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 disciplines 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. 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 countries 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. The Final Act resulting from the GATT Uruguay Round negotiations was signed by more than 117 countries on April 15, 1994. 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 WTO 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. 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. In an August 1995 report, 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 emphasizing the needs for such things as protection against low-priced imports and safeguarding national security. 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. 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. 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 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, 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.U.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). 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. 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. 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. 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. 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; (2) a report on the GATT/WTO disciplines that apply to STEs and the effectiveness of those disciplines to date; 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. 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 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, 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 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. 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. 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) 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. 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. 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. 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 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,” while the AWB literature says that its mission is to “maximize long-term returns to Australian grain growers.” 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. 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. 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, 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 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. 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. 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 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. 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. 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 markets restricted by import quotas. In other situations, however, STEs appear to rely chiefly on practices that are also available to commercial exporters. 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. 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. 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 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. 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 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. 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. CWB operates as a government-backed, centralized marketer of wheat and barley. 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. 1995 (Forecast) 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 markets. Exports of barley over the past 6 years have averaged about 32 percent of Canada’s total barley production (see table 3.1). 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. 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 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. 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. 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 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. CWB also allows accredited exporters, both Canadian and foreign grain companies, to buy grain from CWB and sell it on their own. Until recently, CWB also controlled imports of wheat into Canada. On August 1, 1995, Canada replaced the CWB’s wheat import-licensing procedure with a tariff-rate quota. 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. 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. 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 therefore have a small impact on the export price (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. 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 with regard to Canada’s domestic barley market is the tariff Canada places on U.S.-designated barley imports, 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. 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. 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. 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 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, 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.) 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. 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. 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 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. 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. 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.” 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 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 billion 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. 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, 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. 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, 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 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. 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, “more Canadian grains could eventually move south because of the lower transportation costs.” However, the report noted that increased crop diversification and livestock production in Canada could increase the demand for U.S. grain. 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. 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. 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. 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. Earlier ERS forecasts showed Canada as the second-largest source for U.S. agricultural imports, with the United States importing $5.2 billion in agricultural products from Canada in 1995. 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 though the “feed” grain is later milled in the United States. 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, 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. A second report, 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. 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 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 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. 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. 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 22 investigation. The investigation began on January 18, 1994, with the purpose of reviewing U.S. imports of wheat, wheat flour, and semolina from all countries, including Canada. The International Trade Commission issued its final report in July 1994. 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; 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 Grains 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 manner. 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.” 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. Although Australia is a country of less than 18 million people, its agriculture exports totaled $12.2 billion 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.” 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. 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. 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. 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 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. 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. 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. 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 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. 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. 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. 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. AWB was given some flexibility in the commercial market; besides other activities, AWB may buy and sell a variety of grains. 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. According to the Industry Commission, 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, 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. 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. 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. The Australian government has authorized AWB to be the sole exporter of Australian wheat, through legislation that is reviewed every 5 years. 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. 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. 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, 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. 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. 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. Metric tons (in millions) Note 1: EU estimate excludes trade between EU countries. Note 2: “Other” not specified in source. 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. This figure represents 33 percent of New Zealand’s agricultural exports and 18 percent of New Zealand’s total merchandise exports. (See fig. 5.4.) 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. 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. NZDB is owned by the New Zealand dairy industry. 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. MAF acknowledged that producer boards 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. 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. 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. 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. 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. 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 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. 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. 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. 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 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. 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. 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 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’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. 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. 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. 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. 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. 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. 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. 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.

Summary: Pursuant to a congressional request, GAO reviewed three state trading enterprises (STE), the Canadian Wheat Board (CWB), the Australian Wheat Board (AWB), and the New Zealand Dairy Board (NZDB) focusing on: (1) the potential capability of export-oriented agricultural STEse to distort trade; and (2) the specific potential capability of CWB, AWB, and NZDB to engage in trade-distorting activities based on their status as STEs. GAO found that: (1) it is necessary to consider STEs on a case-by-case basis to understand their potential to distort trade; and (2) the three STEs reviewed 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 its wheat and barley producers, and ongoing Canadian reviews of its 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. It also enjoys indirect subsidies in the form of favorable interest rates and an authority to collect from producers for investment. The deregulation of Australia's domestic grain trade and the decline of direct government assistance have lessened the possibile 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.