AWB reels from futures market hit * Caroline Overington * April...

AWB reels from futures market hit

* Caroline Overington
* April 19, 2007

WHEAT exporter AWB suffered a massive loss on the US futures market last year after a surge in the global wheat price, caused partly by the Australian drought, left it badly exposed.
Efforts by AWB to recoup the losses - caused by bets placed by company traders who believed the wheat price would remain low - are one of the reasons it is lobbying the Howard Government to be allowed to sell this year's national wheat harvest.

Leaked documents obtained by The Australian reveal that AWB badly mismanaged its bets on the wheat price on the Chicago Board of Trade, meaning that growers received far less for their wheat last year than they would have achieved if allowed to sell on the open market.

The documents show that grain growers came within a whisker of not being paid the $360million they were owed for the wheat sold into AWB's 2005-06 pool.

The company's pool managers wanted to use the money to cover the financial crisis, which is believed to have involved speculative bets on the price of wheat rather than the company's normal practice of using the futures market to protect itself against adverse price movements.

The Government has temporarily stripped AWB of its monopoly over bulk wheat exports because of the company's involvement in the Iraqi kickbacks scandal. But the company is lobbying to retain the right to keep its monopoly long enough to sell this year's harvest, in part to recoup the losses on the futures markets.

The revelation of the losses calls into question whether AWB is equipped to manage the national wheat pool, whether it made appropriate disclosures to the Australian Securities Exchange, and whether it should be granted the right to manage this year's national harvest.

The Coalition is currently at war over the management of the national wheat pool, with the Nationals saying AWB should be allowed to manage this year's harvest despite the Cole report last year finding that AWB had deceived the Government and funnelled $290 million to Saddam Hussein's regime. Others in the Coalition want the market opened up to competition.

Representatives of the West Australian Pastoralists and Grazier's Association yesterday said they warned Agriculture Minister Peter McGauran during a meeting on October 11 last year that AWB faced a massive hedge loss and asked for permission to sell their wheat on the open market.

PGA vice-president Rick Wilson said he personally warned Mr McGauran about the looming problem. "We told the Government specifically that AWB was facing hedging losses of between $60 million and $100 million, and they took no notice of us," Mr Wilson said. "Now it looks like they might have lost a lot more."

Mr McGauran said yesterday that following the meeting, he sought an explanation from AWB. "They confirmed heavy hedging losses had occurred but that they were reflected in the estimated pool return," he said. "The strategy of hedging by AWB is well known to wheat growers and there is general acceptance that it has been overall to their advantage. Regrettably it has not worked to the growers benefit this year." AWB pool manager David Johnson said in October that AWB had "only a small amount of hedging in place and the losses might not eventuate".

The leaked documents are copies of the minutes of three meetings of AWB's corporate risk review committee from October, when the world wheat price rose dramatically, in part because of the drought that reduced Australia's harvest from an estimated 12million tonnes to just five million tonnes. Minutes from an October 12 meeting show that AWB was deeply concerned about a "dramatic rise" in US futures. "It has had a large impact on the margining account, and on the liquidity requirement to support it," the minutes say.

AWB was left exposed as the wheat price rose. The minutes say AWB rushed to buy back 6800 contracts over two nights in October but this still left "a gross hedge of 3.39 million metric tonnes" with $US278 million ($332 million) needed to fund it. The minutes said AWB would have to "delay the current pool distribution" - in other words, not make a payment of $360million that was then due to growers for the 2005-06 harvest.

The payment was made on October 16 as AWB was bracing for the release of the Cole report.

AWB came under fire in October for offering growers about $US240 a tonne for their wheat when the world wheat price was $US270 a tonne. Rivals said at the time that AWB must have taken a huge hit on the futures market.

In a statement in October, AWB said it had been "affected by the unprecedented rally of world wheat prices" and would inform the market "of any material development".

AWB said yesterday that statement was an admission that its hedge fund "was adversely affected by the unexpected volatility of the wheat futures in 2006".

It said it was investigating the leak of the minutes and that the "hedging exposures" of late last year had been "actively managed to minimise impacts on the national pool".

"Hedging positions are factored into the estimated pool returns, which are regularly disclosed to the market," it said.

It said finalised hedge positions would not be realised until the pool was closed "which normally takes 18-24 months".

The documents suggest that AWB at October 19 had hedge losses of $US200.2 million for the 2005-06 pool, and $US94.7 million for the 2006-07 pool.

Analyst Tony Smith of Plum Grove said: "Essentially, their losses were so great they were forced to liquidate their hedges."