Wilson Tuckey (O'Connor, Liberal Party) Share this | Link to this | Hansard source

The purpose of this grievance speech is to call for the government to establish immediately an independent forensic financial audit of all the entities of the AWB Ltd conglomerate, particularly in terms of the internal transactions of the publicly listed company and its subsidiary AWB International. To support this request, I quote the following examples provided to me by a knowledgeable witness who would, I am sure, if given appropriate protection, be prepared to assist in such an inquiry.

The Australian wheat industry has been subject to regulated single desk marketing since the late 1940s, conducted until 1999 by a government statutory authority called the Australian Wheat Board. It managed the pooling operation based on the simple principle of sharing with growers the total proceeds of its sales, less operating and market costs which, according to the Grains Council of Australia, totalled some $53 million in its last year of operation, compared with $165 million with the present entity today.

In 1999 these operations were corporatised, with two major entities being established—that is, AWB Ltd, which was listed on the Australian Stock Exchange in August 2001, and its subsidiary AWB International, AWBI, identified as company B in the legislation, which was responsible for the management of the ongoing wheat pool operation with a constitutional responsibility to maximise grower returns. AWBI also held a veto over the issuance of export licences to other operators. This provided a monopoly over wheat growers dependent on the export market such as those in my electorate of O’Connor. However, as the parent company, AWB Ltd opted to undertake all of AWBI’s duties under a service agreement. AWBI existed with no directly employed staff and under a board of directors dominated by the board members and senior executives of AWB Ltd, leaving it open to AWB Ltd to manage its financial affairs as it chose.

In its later years of operation, the Australian Wheat Board commenced offering its pool participants a variety of financial products, particularly in terms of its expanding operations in the derivatives markets. Upon the transfer to this corporate entity, derivative trading and the operation of an extensive loan book became the foundation of AWB Ltd operations, including on behalf of the AWBI pool. Whilst AWB Ltd has constantly claimed an ability to gain physical sale price premiums due to its monopoly marketing status, it appears that where this has occurred it resulted more from derivative trading than from exceeding world prices for physical sales. This risky derivatives practice has now been fully exposed.

Under the corporatised model, growers have to borrow against the value of their as yet unsold wheat deliveries but, as the AWBI pool only provides an estimated pool return, EPR, which varies significantly from time to time, AWB Ltd provides an underwriting product at a cost of approximately $1.60 per tonne by which growers can insure themselves to borrow up to 80 per cent of the EPR announced at harvest time. In the absence of any claims, this service delivers revenues to its shareholders, possibly a profit of around $20 million per annum.

The 2001-02 pool deliveries were approximately 17 million tonnes, followed by a 2002-03 delivery of only 4.5 million tonnes, which is almost identical to the 2005-06 and 2006-07 deliveries, at 18 million tonnes and an estimated four million tonnes respectively. The significant difference, however, is that in the 2002-03 year of low production world prices fell significantly, commencing early in 2003, whilst as I stand here they are rising.

In fact early in 2003 the 2002 harvest EPR was reduced by about $40 per tonne, or approximately 15 per cent, which raised the threat that this reduced value of growers’ wheat could no longer cover their borrowings as underwritten by AWB Ltd and its shareholders. However, there was an available carryover of wheat from the 2001-02 season which needed to be sold forward in 2002-03. I am advised that, to avoid the possibility of breaching the underwriting, the management of AWB Ltd decided to transfer two million tonnes of that wheat at below market value into the forthcoming pool. When sold at market value by the 2002-03 pool, the profit increased the pool’s per tonne EPR to a figure in excess of the trigger level at which AWB would have had to pay compensation to lenders.

The value of this transaction was approximately $50 million, which increased the 2002-03 EPR by approximately $10 per tonne but had a minimal noticeable per tonne impact on the 17 million tonnes delivered in 2001-02. The effect on growers’ return was, however, twofold. Those who delivered to the 2001-02 pool had their overall pool returns reduced by $50 million, and those who delivered to the 2002-03 pool should have received approximately $50 million from the profits of AWB Ltd, which was avoided by this device.

Those in the AWB Ltd workforce who prided themselves on the mantra of maximising grower returns made formal protests to the AWB Ltd senior executive, whose name has been provided to me, but were ignored. I am advised that during 2001 an email was directed to the chief executive of AWB Ltd protesting about scams of this nature and that attempts were subsequently made at the most senior level to have this email removed from the company database.

Another initiative first implemented by the Australian Wheat Board was termed the ‘basis pool’. It allowed participating growers to receive the proceeds of physical sales from the national pool excluding any profit or loss from its derivatives trading, which they were free to conduct on their own behalf. However, upon corporatisation this scheme was not retained by AWBI but was taken over by AWB Ltd.

In its first year of operation under AWB management but prior to the share market listing the differential between the basis pool and the national pool was a negative $5.33 per tonne, which probably represented a reasonable assessment of the profits accrued by AWBI through its derivatives trading. However, by the 2002-03 season, this differential had become a negative $56.16 per tonne, which, after adjustment for the difference in the closing of the basis pool in November and the national pool in the following March, of $7 per tonne, could be rounded out to $50, which, under the operating conditions of the basis pool, should have represented only the profit achieved by the national pool through derivatives trading, which is a most unlikely scenario.

I am advised that a substantial and undisclosed amount was deducted by AWB Ltd for service fees over and above those charged to the national pool, which included the notorious $65 million and bonuses. In fact, it appears that by then AWB Ltd treated this pool as its own property. On one occasion a senior executive, also named to me, simply ordered the staff who were responsible for the management of the basis pool to transfer the sum of $2 million, or $10 a tonne, to AWB Ltd as management fees. This figure was subsequently reduced to $1 million when the staff involved protested vigorously. The $1 million fee, however, was not disclosed as required under the financial services act.

The basis pool concept was embraced by a number of farm improvement groups in my electorate, such as the South East Premium Wheat Growers Association, the Liebe Group and the Mingenew-Irwin Group. Put simply, their expectation was to receive a payment equal to the net value of the national pool excluding the futures trading effect. Yet every year they received an escalating negative return culminating in $50 per tonne for the 2002-03 season and $40 per tonne for the 2003-04 season. For instance, to substantiate the $40 differential for 2003-04 would mean that AWBI’s future trading profit over that pool of 20 million tonnes was $800 million.

The situation stands in stark contrast with the claims now promulgated by the new management of AWB Ltd that, unless they can obtain all of the approximately four million tonnes of the 2006-07 production at prices well below the price available to wheat growers from other traders such as CBH, they will be unable to manage the losses on their forward position—which, if true, should be the responsibility of AWB Ltd and its shareholders, not distressed wheat growers battling to recover the cost of seeding.

Clearly the first, and simple, task for the forensic audit is to analyse the annual profits from derivative trading within the national pool to establish the integrity of these figures or to establish that undisclosed fees and charges have been deducted from the proceeds otherwise available to participants in the basis pool scheme. I seek leave to have an AWB press release tabled. It is a simple document and the opposition is aware of it.

Leave granted.

In closing, let me say that this document shows how complicated AWB managed to make that very simple concept—I believe simply to confuse wheat growers, who in the end had no idea what they were supposed to be paid. They were losing $50-odd a tonne.