3.4.2 Current private system

It is useful to consider grain hygiene levels within those parts of the system that are currently operated by private individuals. This includes grains currently stored and handled on farm and in private facilities.

In the past, longer term on-farm storage of grain was not widespread and, as a result, there was little perceived need to monitor on-farm hygiene practices. The increased use of on-farm storage in recent years, however, has increased the demand for such monitoring. In particular, grain delivered directly from on-farm storage to port for immediate shipment

is seen by a number of groups, for example CSIRO and bulk handling agencies, as being a potentially hazardous path due to the problem of latent infestations. In addition, it has been argued that:

With a lack of specialised knowledge and considering the conditions and equipment available on farm, it is reasonable to expect, despite the best endeavours of the farmer, that chemical application rates will be somewhat inconsistent. (WACBH submission, 31 December 1987, p.5)

Monitoring of on-farm hygiene practices in most States is limited to departments responsible for agriculture in each State, bulk handling agencies, marketers and grower organisations providing growers with information about grain hygiene measures, particularly in relation to such aspects as cleaning of machinery, insect control techniques, storage types and general hygiene management.

In most States on-farm grain storages are not inspected, but there are some exceptions. On-farm inspection schemes for grain insects have been, or are currently being, conducted in South Australia, Victoria and Western Australia. In each of these States programs of inspection began in 1977-78 and, apart from Victoria, where the program was discontinued at the end of 1978-79, they are still in operation.

In Western Australia up to 86 per cent of farms (in 1980-81) are inspected each year; 65 per cent were inspected in 1986-87. Under the schemes in South Australia and Victoria a much smaller proportion of farms have been or were inspected

(less than 1 per cent and approximately 10 to 15 per cent respectively).

18

SUPPORTING PAPER 9

South Australian and Victorian type schemes are based on sampling and trace-back and are aimed at detection of hidden infestation. Samples of 1 kilogram are taken at receival and incubated; if they are found to be infested the offending farm is inspected. (Johnston, 1983)

The Western Australian scheme is operated by the Agricultural Protection Board of Western Australia (APB) and is based on routine inspections of farms for the presence of grain residues in machinery and insects in grain storages. Samples of insects are also taken for subsequent testing for

resistance. Growers are advised of problems and are required to take remedial action. The Western Australian scheme is part of an overall inspection program for the control of noxious weeds and vermin. Testing for insects on farms commenced in 1977 when ten grain insect pests were declared as pests under the State's Agricultural and Related Resources Protection Act 1976 under which the APB operates. (Johnston & Roberts, 1987) The scheme has been successful in that the number of farms detected to have infestations has fallen from 53 per cent in the first full year of operation (1978-79) to 32 per cent in 1986-87, as shown in Table 3.1.

As a result of the inspection program and a number of other programs conducted in Western Australia (for example, farm hygiene and silo design competitions, the provision of practical and technical assistance to growers, the production of educational videos, and newsletters to growers), the

standard of on-farm storage in that State is generally better than that in other States (see, for example, GHA submission, November 1987). The high standard of on-farm storage in Western Australia is also reflected in the proportion of

sealed on-farm storage in that State compared with other States. Howard & Lawrence (1986) estimated that in 1984-85 some 34 per cent of on-farm storages in Western Australia were sealed; this compares with an average of 20 per cent for mainland States overall.

An Australia-wide farm inspection program has been considered in the past but has generally not obtained industry support. For example, such a program failed to get the unanimous support of the Standing Committee on Agriculture in 1972, although it was further developed in Western Australia and eventually introduced.

Grain hygiene on farms has been identified in submissions as the major source of insect and chemical residue problems detected in other parts of the system. Farm surveys

conducted in the Darling Downs region of Queensland and reported in a Queensland Government submission (May 1987) have highlighted these problems. On average, 3000 grain insects were found to be present in the average

header/harvester, often originating from grain residues left in the machinery from the previous harvest. These insects are frequently the source of infestations in newly harvested grain. It was found that 95 per cent fewer insects were present in grain that had been harvested by harvesters

19

SUPPORTING PAPER 9

cleaned by farmers than in grain harvested by harvesters left uncleaned. Farm surveys also showed the presence of large numbers of insects in grain stocks and bags held on farms. The mean number of insects per farm was estimated at 360 000, although most farms had less than 50 000 insect pests.

The recent increase in direct grower-to-buyer and stockfeed sales from farms would therefore be expected to have caused large problems for domestic buyers. However, evidence presented by the Flour Millers' Council of Australia in transcripts and submissions indicated that there have not been major problems with grain hygiene in wheat being received directly off farm under the grower-to-buyer scheme. The reason for this may be that millers are reluctant to accept grain that has been treated by growers for insects and will generally only accept grain from growers up to a maximum of two to three months after harvest (the period within which it is felt safe to store grain without treatment before large infestations can develop).

Flour millers and stockfeed merchants have recently become more involved in chemical residue testing of grain received from farms. The NSWDA submitted:

At least one large integrated stockfeed manufacturer and pig producer has installed its own testing laboratory, is routinely testing grain samples from farms and is requiring farmers to provide statutory declarations that their grain is free of organochlorine residues. (NSWDA submission, December 1987, p. 41)

Private storage and handling in Australia is currently limited by constraints on the types of grain that are permitted to be handled. Where grain is handled for

marketers, strict control measures are generally laid down for the handlers. For example, the Barley Marketing Board of New South Wales provides handlers with an operational handbook detailing requirements for receival, sampling, and testing of grain, and treatment of storages. In some respects private handlers tend to be more responsive to market requirements than bulk handling agencies. For

example, domestic buyers of peas are willing to accept delivery of peas containing pea weavil. In response to this private handlers are less concerned with peas containing live insects than has been indicated by SACBH:

... our company has rejected peas tendered for delivery containing live insects and the growers have then taken them to a neighbouring commercial storage where they have been received. (SACBH submission, December 1987, p. 1)

This may reflect concern by SACBH with cross infestation if grain of varying quality is stored at a particular site.

2 0

TABLE 3.1 WESTERN AUSTRALIAN PROPERTIES INSPECTED WHICH WERE DETECTED TO HAVE INSECT INFESTATIONS. 1977-78 to 1986-87

Year 1977-78® 1978-79 19 79-80 1980-81 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87

Properties inspected 35 78 80 86 65 56 48 70 67 65

Of those inspected:

Clean pipeline 35 51 67 71 71 65 61

Light/Medium infested 43 44 25 23 23 30 33

Heavily infested 22 13 7 6 6 5 5

61 67

35 29

4 4

68

29

3

a. part year only

Source: Agriculture Protection Board, Annual Report, 1985-8 6 ; E.J. Roberts, APB, personal communication, December 1987·

SUPPORTING PAPER 9

From responses to a questionnaire to private handlers and subsequent follow-up interviews, the Commission gained the impression that private handlers generally had a responsible attitude to grain hygiene. Application rates of pesticides

(usually fenitrothion, bioresmethrin or dichlorvos) were understood and adhered to, while fumigation (generally using phosphine) was generally carried out by registered

contractors. Alternative control measures did not seem to be generally well understood, there being some confusion among handlers about the meaning of sealed storage suitable for fumigation or modified atmosphere treatments.

Research conducted by the Queensland Department of Primary Industries (QDPI) into private merchants' premises suggested that 'Infestation levels in this private sector of the grain handling and storage system appear to be somewhat lower than those on farms. In many private premises insect numbers are

low, but in some premises the infestation levels are very high' (Queensland Government submission, May 1987, p. 6). It should, however, be noted that the major private grain traders currently use BGQ for storing and handling grain that they are permitted to trade. The results of the survey were therefore based on a small number of small storage facilities operated by private merchants.

Overall, it appears that private storers and handlers are aware of the importance of maintaining grain hygiene levels and generally do achieve adequate standards, but, under current incentives, knowledge and performance levels appear to fall short of those in the central system.

22

4 . MAINTENANCE OF GRAIN HYGIENE STANDARDS IN THE COMMISSION'S PREFERRED SYSTEM

4.1 Background

Views put to the Commission regarding potential grain hygiene problems in a deregulated storage, handling and transport environment range between two extremes. Some groups argued that the market would be capable of ensuring a socially optimal level of grain hygiene control. For example, ACIL Australia Pty Ltd argued:

What is required is that each grower and buyer must personally bear the cost of his action if infested grain is delivered and be rewarded for delivering insect-free grain. That is extremely difficult to achieve under a monopoly marketing system where the cost is pooled, but

it occurs naturally in an open market where the

individual is held responsible. (ACIL, May 1987 submission , p. 90)

At the other extreme, pest control administrations. bulk handling agencies and entomologists generally argued that a deregulated system would lead to a substantial deterioration in grain hygiene levels in Australia. For example, CSIRO

submitted:

. . . ill advised action by newcomers to the industry (leading to, say, the out-turn of infested grain overseas, the finding of excessive or prohibited insecticides) could, by one incident, destroy Australia's ... reputation as an exporter of good

quality pest free grain'. (CSIRO submission, March 1987, p. 20)

Arguments suggesting that one incident will destroy Australia's reputation are unjustified when one considers that at present up to 2 per cent of export shipments are found to be contaminated on receival by overseas countries.

Other arguments concerning problems which might arise under a deregulated environment related to increased problems with insect resistance and increased chemical residue problems. For example, WACBH argued:

To make in-roads into CBH' s share of the market any private handlers would have to "cut corners" and offer better handling charges. However, it is only logical that if the standard of insect control is not to

deteriorate these other handlers would have to use the same methods as CBH and at identical or even higher costs. Those without a long term view of the industry would surely elect to "cut corners" and whilst they may, through commercial necessity, meet export standards

initially the time could arrive when resistance to protectants and fumigants was so widespread that it

23

SUPPORTING PAPER 9

would be difficult for anyone to export grain insect free. (WACBH submission, April 1987, pp. 100-101)

Increased levels of chemical residues were seen as mainly related to potential increases in on-farm storage. For example, Wellcome Australia submitted:

The recent controversy arising from the discovery of pesticide residues in beef exports to the US has

highlighted the sensitivity of the residue issue. The risks of similar contamination occuring in export grains would be dramatically increased if the responsibility for grain treatment was transferred away from the State handlers back to the farm. (Wellcome Australia

submission, July 1987, p.l)

It should be noted, in this regard, that the Commission's modelling results suggest that, little change in long-term on-farm storage is likely to occur as a specific result of implementing the deregulated system. In any event, it should be recognised that the technology and appropriate practices for control of insects on farms is becoming well known by growers and could become more widespread with increased extension efforts. Howard and Lawrence (1986) have estimated that there is, under current institutional arrangements, some 9.5 million tonnes of on-farm storage capacity. This means that there is already considerable use by growers of chemical protectants and fumigants. The Commission does not regard the control of insects or the administering of chemicals and fumigants as more complex than many other farm production tasks and growers will, like other participants in the storage, handling and transport system, respond to penalties and incentives put in place for grain hygiene.

In addition, it would appear inappropriate to suggest that a deregulated system for storage, handling and transport would pass responsibility for grain hygiene from bulk handling agencies to growers. As most grain originating from on-farm storage would continue to be passed through the country storage and handling system or port terminals, the

responsibility for grain hygiene would be shared between growers and the bulk handling system.

4 .2 M e e tin g g r a in h y g ie n e re q u ire m e n ts i n t h e C om m ission' s

p r e f e r r e d system

In the Commission's view, the key to obtaining grain hygiene standards that meet marketers' requirements and achieve efficiency, cost-effectiveness and integration is to ensure that the benefits and costs of grain hygiene initiatives are internalised to participants in the distribution system. This requirement is met, in the Commission's preferred system, through marketers (mainly statutory marketers) being responsible for setting receival standards and selecting and licensing grain receivers.

24

SUPPORTING PAPER 9

This selection would be based on a number of factors, one of which would be reliability in maintaining grain hygiene measures that ensure a satisfactory quality of grain to be supplied to domestic and export markets. Appropriate clauses would be contained within grain storage and handling

agreements specifying penalties for non-compliance with quality requirements. The ultimate penalty for continued non-compliance would be cancellation of the licence to receive grain, however, with marketers given a more

commercial charter in selecting storage and handling agents, penalties for non-performance with respect to grain hygiene will be based more directly on market penalties imposed by buyers. Therefore, incentives faced by bulk handlers will be more market related than currently occurs.

The AWB and ABB suggested to the Commission that grain quality control and hygiene requirements could be fulfilled under such a setting. The AWB noted that,

... to ensure ... quality control and hygiene be assured . . . the AWB should have the power to appoint receivers for wheat. This may lead to more than one authorized receiver in a State. In this event, the AWB would use contractual agreements to co-ordinate wheat receival and outturn. (AWB submission, November, 1987, p. 5)

Similarly, the ABB stated that 'with careful selection of licensed receivers and quality monitoring of barley stocks we are of the opinion the desired level of quality control can be obtained.' (ABB submission, January 1988, p . 4)

Monitoring of grain quality could be carried out in a number of ways based on practices which currently occur. This includes monitoring levels of unsatisfactory out-turns to markets and the possibility of periodic inspection of

storers' facilities. This may require some marketers to increase their expertise in this area, although a number of marketers (for example, the AWB, ABB and NSW Barley Marketing Board) already have such expertise. In addition, the ABB suggests that they may require ' . . . private receivers to put up a performance bond or take out insurance cover to protect our product.' (ABB submission, January 1988, p. 1)

4.3 Validity of comparisons with overseas systems

There is some question about the validity of comparing existing or alternative systems of grain hygiene in Australia with overseas systems. Geographic or other differences make such comparisons difficult. For example, Canada has an extremely good reputation as a supplier of grain free of

insects and chemical residues. This reputation is largely a result of the fact that Canadian wheat is harvested as winter approaches and stored in sub-zero temperatures (as a result of the climate) for most of its storage time. These

conditions greatly reduce insect population growth and hence reduce the need to apply pesticides to grain. In Australia, grain is harvested during summer and stored when outside

25

SUPPORTING PAPER 9

temperatures favour rapid insect population growth. (Love et al. 1983) In such an environment more attention must be paid to insect control measures. .

In a number of submissions and comments made to the

Commission (for example, AWB submission, April 1987; Wellcome Australia Limited submission, December 1987; GEB submission, January 1988), links were drawn between the poor grain hygiene reputation of United States grain and the

decentralised grain storage, handling and transport system in that country. It has been suggested that a decentralisation of the storage, handling and transport system in Australia would similarly result in a lowering of Australia's grain hygiene reputation. In particular, it has been estimated that United States export grain insect densities are around 40 per tonne compared to 0.05 per tonne in Australia (NSWDA submission, December 1987). The bulk handling agencies were particular advocates of this argument while at the same time they maintained that it is invalid to compare storage, handling and transport costs between countries.

The NSWDA argued that grain hygiene problems in the United States are not the direct result of a decentralised system, but rather that they are the outcome of government

intervention. In particular, due to the influence of United States price support programs, the proportion of grain stored on farm and the average storage time are much greater than would be the case in the absence of such programs. Due to

the price supports having inadequate differentials for quality and hygiene characteristics of grain, growers have little incentive to control grain hygiene problems in an adequate manner. The length of time grain is stored on farm, the lack of incentive for growers to maintain grain in a good condition, restrictions on the use of chemicals and the quality of on-farm storage are likely to be the major causes of the development of insect infestation problems in United States grain. In addition, it would be incorrect to conclude that, of the lOOmt of grain exported annually by the United States, none is of a high standard with respect to grain hygiene. Rather, the Commission obtained the impression, in its visit to the United States, that United States' marketers are making continual trade-offs between quality and price of domestic and export grain and are able to provide grain of a high quality to interested markets. In addition, the United States export grain inspection program and export standards applied for insects tend to be less stringent than the Australian system.

In fact, the role of the Federal Grain Inspection Service with regards to export grain is to certify that the shipment is consistent with the specification of the contract of sale. The grain quality standards in the United States cover the full range of qualities, and reflect the requirements of marketers in a commercial environment with quality being traded-off against prices.

To some extent losses in market share by the United States have resulted in greater concern over grain quality in that

26

SUPPORTING PAPER 9

country. The United States Congress has initiated an inquiry by the Office of Technology Assessment to investigate this matter. In particular, the matters being looked into are, evaluating United States grain competitiveness in terms of quality rather than price; the extent to which quality and handling has contributed to the decline in United States exports; and, the classification of wheat.

In general, it can be concluded that consideration of the performance of overseas countries with respect to grain hygiene needs to take into account the market structure of the system. Overall, it is clear that the grain hygiene

situation in overseas countries reflects the physical conditions, incentive structures and institutional arrangements in place.

27

5. OPTIONS FOR MAINTAINING GRAIN HYGIENE

5.1 Background

The Commission has not questioned the appropriateness or otherwise of grain hygiene standards currently in place. Such standards are beyond the scope of the current inquiry and the Commission believes that marketing boards are in the best position to determine grain hygiene standards. The Commission's view is that there should be a structure of incentives that will encourage participants to adopt grain contaminant control measures required to maintain the determined grain hygiene standards. The Commission believes that this requirement can be met by the licensing approach outlined in the previous section.

The Commission has examined a number of grain hygiene options available to marketers and other participants in the distribution system. None of these options are considered mandatory in the Commission's preferred system. Rather, they are initiatives that could be undertaken in future years in response to market developments and are relevant to both the current system and the Commission's preferred system for storage, handling and transport.

Within the options discussed, a distinction is made between overall system options and path options. 'System options' refer to measures relating to control of grain hygiene in the system overall and are not specific to any particular grain path. The cost of such options would generally be met by the grain industry. 'Path options' refer to measures applicable to particular grain paths. Generally, the cost of such path options would be met by particular individuals using the relevant path.

While the distinction between system and path options is important in determining who bears the cost of any particular option, it was also important for the Commission's modelling

work. In particular, the cost of random inspection of grain is built into the overall costs of paths using long-term on-farm storage in the Commission's cost budgeting model. However, system options do not affect the choice of

least-cost paths; rather, they effect the overall resource costs of the grain distribution system.

As mentioned, it is important that whatever grain hygiene strategy is adopted it must be capable of adjusting to changing market requirements with respect to levels of grain contaminants. Whilst" the Commission has not attempted to predict the likely trends in market requirements in the long term, it seems clear that in the short to medium term minimal

levels of chemical residues in grain will become

increasingly important while zero tolerance limits will continue to be set on particular chemicals. This will be true for both domestic and export markets.

28

SUPPORTING PAPER 9

5.2 Grain hygiene options

The maintenance of grain hygiene standards on a continuing basis requires constant monitoring, and flexibility in response by all participants, whatever the grain distribution system in place. The Commission has identified a number of possible options which could be adopted in the future, in

response to system performance and changing market

requirements. It should be noted that the options outlined below are additional to strategies currently in operation (for example, export inspection and receival testing), the continuation of which is assumed.

5.2.1 System options

Co-ordinating body for grain hygiene In the event that marketers and other system participants find it useful to co-ordinate grain hygiene standards and strategies, it would be possible to establish a grain hygiene co-ordinating body. CSIRO has suggested that such a body could be useful'... for formulating policy and advising on matters such as choice of pesticide, recommended dosages, residue levels, etc'. (CSIRO submission, March 1987, p. 20)

As noted in Chapter 3, in Australia there are currently a number of bodies that monitor grain hygiene practices for individual grains. A number of inquiry participants (for example BGQ, and the Grains Council of Australia (GCA)), have questioned the need for an additional body although a number of others (for example GHA, United Farmers and Stockowners of

South Australia (UF&S)) support the concept. If established, such a body could be an extension of an existing

organisation, for example, of the GCA (as suggested by AQIS (submission, 8 January 1988, p. 3)) or of the Council of the CSIRO Stored Grains Research Laboratory (as suggested by SACBH (submission, 30 December 1987, p. 2)). The body could include such representation as marketers, providers of storage and handling services, the NH&MRC and research and extension agencies.

Research and development A second option is increased research and development, especially into alternative grain insect control strategies and the costs and benefits of adopting alternative

strategies. Whilst the Commission recognises the valuable research already being done, notably by the CSIRO Stored Grain Research Laboratory, additional research into and

development of grain storage methods or control measures that minimise problems of chemical residues while containing insect population growth at reasonable costs may be appropriate. Any increased research could be financed by an

increased industry levy or a reallocation of existing research priorities. In addition, a number of inquiry participants (for example, BGQ and SACBH) have argued that

29

SUPPORTING PAPER 9

the current research levy on statutory grains be extended to non-statutory grains to provide increased research funds.

Extension It may also be appropriate to increase extension activities of the relevant organisations. This particularly relates to the provision of information about appropriate methods of insect control to avoid the build-up of excessive levels of chemical residues and to restrict the development of resistance in insects to control methods. The CSIRO could play an increased role in providing practical research information in a readily usable form, perhaps by means of increased liaison with State government departments responsible for agriculture and with providers of storage and handling services. The government departments responsible

for agriculture in each State already operate general extension services. The demand for such information would increase under a less centralised storage and handling system with an increase in the number of licensed receivers, and if there is an increase in long-term on-farm storage. The role of the relevant departments is therefore likely to be extended under the proposed system. In addition, information about protection measures could be provided by chemical companies, storage and handling equipment companies, and marketing and grower organisations.

On-farm monitoring/advisory scheme Significant increases have occurred in on-farm storage capacity in recent years and there is some potential for further increases under a less regulated environment; in

these circumstances, consideration could be given to introduction of an on-farm monitoring and advisory scheme similar to that adopted in Western Australia. As noted in Chapter 4, this scheme, in combination with a number of other programs, has significantly reduced insect problems on Western Australian farms over the period it has been in operation. Such a scheme, if established, could be based initially on annual inspections of all farms in each State, with follow-up inspections for problem farms. In the longer term, inspections could be conducted less frequently on those farms found consistently clean. Such a scheme could support the extension activities of the State agricultural departments and advise growers on appropriate control measures. In combination with this, monitoring for pesticide resistance in insects could be conducted on a random basis

(say, one farm in ten as in Western Australia) to pinpoint potential problem regions.

The QDPI questions the usefulness of such random testing since the rate of resistance development will be mainly based on whether that particular pesticide is used. Therefore, they suggest that '... there is no such thing as a

"problem" region, unless storage practices and insecticide use are regionally determined'. (QDPI submission, January 1988, p. 3) Given climatic variations across Australia,

30

SUPPORTING PAPER 9

practices are likely to be regionally determined and hence it will be possible to identify 'problem' regions.

Some inquiry participants (for example, UF&S, BGQ and SACBH) suggested that growers may resist such a scheme. However, the benefits of such an on-farm monitoring and advisory scheme, as identified by Johnston and Roberts (1987), would be to reduce any external costs associated with growers delivering infested grain, grain with high levels of chemical residues or grain with pesticide resistant insects by:

. encouragement of growers to adopt a standard of grain insect control beyond what they would do to protect their own seed and feed grain; and

. identification of the build-up of pesticide resistance by insects on farm, to pinpoint potential problem regions.

Further, in order to limit the problems that may arise if receivers are unaware of control treatments used by growers, and to limit pesticide resistance build-up on farm, it may be desirable to restrict the range of chemicals registered for on-farm use, as is currently the practice in some States, and

to actively encourage the use of sealed on-farm storage suited to controlled atmosphere strategies (including fumigation). Testing of such facilities for gas tightness could be part of the on-farm monitoring scheme.

5.2.2 Path options

In the event that deregulation of storage, handling and transport of grain results in grain hygiene problems emerging on particular distribution paths, consideration could be given to the introduction of a range of options. These path options would be paid for by relevant users and could be

adopted alongside existing procedures. The Commission does not suggest that it is necessary to put into operation any or all the options, rather that they be adopted as or if

required according to the performance of the system.

Random inspections The first option is a scheme of random inspection for chemical residues at country receival points and at port. A number of States already have similar inspection schemes in place as outlined previously (for example, in South Australia a sampling and traceback scheme operates for monitoring

latent insect infestations; in Western Australia, a system of sampling for pesticide residues in grain delivered after the normal harvest operates; and the ABB has implemented a monitoring procedure with samples analysed for banned pesticides).

The sample for testing could be taken at the time of sampling for other contaminants such as insects and weed seeds. Inspection of grain received from long-term on-farm storage

31

SUPPORTING PAPER 9

could be conducted at a rate of, say, one sample per 500 tonnes. Assuming that the average production per farm (five-year average to 1985-86) is about 543 tonnes, that growers use 10 tonne trucks and that the inspections are random, then there is a 67 per cent chance of any particular grower being inspected at least once. If allowance is made for the skewed nature of farm production, with a large number of relatively small farms but a small number of large farms, and assuming that the median is 350 tonnes per farm, then the probability of detection falls to 51 per cent. This

probability will also vary with the truck size assumed. Grain received from a licensed receiver would be monitored by marketers and would probably be tested at a lower rate of, say, one sample per 10 000 tonnes. Domestic users may

require more intensive testing and this could be determined as part of the contract with the seller.

Receivers could operate the scheme, taking samples and sending them to an approved independent laboratory appointed by the marketer or by the departments responsible for agriculture in each State. A large penalty could be imposed on suppliers of grain that exceeds prescribed residue levels The QDPI suggest that these prescribed levels may need to be set above the maximum residue levels set down by the NH&MRC to allow for sampling error (QDPI submission, 8 January 1988). The BRS suggest that allowances would also need to be made for excess chemical residues which result from permitted usage of grain protectants but which would break-down to permissable levels by the time grain reaches the consumer

(BRS submission, 8 January 1988). This penalty could involve a substantial fine and, as with the South Australian sampling and traceback scheme, may include full farm inspection with grain certified as being clear of excessive residues before

further deliveries by that grower are permitted.

The extent to which such a scheme would ensure that grain with excessive residues is not delivered is unclear. However, it is likely that sufficient incentives will exist for most growers and other private handlers to deliver clean grain. Any contaminated grain parcels not detected, provided they are not large, would be subsequently mixed with sufficient clean grain to avoid health or market problems. In addition, chemical residues in grain break down over time

(although the rate of break-down varies significantly between chemicals).

Farm certification scheme The second option involves a farm inspection scheme, with certification of all grain delivered from long-term on-farm storage (the definition of long-term will vary according to the characteristics of each State but, in general, it would be at least one month after harvest). Under the

certification scheme, before a grower could deliver, the grain would be inspected and tested to ensure its

cleanliness.

32

SUPPORTING PAPER 9

The New South Wales Farmers Association (NSWFA) proposed such a scheme:

A grower who wished to deliver wheat from his own

storage to a seaboard terminal might be required to obtain a certificate (at the growers' expense) from a licensed assessor. The certificate would specify whatever characteristics of the wheat were deemed

necessary by the AWB. For example, these

characteristics might include variety, protein level, any contamination or chemical residues. (NSWFA submission, November 1987 p . 11)

Other participants have also supported such a scheme, (for example, Wellcome Australia Ltd). However, a number of other inquiry participants regard such a measure as a worse case situation, or a last resort measure (for example, Grains Council, SACBH, ABB).

Some delay would necessarily occur between inspection and delivery because samples would have to be taken to a

laboratory for testing for chemical residues. To discourage substitution of non-tested grain during this time, it may be necessary to conduct random inspection on delivery.

If such a certification scheme were introduced, in order to allow it to be flexible to changing market requirements, it should be reviewed on a regular basis.

Disinfestation on receival Another option involves the adoption of some form of blanket disinfestation treatment at country facilities or port for all grain received from long-term on-farm storage on receival

at country facilities or port. This option concentrates on the insect infestation problem, but indirectly attempts to reduce chemical residue problems by reducing the need for growers to apply excessive levels of chemicals to ensure grain is free of insects. A number of different techniques

could be used for blanket disinfesation, including modified atmosphere techniques (including fumigation) and thermal disinfestation. These methods are discussed in Chapter 3.

Inquiry participants have noted a number of problems with such an approach. These are as follows:

. the option removes encouragement to maintain high levels of grain hygiene on-farm. (UF&S submission, January 1988);

. it could lead to cross infestation of grain bulks if infested grain is being moved around the system. (SACBH submission, December 1987);

. cost could be high if deliveries are sporadic requiring disinfestation of small grain lots. (WACBH submission, December 1987);

33

SUPPORTING PAPER 9

disinfestation does not remove the damage caused by heavy infestations. (AQIS submission, January 1988); and

non-residual disinfestation measures won't satisfy the needs of some overseas customers who require residual protection. (Wellcome Australia Ltd submission, January 1988)

5.2.3 Overview

In summary, the Commission believes that its preferred system which includes the appointment of licensed receivers by marketers, would be capable of maintaining current grain hygiene standards, and responding flexibly to future market requirements. The key factor is to ensure that all system participants face market related incentives and penalties for maintaining grain hygiene standards.

Given the increasing importance of chemical residues in grain and the continuing importance of other grain hygiene issues, it is likely that greater attention will need to be given to such matters even if the existing institutional arrangements were to remain in place. In the Commission's view, the

system options discussed above would be worthy of further consideration in this regard.

The Commission is not proposing that any of the path options be introduced in the event that the storage and handling system is deregulated. The grain hygiene strategy should be flexible and be modified according to demonstrated need in relation to market requirements.

The appropriateness of any of the system or path options will depend upon overall monitoring of the system. Due to the large number of marketers and other organisations involved, it will be most practical for this monitoring to be carried out by a Government body. For example, this role could be performed by the DPIE or the CSIRO.

5.3 Cost of options

The Commission has attributed costs to various parts of the options discussed above. These costs would be additional to the present costs of monitoring and control of grain hygiene.

5.3.1 Cost of system options

The costs to the industry of most of the system requirements are likely to be minimal and have not been calculated. As argued by WACBH, '... the majority of the system requirements . . . are currently performed by CBH, the costs of which are absorbed in the handling charges'. (WACBH submission, December 1987, p. 6)

34

SUPPORTING PAPER 9

Any increased research could be funded by a reallocation of research priorities and/or a relatively small increase in the grower levy. Extension efforts are already conducted by departments responsible for agriculture in each State and any

increase could again be funded by a reordering of priorities or a relatively small budget increase. The operating and administrative costs of a secretariat to support the activities of the grain hygiene co-ordinating body would also be small. The on-farm monitoring/advisory system, however, will impose a significant additional cost to the system if

implemented.

Johnston (1983) and Johnston and Roberts (1987) have discussed the cost of the Western Australian farm inspection scheme, which includes monitoring for grain insects and grain hygiene techniques, and taking samples of insects for resistance testing. Johnston suggests that, while the initial costs of such a scheme will vary between States, as the number of farms inspected approaches the total number of

farms in a State the costs per farm in each State become very similar. It is to be expected, therefore, that the cost per farm of operating such a system in each State would be

similar to the current cost observed in Western Australia.

The cost of farm inspections for all purposes in 1985-86 was estimated by Johnston and Roberts to be $91 per farm. This includes all operating, administration and capital costs associated with the scheme, but does not include the cost for any laboratory testing required. If the scheme includes screening for groups of known chemical residues (that is, chemicals generally used for grain treatment) for every farm, this would add $130 per farm to the cost, as detailed in Appendix B. Further, it may be desirable to conduct tests

for pesticide resistance in insects on a random basis (say, one in every ten farms as currently occurs in Western Australia). The cost of this is estimated in Appendix C at $112 per sample. If one in ten farms is tested there would be a cost of $11.20 per farm.

Thus, the total cost of a monitoring and advisory scheme of on-farm inspection would be approximately $232 per farm (although this could be varied depending on the size of the farm and the time taken for inspections), or about 43 cents per tonne based on a 25 million tonne grain harvest (average

annual Australian grain production over the period 1981-82 to 1985-86, BAE 1987).

Two points should be noted here. First, the Western

Australian scheme has been based on other programs, and not just on-farm monitoring, the cost of which have not been calculated here. The second point is that the cost of on-farm grain insect control may be higher than that in bulk handling

facilities due to economies of scale.

35

SUPPORTING PAPER 9

5.3.2 Cost of path options

Random inspections Random testing for chemical residues on grain received could be undertaken as part of the normal receival procedure, with little additional operational cost. It is assumed each sample would be screened for a number of known and unknown chemical compounds at a cost of $215 per sample. (Unknown chemical compounds (described in Appendix B ) are those which, while not used in general for grain protection, are

occasionally found in grain). This is equivalent to $0.43 per tonne for grain received directly from farm (assuming one sample per 500 tonnes) and $0.02 per tonne for grain from a licensed receiver (assuming one sample per 10 000 tonnes).

Farm certification scheme The second option discussed involves the introduction of an on-farm inspection and certification scheme. The cost per farm will vary depending on the number of times grain is out-turned from storage each year. The expected number of out-turns under a system where growers must certify grain on

every out-turn was estimated on the basis of the average production per farm in. each State and the average number of different grain types or classifications grown on an average farm in each State (see Table 5.1).

The Commission assumed that under a deregulated system each grower would out-load each type or classification of grain only once, either to the domestic market or to a licensed receiver. Moreover, the Commission assumed that the number of grain classifications will fall in direct proportion to the number of tonnes stored on farm, and therefore the costs per tonne shown in Table 5.2 are assumed not to vary with tonnage actually stored on farm.

There are two main costs involved in the on-farm inspection and certification scheme. The first relates to the cost of the operation and administration of the inspection scheme; for example costs of travel, setting up equipment, taking samples, conducting tests for the presence of insects and other contaminants that can be identified by visual inspection, and the administrative support for these activities. The second, relates to the tests conducted off farm, in particular, chemical residue testing. The cost of operating such a scheme is described in Appendix D and is estimated to be $95 per inspection. The cost of testing for known chemical residue is detailed in Appendix B and was estimated to be $130 per inspection. Thus, the total estimated cost is $225 per inspection. The average cost per tonne for each State, based on the ratio of out-turns to production, is shown in Table 5.2.

36

SUPPORTING PAPER 9

TABLE 5.1 FARM NUMBERS, PRODUCTION AND GRAIN TYPES

Number of farms

Average State grain production1 1 kt

Average production per grain farm

t

Number of grain types or class­ ifications

per farm

New Soyth Wales - northern - southern

15 886 8 098 510

4 3

Victoria 8 556 3 253 380 3

Queensland 5 750 3 438 598 5

South Australia

7 739 3 488 451 3

Western Australia

8 157 6 755 828 3

Total Australia

46 088 25 032 543 -

a. Five-year average to 1985-86.

b . Combined figures for northern and southern New South Wales

Source: Departments responsible for agriculture in each State; Howard & Lawrence 1986; BAE 1987.

Disinfestation on receival The final path option outlined is some form of blanket disinfestation carried out by country receivers or at port for grain received from long-term on-farm storage. Given the problems outlined previously with this approach, it is

unlikely to be adopted in isolation. Disinfestation methods are already widely known and used throughout the current system.

Love et al. (1983) calculated the costs of alternative methods of insect control. The estimated operating and capital cost (for sealing and modifying existing storages) for phosphine fumigation in various storage types ranged from

$0.17 per tonne treated for welded steel vertical silos to $2.02 per tonne treated for uncapped concrete silos. The cost of gas treatments (carbon dioxide, exhaust gas or nitrogen) ranged from $0.49 per tonne treated for welded steel vertical silos to $2.65 per tonne treated for uncapped concrete silos.

37

TABLE 5.2 COST OF FARM CERTIFICATION SCHEME ____________________________ ($)____________

State Cost per tonne

New South Wales - northern 1.76

- southern 1.32

Victoria 1.78

Queensland 1.88

South Australia 1.50

Western Australia 0.82

Source: Royal Commission into Grain Storage, Transport Handling and

The cost of thermal disinfestation has also been estimated. CSIRO suggest that a 500 tonne per hour unit used to

disinfest grain on receival would cost $1.7 million. If this cost were amortised over 15 years at a real interest rate of 5 per cent per year and assuming 1 million tonnes throughput per year (this assumes all grain received at port is

disinfested and not just that from on-farm storage), it would be $0.16 per tonne. The cost of natural gas and electricity used by the unit has been estimated at $0.50 per tonne. Where liquefied petroleum gas (LPG) must be used, the cost would be $0.80 per tonne. (Dr David Evans, CSIRO, personal communication, 1 December 1987) Overall, the total cost of such a unit will range between $0.66 and $0.96 per tonne treated. The marginal cost of labour is not included, although this is likely to be fairly minimal. It should also be noted that if only grain received from on-farm storage were disinfested by the unit, the cost per tonne would be signficantly higher.

5.3.3 Summary of options

A summary of the costs for each of the system and path

options is presented in Table 5.3.

38

TABLE 5.3 COST OF GRAIN HYGIENE OPTIONS _______________________ ( $/tonne ) _____________________________

SUPPORTING PAPER 9

Option Cost

. System options

- increased research Very small

- increased extension Very small

- co-ordinating body Very small

- on farm monitoring scheme 0.43

. Path options

- random inspection scheme . grain from on-farm storage . grain from licensed 0.43

receivers 0.02

- certification scheme 0.82 - 1.88

- blanket disinfestation on 0.17 - 2.65

receival

Source: Royal Commission into Grain Storage, Handling and Transport.

39

Codex Alimentarius

cereal grains milled products from grain cooked cereal products

wheat,rye,oats,barley wheat bran wheat flour (white) wholemeal flour

cereal grains wheat bran wheat flour (white) wholemeal flour - wheat

cereal grains milled products from raw grain

barley maize wheat wheat bran wheat flour (white) wholemeal flour - wheat

Limit mg residue/ kg commodity

0.05

5

20 0.2 2

0.5 lr

0-5

TABLE A .1 cont.

Codex Alimentarius

cereal grains bread (white) processed wheat raw wheat bran

wheat flour (white) wholemeal flour - wheat

cereal grains wheat bran wheat flour (white) wholemeal flour - wheat

cereal grains unproc. bran - wheat, rye 20 wholemeal flour- wheat,rye 2

cereal grains 10

wheat bran (unprocesssed) 20 wheat flour (white) 2

wholemeal flour - wheat 10

Limit mg residue/ kg commodity

10 0.2 2

20 1 5

10 0.5 2

8

cereal grains bran flour (white)

wholemeal flour wheat

cereal grains wheat bran wheat flour (white) wholemeal flour - wheat

10"

0r5r 2

TABLE A.l cont.

Protectant _________

Commodity

d-Phenothrin wheat grain

wheat bran wheat pollard

Piperonyl butoxide cereal grains bran wheat germ

Pirimiphos-methyl barley bran maize millet

oats rye . wheat wheat germ

NH&MRC _________

Limit Commodity

mg residue/ kg commodity_______________

Codex Alimentarius Limit mg residue/ ______kg commodity

20 40 50

7

20 7 10 7 10 10 30

cereal grains wheat bran

5

15

r r

cereal grains 20

cereal grains 10

wheat bran 20

wheat flour (white) 2

wholemeal flour- wheat,rye 5 bread (white) 0.5

bread (wholemeal) 1

p. provisional NH&MRC recommendation that is subject to revision or confirmation, r. Codex recommendation that has not yet achieved full Codex acceptance.

Source; National Health and Medical Research Council submission, September 19 87·

APPENDIX B COST OF TESTING FOR CHEMICAL RESIDUES

The NSWDA provided the Commission with results of a project it has been conducting on the costs of testing for chemical residues. The methodology used in this project involved sending out a 'dummy tender' to several Australian

laboratories that undertake chemical residue testing. Tests would be conducted for both 'known' and 'unknown' chemicals. Known chemicals are those chemicals used regularly for grain treatment. Unknown chemicals are those chemicals that, while not specifically intended as grain protectants, are occasionally found in grain. The following chemicals are commonly used on grain for insect control:

. organophosphorous compounds, including malathion, fenitrothion, dichlorvos, chlorpyriphos methyl, and pirimyphos methyl;

. synthetic pyrethroids, including bioresmethrin, deltamethrin, and d-phenothrin;

. natural pyrethrins;

. carbamates;

. fumigants, including phosphine and methyl bromide.

The following compounds that are not specifically intended for use as insect control measures in grain are occasionally found:

. chlorinated hydrocarbon compounds, including DDT, dieldrin, lindane, aldrin, and heptachlor;

. heavy metals, including lead, mercury, and cadmium.

Some heavy metals residue in grain can be traced back to applications of fungicides.

Residue detection in grain is performed by means of gas chromatography. Setting up the test, calibrating the system and analysing and interpreting the results requires a qualified chemist.

Table B.l shows typical prices for testing for these chemicals, as obtained from tendering laboratories. The prices were based on the testing of a single sample from a total contract of either 500 samples or more than 1000 samples, with a five-day notification period. The figures vary according to notification period and size of the contract. In particular, reductions of 10 to 15 per cent were

found when a notification period of around ten days was allowed.

44

SUPPORTING PAPER 9

TABLE B.l COST OF TESTING FOR CHEMICAL RESIDUES ______________________________ ($J___________________________

Chemical group

500 samples per year

Cost

More than 1000

samples per year

Organophosphorus compounds ( OP) 42 30

Chlorinated hydrocarbon compounds (O C )

50 40

Pyrethroids (Pyr) 75 40

OP+OC+Pyr 95 80

Carbaryl 62 50

Heavy metals 90 85

Note: Based on survey of private laboratories.

Source: Dr J . Johnston, NSWDA, personal communication, 1987.

For large contracts in excess of 1000 samples belonging to a single client, discounts of around 25 per cent and as high as 50 per cent can be obtained. The amount of grain required for analysis is approximately 100 to 200 grams, so that even for large numbers of samples the transport and storage cost is likely to be small relative to the total sampling costs. Costs are unlikely to vary with crop type, particularly in the case of wheat, barley and oats, the main winter cereals.

The Commission has been informed that in private and government laboratories excess capacity currently exists for chemical residues analysis - capability has been estimated at up to 10 000 samples per day. (D.J. Parry, Managing

Director, SGS Australia Pty Ltd, personal communication, 26 November 1987) Given this excess capacity in testing facilities it is conceivable that economies of scale in testing large quantities might encourage laboratories to

lower prices in order to obtain as much business as possible.

For the on-farm inspection scheme the Commission assumed that testing would be conducted for organophosphorous compounds, chlorinated hydrocarbon compounds, pyrethroids and carbary1

at a cost of $130 per sample. For random residue testing it was assumed that, in addition to testing for these chemicals, testing for heavy metals would also be carried out, at a total cost of $215 per sample.

45

APPENDIX C COST OF TESTING FOR PESTICIDE RESISTANCE

The NSWDA provided the Commission with estimates of the costs of testing for pesticide resistance in insects to chemicals used for grain insect control. Testing for resistance would be most efficiently performed in specialised laboratories:

it must be done in a controlled environment using specialised equipment.

Testing for pesticide resistance takes a relatively large amount of time, principally because of the need to breed the required number of insects. Insect populations can be increased up to tenfold per generation, depending on the health of the original sample and the culturing environment. Under the FAO testing guidelines for routine monitoring of resistance (Busevine, 1980) the minimum insect numbers required for testing are 80 for liquid chemical tests and 100 for fumigants. In addition to this, a number of insects are required to act as 'controls' for the testing (that is, insects left untreated but in a similar environment to those being tested in order to provide a comparison of death rates between treated and untreated insects). Given the likely size of field-collected samples, breeding for one generation would be necessary to ensure the required number of insects are available to provide a complete tolerance distribution. The time taken for this would be six to ten weeks.

The actual time it takes to test the insects depends upon the degree of detail required, the number of chemicals tested, the insect species tested and the purpose of the test. In the latter case, time will vary according to whether one is seeking to determine the presence of resistance to a particular chemical (only one test needed), or whether one is seeking to determine the degree of resistance (which requires eight additional similar tests).

Testing for resistance to liquid chemicals requires, insects to be kept in contact with filter paper impregnated with chemicals for at least five to 24 hours (depending on the chemical) and those that are 'knocked down' are counted (this is called a 'discriminating dose' test). If there is a 100 per cent knock-down of treated groups and a zero result for an untreated group it can be said with reasonable certainty that no resistance is present. If resistance is detected and it is necessary to determine the level of that resistance, extra (up to eight) dose tests are conducted to obtain a 'log dose probability' (LDP) line using different dosages.

Testing for resistance to chemical fumigants involves confining insects to fumigated air-tight jars for five hours if the fumigant is methyl bromide and for 20 hours if the fumigant is phosphine, and then leaving them in culture for two weeks so that mortality can be observed. If resistance is found, LDP tests are used to determine levels of

resistance.

46

SUPPORTING PAPER 9

The cost of testing for insect resistance was estimated on the basis of the cost of establishing a laboratory dedicated to the purpose. The capacity was assumed to be 5700 samples per year, based on the minimum time taken to process peak

sample receivals. Such a facility could test up to 8000 samples per year, with some delays in peak periods. The estimated Table C.l.

costs for various sampling rates are shown in

TABLE C.l COST OF TESTING FOR PESTICIDE ($) RESISTANCE

Number of samples processed per year 4 000 5 700 7 000 8 000

Cost per sample

134 112 102 97

Source: Dr J. Johnston, NSWDA, personal communication, 1987.

A detailed breakdown of these costs are as follows.

E quipm ent Table C.2 shows a detailed breakdown of equipment

requirements, life expectancy and costs required to perform resistance testing.

Consumable ite m s The cost of consumable items for fumigant testing is

negligible. Solvents and filter paper for liquid chemical testing cost $0,074 per test. Costs of insecticides used and grain for culturing and incubating insects are negligible in terms of cost per test.

L ab o u r re q u ire m e n t The time of staff is the major cost of resistance testing. The laboratory is assumed to be operated by a staff of fifteen comprising an entomologist and senior technical

officer to supervise and organise the laboratory and its activities, nine technical officers undertaking protectant tests (three teams of three), two technical officers undertaking phosphine testing, an assistant undertaking culturing and a part-time typist to process samples received

and test results. Such a staff would be able to handle a base testing load of 5700 samples per annum tested over 40 weeks and could be varied by taking on or shedding casual staff to handle peaks or troughs in work. Under this

arrangement and for 5700 samples the phosphine testing team and the person responsible for culturing would be

underutilized around 20 per cent and 38 per cent of the time respectively.

47

TABLE 0.2 EQUIPMENT COST’ S

Equipment Type Units

required

Life

expectancy

Cost Amortised

annual capital costa

no. years $ $

Annual

maintenance cost $

Total

annual cost

$

Non-specific equipment Building fixtures fittings 1 30 1 800 000 117 090

and amenitites Controlled atmosphere room 1 20 30 000 2 407

Fume cupboards 2 20 10 000 802

Pipete washer 1 15 500 48

Dishwasher 1 10 500 65

Sterilizing oven 1 10 2 000 259

Aspirator pumps 6 4 3 000 846

Exhaust cabin 1 20 2 000 160

Glassware etc. - 3 6 000 2 203

Sieves (sets) 12 15 1 960 188

Lab. safety wear - 5 1 300 300

Personal computer and programming 1 5 10 000 2 310

Equipment specific to liquid insecticide testing Metal rings 2 700 12 5 400 609

Glass sheets 300 5 2 400 554

Equipment specific to fumigant testing Gas liquid chromatograph 1 10 36 000 4 662

Phosphine generator 1 5 1 000 231

Syringes 6 2 300 161

Desicator jars 18 5 900 207

Stirrer 1 15 100 10

90 000

1 500

500

25 100 150 100

1 000

2000

Equipment specific to culturing Controlled atmosphere room 1 20 30 000 2 407

Mill 1 10 3 000 389

Moisture meter 1 20 2 000 160

207 090

3 907 1 302 48 90

359 996 260

2 203 188 300

3 310 220 053

609 554

1 163

6 662 231 161 207 ___10

7 271

3 907 539 160 4 606

SUPPORTING PAPER 9

Table C.3 shows estimated man-hours directly required for resistance testing and the associated variable labour cost. The staff requirements used to derive the man hours per test were obtained by the NSWDA as a result of discussions with researchers in that department and CSIRO, involved in resistance testing. The labour costs of the entomologist, senior technical officer and typist are regarded as fixed within the relevant range of sample numbers processed and their annual cost amounts to $67 116 including on-costs. Table C.4 shows the estimated variable cost of testing for resistance in insects. These costs assume discriminating dose testing for three liquid chemicals and one fumigant. In

addition, LDP tests (based on eight dose tests) are assumed to be required in the 5 per cent of samples where resistance is assumed to be detected.

From Table C. 2 fixed costs for equipment amount to $233 093 per year. The cost per sample will vary according to the number of samples processed each year. Therefore, the estimated total cost of resistance testing per sample will be derived from the formula:

$59.04 + ($300 209/number of samples tested)

The figures contained in Table C.l were derived from this formula.

TABLE C.3 DIRECT LABOUR TIME AND VARIABLE COSTS FOR RESISTANCE TESTING

Test Cost per test

$

Man-hours per test

Discriminating doses - liquid insecticides 11.69 0.691

- chemical fumigants 8.57 0.550

LDP doses - liquid insecticides 64.80 3.946

- chemical fumigants 46.09 3.157

Source: Dr J . Johnston, NSWDA, personal communication, 1987.

49

TABLE C.4 VARIABLE COSTS OF RESISTANCE TESTING ______________________________ ($)______________

Costs per test Liquid chemical Fumigant Cost per

sample

Discriminating - labour - consumables

dose

11.69 0.07

8.57 0.00

Sub-total 11.76 8.57 43.85

LDP doses - labour - consumables

64.80 0.56

46.09 0.00

Sub-total 65.36 46.09 12.11

Culturing 3.08

Total variable costs 59.04

Note: The labour requirement and cost for culturing of

samples is on a per sample basis. It is assumed that

the great majority of samples will only need to be

attended to once, even though they may be cultured

for several generations. For a peak period of around six weeks, casual assistance with culturing is

assumed necessary.

Source: Dr J. Johnston, NSWDA, personal communication, 1987.

50

APPENDIX D OPERATING. COSTS OF ON-FARM CERTIFICATION SCHEME

The Commission based its estimates of the operating costs of the on-farm certification scheme on estimated costs of the Western Australian inspection scheme and on information provided by BGQ. Johnston and Roberts (1987) estimated that

the cost of inspection for all purposes (that is, inspection for grain insects, rabbits and weeds) in Western Australia was $91 per farm, of which they attributed $62 per farm to inspection for grain insects. Note that the figure actually

appearing in the paper is $72 per farm but this has since been amended to $62 to allow for an error in calculation. (Dr J. Johnston, NSWDA, personal communication, August 1987)

Given that on-farm inspection for other States is likely to be solely for the purpose of grain hygiene, the more

appropriate figure to use as an estimate of operating costs is $91 per farm.

BGQ provided the Commission with some estimates of the likely cost of an inspection on each farm. These estimates were based on a calculation of time taken to inspect each farm, travel time and supporting administrative and organisational costs. It was assumed that an inspector would be able to test on average three farms per day. Average times assumed per inspection are shown in Table D.l.

TABLE D.l ASSUMED TIME TAKEN FOR INSPECTION __________________________ ( minutes )_________

Item Time

Travel (two hours per day) 40

Set up equipment 15

Draw samples 45

Screen and test samples 15

Package samples, fill out forms 15

Pack equipment and depart 15

Head office administration, etc. 15

Total 160

Note: Equipment includes items such as a vacuum probe, sieves, and a temperature probe.

Source: BGQ, personal communication, 1987.

51

SUPPORTING PAPER 9

It is assumed that a vacuum probe is used to take

representative samples from the silo or silos. The samples taken would be combined and a sample taken from this. This sample would be screened and tested for insects and other observable contaminants and then packaged to be sent for further analysis. An allowance of approximately one day per fortnight is made for administrative duties associated with each inspection. Estimated costs are shown in Table D.2.

T A B LE D . 2 E S T IM A T E D COST OF O N-FARM IN S P E C T IO N :

BULK G R A IN S QUEENSLAND

____________________ L$J___________

Item Cost

Labour ($25 per hour) 67

Vehicle ($0.30 per kilometre) 12

Administration, capital, etc 16

Total 95

Source: BGQ, personal communication, 1987.

The BGQ estimates are comparable with the costs of the Western Australian inspection scheme, which Johnston and Roberts (1987) estimated at $91 per inspection.

Wellcome Australia Limited (submission, 25 November 1987) has also provided the Commission with estimates of the likely costs of such a scheme. These costs are shown in Table D.3. The total cost was estimated to be some $346 per inspector per day. Wellcome assumed that an inspector could inspect, on average, 4.5 farms per day, which gives a cost of $77 per inspection. If one assumes that only three farms could be inspected in a day (as did BGQ) then the cost would be around $115 per inspection.

In summary, estimates provided by the three sources mentioned indicate a cost per inspection of between $77 and $115. The Commission has opted for the BGQ figure of $95, which lies near the mid-point of this range.

52

SUPPORTING PAPER 9

TABLE D.3 ESTIMATED COSTS OF ON-FARM INSPECTION: WELLCOME AUSTRALIA LIMITED ($)

Item Cost per year

Technician 35 000

On costs (25%) 8 750

Vehicle (50 000km per year) 11 000

Accommodation 6 400

Overheads (25% operating costs) 15 280

Total costs 76 430

Cost per day (221 working days per year) 346

Source: Wellcome Australia Limited submission, 25 November 1987.

53

REFERENCES

BAE 1 9 8 3 , 1 Wheat m a r k e tin g i n A u s t r a l i a : an econom ic

e v a lu a t io n ' , O c c a s io n a l P a p e r No. 8 6 , AGPS, C a n b e rra .

_____ 1 9 8 7 , Wheat M a r k e tin g and A s s is ta n c e : S u b m issio n t o th e

IAC, AGPS, Canberra.

Busevine JR 1980, 'Recommended methods for measurement of pest resistance to pesticides', FAQ Plant Production and Protection Paper 21, FAO, Rome.

Howard P & Lawrence M 1986, 'Australian grain storage c a p a c i t y ' , Q u a r t e r ly R eview o f th e R u r a l Economy, 8 ( 4 ) ,

3 3 0 -3 3 4 .

Johnston JH 1983, 'Public policy, pest management and stored grain insects', unpublished PhD thesis, Macquarie University, Sydney, August.

_____ & R o b e rts EJ 1 9 8 7 , ' The c o s ts o f fa rm in s p e c tio n f o r

agricultural pest management with particular reference to stored grain insects', paper presented at the 31st Annual Conference of the Australian Agricultural Economics Society, University of Adelaide, 9-12

February.

Love G, T w y fo rd -J o n e s P, & W oolcock I 1 9 8 3 , 'A n econom ic

e v a lu a t io n o f a l t e r n a t i v e g r a in in s e c t c o n t r o l

m e a s u re s ', BAE O c c a s io n a l P a p e r No. 7 8 , AGPS, C a n b e rra .

Price D, Herron G & Maldonado R 1987, 'On-farm grain storage project - entomological survey in southern New South Wales', paper contributed to the Australian Barley Technical Symposium, Wagga Wagga, 11-15 October.

Q u e en s lan d D e p a rtm e n t o f P rim a ry In d u s t r ie s 1 9 8 7 , A G reen

P a p e r on C o n tr o l o f th e Uses o f A g r i c u l t u r a l and

V e t e r in a r y C h e m ic a ls , Governm ent P r i n t e r , Q u e en s lan d .

54

ROYAL COMMISSION INTO GRAIN STORAGE, HANDLING AND

INDUSTRIAL RELATIONS

TRANSPORT

Supporting Paper 10 February 1988

CONTENTS

Page

1. INTRODUCTION 1

2. IDENTIFICATION OF RESTRICTIVE PRACTICES 3

2.1 Definition of 'restrictive practice' 3

2.2 Types of restrictive practices 3

2.2.1 Cost-adding practices 3

2.2.2 Production-restricting 5

practices

2.3 The Commission's approach 5

2.3.1 Methodology 5

2.3.2 Basis for identification 6

2.4 Main findings 7

2.4.1 Albany 7

2.4.2 Port Lincoln 11

2.4.3 .Geelong 17

2.4.4 Brisbane 24

2.4.5 Newcastle 26

2.5 Summary 31

3. THE IMPACT OF RESTRICTIVE PRACTICES 33

3.1 Direct and indirect costs 33

3.1.1 Direct costs 33

3.1.2 Indirect costs 33

3.2 The Commission's approach 33

3.3 Main findings 34

3.3.1 Albany 34

3.3.2 Port Lincoln 50

3.3.3 Geelong 57

3.3.4 Brisbane 65

3.3.5 Newcastle 69

3.4 Conclusions 74

4. INDUSTRIAL DISPUTES 79

4.1 Incidence and causes of disputes 79

4.1.1 Incidence of disputes 79

4.1.2 Causes of disputes 80

4.2 The cost of industrial disputes 83

4.2.1 The cost of disputes - overall 83

terms

4.2.2 The cost of disputes - a case 84

study

5. PROGRESS TO DATE 89

5.1 Climate for change 89

5.2 Restrictive practices 90

5.3 Labour relations 90

5.4 Labour adjustment 91

iii

6. STRATEGY FOR CHANGE 93

6.1 Incentive to change 93

6.2 Restrictive practices 93

6.3 Consultation 95

6.4 Industrial disputes - settlement and 95

prevention

6.5 Job security, career paths and 96

training

6.6 Labour adjustment 97

APPENDICES

A Stevedoring manning levels at the Brisbane 99

port terminals

B Principal unions in the grain distribution 102

system

REFERENCES 104

TABLES

2.1 Working hours for ship-loading: Albany 10

2.2 Levels of manning for waterside workers on 15 grain vessels before and after second-tier agreement: Port Lincoln

2.3 Working hours for ship-loading: Port Lincoln 16

2.4 Train working rates: Geelong, December 1986 to 19 June 1987

2.5 Current manning levels and 'efficient' manning 22 levels for grain vessels: Geelong

2.6 Mooring and unmooring schedule for grain 23

vessels: Geelong

2.7 Absences at the Newcastle grain terminal, 28 October 1986 to September 1987

3.1 Number of trucks required to service Albany 34 grain contract under various working arrangements at port and country receival points

3.2 Annual fixed costs of road trains 35

iv

3.3 Estimated days of use of permanent barracks 39

3.4 Estimated additional costs of 24 hour terminal 41 operation: Albany

3.5 Fixed time components in grain train 42

operation: Albany

3.6 Indicative costs and savings of 24 hour 45

availability at terminal and sidings: Albany

3.7 Potential savings from continuous shift 47

working: Albany

3.8 Cost savings from reduced stevedoring 48

manning: Albany

3.9 Cost savings from reduced stevedoring 54

manning: Port Lincoln

3.10 Potential savings from continuous shift-working: 55 Port Lincoln, 1986-87

3.11 Potential savings from continuous working over 60 two shifts: Geelong, December Quarter 1986

3.12 Total labour costs for grain ship stevedoring: 62 Geelong, October 1986 to September 1987

3.13 Summary of estimated costs of restrictive 76 practices in the grain distribution system

4.1 Loss of opportunity to load wheat 81

vessels due to unauthorised stoppages: according to State

4.2 Loss of opportunity to load wheat vessels due 82 to unauthorised stoppages attributed to bulk handling agency or waterfront labour

4.3 Industrial stoppages involving AWU/PSA: 86

Newcastle terminal, October 1986 to September 1987

4.4 'Lost time' profile: Newcastle grain terminal, 87 October 1986 to September 1987

FIGURES

2.1 Types of restrictive practices 4

3.1 The effect on export efficiency of continuous 72 operation at Newcastle grain terminal

v

1 . IN T R O D U C T IO N

This supporting paper presents the results of the

Commission's examination of industrial relations in the grain storage, handling and transport system. In particular, it focuses on restrictive practices and industrial disputes and canvasses a number of approaches aimed at improving the industrial relations environment.

The area of industrial relations encompasses a range of interrelated issues which shape relations between workers and management at the workplace, and between unions and employers more generally. Industrial relations issues range from such basic matters as pay and employment conditions, through to complex and increasingly important issues concerning work organisation, skills enhancement and technological change.

The Commission has not seen its role as inquiring into industrial relations generally in the grain distribution system, but rather to focus on those aspects of the

industrial environment that may have a major influence on the operating efficiency of the system. This approach is consistent with the Commission's terms of reference which require that it examine 'the nature of the most efficient and cost-effective integrated system' of storage, handling and transport that might be instituted in Australia.

Industrial relations in the grain distribution system are complicated by the large number of organisations involved. The distribution system takes in a number of State and Commonwealth bodies, with government and grower

representatives, which have some role in grain storage, handling, transport and marketing. There are also, of course, road transport operators, stevedoring companies and other private sector organisations involved in grain distribution. The workforce is particularly diverse and is represented by a

large number of unions. The situation is further complicated by some variations in union coverage from State to State and by virtue of the fact that both Federal and State industrial tribunals are involved in the industry to varying degrees.

Not surprisingly then, submissions to the inquiry referred to a wide range of industrial relations issues. The Commission circulated a summary of the issues raised to major service providers and unions in order to check whether these

perceptions could be taken as a valid and reliable guide to industrial relations in the grain distribution system.

Testing the accuracy and completeness of information in this way helped the Commission to identify the main areas for investigation. The Commission also held a number of meetings with the Australian Council of Trade Unions (ACTU) and the

Stevedoring Industry Review Committee (SIRC), as well as informal discussions with various other organisations and unions involved in grain distribution. As a result of this consultative process, the Commission decided that the

1

SUPPORTING PAPER 10

principal areas for further examination ought to be

restrictive practices and industrial disputes.

The structure of the paper is as follows. The Commission's approach to identifying restrictive practices is presented in Chapter 2. In Chapter 3 an assessment of the impact of these restrictive practices on the efficiency of the grain distribution system is provided. This is followed in chapter 4 by a discussion of the incidence, causes and costs of industrial disputes. An outline of the climate for change and a discussion of progress to date in reforming industrial relations are provided in Chapter 5. Finally, in Chapter 6, the Commission's options for bringing about change are presented.

The chapters on the identification and impact of restrictive practices draw heavily on work undertaken for the Commission by the Centre for Transport Policy Analysis at the University of Wollongong. Much of the material on industrial disputes was provided by the Commonwealth Department of Industrial

Relations.

During the course of the inquiry, industrial relations, as with other aspects of grain distribution, have been in a state of flux. Many of the organisations involved in grain storage, handling and transport are in the process of changing, or at least reviewing, their work and management practices. It has been extremely difficult, therefore, to obtain an up to date ' snapshot' of the state of industrial relations across the grain distribution system.

Virtually all the empirical data collected by the Commission covers the period up to 30 September 1987. The Commission has attempted to update its information as far as possible, however, and has taken account of any significant subsequent developments.

2

2. IDENTIFICATION OF RESTRICTIVE PRACTICES

2.1 Definition of 'restrictive practice'

Restrictive work and management practices can be defined as arrangements, traditions and ways of doing things in particular workplaces, which are carried out for reasons other than the safe, efficient performance of the tasks of an organisation. Restrictive practices limit productivity and efficiency and inhibit growth of output and real income.

This definition extends significantly beyond cases where there is active disagreement between management and the workforce over work organisation or workplace industrial relations issues.

In considering restrictive practices, the Commission is not particularly concerned about whether a practice is labelled a work practice or a management practice. In any event, the

distinction may not always be clear in that operational practices attributed to labour are quite often within the prerogative of management.

2.2 Types of restrictive practices

It may be useful to categorise restrictive practices according to the way in which they contribute to

inefficiency. Despite their diversity, it is possible to divide restrictive practices into two separate (though related) classes:

. those which directly increase the cost of performing the task to which they relate. These are labelled

'cost-adding' practices; and

. those which, in the first instance, are

'production-restricting'. Although these also lead to increased costs, they do so indirectly.

Figure 2.1 lists examples of practices in each category and their implications.

2.2.1 Cost-adding practices

Examples of cost-adding practices include overmanning, absenteeism and high penalty rates. Each adds to the wage cost, and hence to unit costs of production.

A cost-adding restrictive work practice may become a production-restricting management practice if, for example, terminal management, in the face of excessive penalty rate claims and one-in all-in overtime working, decided to

eliminate all work on public holidays.

3

COST-ADDING PRACTICES PRODUCTION-RESTRICTING

PRACTICES

Examples:

• Overmanning • One-in-all-in Sunday shifts • Excessive absenteeism • Refusal to pick up for half-shift on

overtime • Insistence on manning ratios (eg tradesmen/assistants) • High overtime • High Penalty Rates

Implications:

• Higher than necessary unit production costs • Distortions in balance of factor inputs, for example excessive use of

labour • Can lead to production-restricting practices

Examples:

• Job and finish • Refusal to work Saturday • Refusal to change tasks during sh or between shift and overtime • Early knock-off • Refusal to work more than one

worksite (eg trackshed) at a time • Mismatch of hours • Disputes, stoppages • Public Holiday closure • Overtime limitations

Implications:

• Increase in time required to produt unit of output • Increase in system delays • increase in unit costs • Additional capital investment

SHIP • Increase in queuing time, demurral • Increased freight rates • Increased inventory costs

TERMINAL, RAIL, ROAD AND DEPC • Underutilisation of capital equipms • Underutilisation of labour • Increased inventory costs

FARM • Increased storage requirement • Increased inventory costs • Underutilisation of capital equipms

labour

GRAIN • Increased inventory costs

FIGURE 2.1 TYPES OF RESTRICTIVE PRACTICES

Source: Royal Commission into Grain Storage, Handling and Transport.

SUPPORTING PAPER 10

2.2.2 Production-restricting practices

Many restrictive practices effectively limit the capacity of an operating system by reducing the amount of productive time available, or by constraining the system to one of several working modes. The mismatch of hours of work between

different groups of workers, closure on public holidays, and industrial stoppages all work in this way.

In effect, these practices add time to the productive process, reducing the productivity of capital equipment and causing delays.

For the grain ship, production-restricting practices mean increased time at berth. They may also lead to the formation of queues, and a further loss of time waiting to come to berth.

For the grain terminal, the railway, the road system, and country silos, production-restricting practices will mean under-utilisation of capital equipment. In particular, rolling stock and inloading and outloading facilities will be under-utilised. Delays may also mean increased labour costs, because of increased overtime and reduced labour

productivity.

2.3 The Commission's approach

2.3.1 Methodology

The Commission's approach has been to identify aspects of the performance of the tasks associated with grain storage, handling and transport that are clearly inefficient, and where changes could produce cost savings to the system as a whole without the necessity of major capital investment.

The Commission decided to focus on practices that met one or both of two criteria: either they imposed a significant cost penalty on the system, or they were a source of widespread

concern or controversy. Interruptions to ship-loading typically fall into the first of these categories. At most ports, advance ordering of labour falls into the second.

It was not possible for the Commission to examine all real and alleged restrictive practices in every part of the entire Australian grain distribution system. Through the consultative process outlined in Chapter 1, however, the

Commission was able to determine key areas for detailed investigation.

The Commission decided to conduct its investigations on a case study basis. Each case study focused on a particular port terminal and the region that it serves. One terminal was selected in each of New South Wales, Victoria, Western Australia and South Australia while in Queensland, the three

terminals in the Port of Brisbane were selected. The case

5

SUPPORTING PAPER 10

studies were chosen in order to ensure a mix in terms of terminal size, technology, port operations and industrial relations climate.

In August 1987, the Commission engaged the Centre for Transport Policy Analysis at the University of Wollongong to identify and assess the impact of restrictive practices in each of the case study areas and to propose possible

solutions. The Centre based its investigations on a

comprehensive program of interviews with representatives of the organisations and unions involved in grain distribution.

A draft report was prepared and circulated for comment. This report to the Commission was finalised in late 1987 and provided much of the data contained in Sections 2.4 and 3.3 of this paper.

2.3.2 Basis for identification

In nearly all cases, identifying restrictive practices involves a substantial element of judgment. All workplaces are governed by rules or conventions as to what can

reasonably be expected of employees. Labelling the rules that apply at one particular location as 'restrictive' requires reference to some standard of what is reasonable. In many cases, it is also necessary to make judgments on what is technically feasible.

The Commission has relied heavily on the advice of those interviewed as to what is technically feasible. This is particularly so with manning levels and operational practices that have real or perceived safety implications. The Commission's task was made easier, in some cases, by the fact that managers and union representatives were engaged in negotiating improvements under the restructuring and efficiency principle of the second tier. (The second tier allows for wage rises up to 4 per cent based on agreements for productivity improvement reached between unions and employers at workplace and industry levels and ratified by the appropriate industrial relations commission.) In those cases, alternative work arrangements may have been recently canvassed.

On other occasions, however, the Commission has relied solely on its own judgment. In each case, the Commission has tried to make the basis of its view clear in this paper. Any

explicit differences of opinion between the Commission and either management or unions are acknowledged.

6

SUPPORTING PAPER 10

2.4 Main findings

2.4.1 Albany

Albany is a high-technology, high-storage port terminal for which both road and rail receivals are important. There has been considerable concern about the extent to which terminal hours affect road and rail productivity.

Road transport Road transport of grain from country storage to the Albany terminal is contracted to a single trucking operator, OD Transport. High vehicle utilisation is the key to

efficiency with any trucking operation. The operating times of the Albany port terminal discharge facilities and the loading times at country bins prevent OD Transport from

getting additional mileage out of its equipment.

This constraint is particularly severe when, as was the case until recently at Albany, the hours of port working are closely aligned with those of the country silo. Under these circumstances, many trucks loading at the silo after lunch on medium- and long-haul routes are unable to reach the port

terminal in time to discharge their loads on the same day. This in turn restricts the availability of the truck on the following day, since it can not begin its re-positioning trip until perhaps 9 or 10am. Empty trucks would normally be relocated to country bins in the early hours of the morning,

in order to extend their effective hours of operation.

Recent modifications to truck receival hours at the Albany terminal have alleviated this difficulty to some extent, but interruptions to loading, and the length of the working day at the port and the country receival points still restrict the operator in using his capital equipment efficiently.

Rail transport Westrail's flexibility in scheduling grain trains is constrained by the strict limitations that are imposed on the duration of shifts worked by locomotive drivers. Award conditions limit scheduled shift duration to eight and a half hours. A one-hour extension can be worked on an irregular basis, but there is little or no flexibility to extend beyond that limit.

The shift duration includes 15 minutes to sign on and 15 minutes to sign off. There is an additional (technically essential) loss of 30 minutes when the crew starts up the locomotive and makes mechanical and safety checks. These two factors reduce the effective working time to seven and a half hours.

Arrangements for transporting crews to change-over points also appear to be inefficient. The current practice within Westrail is to provide a driver for crews requiring transport

7

SUPPORTING PAPER 10

to locomotives at transfer points. Since crews are rostered on during the transfer journey, this is a demarcation issue, rather than one related to hours of work.

Westrail's current practice is to provide accommodation for train crews in permanent barracks at all book-off points. Train crews have been unwilling to accept the alternatives of either mobile barracks or commercial accommodation. This has two implications:

. On trains that are destined for locations that are not served by barracks, crews must be transferred during shift time to locations at which barracks are available. This means loss of working time and additional transport costs.

. It is more costly for Westrail to maintain permanent barracks than to use mobile barracks. Many of the permanent barracks get very little use.

Under current demarcation arrangements, car and wagon examiners, who are members of the Australian Railways Union (ARU), are employed to carry out brake testing on all trains. In part, this duplicates a task performed by locomotive crews at the commencement of each run as part of the initial start-up checks. Westrail suggests that considerable savings could be made by reducing the number of

full examinations made, using train examiners' time more flexibly, and by placing greater reliance on the testing done by train crews.

Extensive shunting is necessary at the Albany terminal. Although this is largely due to problems relating to inadequate equipment and yard layout, Westrail believes that there is scope to improve efficiency by reducing the size of shunting crews from four to two.

Westrail also believes that the hours of work at country sidings and the Albany port terminal place significant limitations on its ability to efficiently deploy its resources. At the moment, virtually all points in the Albany region are served on a 48-hour cycle. Wagons are positioned at the loading point early on day one, and loaded during daylight hours. They are then picked up and hauled to the terminal, arriving either overnight or during working hours for discharge at Albany on the second day.

Port terminal The extensive automation of the terminal that took place as part of the Stage V development has reduced the number of plant operators required substantially. Since January 1983,

the complement has been reduced from 45 to 38, and it is generally agreed that there is scope for further reductions. However, the speed at which these reductions can be achieved is limited by a commitment given by Co-operative Bulk Handling Limited of Western Australia (WACBH) to its workforce in 1984 that any further staff reductions will be

8

SUPPORTING PAPER 10

achieved by natural attrition. As the issue of further reductions in manning is a sensitive one, WACBH is reluctant to make an official estimate of what could be considered an efficient manning level.

The Commission understands that it would probably take another three to four years of natural attrition before an efficient manning level is reached. On the assumption that separations will occur at much the same rate in the future

as they have in the past, this suggests that there is at present a surplus of between six and eight operatives within the terminal.

The shipping gallery at the terminal is normally manned by two plant operators during shipping operations. The operators' primary function is the parking and unparking of the ship loader, but this takes only a very small portion of

their time on a normal shipping shift. For the rest of the shift, the operators patrol the very long shipping gallery, monitoring the flow of grain on the conveyor belts, and cleaning the gallery.

There is a strong case for the contention that the use of two men in the shipping gallery is excessive. The Australian Workers' Union (AWU) supports the current level of manning on safety grounds, arguing, with some justification, that the

shipping gallery is a long way from the main plant and is a fairly hazardous location. The AWU claims that the present 'fixed device' communication between the gallery and the main plant is inadequate, and argues that a man working alone would not be able to summon assistance in the event of an

accident. The AWU agrees, however, that with communication by portable two-way radio, the second gallery attendant would not be necessary.

Table 2.1 shows the effect that meal breaks and other interruptions have on the number of hours that ship-loading is actually carried out. Vessel loading records indicate

that lost production due to discontinuous operation is likely to be in the order of three hours in a typical double shift, and can be significantly greater when weather conditions make closing up the ship or parking the loader advisable during

longer breaks.

Wherever possible, breaks taken by terminal workers have been aligned with those of waterside workers. However, because of the differing durations of the breaks, there are still periods during which one set of workers is on duty while the other is taking a break.

Waterfront The normal stevedoring gang for grain ships in Albany consists of five waterside workers, two foremen and a supervisor. If only one spout is in use, then the gang can be reduced by two waterside workers and one foreman.

9

TABLE 2.1 WORKING HOURS FOR SHIP-LOADING: ALBANY

WACBH Terminal WWF

Day Shift 0730-1530 0730-1430

Smoko 0930-0945 0930-0950

Meal 1200-1230 1150-1230

Smoko 1415-1430 1415-1430

Evening Shift 1530-2300 1430-2130

Meal 1645-1745 1645-1745

Smoko 1930-1945 1930-1950

Walk & Wash N/A 2120-2130

Night Shift 2300-0700 2300-0600

Smoko 0130-0145 0130-0150

Meal 0345-0415 0345-0420

Smoko 0545-0600 N/A

Walk & Wash N/A 0550-0600

Notes: WWF meal break times include walk and wash time of 10 minutes at start of break.

Source: Royal Commission into Grain Storage, Handling and Transport

However, this does not happen very often in practice. The full gang must be used if two spouts are in use for any part of the shift. It is also the custom to use a full gang for both day and evening shift if one spout is to be used on day shift and two spouts on the evening shift.

There seems to be widespread agreement (Waterside Workers Federation (WWF) excepted) that three waterside workers (one on each hold and one relief) could adequately perform all the required duties, including fitting and removing the banana chute. With this smaller gang, it would be extremely difficult to justify more than one foreman. The difficulties in reducing manning to this level appear to be industrial rather than technical.

During the two-shift operation that is typical of Albany, formal breaks account for about two hours and 45 minutes of the 14 hour period (refer to Table 2.1). The long lead time from the main plant to the ship-loaders means that every time work is interrupted a further loss of about five minutes is incurred in order to clear the conveyor. With current stevedoring gang sizes well in excess of normal requirements, there should be no real difficulty in staggering breaks to ensure continuous working.

10

SUPPORTING PAPER 10

In addition to the 22 A-register waterside workers at the port, there is a substantial pool of supplementary labour available. However, an agreement exists with the WWF to use supplementary labour only if there is no labour available at any Western Australian port. As a consequence, it is sometimes necessary to transfer labour into the port from Esperance, Bunbury or very occasionally Fremantle or Geraldton. Freer use of supplementary labour would

substantially reduce the need for interport transfers.

Mooring in the port is organised by the Albany Port Authority using WWF labour. Under the terms of the Mooring Staff - Albany Industrial Agreement, a gang of six workers is used for mooring operations, and a gang of four for unmooring. In each case a supervisor is also required, and a minimum payment equivalent to four hours of work is made. It is generally agreed that the minimum period is well in excess of the actual time required to perform the operation,

particularly in the case of unmooring.

2.4.2 Port Lincoln

The road and rail systems feeding Port Lincoln are relatively simple and congestion with shipping is not a problem. Never­ theless, out-loading performance relative to rated capacity is poor. This is largely due to the fragmented development

of the terminal and Port Lincoln's role as a top-up port, but operational factors also play a role.

Country storage and handling South Australia is unique amongst Australian bulk handling agencies in that the management of country receival points is let out to private agents. People employed on country silo operations are still technically South Australian

Co-operative Bulk Handling Limited (SACBH) employees, working under the Bulk Handling of Grain Award, but all are engaged on a casual basis and are employed and laid off at the

discretion of the agent.

The Bulk Handling of Grain Award does provide some notional limitation on this flexibility. Clause 20(b) of the award stipulates that:

Except for overtime work a casual employee shall be guaranteed not less than four hours of engagement on any day, provided that should the time of commencement be earlier than 12 noon he shall, if required to work after the mid-day break, be guaranteed at least four hours work after such break unless he leaves of his own accord before the completion of such period.

Most casual employees are paid for a full shift because of this provision. Unit train working, in many cases, is premised on a loading period at the country silo of not more that 5-6 hours. It may be the case that casual employees are

11

SUPPORTING PAPER 10

paid during out-loading operations for longer periods than are strictly necessary.

SACBH maintains, however, that the remainder of the shift can in most cases be usefully worked out in silo cleaning and other essential duties.

Road transport Contract road haulage in the Eyre Peninsula is performed by a single contractor, Llewellyn Transport. The contract covers all road served silos in the Port Lincoln district.

Llewellyn Transport believes that the hours of country silo operation and terminal operation are generally adequate. There has been no difficulty in arranging extended hours or weekend working at the terminal when necessary. However, the breaks taken within the shift, particularly the one hour

lunch break, do cause some problems. Llewellyn Transport estimates that uninterrupted working at the terminal would enable it to meet its contractual obligations to SACBH with one less road train.

Rail transport Many of the restrictive practices at Australian National (AN) are similar to those described for Westrail in the Albany case study. However, because of differences in the geography of the rail networks, the consequences, in virtually all cases, are less serious for AN.

AN employs two train and wagon examiners at the Port Lincoln terminal. Their duties involve identifying faults and carrying out a very limited range of minor repairs.

Productive time is at present fairly low. It would be possible to make fuller use of these men by expanding the range of repairs that they undertake.

The issue of train examiners carrying out repairs,

essentially a demarcation matter, was discussed in 1987 as part of A N 's second tier negotiations. The Commission understands that, although agreement could not be reached, considerable progress was made and further discussions will be held.

Although AN is committed to introducing two-man crewing throughout its operations, the transition phase is not yet complete. At the time of the Commission's investigations (September 1987), there were five superfluous crew members in the Port Lincoln district, who had yet to accept a redundancy package or transfer to other duties. One of them has since resigned under AN ' s Voluntary Redundancy Incentive Scheme. It is possible that some or all of the others will also accept voluntary redundancy within the next twelve months. In the meantime, AN is carrying the excess costs.

12

SUPPORTING PAPER 10

Port terminal Manning levels at the Port Lincoln terminal, as at other South Australian terminals, are very flexible. SACBH has agreed with the AWU on 1 core' manning levels that will be

retained at port terminals in years of extreme drought. These are well below the normal minimum operating

requirements.

Ship-loading operations outside of normal terminal hours are generally worked as overtime rather than as an additional shift. The number of men required varies, depending on the number of storage blocks from which grain is to be taken. The minimum, if only block 6 is worked, is ten for wheat and nine for barley ships. Three additional workers are used for each additional block.

The basic complement includes three men in the central control room, two men monitoring the belts, and a

supervisor. In addition, there are three maintenance workers -a mechanical fitter, an electrician and a trades assistant. With wheat ships, another employee is allocated to

screening. When more than one block is used, additional hands are kept on to monitor the belts in each working block.

It is only in control room operations that it could be argued that there is any excess staff under these arrangements. Two rather than three operators could probably adequately perform the tasks required. The use of an extra operator is

regarded, at least in part, as a training overhead. This is arguably no longer strictly necessary.

As with terminal staff, the number of Department of Primary Industries and Energy (DPIE) samplers engaged during ship-loading varies with the number of blocks in operation. The number of men required also varies from block to block, depending mainly on the number of belts operated in the block. There are two categories of grain sampler:

. State Department of Agriculture employees who are permanent officers and authorised to act on behalf of DPIE;

. casual samplers, members of the Federated Clerks Union and engaged by the State Department as needed, who are not authorised officers.

The casual samplers work on a half hour on, half hour off basis. The Commission understands that this arrangement was introduced some years ago because of occupational health concerns.

SACBH and DPIE are moving towards automatic sampling in order to minimise the occupational health hazards associated with the work and to establish a basis for negotiating a reduction

in manning. At Port Lincoln, automatic sampling and inspection facilities exist in block 6 and should be introduced shortly in blocks 1 and 4. In the meantime, the

13

SUPPORTING PAPER 10

half hour on, half hour off arrangement adds significantly to costs.

As with the SACBH and the DPIE, shipping operations out of normal working hours are worked as overtime. Department of Marine and Harbour (DMH) employs six men plus a supervisor on ship-loading activities - two men are assigned to each of the

ship-loaders and three patrol the belts. Because all those employed on ship-loading operations are tradesmen, they are able to carry out running repairs on the equipment when necessary. There is, therefore, no need to employ additional maintenance workers. In addition, a cleaning gang of four men is employed on permanent nightshift.

Whether the use of two men on each ship-loader represents overmanning is a matter of fine judgement. Only one is actually engaged in operating the loader, the other is essentially an observer. DMH maintains that the visibility

from the control box at the pivot point of the loader is restricted, and the second man plays a vital role in ensuring that there are no collisions with ship's gear or other accidents, and for early detection of actual or potential spillages.

On the other hand, there is always a member of a stevedoring gang on duty, normally on board the vessel with an even better view than the observer. Until recently,

communications were by telephone, and this may well have been unsatisfactory for the detailed direction of ship-loader positioning. But two-way radios tuned to dedicated frequencies have now been introduced, and the supervisor is now able to contact the ship-loader quickly and, if

necessary, communicate continuously.

Waterfront At the time of the Commission's investigations, the standard size of the stevedoring gang was ten waterside workers, with two foremen and a supervisor. Although there was provision for the gang size to be reduced to six when only one spout was in use, this was rarely invoked.

The Commission understands that the custom of the port is to pick up for all shifts worked on a vessel and the largest gang required for any shift. In addition, the interpretation of the 'one-spout' condition allowed the reduced manning

levels to be used only if no more than one hatch was worked. If more than one hatch was worked, albeit with only one loader in operation, the ten man gang was still used. When trimming machines were in use, the stevedoring gang size was increased to eighteen.

The Association of Employers of Waterside Labour (AEWL) and WWF negotiated new manning scales for Port Lincoln as part of their second tier agreement. Table 2.2 outlines the changes in manning levels.

14

SUPPORTING PAPER 10

TABLE 2.2 LEVELS OF MANNING FOR WATERSIDE WORKERS ON GRAIN VESSELS BEFORE AND AFTER SECOND-TIER AGREEMENT: PORT LINCOLN (Number of men)

Operation Before After

One Spout