United States General Accounting Office

GAO Report to Congressional Requesters

June 1996 CANADA, AUSTRALIA,

AND NEW ZEALAND

Potential Ability of

Agricultural State Trading

Enterprises to Distort

Trade

G O A

years

1921 - 1996

GAO/NSIAD-96-94

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-266130 

June 24, 1996

Congressional Requesters

As you requested, we have reviewed state trading enterprises in three countries: Canada,

Australia, and New Zealand. Our review focused on the capabilities and activities of the

Canadian Wheat Board, the Australian Wheat Board, and the New Zealand Dairy Board. We

developed a framework to analyze these boards and determine whether or not each board was

capable of distorting world markets in their respective commodities.

We are sending copies of this report to the Secretary of Agriculture; the U.S. Trade

Representative; officials of the Canadian, Australian, and New Zealand governments; and other

interested parties. Copies will also be made available to others on request.

Please contact me on (202) 512-8984 if you or your staff have any questions concerning this

report. The major contributors to this report are listed in appendix III.

JayEtta Z. Hecker

Associate Director

International Relations and Trade Issues
B-266130 

List of Congressional Requesters

The Honorable Kent Conrad

The Honorable Larry Craig

The Honorable Byron Dorgan

The Honorable Russell Feingold

The Honorable Herb Kohl

The Honorable Larry Pressler

United States Senate

The Honorable Pat Roberts

Chairman, Committee on Agriculture

House of Representatives

The Honorable Steve Gunderson

Chairman, Subcommittee on Livestock, Dairy, and Poultry

Committee on Agriculture

House of Representatives

The Honorable Joe Skeen

Chairman, Subcommittee on Agriculture, Rural Development, Food

 and Administration, and Related Agencies

Committee on Appropriations

House of Representatives

The Honorable David R. Obey

Ranking Minority Member

Committee on Appropriations

House of Representatives

The Honorable Doug Bereuter

The Honorable Sherwood Boehlert

The Honorable Robert Borski

The Honorable Tim Holden

The Honorable Tim Johnson

The Honorable John M. McHugh

The Honorable Thomas Petri

The Honorable Earl Pomeroy

House of Representatives

Page 2 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
B-266130 

Page 3 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Executive Summary

Purpose The agricultural agreements of the Uruguay Round (1986-94) of the

General Agreement on Tariffs and Trade (GATT) were intended to move

member nations toward the goal of establishing a fair and market-oriented

agricultural trading system. Through a process of progressive reductions

in internal governmental support and export subsidies, conversion of

quotas to tariffs, lowering of barriers to import access, and other reforms

called for by the agreements, the member nations hoped to reduce

distortions in world agricultural markets and to prevent additional

distortions from occurring. Trade distortion can occur when a country’s

policies change production and consumption decisions from what they

would be if they faced an open international market.

Some member nations are using state trading enterprises (STE) to regulate

imports and/or exports of selected products. STEs are generally considered

to be enterprises that are authorized to engage in trade and are owned,

sanctioned, or otherwise supported by the government. Since the start of

GATT, member countries have noted STEs’ unique role and potential to

distort world trade and have thus required them to operate in accordance

with commercial considerations. STEs may have control over exports or

imports of certain commodities; their practices to control these

commodities have included levies on production and/or imports, licenses

for exports, government guarantees, and subsidies. Although STEs are

legitimate trading entities and are subject to GATT regulations, some U.S.

agricultural producers and others are concerned that these STEs, through

their monopoly powers and government support, may have the ability to

distort worldwide trade in their respective commodities.

Eighteen members of Congress, including the Chairman of the House

Agriculture Committee; the Chairman of the House Agriculture

Subcommittee on Livestock, Dairy, and Poultry; and the Ranking Minority

Member of the House Committee on Appropriations, asked GAO to review a

number of issues related to the activities of other countries’ agricultural

STEs. This report, one in a series of products on the nature of state trading

in other countries, discusses (1) the potential capability of export-oriented

agricultural STEs to distort trade and (2) the specific potential capability of

the Canadian Wheat Board (CWB), the Australian Wheat Board (AWB), and

the New Zealand Dairy Board (NZDB) to engage in trade-distorting

activities, based on their status as STEs.

Background Governments have supported the export of agricultural commodities

through a number of means, including direct and indirect subsidies to

Page 4 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Executive Summary

agricultural producers. For example, the United States and the European

Union, as well as other countries, offer subsidies through a variety of

mechanisms. STEs also benefit from government subsidies, but play a

different role in the market. Some trade experts and some member

countries are concerned about STEs’ potential to distort trade due to their

role as both market regulator and market participant. However, it should

be noted that a particular policy can potentially distort trade without being

defined as unfair under GATT. For example, government assistance for

disadvantaged regions can be allowed by GATT under certain conditions.

This government assistance might allow certain firms to continue to

operate that would not survive in a normal competitive environment.

STEs that have monopoly buying authority for certain domestic products

may gain advantages as a result of their overall control of the domestic

supply. These advantages can be trade distorting, such as where STE

authority allows cross-subsidization between domestic and foreign

markets or between foreign markets. Cross-subsidization can occur when

an STE sells products at a loss in one market and finances those losses

through highly profitable sales in another market. Government support for

STEs involving direct and indirect subsidies also provides advantages over

competitors in world markets and can distort world trade. Additionally,

relationships between STEs and foreign buyers can provide advantages

through the ability to charge different prices in different markets. These

advantages are particularly evident in restricted foreign markets, such as

in the United States, where imports of certain commodities are limited.

STEs have been important international players in the wheat and dairy

trade. Some industry observers are concerned about the market power of

specific STEs. Sixteen member countries have reported to GATT about STEs

in either their wheat and/or dairy sectors. The international wheat trade

sector includes STEs such as CWB and AWB, which control 22 percent and

7 percent of the world wheat trade, respectively. NZDB is one of the more

important players in the world dairy trade, controlling approximately

25 percent of international trade in dairy products.

Because complete transaction-level data needed to fully evaluate potential

trade-distorting activities were not available, GAO is not in a position to say

whether or not trade-distorting activities actually have occurred. Even

with this information, such an extensive analysis would require additional

data regarding production costs and comparative private firms’ sales. As

such, definitive statements regarding STEs’ trade-distorting activities can

not be easily reached.

Page 5 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Executive Summary

Results in Brief It is necessary to consider STEs on a case-by-case basis to understand their

potential to distort trade. The three STEs GAO reviewed—CWB, AWB, and

NZDB—have varying capabilities to potentially distort trade in their

respective commodities, although in each case these capabilities have

generally been reduced over recent years due to lower levels of

government assistance.

• CWB benefits from (1) the Canadian government’s subsidies to cover CWB’s

periodic operational deficits; (2) monopoly over both the domestic human

consumption and export wheat and barley markets, which may allow for

cross-subsidization; and (3) pricing flexibility through delayed producer

payments. Canada’s elimination of transportation subsidies in 1995 has

reduced some of the indirect government support going to Canadian

wheat and barley producers, and ongoing Canadian reviews of the

country’s agricultural policies may reduce the control of CWB in the future.

• AWB has not received direct government subsidies in several years, but

enjoys a government guarantee on its payments to producers. AWB also

enjoys indirect subsidies in the form of favorable interest rates and an

authority to collect additional funds from producers for investment. The

deregulation of Australia’s domestic grain trade and the decline of direct

government assistance have lessened the possible trade-distorting policies

of AWB. Recent studies have challenged the premise behind a single selling

authority, but AWB’s monopoly over wheat exports still provides it with a

sure source of supply.

• NZDB is relatively subsidy free, but benefits from its monopoly over New

Zealand dairy exports and its extensive subsidiary structure worldwide.

NZDB’s size and exclusive purchasing authority for export also translate

into market power for NZDB in certain world dairy markets. Its subsidiaries

allow it to keep profits from foreign sales within the organization and take

advantage of the difference between world prices and those of the country

in which it is selling the goods, such as the United States. NZDB’s potential

to distort trade due to direct government subsidies was eliminated during

the 1980s when New Zealand deregulated the domestic dairy market and

stopped offering dairy farmers direct government subsidies.

Principal Findings

Three Relationships Key to

STE Ability to Distort

Trade

GAO’s framework for analyzing export STEs—reviewed by experts from the

World Trade Organization, the U.S. Trade Representative (USTR), and other

organizations—highlights three STE relationships—with domestic

Page 6 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Executive Summary

producers, governments, and foreign buyers—that are key to STEs’ abilities

to distort trade. STEs can have monopoly buying authority over all

domestic production of a particular commodity, or the production of that

commodity for export. This authority provides STEs with the ability to

potentially distort trade through such practices as cross-subsidization. The

STE relationship with the government involves the ways in which the

government can directly or indirectly influence the STE financially.

Government support, through direct or indirect subsidies, could provide

an STE with an advantage over its commercial counterpart and has the

potential to distort trade. The STE’s relationship with a foreign buyer can

also provide it with certain advantages, particularly when the STE is

exporting to markets that are already distorted by import quotas. The

establishment of an STE can also lead to a reduction in the number of

exporters and an increase in the market power of the remaining

participants.

GAO’s framework provides some advantages in the collection, reporting,

and interpretation of information on STE operations. First, it aids in the

collection of a consistent and comprehensive set of information about the

operations of these entities. Similarly, it facilitates reporting about STE

characteristics, since the material can be described in an organized

manner. Finally, the framework helps in the interpretation of the

information about STEs, since it aims at distinguishing between important

characteristics and those that are less important.

Domestic Support and

Monopoly Buying

Authority May Provide

CWB With Opportunity to

Distort Trade

The CWB’s relationship with the Canadian government, as well as its

relationship with Canadian wheat and barley producers, provides CWB with

opportunities to potentially distort trade. Since the establishment of CWB in

1935, the Canadian government has provided more than $1.2 billion (U.S.)

to CWB to help it cover periodic wheat and barley pooling deficits.

Canadian wheat producers also benefited from a government railway

subsidy; this subsidy was eliminated in August 1995. CWB also receives

indirect subsidies as a result of its STE status, such as a lower interest rate

on commercial loans. Through its monopoly authority over Canadian

wheat and barley sold for domestic human consumption or export, CWB

has a limited ability to cross-subsidize its wheat exports and an even

greater potential for cross-subsidizing Canadian barley exports between

its domestic and export markets. Finally, the CWB’s monopoly authority

may provide it with greater pricing flexibility in its relationship with

foreign buyers than is found among private sector traders.

Page 7 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Executive Summary

U.S. Department of Agriculture (USDA) officials acknowledged that they did

not have any evidence that CWB was violating existing trade agreements.

However, trade differences between the United States and Canada have

led to curbs on Canadian wheat imports into the United States and the

establishment of a joint commission to look at all aspects of the two

countries’ respective marketing and support systems for grain. Canada’s

elimination of transportation subsidies to Canadian producers, its reviews

of CWB operations and Canadian agriculture, and its ongoing discussions

with the United States may reduce the CWB’s potential to distort trade in

the future.

AWB Enjoys Indirect

Government Subsidies;

Potential to Distort Trade

Has Declined

AWB has limited potential to distort international wheat markets. The AWB’s

level of direct government assistance has diminished over its 57-year

history, but indirect assistance measures still exist. AWB does not routinely

receive direct subsidies from the Australian government, but its payments

are underwritten by a government guarantee. Because of this guarantee,

AWB receives favorable interest rates on its loans, according to Australian

government officials and AWB itself. In recent years, the AWB’s overall

authority has been decreased through the government’s removal of certain

powers. For example, AWB no longer has a monopoly over wheat sales to

the domestic market, so cross-subsidization between its domestic and

foreign market sales is no longer economically feasible. However, the

AWB’s monopoly buying authority over wheat exports may provide some

advantage over its private sector counterparts, as it has a sure source of

supply and does not have to react to competition from other Australian

exporters. Additionally, AWB has access to revenue from an industrywide

mandatory levy on wheat, allowing it to diversify risk by investing in other

projects. Studies have suggested that a single selling authority is inefficient

and that the AWB’s commercial orientation will have to be enhanced.

NZDB Cannot Use

Government Subsidies to

Distort Trade, but Size and

Subsidiary Structure

Provide Economic

Advantages

The NZDB’s ability to distort trade by using government funds is very

limited since NZDB has not received direct subsidies from the New Zealand

government since the mid-1980s. Nevertheless, NZDB still commands about

25 percent of world dairy trade and has established strong trade footholds

in emerging Asian markets. The NZDB’s statutory authority allows it to

maintain a monopoly over dairy exports but does not permit it to maintain

control over the domestic market; thus, NZDB can not subsidize its export

sales from domestic sales. NZDB also does not have the authority to collect

tariffs on imports of dairy products. Its size and monopoly purchasing

authority allow it to benefit from economies of scale and a certain source

Page 8 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Executive Summary

of supply and provide market power for NZDB in certain world dairy

markets. One of the NZDB’s greatest economic advantages is its network of

international subsidiaries, such as those in the United States. This network

helps NZDB sell a greater amount of its goods at the best possible price in

countries worldwide, especially those countries with markets that are

restricted by quotas. As such, NZDB may reap greater profits from foreign

price support systems and the lack of lower-priced imports in a particular

country. Some U.S. dairy industry sources contend that the NZDB’s ability

to differentiate pricing in foreign markets provides an unfair advantage

over competitors, but GAO had insufficient data to make a judgment on this

potential practice.

Recommendations GAO is not making recommendations in this report.

Agency and Country

Comments

GAO received comments from the USTR and the USDA’s Foreign Agricultural

Service (FAS). USTR was generally pleased with the report and did not offer

written comments. FAS, in its written comments, acknowledged that the

report provided useful insights into state trading issues. However, FAS was

concerned that GAO had not fully explored certain market power issues as

they relate to STEs, such as a guaranteed product supply and pricing

flexibility. Although GAO generally had addressed these issues in its draft

report, it expanded the discussion to better reflect the importance of these

issues in the final report.

GAO also discussed the factual content of the report as it related to the STE

in the individual country with embassy representatives from Canada,

Australia, and New Zealand. Their comments have been incorporated in

the report where appropriate.

Page 9 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Contents

Executive Summary 4

Chapter 1 

Introduction

14

Uruguay Round Participants Committed to Liberalized Trade 14

STE Operations Monitored Under GATT 15

Agreement on Agriculture Applies to STEs 16

STEs Most Prevalent in Grain and Dairy Sectors 18

United States and Other Countries Subsidize Wheat and Milk

Production

19

Objectives, Scope, and Methodology 20

Chapter 2 

A Framework for

Congressional

Reference and Review

of Export STEs

23

STE Relationship With Domestic Producers 24

Government Can Provide Financial Advantages to the STE 27

STE Relationship to Foreign Buyers Depends Upon Other

Factors

28

Chapter 3 

Monopoly Authority

and Government

Support May Allow

CWB to Potentially

Distort Trade

32

Background 32

CWB-Producer Relationship: CWB Monopoly Authority Increases

the CWB’s Ability to Potentially Distort Trade

35

CWB-Government Relationship: CWB Losses Covered by the

Canadian Government

40

CWB-Foreign Buyer Relationship: Flexibility in Pricing May

Allow CWB to Potentially Distort Trade

44

Chapter 4 

AWB Enjoys Indirect

Government

Subsidies, but Ability

to Distort Trade Is

Limited

50

Background 50

AWB-Producer Relationship: Payments Made Over Time 53

AWB-Government Relationship: Both Direct and Indirect

Government Subsidies Help AWB

54

AWB-Foreign Buyer Relationship: Monopoly Status Allows for

Flexible Pricing

58

Page 10 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Contents

Chapter 5 

NZDB Receives Little

Government Support,

but Size and

Subsidiary Structure

Provide Economic

Advantages

60

Background 60

NZDB-Producer Relationship: Pooling Disperses Risk;

Cross-subsidization Between Domestic and Foreign Markets Not

Possible

65

NZDB-Government Relationship: Government Assistance Is

Limited

67

NZDB-Foreign Buyer Relationship: Subsidiaries and Outside

Investments Allow for Greater Returns

69

Appendixes Appendix I: Framework and Country Information 72

Appendix II: Comments From the U.S. Department of Agriculture 75

Appendix III: Major Contributors to This Report 79

Related GAO Products 80

Tables Table 1.1: GATT Member Countries Reporting STEs in Grain or

Dairy Sector, 1980-95

18

Table 1.2: PSE Rates for Wheat, 1979-94 19

Table 1.3: PSE Rates for Milk, 1979-94 20

Table 3.1: Disposition of Canadian Wheat and Barley, 1988-94

Crop Years

34

Table 3.2: Distribution of Sales of CWB-Administered Wheat and

Barley, 1988-94 Crop Years

37

Table 3.3: CWB Wheat and Barley Price Pooling Deficits Since

1943

42

Table 4.1: Australian Grain Marketing—Acquisition Authority, by

State

51

Figures Figure 2.1: Illustration of Key Relationships of Export STEs 23

Figure 3.1: Share of World Exports of Wheat and Wheat Products

by Country, 1993-95

33

Figure 4.1: Australia’s Major Wheat Export Markets 52

Figure 5.1: World Milk Production by Country, 1993 Estimates 61

Figure 5.2: Major Exporters of Skimmed Milk Powder by

Country, 1993 Estimates

62

Figure 5.3: Major Exporters of Cheese by Country, 1993

Estimates

63

Page 11 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Contents

Figure 5.4: New Zealand Agricultural Exports, Year Ending

December 1993

64

Abbreviations

AWB Australian Wheat Board

CWB Canadian Wheat Board

DPIE Department of Primary Industries and Energy

EEP Export Enhancement Program

ERS Economic Research Service

EU European Union

FAS Foreign Agricultural Service

GATT General Agreement on Tariffs and Trade

MAF Ministry of Agriculture and Fisheries (New Zealand)

NAFTA North American Free Trade Agreement

NZDB New Zealand Dairy Board

OECD Organization for Economic Cooperation and Development

PSE Producer subsidy equivalent

STE State trading enterprise

USDA U.S. Department of Agriculture

WIF Wheat Industry Fund

WTO World Trade Organization

USTR U.S. Trade Representative

Page 12 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Page 13 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Chapter 1 

Introduction

With the completion of the Uruguay Round of multilateral trade

negotiations in 1994, member countries of the General Agreement on

Tariffs and Trade (GATT) agreed to a variety of disciplines1

 for international

trade in agricultural products. Nonetheless, according to GATT/World Trade

Organization (WTO) and member country officials, state trading enterprises

(STE) were not a major issue during the Uruguay Round.2

 Since the start of

GATT, member countries have noted STEs’ unique role and potential to

distort world trade and have thus required them to operate in accordance

with commercial considerations. STEs have been important players in the

world agriculture market, particularly in wheat and dairy products. Since

1980, 16 GATT member countries3

 have reported to the GATT secretariat that

they operate STEs in their wheat sector, while 14 countries have reported

STEs in their dairy sector. With the volume of trade in agricultural goods

expected to expand, understanding the role and operations of STEs is likely

to be an important component in understanding the nature of international

trade.

Uruguay Round

Participants

Committed to

Liberalized Trade

The Final Act resulting from the GATT Uruguay Round negotiations was

signed by more than 117 countries on April 15, 1994.4

 The intent of the

Uruguay Round was to further open markets among GATT countries. Under

the Uruguay Round agreement, member countries committed to

reductions in tariffs worldwide by one-third; strengthened GATT through

the creation of WTO5

 and a revised multilateral dispute settlement

mechanism; improved disciplines over unfair trade practices; broadened

GATT coverage by including areas of trade in services, intellectual property

rights, and trade-related investment that previously were not covered; and

provided increased coverage to the areas of agriculture, textiles and

clothing, government procurement, and trade and the environment.

1

“Disciplines” as used in this report refers to rules, commitments, and procedures contained in GATT

and related agreements.

2

STEs are generally considered to be governmental or nongovernmental enterprises that are

authorized to engage in trade and are owned, sanctioned, or otherwise supported by the government.

3

Participants in GATT were known as “contracting parties” until 1994 when WTO was established. In

this report, however, we refer to contracting parties, as well as participants in WTO, as “member

countries.”

4

The Uruguay Round was conducted from 1986 to 1994.

5

The Uruguay Round created WTO as a formal organization encompassing all GATT disciplines to

replace the provisional GATT organizational structure. As an organization, GATT officially ended on

December 31, 1995.

Page 14 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Chapter 1 

Introduction

STE Operations

Monitored Under

GATT

Since GATT was first drafted in 1947, STEs have been recognized as

legitimate trading partners in world markets. However, the original

drafters of GATT also understood how governments with a dual role as

market regulator and market participant can engage in activities that

protect domestic producers and place foreign producers at a disadvantage.

A separate GATT article was established to monitor STEs and ensure they

operate within GATT disciplines. Article XVII establishes a number of

guidelines and requirements with respect to the activities of STEs and the

obligations of member countries. In addition to holding STEs to the same

disciplines as other trading entities, such as making purchases or sales in

accordance with commercial considerations and allowing enterprises from

other countries the opportunity to compete, the article requires periodic

reporting by member countries to the GATT/WTO secretariat.6

In an August 1995 report,7 we commented on the disciplines placed on

STEs by both article XVII and other GATT provisions. Among other things,

our report noted that GATT member countries’ compliance with the 

article XVII reporting requirement between 1980 and 1994 had been poor.

In addition, although state trading was not a major issue during the

Uruguay Round negotiations, members established a definition of STEs and

new measures to improve reporting compliance. Our report also

highlighted the Uruguay Round’s Agreement on Agriculture, which

requires all countries trading in agricultural goods, including those with

STEs, to observe new trade-liberalizing disciplines (the agreement is

defined in the next section). Finally, our report emphasized that the

effectiveness of article XVII is especially important given the potential for

increases in STEs if countries such as the People’s Republic of China

(China), Russia, and Ukraine join GATT/WTO.

Attempts to understand the role of STEs are complicated by the various

measures that STEs use to control either a country’s production, imports,

and/or exports. As we reported in August 1995, STEs’ practices to control

commodities have included placing levies on production and/or imports,

requiring licenses for exports, giving government guarantees, and

providing export subsidies. Some STEs have justified their controls by

6

Information is provided to the GATT/WTO secretariat about STEs and their activities on the basis of a

questionnaire adopted in 1960. These responses are called “notifications.” The questionnaire asks

GATT/WTO members to list their STEs, the products for which STEs are maintained, and the reasons

for maintaining STEs. It also asks them to provide certain information about how their STEs function

and statistics that indicate the extent of trade accounted for by STEs.

7

State Trading Enterprises: Compliance With the General Agreement on Tariffs and Trade

(GAO/GGD-95-208, Aug. 30, 1995).

Page 15 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Chapter 1 

Introduction

emphasizing the needs for such things as protection against low-priced

imports and safeguarding national security.

As a result of the Uruguay Round, GATT/WTO member countries have agreed

to define STEs as8

governmental and nongovernmental enterprises, including marketing boards, which have

been granted exclusive or special rights or privileges, including statutory or constitutional

powers, in the exercise of which they influence through their purchases or sales the level

or direction of imports or exports.

As we stated in our 1995 report, it is still too early to determine the impact

of the STE definition and additional measures to improve the reporting

compliance of member countries. These new measures include the

creation of a working party to review STE notifications. Although some

GATT/WTO member countries have stated that article XVII should require

that STEs report more information, such as detailed data about transaction

prices, other member countries consider this information to be

confidential and related to an STE’s commercial interests. The absence of

this information is expected to hinder those member countries concerned

about the role of STEs from obtaining the type of information they say is

needed to fully determine whether STEs are adhering to GATT disciplines.

According to U.S. Department of Agriculture (USDA) officials, the working

group on STEs has met twice since August 1995. Members of this working

group are reviewing each others’ notifications for completeness.

Additionally, the United States has proposed improvements to the existing

questionnaire on state trading and is seeking disciplines on STE activities

through a working group on credit guarantee disciplines.

Agreement on

Agriculture Applies to

STEs

The Agreement on Agriculture, resulting from the Uruguay Round,

requires member countries to make specific reductions in three

areas—market access restrictions, export subsidies, and internal

support—over a 6-year period beginning in 1995.9

 Under the market access

commitment, countries are required to convert all nontariff barriers, such

as quotas, to tariff equivalents and reduce the resulting tariff equivalents

(as well as old tariffs) during the implementation period. Under the export

8

This definition is found in the Understanding on the Interpretation of Article XVII of the General

Agreement on Tariffs and Trade 1994. The complete text of this understanding was provided in

appendix III of GAO/GGD-95-208.

9

Developing countries have 10 years to comply with the reductions.

Page 16 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Chapter 1 

Introduction

subsidy commitment, countries are required to reduce their budgetary

expenditures on export subsidies and their quantity of subsidized exports.

Member countries are also expected to reduce their aggregate measure of

selected internal support policies. These internal support policies include

budgetary expenditures and revenue forgone by governments or their

agents. These reductions are expected to have the effect of liberalizing

trade in agricultural products, thereby increasing the flow of these

products between GATT/WTO member countries. STEs are subject to these

reductions.

The United States is expected to experience economic benefits as a result

of the new trade discipline in agriculture. As we reported in 1994,10 USDA

estimated that as a result of the Uruguay Round, U.S. annual agricultural

exports are likely to increase between $1.6 billion and $4.7 billion by 2000,

and between $4.7 billion and $8.7 billion by 2005. Higher world income, as

well as reduced tariffs and export subsidies among U.S. trade partners, is

also expected to raise U.S. exports of coarse grains, cotton, dairy, meat,

oilseeds and oilseed products, rice, specialty crops such as fruits and nuts,

and wheat.11U.S. subsidies on some agricultural products will also be

reduced, most likely shrinking government support for dairy, coarse

grains, meat, oilseed products, and wheat.

Nonetheless, even with projected gains for U.S. agriculture, some U.S.

producers are concerned that countries with STEs have not taken the same

steps to reduce trade-distorting activities. For example, the United States

developed its agricultural export subsidies to counteract those of other

countries, such as members of the European Union (EU).12 These export

subsidies were subsequently used to counteract STE practices as well. U.S.

producers are now concerned that under the Uruguay Round the United

States has committed to reduce those subsidies without a corresponding

reduction in other countries’ state trading activities.13

10The General Agreement on Tariffs and Trade: Uruguay Round Final Act Should Produce Overall U.S.

Economic Gains, Volume 2 (GAO/GGD-94-83b, July 29, 1994).

11The same GAO report also cited an International Trade Commission report, Potential Impact on the

U.S. Economy and Industries of the GATT Uruguay Round Agreements, that projected modest gains

(5 percent to 15 percent) in U.S. exports of fruits and vegetables, grains, and tobacco and tobacco

products, and sizable gains (over 15 percent) in U.S exports of dairy products and beverages.

12The EU prior to January 1, 1995, was comprised of Belgium, Denmark, France, Germany, Greece,

Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, and the United Kingdom. Austria,

Finland, and Sweden became members of the EU on January 1, 1995.

13In addition, a particular activity can potentially distort trade without being defined as an unfair

trading practice under GATT. For example, government assistance for disadvantaged regions can be

allowed by GATT under certain conditions. This government assistance might allow certain firms to

continue to operate that would not survive in a normal competitive environment.

Page 17 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Chapter 1 

Introduction

STEs Most Prevalent

in Grain and Dairy

Sectors

The majority of STEs reported to the GATT secretariat between 1980 and

1995 involved trade in agricultural products. Although the reporting

represented only a portion of GATT member countries, the largest number

of STEs were found to be trading in either grains and cereals or dairy

products. As shown in table 1.1, 16 member countries have reported state

trading in their grain and cereals sector, while 14 have reported state

trading in their dairy sector.

Table 1.1: GATT Member Countries

Reporting STEs in Grain or Dairy

Sector, 1980-95 Country

STE in grain and

cereal sector?

STE in dairy

sector? Last notification

Australia Yes Yes 1995

Canada Yes Yes 1995

Cyprus Yes Yes 1995

Czech Republic Yes Yes 1994

Finland Yes No 1993

India Yes Yes 1992

Indonesia Yes No 1995

Israel Yes No 1981

Japan Yes Yes 1995

New Zealand No Yes 1995

Norway Yes No 1995

Poland Yes Yes 1995

Slovak Republic Yes Yes 1995

South Africa Yes Yes 1994

Spain Yes Yes 1984

Switzerland No Yes 1994

Turkey Yes No 1995

United Kingdom No Yes 1993

United Statesa Yes Yes 1995

aIn its 1995 notification to GATT/WTO, the United States reported the Commodity Credit

Corporation as an STE. According to the notification, the Corporation is a government-owned and

-operated entity within USDA, created to stabilize, support, and protect farm income and prices.

The Corporation also aims to help maintain balanced and adequate supplies of agricultural

commodities and to assist in their orderly distribution, including wheat and dairy commodities.

Source: Article XVII notifications submitted to GATT/WTO secretariat.

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Chapter 1 

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United States and

Other Countries

Subsidize Wheat and

Milk Production

Countries support their agricultural producers through both direct and

indirect assistance. One way of measuring the flow of direct and indirect

government assistance to producers is by using the “producer subsidy

equivalent” (PSE). The Organization for Economic Cooperation and

Development (OECD) uses PSEs to compare levels of assistance among

countries. PSE is an internationally recognized measure of government

assistance. It represents the value of the monetary transfers to agricultural

production from consumers of agricultural products and from taxpayers

resulting from a given set of agricultural policies in a given year. A

relatively high PSE means that the government provides a larger amount of

production assistance than do governments in countries with a lower PSE.

Table 1.2 presents the PSEs for wheat in Australia, Canada, the EU, and the

United States from 1979 to 1994. Table 1.3 presents the PSEs for milk in

Australia, the EU, New Zealand, and the United States during the same

period. As indicated in both tables, in recent years both the EU and the

United States have subsidized their wheat and milk production to a greater

extent than Australia, Canada, or New Zealand.

Table 1.2: PSE Rates for Wheat,

1979-94 (as a percent of production) Country 1979-81 1986-88 1989-91 1992 1993a 1994a

Australia 7 11 8 7 7 10

Canada 14 52 46 35 28 20

European

Communityb

33 56 45 47 56 57

United States 14 54 42 37 45 42

Note: Percentage PSE represents the total value of transfers as a percentage of the total value of

production (valued at domestic prices), adjusted to include direct payments and to exclude

levies.

aFigures for 1993 and 1994 are estimates.

bNow the EU.

Source: Agricultural Policies, Markets and Trade in OECD Countries: Monitoring and Outlook

1995, OECD (Paris: 1995).

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Table 1.3: PSE Rates for Milk, 1979-94

(as a percentage of production) Country 1979-81 1986-88 1989-91 1992 1993a 1994a

Australia 24 30 30 32 25 30

European

Communityb

53 64 63 65 62 63

New Zealand 20 11 2 2 2 2

United States 55 64 57 54 55 54

Note: Percentage PSE represents the total value of transfers as a percentage of the total value of

production (valued at domestic prices), adjusted to include direct payments and to exclude

levies.

aFigures for 1993 and 1994 are estimates.

bNow the EU.

Source: Agricultural Policies, Markets and Trade in OECD Countries.

Objectives, Scope,

and Methodology

Members of Congress’ concerns about STEs, further informed by reports of

the USDA’s Foreign Agricultural Service (FAS) and the International Trade

Commission that highlight the operations and trading practices of STEs

operating in the world dairy and wheat markets, have led to the issuance

of three GAO reports on the subject of STEs.14 We have already published

reports on state trading, including (1) a July 1995 report that provides a

summary of trade remedy laws available to investigate and respond to

activities of entities trading with the United States, including STEs;15 (2) a

report on the GATT/WTO disciplines that apply to STEs and the effectiveness

of those disciplines to date;16 and (3) a correspondence report describing

the impact of the Uruguay Round on U.S. cheese quotas and importer

licensing process, as well as the operations of the New Zealand Dairy

Board (NZDB) in the United States.17

Eighteen Members of the House of Representatives and the Senate have

also asked us to provide more information on how STEs operate in an open,

competitive marketplace. Members noted the role of state trading in the

wheat and dairy sectors, saying that any trade problems in these sectors

could be representative of potential problems that may affect U.S.

producers, processors, exporters, and importers. We were asked to

14In August 1995, we also briefed the congressional requesters on the status of our work.

15GAO/OGC-95-24, July 28, 1995.

16State Trading Enterprises: Compliance With the General Agreement on Tariffs and Trade

(GAO/GGD-95-208, Aug. 30, 1995).

17Cheese Imports (GAO/RCED-95-280R, Sept. 29, 1995).

Page 20 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
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Introduction

describe (1) the potential capability of export-oriented agricultural STEs to

distort trade and (2) the specific potential of the Canadian Wheat Board

(CWB), the Australian Wheat Board (AWB), and NZDB to engage in

trade-distorting activities, based on their status as STEs. We agreed to

review the three export STEs based upon their considerable role in

international trade and not due to any assumption of trade distortion.

To create a framework for understanding export STEs,18 we reviewed

various trade practices and trade agreements; reviewed related literature;

interviewed U.S., GATT/WTO member country and GATT/WTO secretariat

officials; and utilized information from STE and national government

officials in Canada, Australia, and New Zealand. Our purpose in

establishing a framework was to (1) facilitate data collection in the three

countries, (2) allow for various STE characteristics to be reported in a

consistent and organized manner, and (3) determine the relevant

relationships maintained by STEs and thereby come to some conclusion

about whether or not an STE is able to distort international trade. We used

the framework as a tool to try to partially overcome the transparency

(openness) problem found in international trade in both the dairy and

wheat sectors. The absence of transaction-level data, protected as

commercial practice by both STE and private sector traders, necessitated

another way of evaluating STEs’ influence on the market. However, foreign

countries’ STEs and private firms are under no obligation to provide these

data, since we have no audit authority over them. Even with this

information, such an extensive analysis would require additional data

regarding production costs. As such, definitive conclusions regarding STEs’

trade-distorting activities cannot be reached, given the complexity of the

overall task. The framework underwent a peer review by economists at

WTO, USDA’s FAS and Economic Research Service (ERS), the Congressional

Research Service, and a private sector agricultural organization. We made

changes in the framework where appropriate.

To obtain information about STE operations in Canada, we interviewed

officials from CWB, Agriculture Canada, the Canadian Grain Commission,

the Canadian International Grains Institute, the Department of Foreign

Affairs and International Trade, private sector grain traders, and provincial

grain associations. In Australia, we interviewed officials with AWB, the

Department of Primary Industries and Energy (DPIE), the Department of

Foreign Affairs and Trade, the Grains Council of Australia, and the

18Export STEs include those STEs where the primary role of the enterprise is to sell a particular

commodity in a foreign market. Import STEs’ primary role is to control and market foreign goods

coming into the host country. Our framework is specific to export STEs since CWB, AWB, and NZDB

are export STEs. The concerns regarding import STEs are different than those of export STEs.

Page 21 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Chapter 1 

Introduction

Industry Commission. To obtain information about the operations of NZDB,

we interviewed officials from NZDB, the Ministry of Agriculture and

Fisheries (MAF), the Ministry of Foreign Affairs and Trade, the Federated

Farmers of New Zealand. We also spoke with or reviewed materials from

assorted industry and academic groups.

In the United States, we interviewed officials at the Office of the U.S.

Trade Representative (USTR) and USDA’s FAS. We met with Canadian,

Australian, and New Zealand embassy representatives located in

Washington, D.C. We also conducted interviews with officials representing

both U.S. dairy and wheat interests. In the case of the wheat industry, we

spoke to officials from U.S. wheat, miller, and grain trading associations.

We also reviewed background documents and reports on wheat and dairy

trade provided by the officials mentioned previously, as well as reports

from other government, industry, and academic organizations. Information

on foreign law in this report does not reflect our independent legal

analysis but is based on interviews and secondary sources.

We did our review from April 1995 to October 1995 in accordance with

generally accepted government auditing standards.

We requested comments on a draft of this report from the USTR and the

Secretary of Agriculture or their designees. On March 26, 1996, we

received oral comments from USTR. The agency was generally pleased with

the report and declined to offer written comments. On May 2, 1996, the FAS

Administrator provided us with written comments on the draft. In general,

FAS agreed with the conclusions in our report. FAS was concerned that we

had not fully explored certain market power issues as they relate to STEs,

such as a guaranteed product supply and pricing flexibility. Although we

generally addressed these issues in our draft report, we have expanded the

discussion to better reflect the importance of the market power of these

issues. Additionally, specific comments regarding clarifying language or

updated information have been incorporated as appropriate.

We also discussed the factual content of the report as it relates to the STE

in their individual country with embassy representatives from Canada,

Australia, and New Zealand. Their comments have been incorporated in

the report where appropriate.

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and Review of Export STEs

Various types of STEs operate in the world market, with differences in

aspects such as an export or import STE, the types of industries, the size of

the operations, and the level of government involvement. This diversity

makes it hard to generalize about the effects of STE operations on

particular markets or on the world trading system. This is true even among

CWB, AWB, and NZDB, which are the subject of this report. As a result, it is

necessary to consider STEs on a case-by-case basis to understand their

potential effects. We developed our framework for reference to

incorporate information from a variety of sources that we believe should

be considered in an analysis of the potential effects of individual export

STEs.1 In subsequent chapters, we use this framework in reviewing three

specific export STEs.

Using this framework, we divided the relationships of export STEs into

three groups: the relationship of the STE to domestic producers, the

relationship of the STE to the government, and the relationship of the STE to

foreign buyers. (See fig. 2.1)

Figure 2.1: Illustration of Key

Relationships of Export STEs

State

trading

enterprise

Government

Producers

Foreign buyers

1

We recognize the importance of import STEs in world markets. However, the focus of this report is on

export STEs.

Page 23 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
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and Review of Export STEs

Using such a framework provided advantages in the collection, reporting,

and interpretation of information on STE operations. First, it should aid in

the collection of a consistent and comprehensive set of information about

the operations of these entities. Similarly, it facilitated reporting about STE

characteristics since the material can be described in an organized

manner. Finally, the framework helped in the interpretation of the

information about STEs since it distinguished between important

characteristics and those that are less important. In each of the

relationships, we considered the advantages and disadvantages the STE

might have in relation to its private sector counterparts. In particular, we

highlighted those characteristics that might provide a unique advantage in

international markets, especially those that have the potential to distort

trade.2

 We also included material on a number of practices that are

common to both private firms and STEs, even if they are not trade

distorting. Some of these practices have been the cause of concern among

industry observers.

We developed this framework based on our own expertise in reviewing

various trade practices and trade agreements, our review of related

literature, and our discussions with STEs and officials with national

governments and international organizations that deal with STE issues. We

circulated a draft of this framework among agency officials and solicited

their comments. The discussion of the framework in this chapter draws

upon examples from CWB, AWB, and NZDB. Chapters 3, 4, and 5 provide more

detailed descriptions of those boards using the framework set forth in this

chapter.

STE Relationship With

Domestic Producers

One of the relationships that is central to the discussion of export STEs is

the relationship between the STE and the domestic producers. Two aspects

of this relationship are important: (1) the ownership and management of

the STE by the domestic producers and (2) the requirement that domestic

producers sell to the STE.

Producers Can Play

Management and

Ownership Roles in STEs

The ownership and management structure can vary significantly across

STEs: these characteristics may provide insights into the goals of the

enterprises. For example, STEs can be owned and managed entirely by

producers, where all of the returns from the sales are given back to the

producers in the form of profits. In these cases, we might expect the

2

Trade distortion can occur when a country’s policies change production and consumption decisions

from what they would be if they faced an open international market.

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and Review of Export STEs

organization to try to maximize its own returns by selling at the highest

prices possible. The stated objectives of the three STEs we assessed

suggest that they are all producer oriented (see app. I for the three STEs’

objectives and other information). In each case, these enterprises seem to

be operated on behalf of farmers. For example, the CWB annual report for

1993-94 states: “The CWB focuses on maximizing performance for prairie

farmers,”3

 while the AWB literature says that its mission is to “maximize

long-term returns to Australian grain growers.”4

Alternatively, if the STE is owned or managed by some group other than the

producers, it is possible that it might have a different goal, such as

maximizing domestic political benefits. In these cases, the STE might

choose to sell the commodity at prices that are advantageous to certain

domestic groups. In this situation, the STE might be able to use its

monopoly authority to lower the returns to producers. This would allow

the STE to sell at a lower price in either the domestic or the international

market. However, if the STE is successful in lowering returns to producers,

this will make those sales less attractive, eventually drive marginal

producers from the market, and decrease supply.

The management of the STE could also make other changes in the terms,

such as pooling the returns of producers. For example, the STE may choose

to pay the producers the same return regardless of the time of delivery

during the marketing year.5

 For example, CWB describes price pooling

efforts as “something which smooths out the seasonal fluctuations in

prices and reflects the values that are achieved over the course of a

marketing year.” This might make it easier for some producers to secure

commercial financing by reducing the volatility of the returns to

producers. However, these practices may also have disadvantages, since

this feature would remove some of the incentive for the individual

producers to try to be responsive to world markets.

Extent of STE Control

Over Producers’ Sales Can

Vary

One of the central elements of an export STE is the relationship of the STE

to the domestic producers. As part of their status as government-related

entities, STEs often have some control over the sales of particular

commodities. However, the extent of this control can vary. In some cases,

3

Canadian Wheat Board 1993-1994 Annual Report, inside front cover (Winnipeg, Manitoba, Canada:

1995).

4

Australian Wheat Board 1992-1993 Annual Report, inside front cover (Melbourne, Victoria, Australia:

1994).

5

A private exporter would not be able to make this arrangement since the producers could treat this as

a guarantee and sell to that exporter only if they were unable to sell at a better price somewhere else.

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and Review of Export STEs

the STE may have exclusive rights to acquire a commodity destined for

export from producers in designated regions, as in the case of CWB, or from

the nation, as in the case of NZDB. Under this authority, NZDB typically

handles the export transactions, and sometimes licenses private firms to

do the exporting. This type of authority might provide certain advantages

in terms of size over individual producers or groups of producers who

attempt to export on their own behalf.

Exclusive purchasing authority can provide the STE with a more secure

source of supply than would be the case for a private exporter. Depending

upon the size of the domestic market and the extent of the purchasing

authority, an STE can count on a certain level of supply for its export sales.

This may increase its willingness to enter into long-term supply

relationships. However, the success of the STE over a period of years

depends more upon its ability to charge high prices and generate high

returns for producers. These high returns keep the marginal suppliers in

business and induce others to increase their production for the STE. These

pressures are similar to those facing private exporters.

A somewhat different situation exists when the STE has exclusive authority

to purchase all production of a particular commodity, whether destined

for domestic or export markets. Although none of the three enterprises we

reviewed has control over all exports and all domestic sales, CWB does

have control over all wheat and barley sales for human consumption from

the western provinces. This additional authority over domestic sales could

provide the STE with the ability to charge different prices in the domestic

and export market. For example, if the STE’s goal were to increase

consumption in the domestic market, it could charge higher prices abroad

in order to subsidize the domestic price. On the other hand, if the STE’s

goal were to maximize exports, it might charge higher prices to domestic

consumers and use the profits to lower the export price. When the export

prices are below the cost of production, these actions are referred to as

“cross-subsidization,” and are potentially trade distorting.

Two factors are important in considering the ability of an STE to engage in

this type of cross-subsidy. One is the openness of the STE’s domestic

market to imports. If the domestic market is open to shipments from

abroad, the ability of the STE to raise the domestic price would be limited

by the availability of imports from the world market. On the other hand, if

the market is closed to imports, this would create at least the potential for

the STE to raise prices above the level of the world price. For example, AWB

must compete with both domestic wheat sellers and foreign wheat sellers

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and Review of Export STEs

for a share of the Australian domestic wheat market. As a result, an STE

with both domestic market and export authority that operates from a

closed market has more potential for trade distortion than an STE with only

two of those factors. None of the STEs that we reviewed has all these

capabilities.

Finally, the extent to which this type of cross-subsidization is possible

depends in part upon the relative size of the domestic and the export

markets. For example, the fact that CWB exports more than 85 percent of

the wheat under its control limits its ability to cross-subsidize. Domestic

prices would have to be raised significantly in order to collect enough

funds to lower the export price in any meaningful way.

Government Can

Provide Financial

Advantages to the

STE

Certain types of relationships between the STE and the government could

provide financial benefits to the STE that would not be available to private

firms. For example, direct subsidies could provide advantages for the STE

over its competitors in the international market. Other government actions

may also provide benefits for the STE, but these may or may not be related

to the fact that the exporter in a particular industry happens to be

organized as an STE.

Direct Subsidies Could

Enable the STE to Lower

Prices

The most obvious type of advantage a government can provide is direct

subsidies paid out from general revenues to STEs. These funds could be

used to reduce the prices of exports to gain an advantage in the

international market. If these subsidies are used in an isolated case, they

could have the effect of protecting the producers from unusually low

prices. For example, the Canadian government provided financial

assistance in the 1990-91 marketing year to CWB during a year when market

prices were low, thus diminishing the impact of the low prices on

producers. If these subsidies were provided on a regular basis, the higher

returns to subsidized producers would likely lead to an increase in the

supply of the commodity and reduce the sales and profits of other

producers in the world market. These kinds of changes are generally

considered trade distorting in the international markets.

There are other ways in which a government could provide financial

assistance to the STE. For example, a special tax advantage for an STE could

reduce the amount of taxes for an STE or its domestic suppliers.

Alternatively, if the STE is allocated tariff revenues on imports of the

commodities, these revenues could be used to lower the price of its

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and Review of Export STEs

exports. In each of these cases, the potential exists for government

assistance to be used to lower the prices of the STE to increase sales

without lowering the prices received by producers. These actions have the

potential to distort trade.

Indirect Subsidies May

Also Provide Benefits to an

STE

In addition, there are a number of ways in which a government might

provide indirect advantages to an STE. One of these indirect benefits is the

interest rate advantage that might accrue to those firms that are associated

with the government. Because the perceived risk of lending to

governments is usually lower than the risk of lending to private entities,

the costs of borrowing money are typically lower for governments than for

private organizations. Because of their association with the government,

STEs might thus have a lower cost of borrowing than a private organization

with the same characteristics.

The extent of this advantage would be difficult to estimate but would

depend upon the amount of borrowing and the difference between the

borrowing rate of the STE and the rate of a private entity with similar

characteristics but without the government association. In cases where the

government has actually stepped in to provide funds when the STE was in

danger of default, the difference would tend to be the highest. On the other

hand, in situations where the government has not provided funds since the

inception of the STE, the difference would tend to be the lowest.

There are other situations in which the STE may not pay the full cost of

services provided. One example is a transportation subsidy where the

stated cost of transporting commodities has been held significantly below

the true cost, although these subsidies may or may not be related to the

STE. For example, in the case of a transportation subsidy, it could be that

the STE happens to be operating in an industry where this type of subsidy

exists. While the STE might benefit from the subsidy, the potential for trade

distortion comes from the indirect subsidy itself, whether it is a

transportation subsidy or some other type of subsidy.

STE Relationship to

Foreign Buyers

Depends Upon Other

Factors

It is also useful to examine the relationship between the STE and the

foreign buyers to determine whether there is any unique advantage to

operating as an STE in foreign markets. For example, as single sellers from

export markets, STEs may have certain advantages in terms of spreading

costs and achieving unity among producers. Some of these STE

characteristics appear to be especially important in selling to foreign

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and Review of Export STEs

markets restricted by import quotas. In other situations, however, STEs

appear to rely chiefly on practices that are also available to commercial

exporters.

STE as Single Seller May

Provide Certain

Advantages

An STE might provide certain advantages in terms of size and experience

over individual producers acting on their own behalf. The costs of

operating an office with specialized expertise in exports is likely to be

considerable, and the larger scale of operations of an STE might enable

these costs to be spread over a much greater volume of sales. NZDB

officials noted that individual farmers or cooperatives would have a

difficult time marketing dairy products on their own; thus, NZDB provides a

mechanism through which the New Zealand dairy farmer can compete in a

global marketplace. Multinational firms may not have the captive source of

supply, but can achieve economies of scale through efficient operations

and establishing relationships with producers in various countries and in

various commodities.

The establishment of an STE can also lead to a reduction in the number of

exporters and an increase in the market power of the remaining

participants. This might allow the STE to be more effective in certain

situations in acting as a cartel to maintain higher prices than a collection

of private firms. The distinction between the STE and the producers who

sell to an exporter or participate in a cooperative is that the STE can

prevent its producers from selling at a discount. Private firms and

cooperatives would generally rely on voluntary cooperation and would

therefore have the ability to offer discounts from the prices set by the

cooperative.6

 To the extent that STEs can extend their control over supply

through collusion with other exporters, their ability to influence the

market would increase. However, the exercise of market power over more

than one year depends on the response of other suppliers to those higher

prices. If those higher prices result in greater production by other nations,

the STE may face additional competition in the market in the following

years.

STEs May Have an

Advantage in Controlled

Import Markets

There are other ways in which STEs might have an advantage in exporting

to controlled import markets. One reason is that the importing nation may

be more responsive to export promotion efforts when they are

government affiliated, such as an STE. STEs with control over the exports of

6

To the extent that cartels are successful in raising prices, they create an incentive for members to

cheat by lowering the price slightly below the cartel price. They also create an incentive for other

producers to stay outside the cartel but take advantage of the higher prices.

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and Review of Export STEs

a commodity may also have an advantage in selling into a market that is

protected by a quota. In this case, the STE is better able to capture the full

difference between the lower world price and the higher price in the

protected market through the establishment of a subsidiary in the

importing nation. For example, NZDB has set up a wholly owned subsidiary

for importing quota cheese products into the United States. As a sole

exporter selling to a subsidiary in the protected market, NZDB has been

able to capture more of the return than would have been possible in selling

to an independent agent.7

STEs May Use Commercial

Practices in Dealing With

Foreign Buyers

There may also be differences in the way that STEs deal with foreign

buyers. However, our ability to analyze sales practices is somewhat limited

by the lack of transaction-level price information for either STEs or private

firms. Recognizing this limitation, nevertheless it is useful to identify

certain practices of firms and STEs in international markets and ask

whether the status of the STE offers any particular advantages.

Price discrimination is the practice of distinguishing between buyers of a

particular good or service in order to charge a higher price to some buyers

and a lower price to others. With the right combination of market

characteristics, some sellers may be able to increase their profits because

the lower-priced sales do not affect their sales to premium customers. STEs

may be able to lower the price to certain importing countries without

affecting the prices to its other customers. However, the important part of

price discrimination is to be able to charge a higher price to premium

customers. If there are other sellers willing to sell at a known world price,

as there are in many commodity markets, it is not obvious why any buyer

would ever be willing to pay a higher price to the STE. As a result, the

success of the price discrimination would depend upon the existence of

other producers willing to sell at the world price, rather than the fact that

one seller happens to be an STE.

One particular type of price discrimination is “predatory pricing,” where a

seller or group of sellers lowers prices for the purpose of driving other

sellers from a market by using higher prices from one market to lower

prices in a second market. If successful, the remaining seller(s) can raise

prices once the competition has been eliminated. However, we did not

examine data to determine whether STEs practice predatory pricing, or

how STEs might provide any unique advantage in this area. Successful

predatory pricing would depend upon the existence of barriers to entry in

7

This situation is described in more detail in GAO/RCED-95-280R.

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and Review of Export STEs

the agricultural commodity markets, which would prevent new

competitors from taking the place of those eliminated from the market.

Predatory pricing implies a certain size in relation to the available market.

In these cases, the important issue is whether the STE or the multinational

firms have that type of market power.

STEs might use other practices such as engaging in long-term supply

arrangements or emphasizing quality to differentiate its products and

services from those of other sellers. For example, STEs might be able to set

some uniform grading standards for the producers; in fact, AWB sets

standards for its wheat for export and further classifies the wheat based

on quality and variety. Similarly, CWB has emphasized the high quality of

the grain as a marketing strategy, but in some cases may have provided a

higher quality than the customer required, potentially reducing the returns

to the Canadian farmers. The success of these efforts in raising returns to

producers would depend upon whether the STE is more responsive to the

demands of world markets than a private firm. In these cases, it is useful

to ask whether the practices are somehow unique to STEs or could be

equally—or perhaps more effectively—practiced by any seller in the

market. The actions of CWB in using private firms to export commodities

rather than export the commodities itself may be evidence that the private

sector is more effective at some of these commercial practices.8

8

In our previous work on government sponsored enterprises (Government Sponsored Enterprises: A

Framework for Limiting the Government’s Exposure to Risks (GAO/GGD-90-97, Aug. 15, 1990)), we

found that association with the government usually has the effect of reducing the responsiveness of

the enterprise to the market.

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Chapter 3 

Monopoly Authority and Government

Support May Allow CWB to Potentially

Distort Trade

By volume, CWB is the world’s largest grain-marketing board. As an STE,

CWB has certain factors that provide it with the potential to distort

international trade in wheat and barley. The CWB’s control over both

domestic human consumption and exports of wheat creates the potential

for cross-subsidization, though the risk of such practices is reduced by

Canada’s dependence on the export market. However, CWB could

potentially cross-subsidize between the domestic and foreign markets in

its barley trade. Canadian government payments to CWB to cover the CWB’s

periodic wheat and barley pool deficits have at times represented a

significant subsidy. Finally, the margin between initial payments and final

payments to the Canadian producers allows for greater flexibility in

pricing than is the case with private sector grain traders. Nonetheless,

some changes in subsidies and CWB control, as well as ongoing reviews of

the CWB’s monopoly status, may have the effect of reducing the CWB’s

ability to potentially distort trade. In addition, a joint commission

established by the United States and Canada has made suggestions for

restructuring both U.S. and Canadian trade practices.

Background CWB operates as a government-backed, centralized marketer of wheat and

barley.1

 It remains the world’s largest grain-marketing board and Canada’s

single largest net exporter. According to USDA figures, Canada’s 19-percent

share of world exports of wheat and wheat products in 1994 was expected

to increase to 22 percent in 1995. Figure 3.1 shows the six largest

wheat-exporting nations over the last 3 years.

1

According to the CWB’s 1993-94 annual report, the three “pillars” of CWB marketing are the

(1) single-desk selling—monopoly power over wheat and barley for export and domestic human

consumption, (2) price pooling—combining farmer produce to manage risk, and (3) partnership of

farmers and government. These three “pillars” are consistent with the relationships we developed in

chapter 2.

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Figure 3.1: Share of World Exports of Wheat and Wheat Products by Country, 1993-95

United States

European Union

Canada

Australia

Argentina

Kazakhstan

Other

0 10 20 30 40

Exporting country

Share of market

1993 1994 1995 (Forecast)

Note: “Other” not specified in source.

Source: USDA/FAS.

In the previous 6 crop years, Canadian exports have averaged about

75 percent of total wheat production, making wheat growers dependent on

export sales. Canadian barley growers are less dependent on foreign

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markets. Exports of barley over the past 6 years have averaged about

32 percent of Canada’s total barley production (see table 3.1).

Table 3.1: Disposition of Canadian Wheat and Barley, 1988-94 Crop Years

Crop year

Sales in percent

Commodity and use 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

Wheat (excluding durum wheat)

Domestic use 35.5 26.3 22.2 21.0 25.8 33.5 28.6

Exports 64.5 73.7 77.8 79.0 74.2 66.5 71.4

Durum wheat

Domestic use 24.3 21.4 19.0 21.7 30.7 22.7 17.0

Exports 75.7 78.6 81.0 78.3 69.3 77.3 83.0

Barley

Domestic use 74.9 64.1 62.5 68.4 71.0 66.8 73.5

Exports 25.1 35.9 37.5 31.6 29.0 33.2 26.5

Note: Crop years are from August to July.

Source: CWB.

The first attempt to organize the Canadian prairie farmers began with the

Manitoba Grain Act of 1900. This act provided farmers with the right to

ship their own grain and to load from their own wagons or warehouses,

rather than having to sell to the grain elevators. The first cooperatives

were soon to follow in 1906, with the first Wheat Board established in

1919. Although the Wheat Board lasted for only one year’s crop, it

incorporated the concepts of initial and final payments, pricing to

maximize producer (pool) return, and centralized marketing.

Prairie provincial wheat pools were successfully formed in 1924, but went

into temporary receivership after the stock market crash of 1929.

Following the financial hardship faced by farmers during the Depression,

the government of Canada passed the Canadian Wheat Board Act of 1935

establishing CWB. CWB was also given control of marketing oats and barley,

although oats have since been removed from the CWB’s control.2

CWB is administered by three to five commissioners, who are appointed by

the government of Canada. A producers’ advisory committee, composed of

11 farmer-elected representatives from the prairie provinces, provides CWB

2

Oats were removed from the CWB’s control on August 1, 1989.

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with producer advice on matters related to its operation. As of July 1994,

CWB employed 464 permanent employees and 58 temporary employees.

The Canadian government has limited oversight of CWB operations.

Officials from Canada’s Department of Foreign Affairs and International

Trade told us that the Canadian government takes a “hands-off” approach

to CWB. The CWB’s day-to-day operations are free from government

monitoring and supervision. The CWB’s only formal reporting requirement

to the government of Canada is an annual report to the Parliament under

the authority of the Minister of Agriculture.

CWB-Producer

Relationship: CWB

Monopoly Authority

Increases the CWB’s

Ability to Potentially

Distort Trade

Western Canadian farmers are required to pool their wheat and barley

production for domestic human consumption and export under CWB,

which then markets this commodity in both the domestic and foreign

markets. The CWB’s control of domestic sales for human consumption sales

and monopoly over export sales of wheat and barley provide it with the

potential ability to charge a higher domestic price for these commodities

and use these proceeds to lower export prices, particularly in the case of

barley exports. Though pooling diminishes the uncertainty involved in

marketing their product, pooling may also lower the returns to some

Canadian producers. The limited transparency of CWB operations reduces

the ability of Canadian farmers to determine the success of the CWB’s

services. Some Canadian farmers have questioned the CWB’s role and are

requesting the chance to market their wheat and barley outside the CWB

system.

CWB Given Partial

Monopoly Authority Over

Canadian Wheat and

Barley

The CWB’s 1993-94 annual report states that “the CWB’s monopoly is its

single greatest asset” and concludes that “the economic benefits that

accrue to Prairie farmers from this marketing strength would be greatly

diminished were the CWB to operate in tandem with a private system.” CWB

has the sole authority to market for export and for domestic human

consumption wheat and barley grown in the western prairie provinces of

Manitoba, Saskatchewan, Alberta, and British Columbia. The small

quantities of wheat and barley grown outside of this area are not handled

by CWB. In addition, feed wheat and feed barley grown throughout Canada

can be sold by the producer domestically.

CWB controls all exports of wheat and barley products through an export

licensing process. Even producers who do not operate under CWB, such as

producers with the Ontario Wheat Producers’ Marketing Board, are still

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required to obtain an export license from CWB. Canadian producers can

buy back their own grain in order to export it themselves, but they have to

purchase it back at the price that CWB sets.3 CWB also allows accredited

exporters, both Canadian and foreign grain companies, to buy grain from

CWB and sell it on their own.4

Until recently, CWB also controlled imports of wheat into Canada.5 On

August 1, 1995, Canada replaced the CWB’s wheat import-licensing

procedure with a tariff-rate quota.6

 The change from licenses to a

tariff-rate quota was part of the alterations agreed to under the Uruguay

Round. Canada’s Department of Foreign Affairs and International Trade

administers the new system.7

 Canada’s barley import-licensing procedure,

already administered by the federal government, was also replaced with a

tariff-rate quota. Canada has established industry advisory committees for

each commodity subject to a tariff-rate quota. The advisory committees

are open to national industry representatives, producers, and consumers.

CWB and others participated in the wheat advisory committee meeting held

before implementation of the tariff-rate quotas on August 1, 1995.

Wheat Price Distortions

Unlikely, but Barley Price

Distortions Are Still

Possible

As the sole marketing agent for western prairie wheat and barley destined

for domestic human consumption or export trade, CWB has the ability to

offer differentiated prices. Under the framework discussed in chapter 2, an

STE with both domestic and export authority might charge higher prices to

domestic consumers and use the profits to lower the export price. The

market-distorting potential of CWB in domestic and export sales depends

on whether CWB is selling wheat or barley. In the case of wheat, Canada’s

small domestic consumption of wheat compared to its large export sales

limits the CWB’s ability to cross-subsidize between these two markets:

charging a higher domestic price would generate limited profits and

3

For example, CWB established a program that provides daily price quotes based on the Minneapolis

futures and cash markets for Canadian farmers wishing to buy back their grain from CWB and market

it directly to the United States.

4

According to CWB officials, accredited exporters handle 20 to 25 percent of export sales. In addition,

accredited exporters are used on 100 percent of the sales to the United States.

5

Canada removed the import-licensing requirement for U.S. wheat and wheat products entering

Canada in May 1991.

6

Under a tariff-rate quota, a limited level of imports is permitted at a low tariff rate; any imports

beyond that level are assessed a tariff at a higher rate. Both the U.S. and Mexican wheat exports to

Canada are exempt from the higher tariff rate.

7

According to CWB officials, tariffs under both the old and new systems are collected by Revenue

Canada at the time of importation. These funds go into the Consolidated Revenue Fund of the Federal

Government of Canada.

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therefore have a small impact on the export price8 (see table 3.1 for a

comparison of domestic consumption of wheat versus exported wheat).

As shown in table 3.2, the majority of CWB wheat sales have been to foreign

markets. In addition, the CWB’s ability to raise the domestic price of wheat

is also limited by the availability of imports of wheat from the United

States.9

Table 3.2: Distribution of Sales of CWB-Administered Wheat and Barley, 1988-94 Crop Years

Crop yeara

Sales in percent

Commodity and use 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95

Wheat (excluding durum wheat)

Domestic use 13.3 11.0 8.1 6.6 10.4 11.0 10.7

Exports 86.7 89.0 91.9 93.4 89.6 89.0 89.3

Durum wheat

Domestic use 8.1 6.7 7.5 5.3 7.2 6.2 4.6

Exports 91.9 93.3 92.5 94.7 92.8 93.8 95.4

Feed barley

Domestic use 0 0 0 0 0 0 0

Exports 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Designated barleyb

Domestic use 69.8 78.5 56.2 44.5 63.8 52.2 47.9

Exports 30.2 21.5 42.8 55.5 36.2 47.8 52.1

aCrop years are from August to July.

bMalting barley.

Source: CWB.

In the case of barley, CWB has a greater ability to use domestic prices to

lower the price of barley exports since only about one-third of Canada’s

barley production is exported (as shown earlier in table 3.1). However, the

CWB’s domestic control is limited to barley sold for human consumption.

CWB does not have control over Canadian feed barley sold domestically. In

fact, CWB does not attempt to sell feed barley domestically, as shown in

table 3.2, though CWB does sell about half of its human consumption barley

to the domestic market. Another factor that strengthens the CWB’s position

8

The Canadians were still able to maintain a two-price wheat program between 1972 and 1989, keeping

domestic wheat prices higher than export prices. This program had the effect of protecting Canadian

millers.

9

This is true even though, according to USDA officials, the price of U.S. wheat and barley is frequently

higher than the price of Canadian wheat when adjusted for transportation, handling, and import fees.

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with regard to Canada’s domestic barley market is the tariff Canada places

on U.S.-designated barley imports,10 limiting the ability of Canadians to

substitute U.S. barley for Canadian barley. A USDA official said these high

barley tariffs have been a point of contention between the two countries.11

Pooling Minimizes Grower

Risk

The intent of pooling farmer wheat and barley production is to maximize

the returns of Canadian farmers while minimizing the risk inherent in

marketing their grain. Pooling effects include (1) removing the timing of

sales as a factor for farmers and (2) distributing market risk while also

sharing resources. Approximately 50 different grades of wheat and barley

are delivered by farmers in a crop year. Also, the wheat and barley are sold

in different quantities at different prices at different times of the year.12

In July, the farmers indicate the number of acres seeded to various crops.

CWB then signs a contract with the farmers committing itself to purchase a

certain percentage of each farmer’s offer. The contract should indicate the

quantity and quality of the wheat and barley that each farmer intends to

deliver to CWB in four contract series over the crop year.13 The marketing

year for wheat and barley lasts from August to July of the following year.

According to CWB officials, the grain delivery period is longer than usual

because Canada’s internal transportation infrastructure limits the amount

of wheat CWB can market at any one time.

Farmers deliver their grain to country elevators, where it is graded and

binned with similar grades entering into the marketing system for

10CWB officials noted that under article 705 of the U.S.-Canada Free Trade Agreement, Canada agreed

to remove its import-licensing requirement for U.S. wheat and barley and their products at such time

as the level of U.S. government support to U.S. producers for each grain became equal to or less than

that provided by the Canadian government to Canadian producers of each grain. CWB officials also

noted that, under this agreement, Canada removed the import-licensing requirement for U.S. wheat

and wheat products entering Canada in May 1991. The import-licensing requirement remained in place

for U.S. barley and barley products due to a high level of U.S. support for these products as compared

to Canadian support. This situation has remained the same under the new tariff-rate quota, with the

quota applying only to U.S. barley and barley products while not applying to U.S. wheat and wheat

products.

11The USDA’s November 1995 Agricultural Outlook stated that the United States views Canada’s high

tariffs on barley as “inconsistent with Canada’s NAFTA [North American Free Trade Agreement]

obligations and as an impediment to U.S. exports.” A NAFTA dispute settlement panel has been

established to review Canada’s high tariffs on barley and other U.S. agricultural products. See Suchada

Langley, “Canada’s Budget Dictates Changes in Agricultural Policy,” Agricultural Outlook, Economic

Research Service, USDA (Washington, D.C.: Nov. 1995), p. 27.

12The pooling process is described in greater detail in International Trade: Canada and Australia Rely

Heavily on Wheat Boards to Market Grain (GAO/NSIAD-92-129, June 10, 1992).

13The contractual process differs from the previous quota system, which was in effect before the

1993-94 crop year. The quota system did not identify individual farmers, but simply called forward the

amount and type of wheat and barley CWB needed.

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exporting grain. At that time, the elevator companies make initial partial

payments to the farmer. In turn, CWB reimburses the elevator companies

once the grain is delivered to a shipping port. The initial payments are set

by the government of Canada in consultation with CWB and are to cover

approximately 70 to 85 percent of the anticipated price of the grain.

At the end of the marketing year, CWB tallies its total revenues from

marketing sales, deducts appropriate operational and marketing costs

from each pool account according to pool sales and expenses, and returns

the difference to the Canadian producers. Each producer’s payment is

based on the type of grain provided,14 less transportation, handling and

cleaning costs. If revenues are lower than the initial payment to the

farmers, the Canadian government covers the CWB’s price pooling deficit.

(Pooling deficits are discussed in greater detail on p. 41.)

Benefits of Pooling

Questioned by Some

Farmers

As we reported in 1992, pooling by itself does not guarantee higher prices

for farmers. The very nature of distributing the production and marketing

risk means that some Canadian farmers benefit more than others in a

given year. For example, a farmer who gets his or her crop into the

distribution system when the international price for the commodity is at a

high point will still receive no more for the grain than the average pool

price.15 Distributed costs, such as some farmers incurring greater

transportation costs to get their product to market, may also benefit some

farmers at the expense of others.16

Some Canadian producers have questioned the underlying premise of

pooling. For example, grain farmers in the province of Alberta have

expressed concerns that the CWB’s operations are not transparent enough

to determine whether CWB is maximizing returns to the farmers. During

November 1995, the government of Alberta held a referendum to

determine whether the provincial farmers should have the freedom to sell

their grain outside CWB. The majority of Albertans voted for voluntary

participation in CWB, though the result of the vote is not binding on the

federal government. Other Canadian grain producers and grain traders

have also questioned CWB operations, with some of them voicing concern

14Different purchase prices exist for different varieties of grains. CWB maintains separate pool

accounts for each of the commodities it markets—wheat, durum wheat, barley, and malting barley.

15Of course, this mismatch would also occur if the international price for grain dropped, leaving the

earlier seller with the lower price.

16Recent reforms in Canada, discussed later in this chapter, are expected to end some of these

practices.

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that CWB inefficiencies can be hidden through the pooling process.

Although the Canadian groups we questioned seek an opportunity to

market their grain outside of CWB, they are not calling for the CWB’s

elimination, but rather for a voluntary relationship with CWB.

17

The Canadian government has already attempted to respond to some of

the farmers’ concerns. In July 1995, the Canadian Minister of agriculture

announced the formation of a nine-member panel to review western grain

marketing issues.18 This panel, in consultation with the Canadian public,

farmers, and farm organizations, is to look at “all available facts and

background information about our existing and potential markets, the

commodities and products we sell into those markets, and the marketing

systems we have or could have to maximize our sales volume and

returns.”19 The panel was expected to hold local town hall meetings

throughout western Canada in late 1995, followed by formal hearings in

early 1996 where farmers and farmer organizations can put forward their

own arguments for alternative marketing methods. A concluding report is

expected to be released in 1996.

CWB-Government

Relationship: CWB

Losses Covered by the

Canadian Government

CWB benefits both from federal direct subsidies and from government

guarantees. As a quasi-governmental entity, CWB has its periodic

operational losses covered by the federal government, providing CWB with

almost $1 billion20 in government assistance over the last 10 years.

Canadian wheat producers have also benefited from government

transportation subsidies, though these subsidies were eliminated in 1995.

In addition, CWB receives indirect subsidies, such as a lower interest rate

on commercial loans as a result of its quasi-governmental status.

17In January 1996, the Canada-U.S. Joint Commission on Grains released a report that examined

alternatives to the current CWB system, including a “voluntary relationship” between CWB and

Canadian farmers. See page 47 for more details.

18Appointed panelists include Canadian farmers, current and former officials from wheat pools and

farming associations, and a private sector miller.

19“Minister Goodale Announces Western Grain Marketing Panel,” Agriculture and Agri-Food Canada

press release, (Ottawa: July 17, 1995).

20All pre-1994 dollar amounts cited in this chapter have been converted from Canadian dollars to

constant 1994 U.S. dollars.

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CWB Experienced

Significant Pooling Deficit

in 1990-91

CWB officials told us the only direct revenue CWB receives from the federal

government is for the purpose of covering operational deficits. As a crown

corporation,21 CWB can make a direct charge of its unliquidated financial

obligations to the Canadian government. As a result, the CWB’s status has

protected CWB from price pooling losses. Since 1943, CWB has experienced

3 crop years with wheat pool deficits and 7 crop years with barley pool

deficits (see table 3.3). Pool deficits have also increased in recent years.

The wheat pool deficit in the 1990-91 crop year, by far the largest of the

pool deficits, cost the federal government over $695 million. The losses in

the 1990-91 market year accounted for approximately 57 percent of the

total pooling deficits recorded since the establishment of CWB. CWB

attributed the 1990-91 pooling loss to a price collapse in wheat and barley

markets caused by a “trade war” between the United States and the EU,

where both nations highly subsidized their wheat and barley exports. CWB

added that a record world cereal crop in 1990 also caused a decline in the

price received for these commodities.

21A crown corporation, or a semiautonomous government organization, is used to administer and

manage public services in which enterprise and public accountability are combined.

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Table 3.3: CWB Wheat and Barley

Price Pooling Deficits Since 1943 U.S. dollars in millions (1994)

Crop year Wheat deficit Barley deficit Total deficita

1968-69b $138.9 $34.3 $173.3c

1970-71 0 36.8 36.8

1971-72 0 12.4 12.4

1982-83 0 6.5 6.5

1985-86d 21.5 160.5 182.0

1986-87 0 105.1 105.1

1990-91 695.4 0.9 696.3

Total $855.9c $356.6c $1,212.5c

Note: Although CWB maintains separate pool accounts for wheat, durum wheat, barley, and

malting barley, in order to simplify the presentation we have combined the two wheat accounts

and the two barley accounts in the table. The only durum wheat pool account deficit was in

1990-91 for $65.2 million. The only malting barley pool account deficit was in 1986-87 for

$17.1 million.

aTable does not show pooling deficits for oats since oats are no longer under the CWB’s control.

However, oat pool pricing deficits occurred in 1956-57, 1968-69, 1977-78, 1979-80, 1981-82,

1985-86, and 1988-89.

bCWB attributes the 1968-69 pool deficits to the collapse of the International Grains Agreement

which had set minimum price levels on grain. Initial payments to producers had been based upon

this minimum price, while the trading prices later dropped below this level.

cTotal may not add due to rounding.

dThe wheat deficit in 1985 has been partially attributed to the introduction of the USDA’s Export

Enhancement Program (EEP) during this period. EEP was established by the Secretary of

Agriculture in May 1985. The program was set up in reaction to continuing declines in U.S.

agricultural exports. Under EEP, cash bonuses are made available to exporters to enable them to

lower the prices of U.S. agricultural commodities in order to make these commodities competitive

with subsidized foreign agricultural exports. The 1985 Farm Bill subsequently authorized EEP as

an export subsidy program.

Source: Canada’s Department of Foreign Affairs and International Trade.

Canadian Farmers

Benefited From

Transportation Subsidies

CWB also benefited from indirect subsidies. One indirect subsidy to CWB

and Canadian wheat and barley producers, though a direct subsidy to the

Canadian railroad, existed in the form of transportation subsidies. The

1983 Western Grain Transportation Act, which modified the Crow’s Nest

Pass Agreement,22 was enacted to subsidize Canadian rail transportation.

This subsidy amounted to approximately $410 million during the 1994-95

crop year. According to a USDA official, this transportation subsidy

22Signed in 1897, the Crow’s Nest Pass Agreement committed the Canadian Pacific Railway to

transport prairie grains to the Great Lakes port of Thunder Bay at rates that were fixed in perpetuity.

Over time the rates were extended to cover other railways as well as additional crops.

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encouraged farmers to grow primarily those crops covered under the

program, such as wheat and barley.

Due to internal budget constraints plus Canada’s obligations to reduce

subsidies under the Uruguay Round, on August 1, 1995, the Canadian

government eliminated the transportation subsidy provided under the

Western Grains Transportation Act. In order to offset the impact of this

change, the government intends to compensate Canadian farmers for this

loss by (1) providing about $1.2 billion as a lump sum payment to the

farmers, (2) establishing a $220-million Adjustment Assistance Fund, and

(3) offering about $732 million in new export credit guarantees for

Canadian agricultural products.23

Transportation pricing will also change in the 1995-96 crop year due to the

elimination of deductions on transportation costs for wheat and barley

traveling to eastern Canada. In the past, all grain producers had to support

the additional costs for grain going eastward, even though the majority of

grain was shipped from western ports. During the 3-year phaseout period

of this subsidy and afterward, producers shipping their grain East will

begin to bear the full cost of the transportation.

USDA officials said the elimination of the transportation subsidies may

affect what Canadian farmers grow and where they sell their goods. Since

the government will no longer subsidize the transportation costs of crops

being exported, Canadian farmers are expected to diversify out of grain

crops, plant more high-value crops, and expand livestock production.

Nonetheless, the effect of the eliminated subsidies on U.S.-Canadian trade

is still uncertain. According to USDA’s November 1995 Agricultural

Outlook,

24 “more Canadian grains could eventually move south because of

the lower transportation costs.”25 However, the report noted that

increased crop diversification and livestock production in Canada could

increase the demand for U.S. grain.

23Both CWB and the Export Development Corporation are expected to distribute these new credits.

Approximately 70 percent of the approximately $732 million is to be allocated to exports of western

wheat and barley.

24Langley, “Canada’s Budget Dictates Changes in Agricultural Policy,” p. 28.

25According to USDA officials, shipping commodities to the United States by truck will now be

relatively cheaper than shipping those same commodities East or West using Canadian rail

transportation.

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Other Government Support

Programs Assist Farmers

The CWB’s 1993-94 annual report states that a partnership of farmers and

government creates a link between farmers and the federal government

that offers “distinct economic advantages.” The report goes on to cite the

benefits of this relationship, including government backing of CWB

borrowing, which “translates into lower interest costs.” CWB officials told

us that although the government does not provide CWB with any loans or

preferential treatment, it guarantees CWB an excellent credit rating by

virtue of its status as a crown corporation. This credit rating assists CWB in

obtaining the loans it needs at favorable rates on commercial markets.26

According to CWB officials, CWB does not benefit from special tax treatment

or the ability to levy assessments on Canadian wheat and barley

producers. Although CWB does not pay taxes to the federal government, the

returns paid to the farmers are taxed as regular income to the farmers. In

addition, CWB officials told us that CWB initiated a voluntary levy was

initiated in the 1994-95 marketing year to help fund grain research at the

Western Canadian Grain Research Institute. A CWB official said that

30 percent of the wheat and barley producers have declined to participate

in the voluntary levy.27

CWB-Foreign Buyer

Relationship:

Flexibility in Pricing

May Allow CWB to

Potentially Distort

Trade

The United States, as well as other grain-trading countries, has questioned

the CWB’s monopoly authority over Canadian wheat and barley as well as

the lack of transparency in the CWB’s marketing system. This lack of

transparency in the CWB’s pricing methods may provide CWB with greater

pricing flexibility than is found among private sector traders. CWB has

attempted to address some of these transparency concerns. However, a

recent U.S.-Canadian joint commission has questioned both CWB and U.S.

trade practices.

U.S. Concerned About the

Limited Transparency of

CWB Operations

Canada is the third-largest export market for U.S. agricultural

commodities. USDA’s ERS preliminary figures for 1995 showed the United

States exporting $5.8 billion in agricultural products to Canada.28 Earlier

ERS forecasts showed Canada as the second-largest source for U.S.

26CWB must take out loans from commercial banks to cover the cost of initial payments to farmers and

to pay CWB operational costs.

27Canadian wheat and barley producers have also been assisted by Canadian income support

programs, as well as research and advisory services. These programs are discussed in detail in our

earlier report (see GAO/NSIAD-92-129). However, some of the programs described in the earlier GAO

report may have been eliminated or reduced in funding.

28The top destination for U.S. agricultural exports was Japan, buying $10.5 billion in U.S. agricultural

goods. The EU was the next largest importer, importing $8.2 billion in U.S. agricultural products.

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agricultural imports, with the United States importing $5.2 billion in

agricultural products from Canada in 1995.29 With respect to grain, the

United States has run a trade deficit with Canada. In 1994, the United

States had a $500-million trade deficit with Canada in the grains, grains

product, and animal feeds sector in 1994.

The U.S. government, as well as other grain-exporting countries, has

expressed concerns about the CWB’s monopoly power and the limited

transparency of its operations. U.S. critics of CWB contend that CWB has an

unfair pricing advantage due to its status as the single selling authority.

According to one USDA official, the day-to-day “replacement cost” for

wheat is more readily apparent in the United States with its commodity

markets than is true of CWB. In such a case, the grain traders in the United

States are “price takers,” or are required to buy their grain at the given

market price without being able to affect that price. The CWB’s exclusive

purchasing authority over wheat and barley for human consumption

provides CWB with a more secure source of supply, as well as more control,

than would be the case for a private exporter. USDA officials expressed

concern that the CWB’s margin between the initial price and the final price

paid to the Canadian wheat and barley producers allows CWB to adjust

transaction prices at will, even if it is to the detriment of Canadian

producers. As stated earlier, some Canadian producers are also concerned

that such detrimental pricing policies could occur without greater

transparency over CWB operations.

Some U.S. officials are also concerned about CWB undercutting U.S.

producers using its grain quality standards. According to USDA officials,

CWB has used high quality as a marketing strategy, often providing higher

protein content in its wheat than the customer requests and thus

developing an expectation that CWB’s wheat is a better value for the

money. In comparison, the U.S. wheat industry tends to blend wheat to the

specifications of the buyer. Although the CWB’s approach may be a useful

marketing strategy, it also has the effect of providing a benefit to a buyer

without CWB getting the full value of the higher quality wheat. The uniform

grading standards that CWB uses, although also cited as a benefit of CWB by

providing consistency across sales, may also be a liability at times to

Canadian producers. A USDA official told us about U.S. concerns that CWB

has downgraded wheat to “feed quality” using these standards, even

29The ERS’ figures showed Canada as the largest source of U.S. agricultural imports in 1994. However,

1995 forecasts indicated that Canada may be a close second to the EU ($5.4 billion in EU imports

versus $5.2 billion in Canadian imports).

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Monopoly Authority and Government

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though the “feed” grain is later milled in the United States.30 In such a

situation, Canadian producers would be deprived of the full value of their

wheat.

Two recent Canadian reports indicate continued attempts to understand

the benefits and costs of the CWB’s single selling authority status. The first

report,31 authored by three Canadian agriculture economists with the

assistance of CWB, estimated that CWB has provided greater revenues and

lower management costs to Canadian wheat producers than would have

been the case had the producers sold their grain through a multiple-seller

system. The report estimates that from 1980 to 1994, Canadian wheat

producers received additional revenues ranging from a low of $18.88 to a

high of $34.47 per ton of wheat due to the single selling authority

marketing system.32

A second report,33 prepared by two Canadian agriculture economists with

the assistance of the Alberta Department of Agriculture, found no

evidence of CWB price premiums for wheat and barley when prices were

examined at the farm level.34 The report also found that the hidden costs

of the single selling authority marketing system to producers could be as

high as $20 per ton for wheat and more than $20 per ton for barley.

Moreover, the report indicated that hidden costs to Canadian taxpayers for

having a single selling authority could be another $5.50 per ton for wheat

and about $9 per ton for barley.

CWB Efforts to Modify

Practices to Satisfy Critics

CWB has attempted to provide greater transparency in its operations and

final price forecasts. CWB has started to provide more detail on expected

returns for CWB grains as well as daily price quotes. In 1993, CWB

introduced the Pooled Return Outlook/Expected Pool Return to forecast

pool returns for each crop year in order to assist producers with seeding,

marketing, and financial planning decisions. A truck-offer program was

also initiated to provide daily price quotes based directly on the

30In its submission to the Canada-U.S. Joint Commission on Grains, CWB acknowledged that some

Canadian feed wheat went to U.S. millers, but noted “the blending of wheat to achieve higher market

value is common practice on both sides of the Canada/U.S. border.”

31See Daryl F. Kraft, W. Hartley Furtan, and Edward W. Tyrchniewicz, Performance Evaluation of the

Canadian Wheat Board (January 1996).

32This estimate pertains only to the wheat pool and not the durum and barley pools.

33Colin A. Carter and R.M.A. Loyns, The Economics of Single Desk Selling of Western Canadian Grain

(March 1996).

34Prices were compared to those in the United States.

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Minneapolis future and cash wheat markets to Canadian farmers wishing

to buy back their grain. Finally, CWB started a weekly South East Asian

News Flash publication showing the CWB’s offer/tradable prices for grain at

West Coast ports.

Even so, without additional transaction price information, there is little

likelihood that the transparency issue between Canada and other

grain-trading nations will be resolved.35 CWB, like private sector grain

traders, continues to protect this information as commercially sensitive

data. One USDA official said U.S. grain traders are just as likely as CWB to

treat this information as proprietary. In addition, CWB does not always have

access to end-user transaction prices. According to CWB officials,

accredited exporters are not, in all cases, required to provide CWB with the

final transaction price or even the customer. These accredited exporters

purchase wheat from CWB and then resell it to U.S. customers, as well as

other customers throughout the world.

Canadian government officials have stated that the transparency issue has

already been resolved, claiming that previous U.S. reports have

exonerated CWB from charges of violating applicable trade agreements and

U.S. law. USDA officials we interviewed early in our review acknowledged

that they did not have any evidence that CWB was violating existing trade

agreements. Nonetheless, trade differences between the United States and

Canada have led to curbs on Canadian wheat imports into the United

States as well as the establishment of a joint commission to look at all

aspects of the two countries’ respective marketing and support systems

for grain.

Joint Commission on

Grains Recommends

Changes

In response to growing U.S. criticism of Canadian exports of durum wheat

to the United States, on November 17, 1993, the President requested that

the U.S. International Trade Commission begin a section 2236 investigation.

The investigation began on January 18, 1994, with the purpose of

reviewing U.S. imports of wheat, wheat flour, and semolina from all

35Without transaction data, we are likewise unable to determine whether CWB practices

discriminatory pricing or cross-subsidization between sales on foreign markets.

36Section 22 of the Agricultural Adjustment Act (7 U.S.C. 624) is intended to protect U.S. farm

programs from imports that impair or interfere with their operation. Under section 22, the President

may impose import restrictions on such imports as are necessary if, after the conclusion of an

International Trade Commission investigation, he determines that products “are being or are

practically certain to be imported into the United States under such conditions or in such quantities as

to render or tend to render ineffective, or materially interfere with” any USDA domestic commodity

support or stabilization program. These provisions are no longer available to products of countries or

entities who are members of WTO.

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countries, including Canada. The International Trade Commission issued

its final report in July 1994.37

As a result of the investigation and negotiations, a memorandum of

understanding between the United States and Canada with respect to

cross-border wheat trade was made effective on September 12, 1994. The

memorandum called for (1) a Joint Commission on Grains to be

established to further examine the grain problems between the two

countries; (2) a 12-month period, beginning September 12, 1994, during

which the United States would apply a new schedule of tariffs on the

importation of wheat into the United States;38 and (3) a 12-month hold on

all countermeasures under NAFTA or GATT, as well as a hold on all

countermeasures inconsistent with either the North American Free Trade

Agreement (NAFTA) or GATT provisions.

The Canada-U.S. Joint Commission on Grains39 released its preliminary

report in June 1995 and its final report in January 1996. The final report

made recommendations in a number of areas, including (1) policy

coordination, (2) cross-border trade, (3) grain grading and regulatory

issues, (4) infrastructure, and (5) domestic and export programs and

institutions.

In relation to domestic and export programs, the final report noted that

“the use of discretionary pricing by governments, directly through their

programs or entities, had led to trade distortions.” As a result, the report

recommended that both the United States and Canada reduce and remove

these trade distortions by (1) the United States eliminating, or significantly

reducing with a view to eliminating, its export subsidy programs such as

EEP for all cereals and their products and (2) CWB being “placed at risk of

profit or loss in the marketplace” or conducting itself in an equivalent

37Wheat, Wheat Flour, and Semolina: Investigation No. 22-54, U.S. International Trade Commission,

Publication 2794 (Washington, D.C.: July 1994).

38Increased tariffs were placed on all durum and non-durum wheat that came into the United States

above a specified threshold. The new tariffs did not apply to flour, semolina imports, and white winter

wheat imports.

39The Joint Commission consists of 10 nongovernment officials, evenly divided between the United

States and Canada.

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manner.40 In this section, the report also recommended removing

trade-distorting effects in each country’s domestic agricultural policies.

Finally, the Joint Commission noted that the implementation of these

recommendations will depend heavily on other grain-exporting countries,

such as the EU and Australia, undertaking comparable actions.

Among other things, the final report also recommended that (1) Canada

and the United States undertake regular and structured consultative

process concerning grain policy issues with the goal of reducing

trade-distorting policies and (2) a bilateral producer/industry-based

Consultative Committee be established to handle short-term cross-border

issues as an “early warning system for trade difficulties.”

40The Joint Commission’s examined alternatives in this regard included “allowing voluntary producer

participation in Canadian wheat and barley pools, and allowing Canadian firms to trade non-CWB

wheat and barley in a domestic and global context without undue impediments.” Additional

alternatives for CWB included that (1) CWB use public offer prices on a global basis; (2) CWB continue

to use private offer prices on a global basis, with a commitment to pricing discipline at the point of

sale and a confidential audit; or (3) CWB use another mechanism that the respective governments

agree will accomplish the goal or encouraging CWB to conduct itself as if it were at comparable risk in

the marketplace.

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Chapter 4 

AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

AWB has limited capability to distort international wheat markets. It has

monopoly power over wheat exports but does not routinely receive direct

subsidies from the Australian government. The AWB’s initial payments to

farmers are underwritten by a government guarantee. Because of this

guarantee, it most likely receives favorable interest rates on its loans.

Additionally, its access to additional funds allows it to diversify risk by

investing in other projects. AWB has the capability to be flexible in its

pricing; this flexibility could lead to either lower or higher returns for

producers.

Background Although Australia is a country of less than 18 million people, its

agriculture exports totaled $12.2 billion1

 in 1992-93. This equates to about

one-quarter of Australia’s total export income. Australian wheat ranks as

the country’s fourth-largest export market, with 12.9 percent of total world

exports in 1994, representing about 80 percent of all wheat grown in

Australia. Australia ranks as the world’s fourth-largest wheat exporter.

AWB is a statutory marketing authority with federal and enabling state

government legislation providing it with the sole license to export

Australian wheat. AWB was established in 1939 to “acquire, with certain

exceptions, all wheat held in Australia and to arrange for its disposal in

view of low world prices prevailing and the marketing and transport

difficulties created by the wartime conditions.”2

 However, when World

War II ended and the justification no longer existed, AWB was not

disbanded. It was reconstituted in 1948 to establish it as the central

marketing authority for wheat and to enable it to administer various wheat

stabilization and marketing arrangements. New legislation in 1989

modified the AWB’s role by deregulating the domestic market, expanding

the AWB’s operating domain to include other grains produced in Australia

and to wheat from other countries. The legislation also removed price

supports and established the Wheat Industry Fund (WIF), which is

discussed in more detail in the following section.

AWB is a national and international grain marketer, financing and

marketing wheat and other grains for growers. AWB also spends a portion

of its budget on market development and promotion, especially in the

Asia/Pacific region. All profits are distributed to growers, even though it is

not officially a grower-owned organization.

1

All monetary references are expressed in constant 1994 U.S. dollars.

2

As per Australia’s notification to GATT, 1994.

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AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

Australia’s Grains Industry

Partitioned Among Several

Boards

Australia’s grains industry is not governed by a single entity. Some grains

are freely traded in all states, while others are governed by state boards in

certain states. AWB is the only organization in Australia that has acquisition

authority for a particular grain (wheat) across all states, and thus the only

organization with the power to make an impact. See table 4.1 for an

overview of the various boards’ acquisition authorities.

Table 4.1: Australian Grain Marketing—Acquisition Authority, by State

Grain Queensland New South Wales Victoria South Australia Western Australia

Wheat (export/domestic) AWB/FT AWB/FT AWB/FT AWB/FT AWB/FT

Malting barley Grainco Qld NSW Grains Board Australian Barley

Board

Australian Barley

Board

FT

Feed barley Grainco Qld NSW Grains Boarda Australian Barley

Board

Australian Barley

Board

FT

Oats FT NSW Grains Boardb FT Australian Barley

Boardc

FT

Sorghum Grainco Qldd NSW Grains Boarde FT FT FT

Maize FT FT FT FT FT

Triticale and rye FT FT FT FT FT

Lupins FT FT FT FT FT

Other grain legumes FT FT FT FT FT

Oilseeds FT NSW Grains Boardf FT FT FT

Legend

FT=freely traded

NSW=New South Wales

Qld=Queensland

SA=South Australia

VA=Victoria

WA=Western Australia

aGrowers can circumvent the NSW Grains Board by paying a license fee.

bThe NSW Grains Board allows free trade on the domestic market.

cThe board does not have acquisition authority over oats sold directly from growers to domestic

end-users.

dIn Central Queensland, domestic sorghum is traded freely. In Southern Queensland, both export

and domestic market-bound sorghum is traded freely.

eThe NSW Grains Board allows free trade on the domestic market.

f

As of March 1995, the NSW Grains Board was in the process of divesting its powers over

oilseeds, allowing the commodity to be freely traded.

Source: Grains Council of Australia.

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AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

Wheat growers may deliver their wheat to AWB, which operates a number

of pools each year. The wheat is segregated by class and variety, and

growers receive initial payments upon delivery. AWB deducts storage,

transport, operating, and marketing costs from sales and returns the

remainder to the farmers once all the wheat has been sold.

The AWB’s major markets lie in Asia and the Middle East, as shown in

figure 4.1.

Figure 4.1: Australia’s Major Wheat

Export Markets (as a percentage of

Total Wheat Exports)

29%

13%

11%

11%

10%

9%

9%

6%

Other

China

South Korea

Indonesia

Japan

India

Iraq 1%

Iran

Egypt

Middle East

Asia

Source: AWB.

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AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

AWB-Producer

Relationship:

Payments Made Over

Time

AWB is responsible to both producers and the government, and its

managing board includes representatives from both groups. Producers sell

their wheat to AWB through a pooling system that averages individual

producer returns, thus dispersing the producers’ financial risk. AWB

payments to producers are not immediate, though, since product pools

may take years to close. Since AWB must compete with other suppliers in

the domestic market, it does not have the capability to cross-subsidize

between its domestic and foreign market sales.

AWB’s Managing Board

Includes Producers

AWB’s managing board consists of a nonexecutive chairperson, the

Managing Director, eight members with special expertise in wheat

production or other specified fields, and a government representative. The

eight members with special expertise include growers, as evidenced by the

current board composition. DPIE, a government agency, loosely oversees

the AWB’s activities by appointing a government representative to sit on the

AWB’s managing board; requiring an annual report, which is submitted to

Parliament; requiring a 3- to 5-year corporate plan, which is approved by

DPIE’s Minister; and requiring an annual operating plan, which is not

subject to ministerial approval. AWB must also consult with the Grains

Council of Australia annually.

Pooling Averages Returns

Across Producers

For the past 57 years, AWB has had the statutory authority to be the

primary buyer and seller of Australian wheat. It is the only entity licensed

by the Australian government to export Australian wheat to the global

marketplace.3

 Thus, growers who wish to take advantage of the export

market are forced to sell their product to AWB. AWB purchases all Australian

wheat bound for export and combines it into a number of pools based on

quality and variety. AWB then sells the wheat on the international market

and returns the proceeds, minus expenses, to growers. Through the

pooling system, all growers of a similar quality and variety of wheat

generally receive the same price. This means that bad luck in delivering

their products during a part of the marketing year when prices are low will

have less impact on individual producers. However, it also means that

those who were able to deliver the product at a time of

higher-than-average prices receive a lower return. Actual net pool

revenues may vary based on individual grower transportation and storage

costs.

3

According to USDA officials, AWB may also authorize another company to export bagged wheat or

wheat in a shipping container.

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AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

Producer Payments Made

Over Time

The majority of wheat produced in Australia is delivered for marketing and

payment within the AWB’s pooling system for export. Various criteria

govern the pools, including quality, time of delivery, location, and category

of wheat. Storage, handling, and transport costs are disaggregated and

charged to growers, and marketing costs and borrowings to fund

payments are pooled. AWB makes a net payment to growers at each stage

of the process, mostly in advance of receipts from sale of the delivered

wheat.

Typically, the first payment is made within 3 weeks of delivery, sometime

between November and January. It amounts to about 80 percent of the

estimated total payment. The second payment is made during March, once

AWB receives the entire harvest. Other payments may take place before a

final payment is made. The final payment for a particular pool may not

take place for years, since some of the wheat may be sold on credit terms

and not finalized for several years.

AWB conducts its domestic market dealings somewhat differently. AWB

offers cash on delivery to a designated silo for wheat destined for the

domestic market. According to AWB, this is a relatively small quantity of

wheat compared to the amount handled in the pooling system.

AWB Authority Limited:

Cross-subsidization Not

Possible Between the

Domestic and Foreign

Markets

AWB does not have the capability to cross-subsidize its sales between its

domestic and overseas markets. AWB sells wheat on the domestic market,

but it must compete with other sellers. According to AWB officials, AWB only

accounts for 30 to 40 percent of the domestic wheat market; however,

other sources claim that this figure is as high as 80 percent.4

 Additionally,

AWB does not have any control over the import of wheat to Australia, so it

cannot control the entrance of other sellers to the domestic Australian

wheat market.

AWB-Government

Relationship: Both

Direct and Indirect

Government Subsidies

Help AWB

Besides its monopoly on Australian wheat exports, AWB benefits from

several forms of assistance. This assistance has changed over time. The

AWB’s current benefits include a government guarantee on borrowings,

which most likely results in lower interest rates. WIF funds also allow AWB

to maintain a strong capital base and invest in outside interests.

Additionally, a number of indirect subsidies benefit AWB, including

government matching research funds.

4

In 1995, a consultant to the Grains Council of Australia reported that the AWB commands 65 percent

of the domestic milling wheat market. USDA claims that AWB controls 80 percent of the wheat sales to

domestic mills, and that wheat imports are effectively prohibited by phytosanitary standards.

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AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

Nature of Government

Subsidies Has Changed

Over Time

Before 1989, the Australian government provided economic support to

wheat farmers through a number of mechanisms, including guaranteed

minimum prices and an artificial premium on domestic wheat prices.

Unit-pooled returns to growers were guaranteed at a certain level by the

federal government, at least for a limited volume of exports, with the

guaranteed price based on cost of production estimates by the Australian

Bureau of Agricultural Resource Economics. Economic assistance to AWB

also included a home consumption price that was set in line with the

guaranteed price, based on the assessed cost of production. Generally,

domestic end-users paid a higher price for wheat than foreign buyers

under this scenario.

The guaranteed minimum price for wheat was ensured through a

stabilization fund. If export prices exceeded a trigger price, an effective

export tax was imposed. If prices fell below the guaranteed price, a

deficiency payment to growers made up the difference between the actual

price and the guaranteed price, up to a specified limit. If the stabilization

fund was depleted, the federal government made up the difference. When

the fund was first established, growers paid into it. However, from 1958 to

1974, the federal government was forced to heavily subsidize the fund.

After other changes in the 1970s and 1980s, including altering the baseline

of stabilized prices, establishing guaranteed minimum delivery prices, and

allowing AWB to borrow on the commercial money market, major reforms

were introduced in 1989. The most important of these included

deregulation of the domestic market, establishment of WIF, and abolition of

the government’s guaranteed minimum pricing scheme.5 AWB was given

some flexibility in the commercial market; besides other activities, AWB

may buy and sell a variety of grains.

5

The AWB’s main functions now include (1) buying and selling grain in Australia and overseas;

(2) importing wheat into Australia or engaging in any trading arrangements that are consistent with its

objectives; (3) storing, handling, or transporting wheat or buying, establishing, or owning and

operating such facilities; (4) entering into wide-ranging financial arrangements consistent with its

commercial orientation; (5) providing a range of services associated with wheat marketing and

charging for those services; and (6) appointing agents in Australia or overseas and engaging in

value-added activities, including establishing subsidiaries or entering into joint ventures both on- and

offshore.

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but Ability to Distort Trade Is Limited

Government Guarantee

Most Likely Results in

Lower Interest Rates

Since 1989, the Australian government has guaranteed a portion of the

AWB’s borrowings to pay farmers at harvest time. This guarantee covers, at

a minimum, between 80 and 90 percent of the aggregate estimated net pool

return.6

 According to the Industry Commission,7 this guarantee has risen in

value from $21.5 million in 1989-90 to $26.4 million in 1992-93. The

government guarantee was initially established to last until June 1994, but

was extended at that time to continue until June 1999 at a maximum of

85 percent.

Both AWB officials and the Industry Commission agree that the

government’s guarantee translates into real savings on interest rates, since

the guarantee transfers the risk from AWB to the taxpayers. This guarantee

results in increased net returns to the wheat industry because of the lower

interest charges.

WIF Provides Revenue for

Capital Base and

Investments

WIF, a nonsales source of AWB revenue, is supported by a 2-percent levy on

wheat growers. WIF serves as the AWB’s capital base and underwrites the

AWB’s domestic trading operations, as well as strategic investments that

support outside business activities. Growers hold equity in WIF and may

transfer that equity. AWB manages the fund in conjunction with the Grains

Council of Australia.

As noted previously, AWB may use this fund to diversify its holdings. For

example, it has used WIF funds to invest in flour mills in China and

Vietnam. Thus, farmers are not completely reliant on the international

wheat market for income; outside investments may help soften the blow of

declining wheat prices.

WIF also provides a capital base for the AWB’s domestic market activities.

This practice is questionable because of its implications for other domestic

sellers. That is, farmers who sell their wheat abroad through AWB may also

choose to sell their wheat on the domestic market through another

company. However, the farmers then must pay a 2-percent WIF levy on

their exported wheat to AWB; in effect, they could be funding the efforts of

a competitor.

6

The Australian government provides a borrowing guarantee of up to 85 percent of the AWB’s

aggregate estimated net pool return from the sale of wheat. The Minister of Primary Industries and

Energy calculates the size of the guarantee based on current and forecast outlooks for international

grain prices.

7

The Industry Commission was established by the Australian government as a review and advisory

body on industry matters. Its role is to conduct independent public inquiries into a broad range of

issues in the economy.

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AWB Enjoys Indirect Government Subsidies,

but Ability to Distort Trade Is Limited

Research Funds and Other

Relief Also Available

Wheat research and development are partially funded by the government.

The government matches industry research contributions dollar for dollar

up to 0.5 percent of gross value of production. The Grains Research and

Development Corporation manages about 22 percent of the wheat

research funds for the industry. Growers only funded about 20 percent of

wheat research and development in 1993-94, and the remainder was

provided by the Commonwealth government, state governments, and

private sources.

Before 1990, drought was regarded in Australia as a natural disaster, and

automatic relief was available through direct subsidies. Direct subsidies

were not available after 1992, when Australia instituted the National

Drought Policy. This policy reclassified drought as “normal operating

procedure” and removed the direct payments. Through this policy,

Australia offers welfare assistance and interest rate subsidy support for

exceptional drought circumstances, assistance with the creation of

financial reserves, and research funds for drought impact and risk

management practices. In 1992, through the Crop Planting Scheme, the

government spent $2.2 million to cover 75 percent of the interest rates on

commercial loans to farmers who, although considered as having viable

farms in the long run, were financially unable to plant a crop.

The Australian government has also compensated farmers directly for

extreme circumstances that affected their incomes directly. For example,

it made a single payment of $27 million to wheat farmers to compensate

for losses due to the sanctions against Iraq.

Growers are taxed on the returns under Australia’s income tax system.

Primary sector producers receive tax breaks from the government under a

number of measures, including two schemes that may reduce the

producers’ taxes. The Income Averaging Scheme allows producers to

average their income over 5 years to compute their tax rate, and the

Income Equalization Deposits Scheme allows producers to make

tax-deductible deposits into a fund that can be used in low-income

periods. AWB does not pay a separate tax on any returns distributed to the

growers, but instead pays corporate tax on holdings and investments, both

domestic and abroad.

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AWB-Foreign Buyer

Relationship:

Monopoly Status

Allows for Flexible

Pricing

The AWB’s monopoly over wheat exports allows it to set prices without fear

of competition from other Australian wheat exporters. This allows for

price flexibility; however, we were unable to determine whether AWB

engaged in any form of price discrimination or cross-subsidization

between foreign markets since data were not available from public or

private sector wheat traders. Australian government-sponsored reports

have suggested that the wheat industry would benefit from complete

deregulation and should focus more on market-based activities.

Australian Government

Gives AWB Sole Export

Authority for Wheat

The Australian government has authorized AWB to be the sole exporter of

Australian wheat, through legislation that is reviewed every 5 years.8

 As

mentioned earlier, AWB also has the right to buy and sell wheat on the

domestic market, but it must compete with other firms. This differs from

the pre-1989 arrangement, when AWB maintained monopolistic control over

both the domestic and export markets in Australia.

Since AWB is a monopoly, it may set prices for Australian wheat abroad

without competition from other Australian exporters. This status may

provide some advantages of a cartel in that individual producers are

unable to undercut a particular price that AWB sets. In situations where

there are limited alternatives to Australian wheat, this might enable AWB to

charge higher prices and capture higher returns for Australian producers.

Additionally, AWB’s single-desk seller status gives it a sure source of supply

for its export sales.

Similarly, the averaging of all sales may allow the sales at prices that are

lower than a primary seller would be willing to accept. This could be done

either to match lower prices of a competitor or to ensure sales to a

particular buyer for other reasons. This could lead to lower returns to

Australian producers.

Price Discrimination,

Cross-subsidization Not

Determined

We were unable to determine whether or not AWB engaged in price

discrimination because we did not have access to individual transaction

data from AWB or private grain traders. Likewise, we were unable to

determine whether or not AWB engaged in cross-subsidization between

foreign markets.

8

The Wheat Marketing Act of 1989 does not have a 5-year sunset provision.

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but Ability to Distort Trade Is Limited

Reports Encourage

Greater Deregulation and

Stronger Efforts Toward

Market-Based Activities

In 1993, the Australian government released a report on National

Competition Policy, also known as the “Hilmer report.” This report clearly

stated that STEs, known in Australia as “statutory marketing authorities,”

should not exist except for certain situations based on public interest

grounds. It stated that statutory marketing authorities’ anticompetitive

practices such as compulsory acquisition of product and monopoly

marketing arrangements are often grossly inefficient. Another report

indicated that grain marketing boards cost more than private traders to

perform similar services.

In 1989, the Grains Council of Australia initiated the Grains 2000 Project. It

identified a number of issues critical to the long-term profitability and

sustainability of the Australian grains industry. Subsequently, the Grains

Council of Australia established several strategic planning units to address

these issues as they relate to specific grains. One of those units, the

National Grain Marketing Strategic Planning Unit,9

 commissioned a report

on the Australian milling wheat industry. The study focused on issues that

may affect the industry for the next 20 years and made recommendations

that the authors believe would lead to greater efficiency.

The Grains 2000 study concluded, among other things, that the benefits of

single-desk selling currently outweighed the costs. However, it noted that

this situation might change once the effects of GATT reforms take hold; that

is, when effective subsidies are reduced and price differentials between

subsidized and unsubsidized markets shrink, or if the market no longer

supports the differentiation strategy. The study also reported that the net

effect of AWB to the Australian grower in 1992-93 fell somewhere between a

loss of $1.22 per ton and a gain of $4.93 per ton. Thus, it is unclear how

much AWB benefits wheat farmers, if at all. The report made additional

recommendations that, in its view, should result in greater efficiency and

support for sustainable practices. These other recommendations included

(1) protecting core markets and developing targeted defenses against

Canada, (2) allowing AWB to trade all grains,(3) allowing AWB investment in

wheat handling and elevation, and (4) making AWB a corporation with

grower ownership.

9

This group includes members of AWB, the Grains Council of Australia, the Australian Grain Marketing

Federation, the Bulk Handling Authorities of Australia, the Australian Flour Millers, the National

Agricultural Commodities Marketing Association, the Australian Mallsters and Brewers, DPIE, and the

Grains Research and Development Corporation.

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NZDB is a major player in the world dairy trade. Individual domestic

producers have some involvement in NZDB activities and participate in a

pooling process, thus dispersing risk across the entire New Zealand dairy

industry. NZDB has successfully weathered the removal of government

subsidies in 1984 and maintains about a 25-percent share of the world

dairy market. The NZDB’s statutory authority allows it to maintain a

monopoly over dairy exports, but does not allow it to maintain control

over the domestic market or collect tariffs on imports of dairy products.

The NZDB’s network of subsidiaries allows it to sell a greater amount of its

goods at the best possible price in other countries’ markets, especially

those with a controlled dairy import market.

Background

State Trading in World

Dairy Trade

State trading also plays a role in international trade in dairy products.

Although the United States is among the world’s largest milk producers

(see fig. 5.1), the country is not a substantial exporter of dairy products

because the great majority of U.S. dairy production is sold to U.S.

consumers. Among the top exporters of skimmed milk powder shown in

figure 5.2, three of the five countries listed maintained STEs in their dairy

sector: Australia, New Zealand, and Poland. In the case of the major

cheese-exporting countries, shown in figure 5.3, Australia and New

Zealand again appear among the listed countries.1

1

Although Switzerland has reported that it maintains an STE in the dairy sector, its STE is limited to

trade in butter.

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Figure 5.1: World Milk Production by Country, 1993 Estimates

European Union

United States

India

Russia

Ukraine

Brazil

Poland 

New Zealand

Japan

0 20 40 60 80 100 120 140

114.7

68.5

60.9

47

18.1

16.3

12.7

9.4

8.6

Producer country

Metric tons (in millions)

Source: International Dairy Arrangement.

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Figure 5.2: Major Exporters of Skimmed Milk Powder by Country, 1993 Estimates

European Union

Australia

New Zealand

Poland

United States

Other

31.5%

12.4%

11.3%

9.1%

8.0%

27.8%

Note 1: EU estimate excludes trade between EU countries.

Note 2: “Other” not specified in source.

Source: International Dairy Arrangement.

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Figure 5.3: Major Exporters of Cheese

by Country, 1993 Estimates

European Union

New Zealand

Australia Switzerland

Other

53.5%

13.0%

8.9% 6.2%

18.5%

Note 1: EU estimate excludes trade between EU countries.

Note 2: “Other” not specified in source.

Source: International Dairy Arrangement.

New Zealand Dairy Trade

Significant

NZDB operates within the terms of the Dairy Board Act of 1961, as

amended. Its group mission is to maximize the sustainable income of New

Zealand dairy farmers through excellence in the global marketing of New

Zealand origin dairy products. According to NZDB officials, NZDB helps New

Zealand farmers obtain the maximum return possible by acting as a single

agent on the export market for New Zealand dairy products. This

eliminates possible “undercutting” by individual dairy cooperatives and

reduces the number of global players in the competition for dairy sales.

Dairy exports constitute a significant portion of New Zealand’s overall

export trade; approximately 90 percent of New Zealand’s dairy products

are exported. According to MAF, in the year ending December 1993, dairy

product exports totaled $1.9 billion.2

 This figure represents 33 percent of

2

All monetary references are expressed in constant 1994 U.S. dollars.

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New Zealand’s agricultural exports and 18 percent of New Zealand’s total

merchandise exports. (See fig. 5.4.)

Figure 5.4: New Zealand Agricultural

Exports, Year Ending December 1993

11%

13%

14%

17%

12%

Wool

Dairy products

Other

Fruits and vegetables

Beef

Sheepmeat

33%

Source: MAF.

In recent years, New Zealand has been a leading supplier of most dairy

produce to world markets; in particular, it supplies a significant

percentage of the world’s exports of milk powder, butter, and cheese.

Conversely, New Zealand’s dairy imports are minimal. No dairy products

are subject to import-licensing requirements, and no quantitative

restrictions apply to dairy products entering New Zealand.

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NZDB-Producer

Relationship: Pooling

Disperses Risk;

Cross-subsidization

Between Domestic

and Foreign Markets

Not Possible

New Zealand domestic producers participate, through elected

representatives, in NZDB policy direction. NZDB is accountable to its

producers and reports back through a number of vehicles, including

annual reports and efficiency audits. Individual producer risk is dispersed

across the entire industry through the pooling process. The small New

Zealand domestic market is deregulated, so any company may sell dairy

products domestically. NZDB cannot engage in cross-subsidization between

domestic and foreign market sales because it neither has control over

imports nor does it sell its dairy products in the domestic market.

Producers Participate in

NZDB Activities

NZDB is owned by the New Zealand dairy industry.3 Policy direction is

determined by a managing board of 13 directors, 11 of whom are elected

by the cooperative dairy companies and are themselves both directors and

shareholders of their own companies. The other two directors are

appointed by the New Zealand government, on the recommendation of

NZDB, on the basis of their commercial expertise.

NZDB reports back to the dairy industry through a number of vehicles. Its

publications include an annual report, which has financial and marketing

information, and newsletters. It also conducts annual general meetings for

farmers and meets with producer organizations, such as the Federated

Farmers of New Zealand.

Audits Assess NZDB

Performance and

Efficiency

MAF acknowledged that producer boards4 were not subject to the same

competitive disciplines as commercial marketing organizations because of

their statutory position and powers. Therefore, the government decided to

subject these boards to performance and efficiency audits every 5 years,

with the requirements for the audits specified in each board’s legislation.

According to MAF, these audits would help to give producer boards more

financial autonomy and make them more responsible for their actions,

improve their performance, and make them more accountable to farmers

for their commercial performance and to the parliament for the exercise of

their statutory powers.

3

According to New Zealand government officials, some dairy industry groups are concerned that

relative equity in NZDB is not appropriately reflected in the current ownership arrangements. NZDB is

working on a proposal to provide more direct ownership to the producers while maintaining the

principles in the 1961 Dairy Board Act.

4

Five of the 11 producer boards in New Zealand are single sellers on the export market: NZDB, the

Apple and Pear Marketing Board, the Kiwifruit Marketing Board, the Raspberry Marketing Council,

and the Hop Marketing Board.

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The NZDB’s first performance and efficiency audit was published in

October 1993. It was conducted by the Boston Consulting Group on behalf

of the New Zealand government. The audit’s overall purpose was to

“assess the effectiveness and efficiency of the NZDB’s activities in achieving

its mission.” It covered 11 major topics, ranging from personnel to

communication. The overall assessment was “seven out of ten.”

Recommendations included a need to develop an industry vision, to

conduct a review of the payments system, and to improve the key

processes through which NZDB creates value for shareholders.

Pooling Disperses

Producer Risk

Individual producer risk is dispersed through the pooling system.

According to its enabling legislation, NZDB has the statutory power to

purchase and market all dairy products intended for export.5 NZDB acquires

these products from approximately 14,000 milk producers through a series

of 15 dairy cooperatives. The processed milk is sold on the export market,

and returns (minus marketing and operating costs) are distributed to the

cooperatives, which in turn distribute them to the individual farmers.

Cooperatives pool the milk separately, so producers are paid according to

the quantity of milk provided to the individual cooperative. More efficient

cooperatives will have lower operating costs and will thus provide higher

payments to the producers.6 NZDB sells its products in export markets

through a worldwide network of holding companies and subsidiaries.

The number of cooperatives has decreased over time, but the volume of

dairy products has generally increased. The number of dairy cooperatives

in New Zealand has fallen from 95 in June 1970 to 15 companies as of

May 1995. However, the volume of dairy products manufactured, in actual

tons, has grown in several sectors. NZDB officials credit this phenomenon

to the increased efficiency of the cooperatives and their operations and

the effect of a free market system.

Domestic Market

Deregulated, but Small

New Zealand’s domestic dairy market has been deregulated since the late

1980s. Thus, NZDB does not have the same control over the domestic

market as it does the export market. In fact, NZDB stated that it is not

5

Dairy produce intended for export, as defined in the 1961 Dairy Board Act, includes (1) any goods or

produce manufactured in New Zealand and intended for export that contain more than 30 percent by

weight of dairy produce and (2) any milk or cream acquired by NZDB from a cooperative dairy

company for the purposes of manufacture into a product intended for export.

6

Producers may choose which dairy cooperative will receive their milk. Thus, they will choose the

most efficient cooperative in order to receive the highest return. Officials speculated that the

less-efficient cooperatives may have gone out of business due to this process of natural selection.

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Economic Advantages

involved directly in the marketing of dairy products in New Zealand, but

that it does have a role in coordinating market promotion and other

activities on behalf of the wider industry. Only 10 percent of New Zealand

milk remains in New Zealand, either as raw milk or as processed dairy

products.

The domestic dairy market is very small compared to the export market.

For example, NZDB exported 205,000 tons of butter in 1993-94, while local

market sales in 1993 totaled 32,000 tons. Similarly, typical cheese exports

in 1993 were 124,000 tons, while local market sales in 1993 were 29,000

tons.

Cross-subsidization

Between Domestic and

Foreign Sales Not Possible

Since NZDB does not have control over the domestic dairy market,

cross-subsidization between domestic and foreign sales is not possible.

The NZDB’s control over imports of dairy products was removed in the

mid-1980s, and it does not receive any tariffs from imported dairy

products. Moreover, NZDB does not even sell dairy products in New

Zealand; individual dairy cooperatives may compete for shares of the

domestic market.

NZDB-Government

Relationship:

Government

Assistance Is Limited

Even though NZDB has sole export authority for New Zealand dairy

products, it has not received direct government subsidies since 1984, when

a governmentwide reform removed most agricultural subsidies. The New

Zealand government continues to support NZDB indirectly through a

research grant scheme, which benefits the dairy industry as a whole.

However, the New Zealand government has removed some of the NZDB’s

advantages, including its access to New Zealand’s Reserve Bank credit.

Direct Government

Subsidies Removed

New Zealand has instituted a number of reforms that directly affected

NZDB. The first and most important reform was put in place in 1984; it

removed direct government subsidies to farmers. This reform was

instituted virtually overnight, abolishing more than 30 agricultural

production and export subsidy programs. As a result, New Zealand

farmers lost nearly 40 percent of their gross income, and producer boards

were forced to reevaluate their operations and marketing strategies and to

implement new initiatives.

Other terminated programs included the Export Programme Suspensory

Loan Scheme and portions of the Export Market Development Tax

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Economic Advantages

Incentive Scheme. This scheme was available to taxpayers who incurred

expenditures for the purpose of seeking markets, retaining existing

markets, obtaining market information, doing market research, creating or

increasing demand for the export of goods and services, or attracting

tourists to New Zealand.

The Supplementary Minimum Price program applied to the dairy industry,

but only one payment was made in 1978-79, of $37.8 million. The PSE on

milk fell from a peak of 67 percent in 1983 to an average of 15 percent in

1985-87 and an estimated 1.7 percent in 1990.

Indirect Subsidies Support

Mission, Research Goals

The NZDB’s mission is further enhanced by enforcement actions written

into its enabling legislation. The New Zealand government, through the

Dairy Board Act of 1961, may impose fines on persons or companies that

circumvent NZDB and try to export dairy goods without a license. This fine

may not exceed $1,187. According to NZDB officials, such fines have not

been imposed at any time.

NZDB does not receive any direct grants or concessionary loans from the

government for research, but its research affiliate may compete for

government research grants. Through its Public Good Science Fund, the

government sponsors a variety of projects; funds are bid upon by a variety

of research institutions. NZDB sponsors the New Zealand Dairy Research

Institute, which focuses on fundamental, long-term dairy research; NZDB

also maintains research centers in Singapore, the United Kingdom, Japan,

and the United States. Other research on dairy issues takes place in New

Zealand universities and at Crown Research Institutes.7

NZDB Lost Other

Advantages

In the 1980s, NZDB lost access to Reserve Bank of New Zealand credit; it

has been forced to turn to the commercial lending market to obtain loans.

Thus, it can no longer obtain cheap loans through the Reserve Bank of

New Zealand. In 1983, the outstanding deficit in the Dairy Industry (Loans)

Account, an account that served as an overdraft facility for NZDB, was

converted to a long-term loan. This $725-million loan, considered a

substantial subsidy by the New Zealand government, was repayable over

40 years. In 1986, the New Zealand government conceded part of this loan

and allowed NZDB to pay off the balance for $102 million as part of its

7

In 1992, the government formed 10 Crown Research Institutes to take over the major research

responsibilities from previous government agencies. These institutes do not have any core funding but

operate as science contractors and are expected to be viable businesses.

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transition in dissolving the NZDB’s financial arrangements with the Reserve

Bank.

NZDB benefits from a good credit rating, which may be related to its status

as a government-established STE. However, NZDB no longer benefits from

tax concessions; it is taxed on its retained earnings the same as any other

enterprise. Producers pay individual income tax on their returns.

NZDB-Foreign Buyer

Relationship:

Subsidiaries and

Outside Investments

Allow for Greater

Returns

NZDB’s sole export authority affords it the opportunity to achieve

economies of scale and provides other benefits. By using its statutory

authority to export dairy products to the United States and other

countries, NZDB benefits from its extensive subsidiary network and higher

U.S. prices, since the U.S. price for dairy goods is higher than the standard

world price. The NZDB’s ability to invest in outside companies also allows it

to diversify its economic interests. While price discrimination is possible

and not prohibited under GATT, we were unable to analyze the extent to

which NZDB or other exporters engage in this practice because we did not

have access to public or private companies’ transaction-level data.

Likewise, we were unable to determine whether NZDB engaged in

cross-subsidization between its higher- and lower-priced foreign market

sales.

NZDB Has Sole Export

Authority Over All New

Zealand Dairy Products

The New Zealand Dairy Board Act of 1961 granted NZDB the sole authority

to purchase and market all export dairy products from New Zealand. That

is, all New Zealand dairy products destined for export are under the NZDB’s

jurisdiction; thus, NZDB is assured a certain level of product supply and the

NZDB buying price is the prevailing level of compensation available to

producers. To achieve this, NZDB purchases dairy produce from the

cooperative manufacturing dairy companies and sells it through a

worldwide marketing network of subsidiary and associate companies.

NZDB is also responsible for packaging, transporting, storing, and making

shipping arrangements for its exports.

NZDB has the authority to grant export licenses to other companies that

want to export dairy products on their own. It may choose to grant such

licenses if it is not interested in exporting a particular dairy commodity.

For example, companies have successfully obtained licenses to export ice

cream and certain specialty cheese products, as NZDB does not market

these products.

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This export authority provides NZDB with the opportunity to achieve

economies of scale in its operations, which translates into the ability to

spread the cost of its international operations across a large volume of

sales. NZDB officials noted that individual farmers or cooperatives would

have a difficult time marketing dairy products on their own; thus, NZDB

provides a mechanism through which the New Zealand dairy farmer can

compete in a global marketplace. NZDB’s exclusive authority and size

translate into market power for NZDB in certain world dairy markets.

Situations where STEs or private firms supply a large share of world

markets, increases the concerns about efforts of suppliers to work

together to exercise their market power.

As an example of the possible exercise of this market power, U.S. dairy

industry sources provided us with a June 1995 proposal addressed to the

Australian Dairy Industry Council from NZDB. This proposal suggested that

the two industries coordinate their supply of dairy products to satisfy new

EU quotas. We spoke with industry officials from both New Zealand and

Australia, who were unable to pinpoint the exact origin of the proposal.

According to NZDB officials, this was an effort to respond to the two

governments’ agreement to maintain closer economic relations. Officials

from both countries’ dairy industries affirmed that the proposal was

dropped.

U.S. Dairy Market Benefits

NZDB

NZDB benefits from the U.S. market, as well as other restricted markets

around the world, because of its subsidiaries and domestic dairy price

support programs. NZDB sells its products through 88 subsidiary companies

in more than 60 countries around the world, including each of New

Zealand’s largest trading partners. These companies are managed by

geographically oriented holding companies. NZDB believes that this

subsidiary framework allows it better access to markets, and these

subsidiaries appear to offer particular advantages in markets restricted by

quotas, such as the United States. The NZDB’s subsidiaries, such as Western

Dairy Products, Inc., can import New Zealand cheese that is subject to

quota and help NZDB realize profits that would otherwise go to unaffiliated

U.S. importers. For example, under the U.S. quota system, New Zealand’s

allocation of cheese can be assigned to any licensed U.S. importer.8

 The

New Zealand government has the authority to choose the U.S. importers of

New Zealand cheese. NZDB may encourage the New Zealand government to

select the NZDB’s own subsidiaries to import the cheese, thus keeping the

cash flow within the organization.

8

For a more comprehensive explanation of the U.S. cheese quota system, see GAO/RCED-95-280R.

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NZDB can take advantage of the difference between world and U.S. prices

by selling its goods through wholly owned subsidiaries in the United

States. U.S. prices are significantly higher than world prices because

(1) the U.S. dairy program keeps domestic prices more elevated than they

would otherwise be and (2) the U.S. cheese import quota system restricts

the supply of generally lower-priced imports. Thus, NZDB can get the

greatest advantage for its sales by working through subsidiaries.

NZDB Can Invest in Other

Companies

As of 1988, the New Zealand government granted NZDB the “powers of a

natural person.” This allowed NZDB to, among other commercial practices,

enter into contracts and invest in other businesses. NZDB has taken

advantage of this privilege by investing in businesses in other countries

and thus diversifying its economic interests. For example, during the

1993-94 season, NZDB formed New Zealand Milk Products (Egypt) Ltd., a

100-percent subsidiary to manufacture and market ghee, and New Zealand

Milk Products Treasury (S) Pte Limited in Singapore as a treasury and

reinvoicing center for the South East Asia region.

Price Discrimination,

Foreign Market

Cross-subsidization Not

Determined

We could not determine whether or not NZDB engaged in price

discrimination because we did not have access to public or private firm

transaction data. Similarly, we were unable to ascertain whether or not

NZDB subsidized its sales in one foreign market with higher-priced sales in

another foreign market. Some U.S. dairy industry sources expressed

concerns regarding the NZDB’s potential to cross-subsidize its sales

between foreign markets, but we had insufficient data to make a

judgement on this potential practice.

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Appendix I 

Framework and Country Information

CWB AWB NZDB

In 1993-94, more than twothirds of Canada’s wheat

production was exported.

Canada has about a 22%

share of world exports of

wheat and wheat flour.

In 1993-94, more than

three-quarters of Australia’s

wheat production was

exported. Australia had

about a 13% share of world

exports of wheat and wheat

products.

New Zealand exports about

90% of its dairy production.

In 1993, NZDB had about

an 11% share of world

exports of skimmed milk

and a 13% share of world

exports of cheese.

Relationships of STEs

Relationship with producers

Management and ownership CWB is a

quasi-governmental

organization that markets

grain on behalf of Canadian

farmers.

Government-appointed

commissioners administer

the program, while farmers

are represented by an

11- member producers’

advisory committee.

AWB works to maximize the

net returns to Australian

wheat growers by securing,

developing, and maintaining

markets for wheat products.

Its managing board

includes producers.

NZDB exports dairy

products on behalf of

producers. Its managing

board is mostly elected by

dairy cooperatives. NZDB

reports to the dairy industry

through a variety of

mechanisms and

undergoes a performance

and efficiency audit once

every 5 years.

Pooling Pooling western Canadian

wheat and barley

production (1) removes the

timing of sales as a factor

for farmers and (2)

distributes the market risks

and advantages to all

farmers while also allowing

them to share resources.

AWB pools its returns for

each variety and class of

wheat and distributes them

to the farmers minus

marketing, operating,

storage, and transport costs.

Dairy farmers deliver their

milk to dairy cooperatives

that pool and process the

milk separately, then turn

the dairy products over to

NZDB. Market risk is

dispersed, and dairy

farmers receive their

payments based on the

efficiency of the

cooperatives.

Authority (domestic and imports) CWB has authority over all

Canadian wheat and barley

export sales, as well as over

all western Canadian wheat

and barley sold for

domestic human

consumption.

CWB had control over all

imports of wheat and wheat

products until August 1,

1995.a

AWB handles anywhere

from 30% to 80% of the

domestic trade in wheat.

AWB does not have control

over wheat imports.

NZDB does not sell dairy

products in the deregulated

domestic market. The dairy

cooperatives compete for

domestic sales. 

NZDB does not have control

over dairy imports.

Potential ability to cross-subsidize

between domestic and

foreign market sales

CWB has limited potential to

cross-subsidize wheat

exports, and somewhat

greater potential to

cross-subsidize barley

exports in this manner.

AWB does not have the

potential to cross-subsidize

in this manner.

NZDB does not have the

potential to cross-subsidize

in this manner.

(continued)

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Appendix I 

Framework and Country Information

CWB AWB NZDB

Relationship with government

Direct subsidies The Canadian government

has covered CWB wheat

pool deficits during 3 crop

years, and barley pool

deficits during 7 crop years,

requiring over $1.2 billion in

government payments.

The Australian government’s

price support schemes

were removed in 1989.

AWB benefits from a

government guarantee on

its borrowing to pay wheat

producers (up to 85% of

expected net return).

Direct government

subsidies to the dairy

industry were removed in

1984. NZDB has not

received subsidies since

1983 when the New

Zealand government

allowed NZDB to take out a

long-term loan on extremely

favorable terms.

Indirect subsidies As a crown corporation,

CWB is able to maintain a

high credit rating on its

commercial loans for initial

payments.

CWB pays no taxes to the

federal government or any

other provincial

government. Returns to the

producers are taxed as

regular income.

The Canadian government

provides some domestic

support (crop insurance,

research, and income

support) to farmers, as well

as indirect subsidies

covering the transportation

of grains.b

AWB officials

acknowledged that the

government guarantee may

translate to favorable

interest rates.

AWB receives levy funds to

support capital investments

and domestic trading

operations. AWB does not

pay tax on its commodity

sales, but pays corporate

tax on holdings and

investments. Returns are

considered personal

income for the farmers and

are taxed under Australia’s

income tax system.

Research funds and other

economic relief are also

available.

NZDB indirectly benefits

from research subsidies to

its research affiliate.

NZDB has a good credit

rating, which may be related

to its status as an STE. The

NZDB’s retained earnings

are subject to taxation.

Producers’ incomes are also

taxable under New

Zealand’s income tax

system.

Relationship with foreign buyers

Single seller CWB has authority over all

Canadian wheat and barley

destined for export.c Thus, it

has a sure source of supply

and can use economies of

scale to disperse the cost of

operations.

AWB has authority over all

Australian wheat destined

for export. Thus, it has a

sure source of supply and

can use economies of scale

to disperse the cost of

operations.

NZDB controls all New

Zealand dairy products

destined for export. Thus, it

has a sure source of supply

and can use economies of

scale to disperse the cost of

operations.

It may grant export licenses

to other companies that

wish to export dairy

products.

(continued)

Page 73 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Appendix I 

Framework and Country Information

CWB AWB NZDB

Commercial practices The lack of transparency in

the CWB’s pricing methods

may provide CWB with

greater pricing flexibility

than is found among private

sector traders and the

ability to cross-subsidize

between foreign market

sales.

Price flexibility and foreign

market cross-subsidization

are possible due to a lack of

transparency. Stronger

efforts toward market-based

activities were encouraged

in a recent

government-sponsored

report.

The NZDB’s subsidiaries

allow it to benefit from the

U.S. dairy market’s quota

system and price supports.

Price discrimination and

predatory pricing are

possible, but not confirmed.

aOn August 1, 1995, the licensing procedure was replaced by a tariff-rate quota, negotiated by

the Canadian government under the terms of the GATT. This tariff-rate quota is administered by

the Canadian federal government. Canada removed the import-licensing requirement for U.S.

wheat and wheat products entering Canada in May 1991.

bThe transportation subsidy ended on August 1, 1995.

cThis control extends to the exports of the Ontario Wheat Board as well. However, farmers are

allowed to buy back their wheat and barley from CWB and sell it for export themselves.

Page 74 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Appendix II 

Comments From the U.S. Department of

Agriculture

Note: GAO comments

supplementing those in the

report text appear at the

end of this appendix.

Now on p. 16.

Now on pp. 18 and 46-47.

Page 75 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Appendix II 

Comments From the U.S. Department of

Agriculture

Now on pp. 6 and 23.

See comment 1.

Now on pp. 26 and 45.

See comment 2.

Now on pp. 70-71.

Page 76 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Appendix II 

Comments From the U.S. Department of

Agriculture

Page 77 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Appendix II 

Comments From the U.S. Department of

Agriculture

The following are GAO’s comments on the Department of Agriculture’s

letter dated May 2, 1996.

GAO Comments 1. Although cross-subsidization is an issue that spans many topics, we

believe the structure of our framework is best left as is, given the

relationships between the sections. We took a number of considerations

into account when developing our economic framework, including natural

progression and logical flow.

2. In chapter 3, we outline the Joint Commission on Grains’

recommendations and its discussion on discretionary pricing. We also

have incorporated summaries of the two academic studies in chapter 3.

We believe that we have adequately covered the benefits of indirect

subsidies in chapters 3, 4, and 5.

Page 78 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Appendix III 

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Phillip J. Thomas

Kimberly M. Gianopoulos

Michael Kassack

Rona Mendelsohn

Robert E. Sanchez

Walter E. Bayer, Jr.

Resources,

Community, and

Economic

Development

Division, Washington,

D.C.

Carol E. Bray

Office of the Chief

Economist,

Washington, D.C.

Loren Yager

Page 79 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
Related GAO Products

Cheese Imports (GAO/RCED-95-280R, Sept. 29, 1995).

State Trading Enterprises: Compliance With the General Agreement on

Tariffs and Trade (GAO/GGD-95-208, Aug. 30, 1995).

GAO/OGC-95-24, July 28, 1995.

International Trade: Canada and Australia Rely Heavily on Wheat Boards

to Market Grain (GAO/NSIAD-92-129, June 10, 1992).

(280146) Page 80 GAO/NSIAD-96-94 Canada, Australia, and New Zealand
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