February 8, 2007

 

Australia AWB likely to stall currency-wheat hedging
 

 

Australia's AWB Ltd. might stall the start of currency and commodity hedging for the next wheat crop because of uncertainty over export arrangements, company spokesman Peter McBride said Thursday.

 

No final decision on hedging programmes has yet been made by the company, but it is unlikely that AWB will start these while the future of the export system is in doubt, he said by telephone from Melbourne.

 

AWB usually starts currency hedging for the wheat crop mostly harvested in November and December around February or March, and commodity hedging a month or two later to support returns for the collective export monopoly sales pool that it operates, he said.

 

The company usually feeds this hedging into an estimated pool return range that it issued in past years, in late February or March, and that growers use to help in planning winter cropping programmes. But this is also in doubt, he added.

 

AWB usually operates one of Australia's largest currency hedging programmes to support wheat exports, the annual volume of which can approach 20 million tonnes and value almost A$5 billion (about US$3.896 billion).

 

AWB is also one of the largest industry participants in wheat futures markets in the US.

 

Even if AWB has an opinion about what production from the next crop might be, it cannot estimate the size of its collective sales pool and so might not hedge, he added.

 

"It would be unwise to do it due to not having a handle on what the future marketing arrangements will be and therefore not really knowing the potential size of the national pool," he said.

 

AWB might, at some future stage, start these hedging programmes but that depends on industry and government decisions about export arrangements, he said.

 

A four-member panel appointed by the government is consulting with wheat growers and the industry about their export wheat marketing needs. The panel is holding 25 public forums on the issue around Australia, the first of which was held Jan 31 in Queensland and the last scheduled in Perth on Feb 23.

 

The government will use the panel's report, which it wants by Mar 30, for making a decision on future wheat export marketing arrangements.

 

This decision to consult on marketing needs followed a report from an inquiry about AWB's payment of US$221.7 million in kickbacks to the former Iraqi regime of Saddam Hussein under the UN oil-for-food programme.

 

The inquiry, headed by former state judge Terence Cole, found AWB might have broken local criminal and corporate laws by making the payments. 11 former AWB executives were named to have possibly acted illegally. A police task force is looking into the report.

 

McBride said everyone wants this consultation process to come to a conclusion as soon as possible.

 

Grains analyst Malcolm Bartholomaeus said that while AWB's likely decision to stall hedging is understandable, it could be costly for growers who do not manage their own commodity risk if the best wheat prices for the coming crop are prevailing now.

 

"The risk for growers is the US$5/bushel on offer right now for new season wheat would not be there by the end of the year," he wrote in his Smart Marketing column in The Land weekly farm newspaper.

 

Current forward prices suggest a net return for the next Australian wheat crop of about A$240/tonne, but if a large global crop pushes US wheat prices down to US$4/bushel, then local net returns likely will come in about A$190/tonne, he said.

 

Bartholomaeus said the wheat export system was straining at the seams because growers in Western Australia and South Australia, who have little choice but to export, are no longer willing to subsidise growers in eastern Australia, by paying the full cost of managing and maintaining the export system during drought years.

 

Growers in Australia's three eastern states have a vibrant domestic market to sell into, unlike growers elsewhere, who must make use of AWB's export monopoly.

 

Bartholomaeus said Australia needs either deregulation or a much lower cost export monopoly system, paid for by all growers each year, not just by a few growers locked into using the export monopoly year in, year out.