What should be the U.S. response to AWB illicit payments to Saddam Hussein?
On October 27, 2005, the United Nations issued a devastating report on illicit payments made to Saddam Hussein’s regime under the UN Oil for Food (OFF) Programme. We at U.S. Wheat Associates are impressed with the report’s depth and detail about the Australian Wheat Board (AWB Ltd.) transactions, and with the fact that the committee, led by Paul Volcker, made the AWB a major “case study.”
The Independent Inquiry Committee into the United Nations Oil-for-Food Programme found that the Australian Wheat Board was the largest supplier to Iraq under the Programme ($2.3 billion), and estimated that AWB accounted for more than 14 percent of the illicit payments made to Iraq in connection with the humanitarian purchases under the Programme.
In a letter to committee chairman Paul Volcker, AWB leadership asserted that “AWB never intended for payments to be channeled to the former Iraqi government,” and claimed to have no knowledge of the arrangements. The Committee acknowledges that it did not find sufficient evidence to conclude that AWB had actual knowledge but makes very strong arguments in its case study that AWB should have known.
USW finds it inconceivable that they did not know.
The Australian government has pledged to conduct an “inquiry” into the payments.
Put a stop to AWB participation in U.S. market system
Knowingly paying kickbacks to prop up the Saddam regime, if proven, would be a moral outrage. Beyond that, paying bribes to foreign officials is a crime in most countries, including both Australia and the U.S. Because of the seriousness of the matter and in view of the strong case put forward by the Committee against the AWB, USW makes several recommendations:
1. Suspend the AWB monopoly from participating in the U.S. futures markets.
2. Bar the AWB from any further access to the U.S. government credit programs that they have used and abused.
3. Prohibit AWB from using any U.S. Export-Import Bank programs, particularly for wheat sales to Iraq.
Why do we suggest these actions? Because they are the only feasible options available for the U.S. to object to the ethical and legal improprieties suggested by the UN report. If the AWB knowingly funneled money to Saddam Hussein’s regime, the repercussions would be of such magnitude and importance that the U.S. should act now, especially given the apparent reluctance of the Australian government to appoint a “royal commission” to investigate the charges.
Suspend AWB participation in U.S. futures markets
The AWB is a significant player in the U.S. futures markets. Many argue that they add volume and liquidity. It is true that they add volume, in that they are one private company that can hold a volume that can be the equivalent of 50 to 70 percent of all U.S. wheat exports in any given year. But liquidity? Actually, the potential liquidity in U.S. futures markets would be substantially greater if hundreds of farmers, shippers, warehousemen and traders in Australia were able to individually participate. Thus, the monopoly aspect of AWB hurts rather than helps in the futures markets.
In the months leading up to the beginning of any crop year, a U.S. grain company essentially starts with a zero position in both cash and futures. As they formulate market opinion, buy cash wheat from the country and/or sell wheat forward to U.S. mills or into export positions, U.S. companies trade futures as price risk management tools to allow them to take or offset these cash transactions. They have no underlying source of profit or even cost recovery, until they buy, handle, move the wheat and earn a margin, all which must be done under a competitive market system while, at the same time, managing the risk of price volatility.
On the other hand, because of its monopoly authority, the AWB is granted full and sole control -- without a competitor -- over the purchase and sale of up to 20 million metric tons of wheat. Their monopoly benefit, on average, is the equivalent of singularly holding between 15 and 20 percent of the total world wheat trade. In this process, the Australian wheat farmers pay AWB a direct operations cost recovery (as provided through the monopoly authority) of about $65 million annually, plus AWB retains 20 percent of the “profits” from sales generated above a fixed grower price. All of this income and return is given without the need to compete with anyone and without the need to manage risk.
In the months leading up to a new crop, the AWB essentially becomes “long” the entire export position of Australia at an acquisition price that is only equal to their initial payment guaranteed to the wheat producer through their wheat pool program. This is, of course, a very low initial price based on 80 percent of their estimated annual pool price return -- less all of the AWB anticipated “expenses” -- which are reflected in the $65 million transfer from Australian producers to the AWB. (Just for contrast, try to imagine U.S. wheat producers providing a $65 million operating guarantee to a multinational U.S. grain company, without question, before the first bushel was even turned over? Impossible.)
From this point, the AWB can, and does at times, become a significant player in the U.S. wheat futures markets. However, because of their inherent “long position,” their needs and uses have an entirely different motivation than the other commercial entities trading in the marketplace. While they may choose to do it, buying futures at this point would only be an additional long speculation. Their only logical risk management need to use U.S. futures would be to take short positions as an offset to their given long cash position, which could eventually be rolled forward or liquidated as they make cash export sales over the ensuing months.
Because of AWB’s monopoly authority, the potential liquidity in U.S. futures markets is actually being limited. If Australian prices do exhibit identifiable relationships to U.S. futures markets (as it appears the AWB believes by their trading activities), then disbanding their monopoly authority would bring more grain companies into the Australian cash markets, provide price competition in the market place and demonstrate the benefits to all Australian farmers, domestic traders and handlers, cooperatives, flour millers, and exporters for participating in the US futures markets. None of these agri-businesses currently have much need to trade U.S. futures in conjunction with Australian wheat cash transactions. These businesses are currently not adding to market volume and liquidity.
With open trading and competition in the Australian domestic market, these new market participants, hedge accounts and speculator clients would all add to increased trade volume and liquidity in the U.S. wheat pit -- not less.
Bar the AWB from any further access to the U.S. government credit programs
It is one thing to have a monopoly on exports from their country, but the monopoly becomes especially powerful (and trade distorting) when it is accompanied by the ability to be a trader in the world market of all types and origins of commodities. AWB has used that power to abuse U.S. credit programs, and so we must call an immediate halt to AWB’s ability to stiff the U.S. tax payers.
In the summer of 2004, AWB sold U.S. soybeans to a private buyer in Indonesia and registered their sale for 65 percent risk guarantee coverage under the USDA Supplier Credit Guarantee Program (SCGP). We will refrain from listing commercially sensitive details, but suffice it to say that AWB subsequently notified USDA that their buyer was in default on the contract and asked USDA for reimbursement. It is widely accepted that AWB, in contravention to the program rules, recovered 100 percent of their losses from this default from various sources. American farmers and the rest of the U.S. taxpayers covered tens of millions of dollars in AWB “losses.”
The damage to the U.S. did not end with the U.S. taxpayer. Despite not having a single previous incident of default by Indonesia on U.S. commodity purchases guaranteed under the GSM 102, the AWB default was the major event that spurred the USDA shut down of all U.S. government export financing programs for Indonesia.
The loss of this program for U.S. wheat contrasts to a press release from Australian Trade Minister Mark Vaile, where he credits AWB with using the similar Australian government EFIC National Interest Account export credit program to sell and finance $300 million in Australian wheat exports to Indonesia over a five year period.
In short, AWB blew up the U.S. export credit program for Indonesia but maintained exclusive access to their own. Commercial buyers today in Indonesia want consideration of U.S. export credit financing to buy U.S. wheat (and soybeans and corn) but, because of the AWB program default, USDA is unwilling to consider any new credit facilities. No program translates into less U.S. exports.
Prohibit AWB from using any U.S. Export-Import Bank programs
The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. Ex-Im Bank’s mission is to assist in financing the export of U.S. goods and services to international markets.
The Ex-Im recently announced a new export credit financing program to assist the Iraqi government in establishing creditworthiness for commodity purchases. Within days of the announcement, USW received information that the AWB was pursuing information relative to their interest in using the program for wheat sales to Iraq.
We stridently object to this. First, the Ex-Im’s mission is to support U.S. sales, not Australian. Second, as U.S. companies have neither access to Australian wheat nor to the Australian government’s EFIC export credit programs, the AWB’s attempts to access and use U.S. government programs is patently unfair.
Reform, NOW
Up until now, the U.S. has not restricted the access of the AWB to U.S. markets in any way. They trade in our cash and futures markets and have registered as an exporter under USDA export credit programs. Unfortunately, no U.S. company has the same access to the Australia market. Nor do U.S. exporters have monopoly authority providing money to financially prop up their futures trading activities.
USW has long called for disciplines on the export monopolies. The Oil for Food travesty adds new urgency to the need for reform.
Let’s redouble our efforts to eliminate such export monopolies, through the WTO trading rules. Some have argued that since the export monopolities are so secretive, the solution would be greater transparency. But transparency will not solve the problems. The solution is to end the monopoly powers. |