U.S. WHEAT ASSOCIATES Wheat Letter November 2, 2005
In this issue:
1) UN makes the AWB a "case study" in Oil for Food illicit payment report 2) Iraq trade takes a big step forward
1) UN makes the AWB a "case study" in Oil for Food illicit payment report Last week the United Nations issued a devastating report on illicit payments made to Saddam Hussein's regime under the UN Oil for Food (OFF) Programme. We at U.S. Wheat Associates are impressed with the report's depth and detail about the Australian Wheat Board (AWB Ltd.) transactions, and with the fact that the committee, led by Paul Volcker, made the AWB a major "case study" as the largest single recipient of humanitarian payments for products under OFF. USW won't be commenting on the guilt or innocence of the AWB -- the observations in the report speak for themselves. People can read those observations here.
The finding: Citing exorbitant inland transportation fees paid by AWB to Alia Transport (which was partially owned by the Iraqi government and which, in fact, did not transport the AWB wheat), the report finds that "AWB accounted for more than fourteen percent of the illicit payments made to Iraq in connection with humanitarian purchases under the [Oil for Food] Programme." (UN Report on Programme Manipulation, October 27, 2005) AWB paid more that $US 221 million to Alia.
AWB response: The AWB is claiming ignorance, and told a reporter that "Alia gave all appearances of an established transportation company performing actual services." (Statement by AWB, "Backgrounder: Plenty of signs that AWB money was going to Saddam," Australian Associated Press, October 28, 2005)
The truth? Numerous statements by Trade Minister Mark Vaile, before the UN investigation was established, seem to contradict AWB's claim of ignorance about inland transportation. Like when he told an interviewer: "But what has not been recognized, nor reported, is that not only does AWB supply the wheat and sell the wheat to the Iraqis through the UN Oil For Food Program but they also have the unloading and distribution network within Iraq." (Interview on "Sunday Sunrise" October 26, 2003) Or when Mr. Vaile told U.S. reporters that "...AWB is actually established and invested in a lot of the logistical supply chain within Iraq as well." (Press conference transcript, April 29, 2003).
Who is telling the truth, the AWB or the Australian Trade Minister? Following the recommendation of UN Secretary General Kofi Annan, that countries should investigate and prosecute companies for any alleged crimes, Australian Prime Minister John Howard agreed this week to establish a formal inquiry into the scandal. We expect that the Australian government will be able to bring together the Volcker report findings, sales contracts, and -- perhaps most important -- reports from honorable AWB employees and associates (both former and current). It is up to the Howard administration to connect the dots.
Put a stop to AWB participation in U.S. market system U.S. Wheat Associates raised early warning flags about possible kickbacks from the AWB to Saddam's regime, beginning in 2003 when we first learned of the excessive prices in the AWB contracts. The AWB attacked us for publicly raising those concerns. AWB managing director Andrew Lindberg called our observations an "act of desperation." Privately, letters and emails from AWB employees were much more vivid, as one can imagine. USW would welcome an apology from AWB now that the Volcker report justifies and supports the earlier USW observations.
But the issue before the grain trade is bigger than that now.
"U.S. Wheat Associates strongly believes that it is time to put a stop to the abusive power of the export monopolies," says USW president Alan Tracy. "Knowingly paying kickbacks to prop up the Saddam regime, if proven, would be a moral outrage. Beyond that, paying bribes to foreign officials is a crime in most countries, including both Australia and the U.S."
In view of the strong case put forward by the Volcker Committee against the AWB, USW particularly objects to AWB's increasing use of the U.S. free market system to advance their monopoly.
"At least until the Australian investigation is completed, the AWB should be suspended from its participation in the U.S. grain exchanges. They should also be barred from any further access to the U.S. government credit programs that they have used and abused," Mr. Tracy said.
Looking at the big picture The Volcker report is precise in its examination of the AWB payments to Alia, ostensibly for inland transportation costs, which rose over 400 percent between 1999 and 2003.
"It is inconceivable that the AWB leadership did not realize that these fees were suspect, especially at the rate they were escalating," Mr. Tracy observes.
But it will be up to the Australian government to look beyond the report and fill in the blanks.
For instance, in August 2002, Saddam Hussein threatened to ban Australian wheat. AWB executives rushed to Baghdad, and, as reported by Reuters, "monopoly wheat exporter AWB Ltd said on Friday it was negotiating with Iraq over its threat to chop massive imports of Australian wheat because of Canberra's support for a possible U.S. attack on Baghdad."
"'(Iraq's) Minister made it clear that Iraq wished to resume and increase future business with AWB on the basis that the Australian government supports diplomatic solutions to the current situation in Iraq,' AWB chief executive Andrew Lindberg, leader of a delegation now in Iraq, said in statement," Reuters reported.
USW was amazed when AWB returned to Australia. Not only did Iraq agree to resume purchases, despite no change in Australian foreign policy, but they agreed to even higher AWB prices than they had paid in the contract before the meeting.
These Iraqi actions, in and of themselves, run contrary to common sense. Why would a buyer threaten to cut sales, and then agree to resume purchases at a higher price? It's usually the opposite -- the buyer holds out for a lower price. (One Oil for Food contract seen by USW, signed on 16 July 2002, was for Euro 237.55 per metric ton, delivered in country. Prices escalated after the August 2002 AWB meetings in Baghdad. In another OFF contract, signed on 14 December 2002, AWB wheat was priced at Euro 280.37, or US$285.98, per metric ton. U.S. FOB wheat prices at the time were US$148 in July and US$167 in December 2002.)
Trade Minister Mark Vaile, who evidently received a report on the meeting with the Iraqis from the AWB travelers upon their return from Baghdad, issued a press release on Sunday 18 August 2002 praising the AWB's commercial acumen.
The reasons for Iraq's willingness to pay higher price may be more clear in the context of this observation in the Volcker report:
"In September 2002, apparently in light of AWB's failure to make a timely payment for a shipment that had arrived in port, Alia sent a fax marked 'URGENT' to AWB warning that 'ISCWT [the Iraqi State Company for Water Transport, overseen by Iraq's Ministry of Transportation] informed us that you should credit their account with the amount of Euro 203303 immediately today otherwise they will stop the discharging of vessel and would not permit it to leave the harbor until money is received.'"
The AWB may yet be able to explain these deals and transactions, in a way that they evidently didn't in interviews with the UN committee. But the point is that the Australian inquiry can only be considered legitimate if, in addition to examining the narrow transactions described in the Volcker report, it explores the timelines of Saddam's threats to cut off sales, mad dashes by AWB executives to Baghdad, resumption of trade, and Iraqi government demands for money, all within the context of the UN information.
If nothing else, this scandal has a growing number of Australian wheat and barley producers calling for an end to the AWB monopoly.
2) Iraq trade takes a big step forward It is a new day in Iraq. Their trade environment is constantly improving, and recent improvements in financing instruments represents even better opportunities for U.S.-Iraqi trading relations, U.S. Wheat Associates and others learned at a meeting recently with U.S. government and private banking officials. The news was especially welcomed by the U.S. wheat industry, which has recently seen the largest tonnage of exports to Iraq in over 20 years.
As of USDA's most recent export sales report, Iraq has purchased over a million tons of U.S. wheat so far this marketing year, the most since 1983/84. At 1.07 million metric tons of sales, they are now the 4th largest customer of U.S. wheat, behind only Nigeria (2.1 MMT), Japan (1.53 MMT) and Mexico (1.5 MMT). They are the world's second largest buyer of U.S. hard red winter wheat.
At the meeting arranged by the North American Export Grain Association, an assembly of high ranking grain trade representatives heard from James Smith, agricultural counselor at the U.S. Embassy in Baghdad, on the progress made by the Iraqis. Smith, who was briefly in Washington, D.C. for consultations, was upbeat and complimentary about the leadership exhibited by the Grain Board of Iraq, the Trade Ministry, and several high ranking Iraqi officials.
"The first responsibility of the Grain Board is to feed the people of Iraq, and the efforts by the current government leadership demonstrate they are taking this more seriously than others have," Smith explained. "As with any enterprise of this size and complexity, there are problems, but the U.S. trade can have confidence that the situation in Iraq is increasingly conducive to productive and long-term business relations."
Smith related several examples of the changing trade environment of Iraq.
"I recently commended the Iraqis for their success in resolving some major logistical problems at the port of Um Qasr," he said. "They deserve credit for tackling the problems, and proving to the naysayers that they are firmly rebuilding industries that are re-entering the global economy on a sound footing."
Representatives from the Export-Import Bank of the U.S. and JP Morgan Chase were equally upbeat, explaining how the financing sector is progressing to a new stage in commercial viability as Iraq establishes its creditworthiness with each new contract. The Grain Board now has access to 180 day credit terms under Ex-Im Bank's $500 million short-term insurance facility for the Trade Bank of Iraq.
"Use of the credit facility provides the Iraqi government liquidity for buying much-needed food supplies, but just as importantly, it gives the Iraqi government the opportunity to re-establish credit in the wake of years of economic challenges," said Ex-Im Bank chairman and president (acting) James H. Lambright.
Readers' comments and observations are always welcome. To submit comments, or to cancel your subscription to the USW Wheat Letter, simply respond to this email.
regards, Dawn
(Mrs.) Dawn Forsythe Director, Public Affairs U.S. Wheat Associates www.uswheat.org
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