Canada, Australia, and New Zealand: Potential Ability of Agricultural
State Trading Enterprises to Distort Trade (Chapter Report, 06/24/96,
GAO/NSIAD-96-94).

Pursuant to a congressional request, GAO reviewed the potential
capability of the Canadian Wheat Board (CWB), the Australian Wheat Board
(AWB), and the New Zealand Dairy Board (NZDB) to engage in
trade-distorting activities based on their status as state trading
enterprises (STE).

GAO found that: (1) STE can distort trade through their relationships
with domestic producers, governments, and foreign buyers; (2) indirect
subsidies and monopoly buying authority allows CWB to cross-subsidize
its wheat and barley exports between its domestic and export markets,
and may provide it greater pricing flexibility in its relationship with
foreign buyers; (3) while the United States cannot prove that CWB is
violating existing trade agreements, trade differences between the
United States and Canada have curbed Canadian wheat imports and led to
the establishment of a joint commission to review the two countries'
marketing and support systems for grain; (4) AWB has limited potential
to distort international wheat markets because it receives little
government assistance and no longer has a monopoly over wheat sales to
its domestic market; (5) NZDB does not receive government subsidies, but
its size and monopoly purchasing power allow it to benefit from
economies of scale, and provide NZDB market power in world dairy
markets; and (6) it is uncertain whether NZDB ability to differentiate
pricing in foreign markets provides an unfair advantage over
competitors.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-96-94
     TITLE:  Canada, Australia, and New Zealand: Potential Ability of 
             Agricultural State Trading Enterprises to Distort
             Trade
      DATE:  06/24/96
   SUBJECT:  Commodity sales
             Monopolies
             Restrictive trade practices
             Farm subsidies
             Foreign trade agreements
             Foreign trade policies
             International trade
             International trade restriction
             Tariffs
IDENTIFIER:  Canada
             North American Free Trade Agreement
             USDA Export Enhancement Program
             NAFTA
             Australia
             New Zealand
             
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Cover
================================================================ COVER


Report to Congressional Requesters

June 1996

CANADA, AUSTRALIA, AND NEW ZEALAND
- POTENTIAL ABILITY OF
AGRICULTURAL STATE TRADING
ENTERPRISES TO DISTORT TRADE

GAO/NSIAD-96-94

Canada, Australia, and New Zealand

(280146)


Abbreviations
=============================================================== ABBREV

  AWB - Australian Wheat Board
  CWB - Canadian Wheat Board
  DPIE - Department of Primary Industries and Energy
  EEP - Export Enhancement Program
  ERS - Economic Research Service
  EU - European Union
  FAS - Foreign Agricultural Service
  GATT - General Agreement on Tariffs and Trade
  MAF - Ministry of Agriculture and Fisheries (New Zealand)
  NAFTA - North American Free Trade Agreement
  NZDB - New Zealand Dairy Board
  OECD - Organization for Economic Cooperation and Development
  PSE - Producer subsidy equivalent
  STE - State trading enterprise
  USDA - U.S.  Department of Agriculture
  WIF - Wheat Industry Fund
  WTO - World Trade Organization
  USTR - U.S.  Trade Representative

Letter
=============================================================== LETTER


B-266130

June 24, 1996

Congressional Requesters

As you requested, we have reviewed state trading enterprises in three
countries:  Canada, Australia, and New Zealand.  Our review focused
on the capabilities and activities of the Canadian Wheat Board, the
Australian Wheat Board, and the New Zealand Dairy Board.  We
developed a framework to analyze these boards and determine whether
or not each board was capable of distorting world markets in their
respective commodities. 

We are sending copies of this report to the Secretary of Agriculture;
the U.S.  Trade Representative; officials of the Canadian,
Australian, and New Zealand governments; and other interested
parties.  Copies will also be made available to others on request. 

Please contact me on (202) 512-8984 if you or your staff have any
questions concerning this report.  The major contributors to this
report are listed in appendix III. 

JayEtta Z.  Hecker
Associate Director
International Relations and Trade Issues


List of Congressional Requesters

The Honorable Kent Conrad
The Honorable Larry Craig
The Honorable Byron Dorgan
The Honorable Russell Feingold
The Honorable Herb Kohl
The Honorable Larry Pressler
United States Senate

The Honorable Pat Roberts
Chairman, Committee on Agriculture
House of Representatives

The Honorable Steve Gunderson
Chairman, Subcommittee on Livestock, Dairy, and Poultry
Committee on Agriculture
House of Representatives

The Honorable Joe Skeen
Chairman, Subcommittee on Agriculture, Rural Development, Food
 and Administration, and Related Agencies
Committee on Appropriations
House of Representatives

The Honorable David R.  Obey
Ranking Minority Member
Committee on Appropriations
House of Representatives

The Honorable Doug Bereuter
The Honorable Sherwood Boehlert
The Honorable Robert Borski
The Honorable Tim Holden
The Honorable Tim Johnson
The Honorable John M.  McHugh
The Honorable Thomas Petri
The Honorable Earl Pomeroy
House of Representatives


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

The agricultural agreements of the Uruguay Round (1986-94) of the
General Agreement on Tariffs and Trade (GATT) were intended to move
member nations toward the goal of establishing a fair and
market-oriented agricultural trading system.  Through a process of
progressive reductions in internal governmental support and export
subsidies, conversion of quotas to tariffs, lowering of barriers to
import access, and other reforms called for by the agreements, the
member nations hoped to reduce distortions in world agricultural
markets and to prevent additional distortions from occurring.  Trade
distortion can occur when a country's policies change production and
consumption decisions from what they would be if they faced an open
international market. 

Some member nations are using state trading enterprises (STE) to
regulate imports and/or exports of selected products.  STEs are
generally considered to be enterprises that are authorized to engage
in trade and are owned, sanctioned, or otherwise supported by the
government.  Since the start of GATT, member countries have noted
STEs' unique role and potential to distort world trade and have thus
required them to operate in accordance with commercial
considerations.  STEs may have control over exports or imports of
certain commodities; their practices to control these commodities
have included levies on production and/or imports, licenses for
exports, government guarantees, and subsidies.  Although STEs are
legitimate trading entities and are subject to GATT regulations, some
U.S.  agricultural producers and others are concerned that these
STEs, through their monopoly powers and government support, may have
the ability to distort worldwide trade in their respective
commodities. 

Eighteen members of Congress, including the Chairman of the House
Agriculture Committee; the Chairman of the House Agriculture
Subcommittee on Livestock, Dairy, and Poultry; and the Ranking
Minority Member of the House Committee on Appropriations, asked GAO
to review a number of issues related to the activities of other
countries' agricultural STEs.  This report, one in a series of
products on the nature of state trading in other countries, discusses
(1) the potential capability of export-oriented agricultural STEs to
distort trade and (2) the specific potential capability of the
Canadian Wheat Board (CWB), the Australian Wheat Board (AWB), and the
New Zealand Dairy Board (NZDB) to engage in trade-distorting
activities, based on their status as STEs. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Governments have supported the export of agricultural commodities
through a number of means, including direct and indirect subsidies to
agricultural producers.  For example, the United States and the
European Union, as well as other countries, offer subsidies through a
variety of mechanisms.  STEs also benefit from government subsidies,
but play a different role in the market.  Some trade experts and some
member countries are concerned about STEs' potential to distort trade
due to their role as both market regulator and market participant. 
However, it should be noted that a particular policy can potentially
distort trade without being defined as unfair under GATT.  For
example, government assistance for disadvantaged regions can be
allowed by GATT under certain conditions.  This government assistance
might allow certain firms to continue to operate that would not
survive in a normal competitive environment. 

STEs that have monopoly buying authority for certain domestic
products may gain advantages as a result of their overall control of
the domestic supply.  These advantages can be trade distorting, such
as where STE authority allows cross-subsidization between domestic
and foreign markets or between foreign markets.  Cross-subsidization
can occur when an STE sells products at a loss in one market and
finances those losses through highly profitable sales in another
market.  Government support for STEs involving direct and indirect
subsidies also provides advantages over competitors in world markets
and can distort world trade.  Additionally, relationships between
STEs and foreign buyers can provide advantages through the ability to
charge different prices in different markets.  These advantages are
particularly evident in restricted foreign markets, such as in the
United States, where imports of certain commodities are limited. 

STEs have been important international players in the wheat and dairy
trade.  Some industry observers are concerned about the market power
of specific STEs.  Sixteen member countries have reported to GATT
about STEs in either their wheat and/or dairy sectors.  The
international wheat trade sector includes STEs such as CWB and AWB,
which control 22 percent and 7 percent of the world wheat trade,
respectively.  NZDB is one of the more important players in the world
dairy trade, controlling approximately 25 percent of international
trade in dairy products. 

Because complete transaction-level data needed to fully evaluate
potential trade-distorting activities were not available, GAO is not
in a position to say whether or not trade-distorting activities
actually have occurred.  Even with this information, such an
extensive analysis would require additional data regarding production
costs and comparative private firms' sales.  As such, definitive
statements regarding STEs' trade-distorting activities can not be
easily reached. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

It is necessary to consider STEs on a case-by-case basis to
understand their potential to distort trade.  The three STEs GAO
reviewed--CWB, AWB, and NZDB--have varying capabilities to
potentially distort trade in their respective commodities, although
in each case these capabilities have generally been reduced over
recent years due to lower levels of government assistance. 

  -- CWB benefits from (1) the Canadian government's subsidies to
     cover CWB's periodic operational deficits; (2) monopoly over
     both the domestic human consumption and export wheat and barley
     markets, which may allow for cross-subsidization; and (3)
     pricing flexibility through delayed producer payments.  Canada's
     elimination of transportation subsidies in 1995 has reduced some
     of the indirect government support going to Canadian wheat and
     barley producers, and ongoing Canadian reviews of the country's
     agricultural policies may reduce the control of CWB in the
     future. 

  -- AWB has not received direct government subsidies in several
     years, but enjoys a government guarantee on its payments to
     producers.  AWB also enjoys indirect subsidies in the form of
     favorable interest rates and an authority to collect additional
     funds from producers for investment.  The deregulation of
     Australia's domestic grain trade and the decline of direct
     government assistance have lessened the possible
     trade-distorting policies of AWB.  Recent studies have
     challenged the premise behind a single selling authority, but
     AWB's monopoly over wheat exports still provides it with a sure
     source of supply. 

  -- NZDB is relatively subsidy free, but benefits from its monopoly
     over New Zealand dairy exports and its extensive subsidiary
     structure worldwide.  NZDB's size and exclusive purchasing
     authority for export also translate into market power for NZDB
     in certain world dairy markets.  Its subsidiaries allow it to
     keep profits from foreign sales within the organization and take
     advantage of the difference between world prices and those of
     the country in which it is selling the goods, such as the United
     States.  NZDB's potential to distort trade due to direct
     government subsidies was eliminated during the 1980s when New
     Zealand deregulated the domestic dairy market and stopped
     offering dairy farmers direct government subsidies. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      THREE RELATIONSHIPS KEY TO
      STE ABILITY TO DISTORT TRADE
-------------------------------------------------------- Chapter 0:4.1

GAO's framework for analyzing export STEs--reviewed by experts from
the World Trade Organization, the U.S.  Trade Representative (USTR),
and other organizations--highlights three STE relationships--with
domestic producers, governments, and foreign buyers--that are key to
STEs' abilities to distort trade.  STEs can have monopoly buying
authority over all domestic production of a particular commodity, or
the production of that commodity for export.  This authority provides
STEs with the ability to potentially distort trade through such
practices as cross-subsidization.  The STE relationship with the
government involves the ways in which the government can directly or
indirectly influence the STE financially.  Government support,
through direct or indirect subsidies, could provide an STE with an
advantage over its commercial counterpart and has the potential to
distort trade.  The STE's relationship with a foreign buyer can also
provide it with certain advantages, particularly when the STE is
exporting to markets that are already distorted by import quotas. 
The establishment of an STE can also lead to a reduction in the
number of exporters and an increase in the market power of the
remaining participants. 

GAO's framework provides some advantages in the collection,
reporting, and interpretation of information on STE operations. 
First, it aids in the collection of a consistent and comprehensive
set of information about the operations of these entities. 
Similarly, it facilitates reporting about STE characteristics, since
the material can be described in an organized manner.  Finally, the
framework helps in the interpretation of the information about STEs,
since it aims at distinguishing between important characteristics and
those that are less important. 


      DOMESTIC SUPPORT AND
      MONOPOLY BUYING AUTHORITY
      MAY PROVIDE CWB WITH
      OPPORTUNITY TO DISTORT TRADE
-------------------------------------------------------- Chapter 0:4.2

The CWB's relationship with the Canadian government, as well as its
relationship with Canadian wheat and barley producers, provides CWB
with opportunities to potentially distort trade.  Since the
establishment of CWB in 1935, the Canadian government has provided
more than $1.2 billion (U.S.) to CWB to help it cover periodic wheat
and barley pooling deficits.  Canadian wheat producers also benefited
from a government railway subsidy; this subsidy was eliminated in
August 1995.  CWB also receives indirect subsidies as a result of its
STE status, such as a lower interest rate on commercial loans. 
Through its monopoly authority over Canadian wheat and barley sold
for domestic human consumption or export, CWB has a limited ability
to cross-subsidize its wheat exports and an even greater potential
for cross-subsidizing Canadian barley exports between its domestic
and export markets.  Finally, the CWB's monopoly authority may
provide it with greater pricing flexibility in its relationship with
foreign buyers than is found among private sector traders. 

U.S.  Department of Agriculture (USDA) officials acknowledged that
they did not have any evidence that CWB was violating existing trade
agreements.  However, trade differences between the United States and
Canada have led to curbs on Canadian wheat imports into the United
States and the establishment of a joint commission to look at all
aspects of the two countries' respective marketing and support
systems for grain.  Canada's elimination of transportation subsidies
to Canadian producers, its reviews of CWB operations and Canadian
agriculture, and its ongoing discussions with the United States may
reduce the CWB's potential to distort trade in the future. 


      AWB ENJOYS INDIRECT
      GOVERNMENT SUBSIDIES;
      POTENTIAL TO DISTORT TRADE
      HAS DECLINED
-------------------------------------------------------- Chapter 0:4.3

AWB has limited potential to distort international wheat markets. 
The AWB's level of direct government assistance has diminished over
its 57-year history, but indirect assistance measures still exist. 
AWB does not routinely receive direct subsidies from the Australian
government, but its payments are underwritten by a government
guarantee.  Because of this guarantee, AWB receives favorable
interest rates on its loans, according to Australian government
officials and AWB itself.  In recent years, the AWB's overall
authority has been decreased through the government's removal of
certain powers.  For example, AWB no longer has a monopoly over wheat
sales to the domestic market, so cross-subsidization between its
domestic and foreign market sales is no longer economically feasible. 
However, the AWB's monopoly buying authority over wheat exports may
provide some advantage over its private sector counterparts, as it
has a sure source of supply and does not have to react to competition
from other Australian exporters.  Additionally, AWB has access to
revenue from an industrywide mandatory levy on wheat, allowing it to
diversify risk by investing in other projects.  Studies have
suggested that a single selling authority is inefficient and that the
AWB's commercial orientation will have to be enhanced. 


      NZDB CANNOT USE GOVERNMENT
      SUBSIDIES TO DISTORT TRADE,
      BUT SIZE AND SUBSIDIARY
      STRUCTURE PROVIDE ECONOMIC
      ADVANTAGES
-------------------------------------------------------- Chapter 0:4.4

The NZDB's ability to distort trade by using government funds is very
limited since NZDB has not received direct subsidies from the New
Zealand government since the mid-1980s.  Nevertheless, NZDB still
commands about 25 percent of world dairy trade and has established
strong trade footholds in emerging Asian markets.  The NZDB's
statutory authority allows it to maintain a monopoly over dairy
exports but does not permit it to maintain control over the domestic
market; thus, NZDB can not subsidize its export sales from domestic
sales.  NZDB also does not have the authority to collect tariffs on
imports of dairy products.  Its size and monopoly purchasing
authority allow it to benefit from economies of scale and a certain
source of supply and provide market power for NZDB in certain world
dairy markets.  One of the NZDB's greatest economic advantages is its
network of international subsidiaries, such as those in the United
States.  This network helps NZDB sell a greater amount of its goods
at the best possible price in countries worldwide, especially those
countries with markets that are restricted by quotas.  As such, NZDB
may reap greater profits from foreign price support systems and the
lack of lower-priced imports in a particular country.  Some U.S. 
dairy industry sources contend that the NZDB's ability to
differentiate pricing in foreign markets provides an unfair advantage
over competitors, but GAO had insufficient data to make a judgment on
this potential practice. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

GAO is not making recommendations in this report. 


   AGENCY AND COUNTRY COMMENTS
---------------------------------------------------------- Chapter 0:6

GAO received comments from the USTR and the USDA's Foreign
Agricultural Service (FAS).  USTR was generally pleased with the
report and did not offer written comments.  FAS, in its written
comments, acknowledged that the report provided useful insights into
state trading issues.  However, FAS was concerned that GAO had not
fully explored certain market power issues as they relate to STEs,
such as a guaranteed product supply and pricing flexibility. 
Although GAO generally had addressed these issues in its draft
report, it expanded the discussion to better reflect the importance
of these issues in the final report. 

GAO also discussed the factual content of the report as it related to
the STE in the individual country with embassy representatives from
Canada, Australia, and New Zealand.  Their comments have been
incorporated in the report where appropriate. 


INTRODUCTION
============================================================ Chapter 1

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\1 for
international trade in agricultural products.  Nonetheless, according
to GATT/World Trade Organization (WTO) and member country officials,
state trading enterprises (STE) were not a major issue during the
Uruguay Round.\2 Since the start of GATT, member countries have noted
STEs' unique role and potential to distort world trade and have thus
required them to operate in accordance with commercial
considerations.  STEs have been important players in the world
agriculture market, particularly in wheat and dairy products.  Since
1980, 16 GATT member countries\3 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. 


--------------------
\1 "Disciplines" as used in this report refers to rules, commitments,
and procedures contained in GATT and related agreements. 

\2 STEs are generally considered to be governmental or
nongovernmental enterprises that are authorized to engage in trade
and are owned, sanctioned, or otherwise supported by the government. 

\3 Participants in GATT were known as "contracting parties" until
1994 when WTO was established.  In this report, however, we refer to
contracting parties, as well as participants in WTO, as "member
countries."


   URUGUAY ROUND PARTICIPANTS
   COMMITTED TO LIBERALIZED TRADE
---------------------------------------------------------- Chapter 1:1

The Final Act resulting from the GATT Uruguay Round negotiations was
signed by more than 117 countries on April 15, 1994.\4 The intent of
the Uruguay Round was to further open markets among GATT countries. 
Under the Uruguay Round agreement, member countries committed to
reductions in tariffs worldwide by one-third; strengthened GATT
through the creation of WTO\5 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. 


--------------------
\4 The Uruguay Round was conducted from 1986 to 1994. 

\5 The Uruguay Round created WTO as a formal organization
encompassing all GATT disciplines to replace the provisional GATT
organizational structure.  As an organization, GATT officially ended
on December 31, 1995. 


   STE OPERATIONS MONITORED UNDER
   GATT
---------------------------------------------------------- Chapter 1:2

Since GATT was first drafted in 1947, STEs have been recognized as
legitimate trading partners in world markets.  However, the original
drafters of GATT also understood how governments with a dual role as
market regulator and market participant can engage in activities that
protect domestic producers and place foreign producers at a
disadvantage.  A separate GATT article was established to monitor
STEs and ensure they operate within GATT disciplines.  Article XVII
establishes a number of guidelines and requirements with respect to
the activities of STEs and the obligations of member countries.  In
addition to holding STEs to the same disciplines as other trading
entities, such as making purchases or sales in accordance with
commercial considerations and allowing enterprises from other
countries the opportunity to compete, the article requires periodic
reporting by member countries to the GATT/WTO secretariat.\6

In an August 1995 report,\7 we commented on the disciplines placed on
STEs by both article XVII and other GATT provisions.  Among other
things, our report noted that GATT member countries' compliance with
the
article XVII reporting requirement between 1980 and 1994 had been
poor.  In addition, although state trading was not a major issue
during the Uruguay Round negotiations, members established a
definition of STEs and new measures to improve reporting compliance. 
Our report also highlighted the Uruguay Round's Agreement on
Agriculture, which requires all countries trading in agricultural
goods, including those with STEs, to observe new trade-liberalizing
disciplines (the agreement is defined in the next section).  Finally,
our report emphasized that the effectiveness of article XVII is
especially important given the potential for increases in STEs if
countries such as the People's Republic of China (China), Russia, and
Ukraine join GATT/WTO. 

Attempts to understand the role of STEs are complicated by the
various measures that STEs use to control either a country's
production, imports, and/or exports.  As we reported in August 1995,
STEs' practices to control commodities have included placing levies
on production and/or imports, requiring licenses for exports, giving
government guarantees, and providing export subsidies.  Some STEs
have justified their controls by emphasizing the needs for such
things as protection against low-priced imports and safeguarding
national security. 

As a result of the Uruguay Round, GATT/WTO member countries have
agreed to define STEs as\8

     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. 


--------------------
\6 Information is provided to the GATT/WTO secretariat about STEs and
their activities on the basis of a questionnaire adopted in 1960. 
These responses are called "notifications." The questionnaire asks
GATT/WTO members to list their STEs, the products for which STEs are
maintained, and the reasons for maintaining STEs.  It also asks them
to provide certain information about how their STEs function and
statistics that indicate the extent of trade accounted for by STEs. 

\7 State Trading Enterprises:  Compliance With the General Agreement
on Tariffs and Trade (GAO/GGD-95-208, Aug.  30, 1995). 

\8 This definition is found in the Understanding on the
Interpretation of Article XVII of the General Agreement on Tariffs
and Trade 1994.  The complete text of this understanding was provided
in appendix III of GAO/GGD-95-208. 


   AGREEMENT ON AGRICULTURE
   APPLIES TO STES
---------------------------------------------------------- Chapter 1:3

The Agreement on Agriculture, resulting from the Uruguay Round,
requires member countries to make specific reductions in three
areas--market access restrictions, export subsidies, and internal
support--over a 6-year period beginning in 1995.\9 Under the market
access commitment, countries are required to convert all nontariff
barriers, such as quotas, to tariff equivalents and reduce the
resulting tariff equivalents (as well as old tariffs) during the
implementation period.  Under the export subsidy commitment,
countries are required to reduce their budgetary expenditures on
export subsidies and their quantity of subsidized exports.  Member
countries are also expected to reduce their aggregate measure of
selected internal support policies.  These internal support policies
include budgetary expenditures and revenue forgone by governments or
their agents.  These reductions are expected to have the effect of
liberalizing trade in agricultural products, thereby increasing the
flow of these products between GATT/WTO member countries.  STEs are
subject to these reductions. 

The United States is expected to experience economic benefits as a
result of the new trade discipline in agriculture.  As we reported in
1994,\10 USDA estimated that as a result of the Uruguay Round, U.S. 
annual agricultural exports are likely to increase between $1.6
billion and $4.7 billion by 2000, and between $4.7 billion and $8.7
billion by 2005.  Higher world income, as well as reduced tariffs and
export subsidies among U.S.  trade partners, is also expected to
raise U.S.  exports of coarse grains, cotton, dairy, meat, oilseeds
and oilseed products, rice, specialty crops such as fruits and nuts,
and wheat.\11 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).\12 These export subsidies were subsequently used to
counteract STE practices as well.  U.S.  producers are now concerned
that under the Uruguay Round the United States has committed to
reduce those subsidies without a corresponding reduction in other
countries' state trading activities.\13


--------------------
\9 Developing countries have 10 years to comply with the reductions. 

\10 The General Agreement on Tariffs and Trade:  Uruguay Round Final
Act Should Produce Overall U.S.  Economic Gains, Volume 2
(GAO/GGD-94-83b, July 29, 1994). 

\11 The same GAO report also cited an International Trade Commission
report, Potential Impact on the U.S.  Economy and Industries of the
GATT Uruguay Round Agreements, that projected modest gains (5 percent
to 15 percent) in U.S.  exports of fruits and vegetables, grains, and
tobacco and tobacco products, and sizable gains (over 15 percent) in
U.S exports of dairy products and beverages. 

\12 The EU prior to January 1, 1995, was comprised of Belgium,
Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, Spain, and the United Kingdom.  Austria,
Finland, and Sweden became members of the EU on January 1, 1995. 

\13 In addition, a particular activity can potentially distort trade
without being defined as an unfair trading practice under GATT.  For
example, government assistance for disadvantaged regions can be
allowed by GATT under certain conditions.  This government assistance
might allow certain firms to continue to operate that would not
survive in a normal competitive environment. 


   STES MOST PREVALENT IN GRAIN
   AND DAIRY SECTORS
---------------------------------------------------------- Chapter 1:4

The majority of STEs reported to the GATT secretariat between 1980
and 1995 involved trade in agricultural products.  Although the
reporting represented only a portion of GATT member countries, the
largest number of STEs were found to be trading in either grains and
cereals or dairy products.  As shown in table 1.1, 16 member
countries have reported state trading in their grain and cereals
sector, while 14 have reported state trading in their dairy sector. 



                               Table 1.1
                
                GATT Member Countries Reporting STEs in
                     Grain or Dairy Sector, 1980-95

                           STE in grain
                           and cereal     STE in dairy            Last
Country                    sector?        sector?         notification
-------------------------  -------------  -------------  -------------
Australia                  Yes            Yes                     1995

Canada                     Yes            Yes                     1995

Cyprus                     Yes            Yes                     1995

Czech Republic             Yes            Yes                     1994

Finland                    Yes            No                      1993

India                      Yes            Yes                     1992

Indonesia                  Yes            No                      1995

Israel                     Yes            No                      1981

Japan                      Yes            Yes                     1995

New Zealand                No             Yes                     1995

Norway                     Yes            No                      1995

Poland                     Yes            Yes                     1995

Slovak Republic            Yes            Yes                     1995

South Africa               Yes            Yes                     1994

Spain                      Yes            Yes                     1984

Switzerland                No             Yes                     1994

Turkey                     Yes            No                      1995

United Kingdom             No             Yes                     1993

United States\a            Yes            Yes                     1995
----------------------------------------------------------------------
\a In its 1995 notification to GATT/WTO, the United States reported
the Commodity Credit Corporation as an STE.  According to the
notification, the Corporation is a government-owned and -operated
entity within USDA, created to stabilize, support, and protect farm
income and prices.  The Corporation also aims to help maintain
balanced and adequate supplies of agricultural commodities and to
assist in their orderly distribution, including wheat and dairy
commodities. 

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


   UNITED STATES AND OTHER
   COUNTRIES SUBSIDIZE WHEAT AND
   MILK PRODUCTION
---------------------------------------------------------- Chapter 1:5

Countries support their agricultural producers through both direct
and indirect assistance.  One way of measuring the flow of direct and
indirect government assistance to producers is by using the "producer
subsidy equivalent" (PSE).  The Organization for Economic Cooperation
and Development (OECD) uses PSEs to compare levels of assistance
among countries.  PSE is an internationally recognized measure of
government assistance.  It represents the value of the monetary
transfers to agricultural production from consumers of agricultural
products and from taxpayers resulting from a given set of
agricultural policies in a given year.  A relatively high PSE means
that the government provides a larger amount of production assistance
than do governments in countries with a lower PSE. 

Table 1.2 presents the PSEs for wheat in Australia, Canada, the EU,
and the United States from 1979 to 1994.  Table 1.3 presents the PSEs
for milk in Australia, the EU, New Zealand, and the United States
during the same period.  As indicated in both tables, in recent years
both the EU and the United States have subsidized their wheat and
milk production to a greater extent than Australia, Canada, or New
Zealand. 



                               Table 1.2
                
                   PSE Rates for Wheat, 1979-94 (as a
                         percent of production)

                         1979-   1986-   1989-
Country                     81      88      91    1992  1993\a  1994\a
----------------------  ------  ------  ------  ------  ------  ------
Australia                    7      11       8       7       7      10
Canada                      14      52      46      35      28      20
European Community\b        33      56      45      47      56      57
United States               14      54      42      37      45      42
----------------------------------------------------------------------
Note:  Percentage PSE represents the total value of transfers as a
percentage of the total value of production (valued at domestic
prices), adjusted to include direct payments and to exclude levies. 

\a Figures for 1993 and 1994 are estimates. 

\b Now the EU. 

Source:  Agricultural Policies, Markets and Trade in OECD Countries: 
Monitoring and Outlook 1995, OECD (Paris:  1995). 



                               Table 1.3
                
                   PSE Rates for Milk, 1979-94 (as a
                       percentage of production)

                         1979-   1986-   1989-
Country                     81      88      91    1992  1993\a  1994\a
----------------------  ------  ------  ------  ------  ------  ------
Australia                   24      30      30      32      25      30
European Community\b        53      64      63      65      62      63
New Zealand                 20      11       2       2       2       2
United States               55      64      57      54      55      54
----------------------------------------------------------------------
Note:  Percentage PSE represents the total value of transfers as a
percentage of the total value of production (valued at domestic
prices), adjusted to include direct payments and to exclude levies. 

\a Figures for 1993 and 1994 are estimates. 

\b Now the EU. 

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


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:6

Members of Congress' concerns about STEs, further informed by reports
of the USDA's Foreign Agricultural Service (FAS) and the
International Trade Commission that highlight the operations and
trading practices of STEs operating in the world dairy and wheat
markets, have led to the issuance of three GAO reports on the subject
of STEs.\14 We have already published reports on state trading,
including (1) a July 1995 report that provides a summary of trade
remedy laws available to investigate and respond to activities of
entities trading with the United States, including STEs;\15 (2) a
report on the GATT/WTO disciplines that apply to STEs and the
effectiveness of those disciplines to date;\16 and (3) a
correspondence report describing the impact of the Uruguay Round on
U.S.  cheese quotas and importer licensing process, as well as the
operations of the New Zealand Dairy Board (NZDB) in the United
States.\17

Eighteen Members of the House of Representatives and the Senate have
also asked us to provide more information on how STEs operate in an
open, competitive marketplace.  Members noted the role of state
trading in the wheat and dairy sectors, saying that any trade
problems in these sectors could be representative of potential
problems that may affect U.S.  producers, processors, exporters, and
importers.  We were asked to describe (1) the potential capability of
export-oriented agricultural STEs to distort trade and (2) the
specific potential of the Canadian Wheat Board (CWB), the Australian
Wheat Board (AWB), and NZDB to engage in trade-distorting activities,
based on their status as STEs.  We agreed to review the three export
STEs based upon their considerable role in international trade and
not due to any assumption of trade distortion. 

To create a framework for understanding export STEs,\18 we reviewed
various trade practices and trade agreements; reviewed related
literature; interviewed U.S., GATT/WTO member country and GATT/WTO
secretariat officials; and utilized information from STE and national
government officials in Canada, Australia, and New Zealand.  Our
purpose in establishing a framework was to (1) facilitate data
collection in the three countries, (2) allow for various STE
characteristics to be reported in a consistent and organized manner,
and (3) determine the relevant relationships maintained by STEs and
thereby come to some conclusion about whether or not an STE is able
to distort international trade.  We used the framework as a tool to
try to partially overcome the transparency (openness) problem found
in international trade in both the dairy and wheat sectors.  The
absence of transaction-level data, protected as commercial practice
by both STE and private sector traders, necessitated another way of
evaluating STEs' influence on the market.  However, foreign
countries' STEs and private firms are under no obligation to provide
these data, since we have no audit authority over them.  Even with
this information, such an extensive analysis would require additional
data regarding production costs.  As such, definitive conclusions
regarding STEs' trade-distorting activities cannot be reached, given
the complexity of the overall task.  The framework underwent a peer
review by economists at WTO, USDA's FAS and Economic Research Service
(ERS), the Congressional Research Service, and a private sector
agricultural organization.  We made changes in the framework where
appropriate. 

To obtain information about STE operations in Canada, we interviewed
officials from CWB, Agriculture Canada, the Canadian Grain
Commission, the Canadian International Grains Institute, the
Department of Foreign Affairs and International Trade, private sector
grain traders, and provincial grain associations.  In Australia, we
interviewed officials with AWB, the Department of Primary Industries
and Energy (DPIE), the Department of Foreign Affairs and Trade, the
Grains Council of Australia, and the 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. 


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

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

\16 State Trading Enterprises:  Compliance With the General Agreement
on Tariffs and Trade (GAO/GGD-95-208, Aug.  30, 1995). 

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

\18 Export STEs include those STEs where the primary role of the
enterprise is to sell a particular commodity in a foreign market. 
Import STEs' primary role is to control and market foreign goods
coming into the host country.  Our framework is specific to export
STEs since CWB, AWB, and NZDB are export STEs.  The concerns
regarding import STEs are different than those of export STEs. 


A FRAMEWORK FOR CONGRESSIONAL
REFERENCE AND REVIEW OF EXPORT
STES
============================================================ Chapter 2

Various types of STEs operate in the world market, with differences
in aspects such as an export or import STE, the types of industries,
the size of the operations, and the level of government involvement. 
This diversity makes it hard to generalize about the effects of STE
operations on particular markets or on the world trading system. 
This is true even among CWB, AWB, and NZDB, which are the subject of
this report.  As a result, it is necessary to consider STEs on a
case-by-case basis to understand their potential effects.  We
developed our framework for reference to incorporate information from
a variety of sources that we believe should be considered in an
analysis of the potential effects of individual export STEs.\1 In
subsequent chapters, we use this framework in reviewing three
specific export STEs. 

Using this framework, we divided the relationships of export STEs
into three groups:  the relationship of the STE to domestic
producers, the relationship of the STE to the government, and the
relationship of the STE to foreign buyers.  (See fig.  2.1)

   Figure 2.1:  Illustration of
   Key Relationships of Export
   STEs

   (See figure in printed
   edition.)

Using such a framework provided advantages in the collection,
reporting, and interpretation of information on STE operations. 
First, it should aid in the collection of a consistent and
comprehensive set of information about the operations of these
entities.  Similarly, it facilitated reporting about STE
characteristics since the material can be described in an organized
manner.  Finally, the framework helped in the interpretation of the
information about STEs since it distinguished between important
characteristics and those that are less important.  In each of the
relationships, we considered the advantages and disadvantages the STE
might have in relation to its private sector counterparts.  In
particular, we highlighted those characteristics that might provide a
unique advantage in international markets, especially those that have
the potential to distort trade.\2 We also included material on a
number of practices that are common to both private firms and STEs,
even if they are not trade distorting.  Some of these practices have
been the cause of concern among industry observers. 

We developed this framework based on our own expertise in reviewing
various trade practices and trade agreements, our review of related
literature, and our discussions with STEs and officials with national
governments and international organizations that deal with STE
issues.  We circulated a draft of this framework among agency
officials and solicited their comments.  The discussion of the
framework in this chapter draws upon examples from CWB, AWB, and
NZDB.  Chapters 3, 4, and 5 provide more detailed descriptions of
those boards using the framework set forth in this chapter. 


--------------------
\1 We recognize the importance of import STEs in world markets. 
However, the focus of this report is on export STEs. 

\2 Trade distortion can occur when a country's policies change
production and consumption decisions from what they would be if they
faced an open international market. 


   STE RELATIONSHIP WITH DOMESTIC
   PRODUCERS
---------------------------------------------------------- Chapter 2:1

One of the relationships that is central to the discussion of export
STEs is the relationship between the STE and the domestic producers. 
Two aspects of this relationship are important:  (1) the ownership
and management of the STE by the domestic producers and (2) the
requirement that domestic producers sell to the STE. 


      PRODUCERS CAN PLAY
      MANAGEMENT AND OWNERSHIP
      ROLES IN STES
-------------------------------------------------------- Chapter 2:1.1

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,"\3
while the AWB literature says that its mission is to "maximize
long-term returns to Australian grain growers."\4

Alternatively, if the STE is owned or managed by some group other
than the producers, it is possible that it might have a different
goal, such as maximizing domestic political benefits.  In these
cases, the STE might choose to sell the commodity at prices that are
advantageous to certain domestic groups.  In this situation, the STE
might be able to use its monopoly authority to lower the returns to
producers.  This would allow the STE to sell at a lower price in
either the domestic or the international market.  However, if the STE
is successful in lowering returns to producers, this will make those
sales less attractive, eventually drive marginal producers from the
market, and decrease supply. 

The management of the STE could also make other changes in the terms,
such as pooling the returns of producers.  For example, the STE may
choose to pay the producers the same return regardless of the time of
delivery during the marketing year.\5 For example, CWB describes
price pooling efforts as "something which smooths out the seasonal
fluctuations in prices and reflects the values that are achieved over
the course of a marketing year." This might make it easier for some
producers to secure commercial financing by reducing the volatility
of the returns to producers.  However, these practices may also have
disadvantages, since this feature would remove some of the incentive
for the individual producers to try to be responsive to world
markets. 


--------------------
\3 Canadian Wheat Board 1993-1994 Annual Report, inside front cover
(Winnipeg, Manitoba, Canada:  1995). 

\4 Australian Wheat Board 1992-1993 Annual Report, inside front cover
(Melbourne, Victoria, Australia:  1994). 

\5 A private exporter would not be able to make this arrangement
since the producers could treat this as a guarantee and sell to that
exporter only if they were unable to sell at a better price somewhere
else. 


      EXTENT OF STE CONTROL OVER
      PRODUCERS' SALES CAN VARY
-------------------------------------------------------- Chapter 2:1.2

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. 


   GOVERNMENT CAN PROVIDE
   FINANCIAL ADVANTAGES TO THE STE
---------------------------------------------------------- Chapter 2:2

Certain types of relationships between the STE and the government
could provide financial benefits to the STE that would not be
available to private firms.  For example, direct subsidies could
provide advantages for the STE over its competitors in the
international market.  Other government actions may also provide
benefits for the STE, but these may or may not be related to the fact
that the exporter in a particular industry happens to be organized as
an STE. 


      DIRECT SUBSIDIES COULD
      ENABLE THE STE TO LOWER
      PRICES
-------------------------------------------------------- Chapter 2:2.1

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. 


      INDIRECT SUBSIDIES MAY ALSO
      PROVIDE BENEFITS TO AN STE
-------------------------------------------------------- Chapter 2:2.2

In addition, there are a number of ways in which a government might
provide indirect advantages to an STE.  One of these indirect
benefits is the interest rate advantage that might accrue to those
firms that are associated with the government.  Because the perceived
risk of lending to governments is usually lower than the risk of
lending to private entities, the costs of borrowing money are
typically lower for governments than for private organizations. 
Because of their association with the government, STEs might thus
have a lower cost of borrowing than a private organization with the
same characteristics. 

The extent of this advantage would be difficult to estimate but would
depend upon the amount of borrowing and the difference between the
borrowing rate of the STE and the rate of a private entity with
similar characteristics but without the government association.  In
cases where the government has actually stepped in to provide funds
when the STE was in danger of default, the difference would tend to
be the highest.  On the other hand, in situations where the
government has not provided funds since the inception of the STE, the
difference would tend to be the lowest. 

There are other situations in which the STE may not pay the full cost
of services provided.  One example is a transportation subsidy where
the stated cost of transporting commodities has been held
significantly below the true cost, although these subsidies may or
may not be related to the STE.  For example, in the case of a
transportation subsidy, it could be that the STE happens to be
operating in an industry where this type of subsidy exists.  While
the STE might benefit from the subsidy, the potential for trade
distortion comes from the indirect subsidy itself, whether it is a
transportation subsidy or some other type of subsidy. 


   STE RELATIONSHIP TO FOREIGN
   BUYERS DEPENDS UPON OTHER
   FACTORS
---------------------------------------------------------- Chapter 2:3

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. 


      STE AS SINGLE SELLER MAY
      PROVIDE CERTAIN ADVANTAGES
-------------------------------------------------------- Chapter 2:3.1

An STE might provide certain advantages in terms of size and
experience over individual producers acting on their own behalf.  The
costs of operating an office with specialized expertise in exports is
likely to be considerable, and the larger scale of operations of an
STE might enable these costs to be spread over a much greater volume
of sales.  NZDB officials noted that individual farmers or
cooperatives would have a difficult time marketing dairy products on
their own; thus, NZDB provides a mechanism through which the New
Zealand dairy farmer can compete in a global marketplace. 
Multinational firms may not have the captive source of supply, but
can achieve economies of scale through efficient operations and
establishing relationships with producers in various countries and in
various commodities. 

The establishment of an STE can also lead to a reduction in the
number of exporters and an increase in the market power of the
remaining participants.  This might allow the STE to be more
effective in certain situations in acting as a cartel to maintain
higher prices than a collection of private firms.  The distinction
between the STE and the producers who sell to an exporter or
participate in a cooperative is that the STE can prevent its
producers from selling at a discount.  Private firms and cooperatives
would generally rely on voluntary cooperation and would therefore
have the ability to offer discounts from the prices set by the
cooperative.\6 To the extent that STEs can extend their control over
supply through collusion with other exporters, their ability to
influence the market would increase.  However, the exercise of market
power over more than one year depends on the response of other
suppliers to those higher prices.  If those higher prices result in
greater production by other nations, the STE may face additional
competition in the market in the following years. 


--------------------
\6 To the extent that cartels are successful in raising prices, they
create an incentive for members to cheat by lowering the price
slightly below the cartel price.  They also create an incentive for
other producers to stay outside the cartel but take advantage of the
higher prices. 


      STES MAY HAVE AN ADVANTAGE
      IN CONTROLLED IMPORT MARKETS
-------------------------------------------------------- Chapter 2:3.2

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.\7


--------------------
\7 This situation is described in more detail in GAO/RCED-95-280R. 


      STES MAY USE COMMERCIAL
      PRACTICES IN DEALING WITH
      FOREIGN BUYERS
-------------------------------------------------------- Chapter 2:3.3

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.\8


--------------------
\8 In our previous work on government sponsored enterprises
(Government Sponsored Enterprises:  A Framework for Limiting the
Government's Exposure to Risks (GAO/GGD-90-97, Aug.  15, 1990)), we
found that association with the government usually has the effect of
reducing the responsiveness of the enterprise to the market. 


MONOPOLY AUTHORITY AND GOVERNMENT
SUPPORT MAY ALLOW CWB TO
POTENTIALLY DISTORT TRADE
============================================================ Chapter 3

By volume, CWB is the world's largest grain-marketing board.  As an
STE, CWB has certain factors that provide it with the potential to
distort international trade in wheat and barley.  The CWB's control
over both domestic human consumption and exports of wheat creates the
potential for cross-subsidization, though the risk of such practices
is reduced by Canada's dependence on the export market.  However, CWB
could potentially cross-subsidize between the domestic and foreign
markets in its barley trade.  Canadian government payments to CWB to
cover the CWB's periodic wheat and barley pool deficits have at times
represented a significant subsidy.  Finally, the margin between
initial payments and final payments to the Canadian producers allows
for greater flexibility in pricing than is the case with private
sector grain traders.  Nonetheless, some changes in subsidies and CWB
control, as well as ongoing reviews of the CWB's monopoly status, may
have the effect of reducing the CWB's ability to potentially distort
trade.  In addition, a joint commission established by the United
States and Canada has made suggestions for restructuring both U.S. 
and Canadian trade practices. 


   BACKGROUND
---------------------------------------------------------- Chapter 3:1

CWB operates as a government-backed, centralized marketer of wheat
and barley.\1 It remains the world's largest grain-marketing board
and Canada's single largest net exporter.  According to USDA figures,
Canada's 19-percent share of world exports of wheat and wheat
products in 1994 was expected to increase to 22 percent in 1995. 
Figure 3.1 shows the six largest wheat-exporting nations over the
last 3 years. 

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

   (See figure in printed
   edition.)

   Note:  "Other" not specified in
   source.

   (See figure in printed
   edition.)

   Source:  USDA/FAS.

   (See figure in printed
   edition.)

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). 



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

                                (Sales in percent)


Commodity
and use      1988-89   1989-90   1990-91   1991-92   1992-93   1993-94   1994-95
----------  --------  --------  --------  --------  --------  --------  --------
Wheat (excluding durum wheat)
--------------------------------------------------------------------------------
Domestic        35.5      26.3      22.2      21.0      25.8      33.5      28.6
 use
Exports         64.5      73.7      77.8      79.0      74.2      66.5      71.4

Durum wheat
--------------------------------------------------------------------------------
Domestic        24.3      21.4      19.0      21.7      30.7      22.7      17.0
 use
Exports         75.7      78.6      81.0      78.3      69.3      77.3      83.0

Barley
--------------------------------------------------------------------------------
Domestic        74.9      64.1      62.5      68.4      71.0      66.8      73.5
 use
Exports         25.1      35.9      37.5      31.6      29.0      33.2      26.5
--------------------------------------------------------------------------------
Note:  Crop years are from August to July. 

Source:  CWB. 

The first attempt to organize the Canadian prairie farmers began with
the Manitoba Grain Act of 1900.  This act provided farmers with the
right to ship their own grain and to load from their own wagons or
warehouses, rather than having to sell to the grain elevators.  The
first cooperatives were soon to follow in 1906, with the first Wheat
Board established in 1919.  Although the Wheat Board lasted for only
one year's crop, it incorporated the concepts of initial and final
payments, pricing to maximize producer (pool) return, and centralized
marketing. 

Prairie provincial wheat pools were successfully formed in 1924, but
went into temporary receivership after the stock market crash of
1929.  Following the financial hardship faced by farmers during the
Depression, the government of Canada passed the Canadian Wheat Board
Act of 1935 establishing CWB.  CWB was also given control of
marketing oats and barley, although oats have since been removed from
the CWB's control.\2

CWB is administered by three to five commissioners, who are appointed
by the government of Canada.  A producers' advisory committee,
composed of 11 farmer-elected representatives from the prairie
provinces, provides CWB 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. 


--------------------
\1 According to the CWB's 1993-94 annual report, the three "pillars"
of CWB marketing are the (1) single-desk selling--monopoly power over
wheat and barley for export and domestic human consumption, (2) price
pooling--combining farmer produce to manage risk, and (3) partnership
of farmers and government.  These three "pillars" are consistent with
the relationships we developed in chapter 2. 

\2 Oats were removed from the CWB's control on August 1, 1989. 


   CWB-PRODUCER RELATIONSHIP:  CWB
   MONOPOLY AUTHORITY INCREASES
   THE CWB'S ABILITY TO
   POTENTIALLY DISTORT TRADE
---------------------------------------------------------- Chapter 3:2

Western Canadian farmers are required to pool their wheat and barley
production for domestic human consumption and export under CWB, which
then markets this commodity in both the domestic and foreign markets. 
The CWB's control of domestic sales for human consumption sales and
monopoly over export sales of wheat and barley provide it with the
potential ability to charge a higher domestic price for these
commodities and use these proceeds to lower export prices,
particularly in the case of barley exports.  Though pooling
diminishes the uncertainty involved in marketing their product,
pooling may also lower the returns to some Canadian producers.  The
limited transparency of CWB operations reduces the ability of
Canadian farmers to determine the success of the CWB's services. 
Some Canadian farmers have questioned the CWB's role and are
requesting the chance to market their wheat and barley outside the
CWB system. 


      CWB GIVEN PARTIAL MONOPOLY
      AUTHORITY OVER CANADIAN
      WHEAT AND BARLEY
-------------------------------------------------------- Chapter 3:2.1

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.\3 CWB also allows accredited exporters, both Canadian and
foreign grain companies, to buy grain from CWB and sell it on their
own.\4

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

On August 1, 1995, Canada replaced the CWB's wheat import-licensing
procedure with a tariff-rate quota.\6 The change from licenses to a
tariff-rate quota was part of the alterations agreed to under the
Uruguay Round.  Canada's Department of Foreign Affairs and
International Trade administers the new system.\7 Canada's barley
import-licensing procedure, already administered by the federal
government, was also replaced with a tariff-rate quota.  Canada has
established industry advisory committees for each commodity subject
to a tariff-rate quota.  The advisory committees are open to national
industry representatives, producers, and consumers.  CWB and others
participated in the wheat advisory committee meeting held before
implementation of the tariff-rate quotas on August 1, 1995. 


--------------------
\3 For example, CWB established a program that provides daily price
quotes based on the Minneapolis futures and cash markets for Canadian
farmers wishing to buy back their grain from CWB and market it
directly to the United States. 

\4 According to CWB officials, accredited exporters handle 20 to 25
percent of export sales.  In addition, accredited exporters are used
on 100 percent of the sales to the United States. 

\5 Canada removed the import-licensing requirement for U.S.  wheat
and wheat products entering Canada in May 1991. 

\6 Under a tariff-rate quota, a limited level of imports is permitted
at a low tariff rate; any imports beyond that level are assessed a
tariff at a higher rate.  Both the U.S.  and Mexican wheat exports to
Canada are exempt from the higher tariff rate. 

\7 According to CWB officials, tariffs under both the old and new
systems are collected by Revenue Canada at the time of importation. 
These funds go into the Consolidated Revenue Fund of the Federal
Government of Canada. 


      WHEAT PRICE DISTORTIONS
      UNLIKELY, BUT BARLEY PRICE
      DISTORTIONS ARE STILL
      POSSIBLE
-------------------------------------------------------- Chapter 3:2.2

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\8 (see
table 3.1 for a comparison of domestic consumption of wheat versus
exported wheat).  As shown in table 3.2, the majority of CWB wheat
sales have been to foreign markets.  In addition, the CWB's ability
to raise the domestic price of wheat is also limited by the
availability of imports of wheat from the United States.\9



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

                                (Sales in percent)


Commodity
and use      1988-89   1989-90   1990-91   1991-92   1992-93   1993-94   1994-95
----------  --------  --------  --------  --------  --------  --------  --------
Wheat (excluding durum wheat)
--------------------------------------------------------------------------------
Domestic        13.3      11.0       8.1       6.6      10.4      11.0      10.7
 use
Exports         86.7      89.0      91.9      93.4      89.6      89.0      89.3

Durum wheat
--------------------------------------------------------------------------------
Domestic         8.1       6.7       7.5       5.3       7.2       6.2       4.6
 use
Exports         91.9      93.3      92.5      94.7      92.8      93.8      95.4

Feed barley
--------------------------------------------------------------------------------
Domestic           0         0         0         0         0         0         0
 use
Exports        100.0     100.0     100.0     100.0     100.0     100.0     100.0

Designated barley\b
--------------------------------------------------------------------------------
Domestic        69.8      78.5      56.2      44.5      63.8      52.2      47.9
 use
Exports         30.2      21.5      42.8      55.5      36.2      47.8      52.1
--------------------------------------------------------------------------------
\a Crop years are from August to July. 

\b Malting barley. 

Source:  CWB. 

In the case of barley, CWB has a greater ability to use domestic
prices to lower the price of barley exports since only about
one-third of Canada's barley production is exported (as shown earlier
in table 3.1).  However, the CWB's domestic control is limited to
barley sold for human consumption.  CWB does not have control over
Canadian feed barley sold domestically.  In fact, CWB does not
attempt to sell feed barley domestically, as shown in table 3.2,
though CWB does sell about half of its human consumption barley to
the domestic market.  Another factor that strengthens the CWB's
position with regard to Canada's domestic barley market is the tariff
Canada places on U.S.-designated barley imports,\10 limiting the
ability of Canadians to substitute U.S.  barley for Canadian barley. 
A USDA official said these high barley tariffs have been a point of
contention between the two countries.\11


--------------------
\8 The Canadians were still able to maintain a two-price wheat
program between 1972 and 1989, keeping domestic wheat prices higher
than export prices.  This program had the effect of protecting
Canadian millers. 

\9 This is true even though, according to USDA officials, the price
of U.S.  wheat and barley is frequently higher than the price of
Canadian wheat when adjusted for transportation, handling, and import
fees. 

\10 CWB officials noted that under article 705 of the U.S.-Canada
Free Trade Agreement, Canada agreed to remove its import-licensing
requirement for U.S.  wheat and barley and their products at such
time as the level of U.S.  government support to U.S.  producers for
each grain became equal to or less than that provided by the Canadian
government to Canadian producers of each grain.  CWB officials also
noted that, under this agreement, Canada removed the import-licensing
requirement for U.S.  wheat and wheat products entering Canada in May
1991.  The import-licensing requirement remained in place for U.S. 
barley and barley products due to a high level of U.S.  support for
these products as compared to Canadian support.  This situation has
remained the same under the new tariff-rate quota, with the quota
applying only to U.S.  barley and barley products while not applying
to U.S.  wheat and wheat products. 

\11 The USDA's November 1995 Agricultural Outlook stated that the
United States views Canada's high tariffs on barley as "inconsistent
with Canada's NAFTA [North American Free Trade Agreement] obligations
and as an impediment to U.S.  exports." A NAFTA dispute settlement
panel has been established to review Canada's high tariffs on barley
and other U.S.  agricultural products.  See Suchada Langley,
"Canada's Budget Dictates Changes in Agricultural Policy,"
Agricultural Outlook, Economic Research Service, USDA (Washington,
D.C.:  Nov.  1995), p.  27. 


      POOLING MINIMIZES GROWER
      RISK
-------------------------------------------------------- Chapter 3:2.3

The intent of pooling farmer wheat and barley production is to
maximize the returns of Canadian farmers while minimizing the risk
inherent in marketing their grain.  Pooling effects include (1)
removing the timing of sales as a factor for farmers and (2)
distributing market risk while also sharing resources.  Approximately
50 different grades of wheat and barley are delivered by farmers in a
crop year.  Also, the wheat and barley are sold in different
quantities at different prices at different times of the year.\12

In July, the farmers indicate the number of acres seeded to various
crops.  CWB then signs a contract with the farmers committing itself
to purchase a certain percentage of each farmer's offer.  The
contract should indicate the quantity and quality of the wheat and
barley that each farmer intends to deliver to CWB in four contract
series over the crop year.\13 The marketing year for wheat and barley
lasts from August to July of the following year.  According to CWB
officials, the grain delivery period is longer than usual because
Canada's internal transportation infrastructure limits the amount of
wheat CWB can market at any one time. 

Farmers deliver their grain to country elevators, where it is graded
and binned with similar grades entering into the marketing system for
exporting grain.  At that time, the elevator companies make initial
partial payments to the farmer.  In turn, CWB reimburses the elevator
companies once the grain is delivered to a shipping port.  The
initial payments are set by the government of Canada in consultation
with CWB and are to cover approximately 70 to 85 percent of the
anticipated price of the grain. 

At the end of the marketing year, CWB tallies its total revenues from
marketing sales, deducts appropriate operational and marketing costs
from each pool account according to pool sales and expenses, and
returns the difference to the Canadian producers.  Each producer's
payment is based on the type of grain provided,\14 less
transportation, handling and cleaning costs.  If revenues are lower
than the initial payment to the farmers, the Canadian government
covers the CWB's price pooling deficit.  (Pooling deficits are
discussed in greater detail on p.  41.)


--------------------
\12 The pooling process is described in greater detail in
International Trade:  Canada and Australia Rely Heavily on Wheat
Boards to Market Grain (GAO/NSIAD-92-129, June 10, 1992). 

\13 The contractual process differs from the previous quota system,
which was in effect before the 1993-94 crop year.  The quota system
did not identify individual farmers, but simply called forward the
amount and type of wheat and barley CWB needed. 

\14 Different purchase prices exist for different varieties of
grains.  CWB maintains separate pool accounts for each of the
commodities it markets--wheat, durum wheat, barley, and malting
barley. 


      BENEFITS OF POOLING
      QUESTIONED BY SOME FARMERS
-------------------------------------------------------- Chapter 3:2.4

As we reported in 1992, pooling by itself does not guarantee higher
prices for farmers.  The very nature of distributing the production
and marketing risk means that some Canadian farmers benefit more than
others in a given year.  For example, a farmer who gets his or her
crop into the distribution system when the international price for
the commodity is at a high point will still receive no more for the
grain than the average pool price.\15 Distributed costs, such as some
farmers incurring greater transportation costs to get their product
to market, may also benefit some farmers at the expense of others.\16

Some Canadian producers have questioned the underlying premise of
pooling.  For example, grain farmers in the province of Alberta have
expressed concerns that the CWB's operations are not transparent
enough to determine whether CWB is maximizing returns to the farmers. 
During November 1995, the government of Alberta held a referendum to
determine whether the provincial farmers should have the freedom to
sell their grain outside CWB.  The majority of Albertans voted for
voluntary participation in CWB, though the result of the vote is not
binding on the federal government.  Other Canadian grain producers
and grain traders have also questioned CWB operations, with some of
them voicing concern that CWB inefficiencies can be hidden through
the pooling process.  Although the Canadian groups we questioned seek
an opportunity to market their grain outside of CWB, they are not
calling for the CWB's elimination, but rather for a voluntary
relationship with CWB.\17

The Canadian government has already attempted to respond to some of
the farmers' concerns.  In July 1995, the Canadian Minister of
agriculture announced the formation of a nine-member panel to review
western grain marketing issues.\18 This panel, in consultation with
the Canadian public, farmers, and farm organizations, is to look at
"all available facts and background information about our existing
and potential markets, the commodities and products we sell into
those markets, and the marketing systems we have or could have to
maximize our sales volume and returns."\19 The panel was expected to
hold local town hall meetings throughout western Canada in late 1995,
followed by formal hearings in early 1996 where farmers and farmer
organizations can put forward their own arguments for alternative
marketing methods.  A concluding report is expected to be released in
1996. 


--------------------
\15 Of course, this mismatch would also occur if the international
price for grain dropped, leaving the earlier seller with the lower
price. 

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

\17 In January 1996, the Canada-U.S.  Joint Commission on Grains
released a report that examined alternatives to the current CWB
system, including a "voluntary relationship" between CWB and Canadian
farmers.  See page 47 for more details. 

\18 Appointed panelists include Canadian farmers, current and former
officials from wheat pools and farming associations, and a private
sector miller. 

\19 "Minister Goodale Announces Western Grain Marketing Panel,"
Agriculture and Agri-Food Canada press release, (Ottawa:  July 17,
1995). 


   CWB-GOVERNMENT RELATIONSHIP: 
   CWB LOSSES COVERED BY THE
   CANADIAN GOVERNMENT
---------------------------------------------------------- Chapter 3:3

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\20 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. 


--------------------
\20 All pre-1994 dollar amounts cited in this chapter have been
converted from Canadian dollars to constant 1994 U.S.  dollars. 


      CWB EXPERIENCED SIGNIFICANT
      POOLING DEFICIT IN 1990-91
-------------------------------------------------------- Chapter 3:3.1

CWB officials told us the only direct revenue CWB receives from the
federal government is for the purpose of covering operational
deficits.  As a crown corporation,\21 CWB can make a direct charge of
its unliquidated financial obligations to the Canadian government. 
As a result, the CWB's status has protected CWB from price pooling
losses.  Since 1943, CWB has experienced 3 crop years with wheat pool
deficits and 7 crop years with barley pool deficits (see table 3.3). 
Pool deficits have also increased in recent years.  The wheat pool
deficit in the 1990-91 crop year, by far the largest of the pool
deficits, cost the federal government over $695 million.  The losses
in the 1990-91 market year accounted for approximately 57 percent of
the total pooling deficits recorded since the establishment of CWB. 
CWB attributed the 1990-91 pooling loss to a price collapse in wheat
and barley markets caused by a "trade war" between the United States
and the EU, where both nations highly subsidized their wheat and
barley exports.  CWB added that a record world cereal crop in 1990
also caused a decline in the price received for these commodities. 



                               Table 3.3
                
                   CWB Wheat and Barley Price Pooling
                          Deficits Since 1943

                   (U.S. dollars in millions (1994))

                                                 Barley          Total
Crop year                  Wheat deficit        deficit      deficit\a
-------------------------  -------------  -------------  =============
1968-69\b                         $138.9          $34.3       $173.3\c
1970-71                                0           36.8           36.8
1971-72                                0           12.4           12.4
1982-83                                0            6.5            6.5
1985-86\d                           21.5          160.5          182.0
1986-87                                0          105.1          105.1
1990-91                            695.4            0.9          696.3
======================================================================
Total                           $855.9\c       $356.6\c     $1,212.5\c
----------------------------------------------------------------------
Note:  Although CWB maintains separate pool accounts for wheat, durum
wheat, barley, and malting barley, in order to simplify the
presentation we have combined the two wheat accounts and the two
barley accounts in the table.  The only durum wheat pool account
deficit was in 1990-91 for $65.2 million.  The only malting barley
pool account deficit was in 1986-87 for $17.1 million. 

\a Table does not show pooling deficits for oats since oats are no
longer under the CWB's control.  However, oat pool pricing deficits
occurred in 1956-57, 1968-69, 1977-78, 1979-80, 1981-82, 1985-86, and
1988-89. 

\b CWB attributes the 1968-69 pool deficits to the collapse of the
International Grains Agreement which had set minimum price levels on
grain.  Initial payments to producers had been based upon this
minimum price, while the trading prices later dropped below this
level. 

\c Total may not add due to rounding. 

\d The wheat deficit in 1985 has been partially attributed to the
introduction of the USDA's Export Enhancement Program (EEP) during
this period.  EEP was established by the Secretary of Agriculture in
May 1985.  The program was set up in reaction to continuing declines
in U.S.  agricultural exports.  Under EEP, cash bonuses are made
available to exporters to enable them to lower the prices of U.S. 
agricultural commodities in order to make these commodities
competitive with subsidized foreign agricultural exports.  The 1985
Farm Bill subsequently authorized EEP as an export subsidy program. 

Source:  Canada's Department of Foreign Affairs and International
Trade. 


--------------------
\21 A crown corporation, or a semiautonomous government organization,
is used to administer and manage public services in which enterprise
and public accountability are combined. 


      CANADIAN FARMERS BENEFITED
      FROM TRANSPORTATION
      SUBSIDIES
-------------------------------------------------------- Chapter 3:3.2

CWB also benefited from indirect subsidies.  One indirect subsidy to
CWB and Canadian wheat and barley producers, though a direct subsidy
to the Canadian railroad, existed in the form of transportation
subsidies.  The 1983 Western Grain Transportation Act, which modified
the Crow's Nest Pass Agreement,\22 was enacted to subsidize Canadian
rail transportation.  This subsidy amounted to approximately $410
million during the 1994-95 crop year.  According to a USDA official,
this transportation subsidy encouraged farmers to grow primarily
those crops covered under the program, such as wheat and barley. 

Due to internal budget constraints plus Canada's obligations to
reduce subsidies under the Uruguay Round, on August 1, 1995, the
Canadian government eliminated the transportation subsidy provided
under the Western Grains Transportation Act.  In order to offset the
impact of this change, the government intends to compensate Canadian
farmers for this loss by (1) providing about $1.2 billion as a lump
sum payment to the farmers, (2) establishing a $220- million
Adjustment Assistance Fund, and (3) offering about $732 million in
new export credit guarantees for Canadian agricultural products.\23

Transportation pricing will also change in the 1995-96 crop year due
to the elimination of deductions on transportation costs for wheat
and barley traveling to eastern Canada.  In the past, all grain
producers had to support the additional costs for grain going
eastward, even though the majority of grain was shipped from western
ports.  During the 3-year phaseout period of this subsidy and
afterward, producers shipping their grain East will begin to bear the
full cost of the transportation. 

USDA officials said the elimination of the transportation subsidies
may affect what Canadian farmers grow and where they sell their
goods.  Since the government will no longer subsidize the
transportation costs of crops being exported, Canadian farmers are
expected to diversify out of grain crops, plant more high-value
crops, and expand livestock production.  Nonetheless, the effect of
the eliminated subsidies on U.S.-Canadian trade is still uncertain. 
According to USDA's November 1995 Agricultural Outlook,\24 "more
Canadian grains could eventually move south because of the lower
transportation costs."\25 However, the report noted that increased
crop diversification and livestock production in Canada could
increase the demand for U.S.  grain. 


--------------------
\22 Signed in 1897, the Crow's Nest Pass Agreement committed the
Canadian Pacific Railway to transport prairie grains to the Great
Lakes port of Thunder Bay at rates that were fixed in perpetuity. 
Over time the rates were extended to cover other railways as well as
additional crops. 

\23 Both CWB and the Export Development Corporation are expected to
distribute these new credits.  Approximately 70 percent of the
approximately $732 million is to be allocated to exports of western
wheat and barley. 

\24 Langley, "Canada's Budget Dictates Changes in Agricultural
Policy," p.  28. 

\25 According to USDA officials, shipping commodities to the United
States by truck will now be relatively cheaper than shipping those
same commodities East or West using Canadian rail transportation. 


      OTHER GOVERNMENT SUPPORT
      PROGRAMS ASSIST FARMERS
-------------------------------------------------------- Chapter 3:3.3

The CWB's 1993-94 annual report states that a partnership of farmers
and government creates a link between farmers and the federal
government that offers "distinct economic advantages." The report
goes on to cite the benefits of this relationship, including
government backing of CWB borrowing, which "translates into lower
interest costs." CWB officials told us that although the government
does not provide CWB with any loans or preferential treatment, it
guarantees CWB an excellent credit rating by virtue of its status as
a crown corporation.  This credit rating assists CWB in obtaining the
loans it needs at favorable rates on commercial markets.\26

According to CWB officials, CWB does not benefit from special tax
treatment or the ability to levy assessments on Canadian wheat and
barley producers.  Although CWB does not pay taxes to the federal
government, the returns paid to the farmers are taxed as regular
income to the farmers.  In addition, CWB officials told us that CWB
initiated a voluntary levy was initiated in the 1994-95 marketing
year to help fund grain research at the Western Canadian Grain
Research Institute.  A CWB official said that 30 percent of the wheat
and barley producers have declined to participate in the voluntary
levy.\27


--------------------
\26 CWB must take out loans from commercial banks to cover the cost
of initial payments to farmers and to pay CWB operational costs. 

\27 Canadian wheat and barley producers have also been assisted by
Canadian income support programs, as well as research and advisory
services.  These programs are discussed in detail in our earlier
report (see GAO/NSIAD-92-129).  However, some of the programs
described in the earlier GAO report may have been eliminated or
reduced in funding. 


   CWB-FOREIGN BUYER RELATIONSHIP: 
   FLEXIBILITY IN PRICING MAY
   ALLOW CWB TO POTENTIALLY
   DISTORT TRADE
---------------------------------------------------------- Chapter 3:4

The United States, as well as other grain-trading countries, has
questioned the CWB's monopoly authority over Canadian wheat and
barley as well as the lack of transparency in the CWB's marketing
system.  This lack of transparency in the CWB's pricing methods may
provide CWB with greater pricing flexibility than is found among
private sector traders.  CWB has attempted to address some of these
transparency concerns.  However, a recent U.S.-Canadian joint
commission has questioned both CWB and U.S.  trade practices. 


      U.S.  CONCERNED ABOUT THE
      LIMITED TRANSPARENCY OF CWB
      OPERATIONS
-------------------------------------------------------- Chapter 3:4.1

Canada is the third-largest export market for U.S.  agricultural
commodities.  USDA's ERS preliminary figures for 1995 showed the
United States exporting $5.8 billion in agricultural products to
Canada.\28 Earlier ERS forecasts showed Canada as the second-largest
source for U.S.  agricultural imports, with the United States
importing $5.2 billion in agricultural products from Canada in
1995.\29 With respect to grain, the United States has run a trade
deficit with Canada.  In 1994, the United States had a $500-million
trade deficit with Canada in the grains, grains product, and animal
feeds sector in 1994. 

The U.S.  government, as well as other grain-exporting countries, has
expressed concerns about the CWB's monopoly power and the limited
transparency of its operations.  U.S.  critics of CWB contend that
CWB has an unfair pricing advantage due to its status as the single
selling authority.  According to one USDA official, the day-to-day
"replacement cost" for wheat is more readily apparent in the United
States with its commodity markets than is true of CWB.  In such a
case, the grain traders in the United States are "price takers," or
are required to buy their grain at the given market price without
being able to affect that price.  The CWB's exclusive purchasing
authority over wheat and barley for human consumption provides CWB
with a more secure source of supply, as well as more control, than
would be the case for a private exporter.  USDA officials expressed
concern that the CWB's margin between the initial price and the final
price paid to the Canadian wheat and barley producers allows CWB to
adjust transaction prices at will, even if it is to the detriment of
Canadian producers.  As stated earlier, some Canadian producers are
also concerned that such detrimental pricing policies could occur
without greater transparency over CWB operations. 

Some U.S.  officials are also concerned about CWB undercutting U.S. 
producers using its grain quality standards.  According to USDA
officials, CWB has used high quality as a marketing strategy, often
providing higher protein content in its wheat than the customer
requests and thus developing an expectation that CWB's wheat is a
better value for the money.  In comparison, the U.S.  wheat industry
tends to blend wheat to the specifications of the buyer.  Although
the CWB's approach may be a useful marketing strategy, it also has
the effect of providing a benefit to a buyer without CWB getting the
full value of the higher quality wheat.  The uniform grading
standards that CWB uses, although also cited as a benefit of CWB by
providing consistency across sales, may also be a liability at times
to Canadian producers.  A USDA official told us about U.S.  concerns
that CWB has downgraded wheat to "feed quality" using these
standards, even though the "feed" grain is later milled in the United
States.\30 In such a situation, Canadian producers would be deprived
of the full value of their wheat. 

Two recent Canadian reports indicate continued attempts to understand
the benefits and costs of the CWB's single selling authority status. 
The first report,\31 authored by three Canadian agriculture
economists with the assistance of CWB, estimated that CWB has
provided greater revenues and lower management costs to Canadian
wheat producers than would have been the case had the producers sold
their grain through a multiple-seller system.  The report estimates
that from 1980 to 1994, Canadian wheat producers received additional
revenues ranging from a low of $18.88 to a high of $34.47 per ton of
wheat due to the single selling authority marketing system.\32

A second report,\33 prepared by two Canadian agriculture economists
with the assistance of the Alberta Department of Agriculture, found
no evidence of CWB price premiums for wheat and barley when prices
were examined at the farm level.\34 The report also found that the
hidden costs of the single selling authority marketing system to
producers could be as high as $20 per ton for wheat and more than $20
per ton for barley.  Moreover, the report indicated that hidden costs
to Canadian taxpayers for having a single selling authority could be
another $5.50 per ton for wheat and about $9 per ton for barley. 


--------------------
\28 The top destination for U.S.  agricultural exports was Japan,
buying $10.5 billion in U.S.  agricultural goods.  The EU was the
next largest importer, importing $8.2 billion in U.S.  agricultural
products. 

\29 The ERS' figures showed Canada as the largest source of U.S. 
agricultural imports in 1994.  However, 1995 forecasts indicated that
Canada may be a close second to the EU ($5.4 billion in EU imports
versus $5.2 billion in Canadian imports). 

\30 In its submission to the Canada-U.S.  Joint Commission on Grains,
CWB acknowledged that some Canadian feed wheat went to U.S.  millers,
but noted "the blending of wheat to achieve higher market value is
common practice on both sides of the Canada/U.S.  border."

\31 See Daryl F.  Kraft, W.  Hartley Furtan, and Edward W. 
Tyrchniewicz, Performance Evaluation of the Canadian Wheat Board
(January 1996). 

\32 This estimate pertains only to the wheat pool and not the durum
and barley pools. 

\33 Colin A.  Carter and R.M.A.  Loyns, The Economics of Single Desk
Selling of Western Canadian Grain (March 1996). 

\34 Prices were compared to those in the United States. 


      CWB EFFORTS TO MODIFY
      PRACTICES TO SATISFY CRITICS
-------------------------------------------------------- Chapter 3:4.2

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.\35 CWB, like private
sector grain traders, continues to protect this information as
commercially sensitive data.  One USDA official said U.S.  grain
traders are just as likely as CWB to treat this information as
proprietary.  In addition, CWB does not always have access to
end-user transaction prices.  According to CWB officials, accredited
exporters are not, in all cases, required to provide CWB with the
final transaction price or even the customer.  These accredited
exporters purchase wheat from CWB and then resell it to U.S. 
customers, as well as other customers throughout the world. 

Canadian government officials have stated that the transparency issue
has already been resolved, claiming that previous U.S.  reports have
exonerated CWB from charges of violating applicable trade agreements
and U.S.  law.  USDA officials we interviewed early in our review
acknowledged that they did not have any evidence that CWB was
violating existing trade agreements.  Nonetheless, trade differences
between the United States and Canada have led to curbs on Canadian
wheat imports into the United States as well as the establishment of
a joint commission to look at all aspects of the two countries'
respective marketing and support systems for grain. 


--------------------
\35 Without transaction data, we are likewise unable to determine
whether CWB practices discriminatory pricing or cross-subsidization
between sales on foreign markets. 


      JOINT COMMISSION ON GRAINS
      RECOMMENDS CHANGES
-------------------------------------------------------- Chapter 3:4.3

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\36 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.\37

As a result of the investigation and negotiations, a memorandum of
understanding between the United States and Canada with respect to
cross-border wheat trade was made effective on September 12, 1994. 
The memorandum called for (1) a Joint Commission on Grains to be
established to further examine the grain problems between the two
countries; (2) a 12-month period, beginning September 12, 1994,
during which the United States would apply a new schedule of tariffs
on the importation of wheat into the United States;\38 and (3) a
12-month hold on all countermeasures under NAFTA or GATT, as well as
a hold on all countermeasures inconsistent with either the North
American Free Trade Agreement (NAFTA) or GATT provisions. 

The Canada-U.S.  Joint Commission on Grains\39 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.\40 In this section, the report also recommended removing
trade-distorting effects in each country's domestic agricultural
policies.  Finally, the Joint Commission noted that the
implementation of these recommendations will depend heavily on other
grain-exporting countries, such as the EU and Australia, undertaking
comparable actions. 

Among other things, the final report also recommended that (1) Canada
and the United States undertake regular and structured consultative
process concerning grain policy issues with the goal of reducing
trade-distorting policies and (2) a bilateral producer/industry-based
Consultative Committee be established to handle short-term
cross-border issues as an "early warning system for trade
difficulties."


--------------------
\36 Section 22 of the Agricultural Adjustment Act (7 U.S.C.  624) is
intended to protect U.S.  farm programs from imports that impair or
interfere with their operation.  Under section 22, the President may
impose import restrictions on such imports as are necessary if, after
the conclusion of an International Trade Commission investigation, he
determines that products "are being or are practically certain to be
imported into the United States under such conditions or in such
quantities as to render or tend to render ineffective, or materially
interfere with" any USDA domestic commodity support or stabilization
program.  These provisions are no longer available to products of
countries or entities who are members of WTO. 

\37 Wheat, Wheat Flour, and Semolina:  Investigation No.  22-54, U.S. 
International Trade Commission, Publication 2794 (Washington, D.C.: 
July 1994). 

\38 Increased tariffs were placed on all durum and non-durum wheat
that came into the United States above a specified threshold.  The
new tariffs did not apply to flour, semolina imports, and white
winter wheat imports. 

\39 The Joint Commission consists of 10 nongovernment officials,
evenly divided between the United States and Canada. 

\40 The Joint Commission's examined alternatives in this regard
included "allowing voluntary producer participation in Canadian wheat
and barley pools, and allowing Canadian firms to trade non-CWB wheat
and barley in a domestic and global context without undue
impediments." Additional alternatives for CWB included that (1) CWB
use public offer prices on a global basis; (2) CWB continue to use
private offer prices on a global basis, with a commitment to pricing
discipline at the point of sale and a confidential audit; or (3) CWB
use another mechanism that the respective governments agree will
accomplish the goal or encouraging CWB to conduct itself as if it
were at comparable risk in the marketplace. 


AWB ENJOYS INDIRECT GOVERNMENT
SUBSIDIES, BUT ABILITY TO DISTORT
TRADE IS LIMITED
============================================================ Chapter 4

AWB has limited capability to distort international wheat markets. 
It has monopoly power over wheat exports but does not routinely
receive direct subsidies from the Australian government.  The AWB's
initial payments to farmers are underwritten by a government
guarantee.  Because of this guarantee, it most likely receives
favorable interest rates on its loans.  Additionally, its access to
additional funds allows it to diversify risk by investing in other
projects.  AWB has the capability to be flexible in its pricing; this
flexibility could lead to either lower or higher returns for
producers. 


   BACKGROUND
---------------------------------------------------------- Chapter 4:1

Although Australia is a country of less than 18 million people, its
agriculture exports totaled $12.2 billion\1 in 1992-93.  This equates
to about one-quarter of Australia's total export income.  Australian
wheat ranks as the country's fourth-largest export market, with 12.9
percent of total world exports in 1994, representing about 80 percent
of all wheat grown in Australia.  Australia ranks as the world's
fourth-largest wheat exporter. 

AWB is a statutory marketing authority with federal and enabling
state government legislation providing it with the sole license to
export Australian wheat.  AWB was established in 1939 to "acquire,
with certain exceptions, all wheat held in Australia and to arrange
for its disposal in view of low world prices prevailing and the
marketing and transport difficulties created by the wartime
conditions."\2 However, when World War II ended and the justification
no longer existed, AWB was not disbanded.  It was reconstituted in
1948 to establish it as the central marketing authority for wheat and
to enable it to administer various wheat stabilization and marketing
arrangements.  New legislation in 1989 modified the AWB's role by
deregulating the domestic market, expanding the AWB's operating
domain to include other grains produced in Australia and to wheat
from other countries.  The legislation also removed price supports
and established the Wheat Industry Fund (WIF), which is discussed in
more detail in the following section. 

AWB is a national and international grain marketer, financing and
marketing wheat and other grains for growers.  AWB also spends a
portion of its budget on market development and promotion, especially
in the Asia/Pacific region.  All profits are distributed to growers,
even though it is not officially a grower-owned organization. 


--------------------
\1 All monetary references are expressed in constant 1994 U.S. 
dollars. 

\2 As per Australia's notification to GATT, 1994. 


      AUSTRALIA'S GRAINS INDUSTRY
      PARTITIONED AMONG SEVERAL
      BOARDS
-------------------------------------------------------- Chapter 4:1.1

Australia's grains industry is not governed by a single entity.  Some
grains are freely traded in all states, while others are governed by
state boards in certain states.  AWB is the only organization in
Australia that has acquisition authority for a particular grain
(wheat) across all states, and thus the only organization with the
power to make an impact.  See table 4.1 for an overview of the
various boards' acquisition authorities. 



                                    Table 4.1
                     
                     Australian Grain Marketing--Acquisition
                               Authority, by State

                      New South                     South          Western
Grain  Queensland     Wales          Victoria       Australia      Australia
-----  -------------  -------------  -------------  -------------  -------------
Wheat  AWB/FT         AWB/FT         AWB/FT         AWB/FT         AWB/FT
(expo
rt/
domes
tic)

Malti  Grainco Qld    NSW Grains     Australian     Australian     FT\
ng                    Board          Barley Board   Barley Board
barle
y

Feed   Grainco Qld    NSW Grains     Australian     Australian     FT
barle                 Board\a        Barley Board   Barley Board
y

Oats   FT             NSW Grains     FT             Australian     FT
                      Board\b                       Barley
                                                    Board\c

Sorgh  Grainco Qld\d  NSW Grains     FT             FT             FT
um                    Board\e

Maize  FT             FT             FT             FT             FT

Triti  FT             FT             FT             FT             FT
cale
and
rye

Lupin  FT             FT             FT             FT             FT
s

Other  FT             FT             FT             FT             FT
grain
legum
es

Oilse  FT             NSW Grains     FT             FT             FT
eds                   Board\f
--------------------------------------------------------------------------------
Legend

FT=freely traded
NSW=New South Wales
Qld=Queensland
SA=South Australia
VA=Victoria
WA=Western Australia

\a Growers can circumvent the NSW Grains Board by paying a license
fee. 

\b The NSW Grains Board allows free trade on the domestic market. 

\c The board does not have acquisition authority over oats sold
directly from growers to domestic end-users. 

\d In Central Queensland, domestic sorghum is traded freely.  In
Southern Queensland, both export and domestic market-bound sorghum is
traded freely. 

\e The NSW Grains Board allows free trade on the domestic market. 

\f As of March 1995, the NSW Grains Board was in the process of
divesting its powers over oilseeds, allowing the commodity to be
freely traded. 

Source:  Grains Council of Australia. 

Wheat growers may deliver their wheat to AWB, which operates a number
of pools each year.  The wheat is segregated by class and variety,
and growers receive initial payments upon delivery.  AWB deducts
storage, transport, operating, and marketing costs from sales and
returns the remainder to the farmers once all the wheat has been
sold. 

The AWB's major markets lie in Asia and the Middle East, as shown in
figure 4.1. 

   Figure 4.1:  Australia's Major
   Wheat Export Markets (as a
   percentage of total wheat
   exports)

   (See figure in printed
   edition.)

Source:  AWB. 


   AWB-PRODUCER RELATIONSHIP: 
   PAYMENTS MADE OVER TIME
---------------------------------------------------------- Chapter 4:2

AWB is responsible to both producers and the government, and its
managing board includes representatives from both groups.  Producers
sell their wheat to AWB through a pooling system that averages
individual producer returns, thus dispersing the producers' financial
risk.  AWB payments to producers are not immediate, though, since
product pools may take years to close.  Since AWB must compete with
other suppliers in the domestic market, it does not have the
capability to cross-subsidize between its domestic and foreign market
sales. 


      AWB'S MANAGING BOARD
      INCLUDES PRODUCERS
-------------------------------------------------------- Chapter 4:2.1

AWB's managing board consists of a nonexecutive chairperson, the
Managing Director, eight members with special expertise in wheat
production or other specified fields, and a government
representative.  The eight members with special expertise include
growers, as evidenced by the current board composition.  DPIE, a
government agency, loosely oversees the AWB's activities by
appointing a government representative to sit on the AWB's managing
board; requiring an annual report, which is submitted to Parliament;
requiring a 3- to 5-year corporate plan, which is approved by DPIE's
Minister; and requiring an annual operating plan, which is not
subject to ministerial approval.  AWB must also consult with the
Grains Council of Australia annually. 


      POOLING AVERAGES RETURNS
      ACROSS PRODUCERS
-------------------------------------------------------- Chapter 4:2.2

For the past 57 years, AWB has had the statutory authority to be the
primary buyer and seller of Australian wheat.  It is the only entity
licensed by the Australian government to export Australian wheat to
the global marketplace.\3 Thus, growers who wish to take advantage of
the export market are forced to sell their product to AWB.  AWB
purchases all Australian wheat bound for export and combines it into
a number of pools based on quality and variety.  AWB then sells the
wheat on the international market and returns the proceeds, minus
expenses, to growers.  Through the pooling system, all growers of a
similar quality and variety of wheat generally receive the same
price.  This means that bad luck in delivering their products during
a part of the marketing year when prices are low will have less
impact on individual producers.  However, it also means that those
who were able to deliver the product at a time of higher-than-average
prices receive a lower return.  Actual net pool revenues may vary
based on individual grower transportation and storage costs. 


--------------------
\3 According to USDA officials, AWB may also authorize another
company to export bagged wheat or wheat in a shipping container. 


      PRODUCER PAYMENTS MADE OVER
      TIME
-------------------------------------------------------- Chapter 4:2.3

The majority of wheat produced in Australia is delivered for
marketing and payment within the AWB's pooling system for export. 
Various criteria govern the pools, including quality, time of
delivery, location, and category of wheat.  Storage, handling, and
transport costs are disaggregated and charged to growers, and
marketing costs and borrowings to fund payments are pooled.  AWB
makes a net payment to growers at each stage of the process, mostly
in advance of receipts from sale of the delivered wheat. 

Typically, the first payment is made within 3 weeks of delivery,
sometime between November and January.  It amounts to about 80
percent of the estimated total payment.  The second payment is made
during March, once AWB receives the entire harvest.  Other payments
may take place before a final payment is made.  The final payment for
a particular pool may not take place for years, since some of the
wheat may be sold on credit terms and not finalized for several
years. 

AWB conducts its domestic market dealings somewhat differently.  AWB
offers cash on delivery to a designated silo for wheat destined for
the domestic market.  According to AWB, this is a relatively small
quantity of wheat compared to the amount handled in the pooling
system. 


      AWB AUTHORITY LIMITED: 
      CROSS-SUBSIDIZATION NOT
      POSSIBLE BETWEEN THE
      DOMESTIC AND FOREIGN MARKETS
-------------------------------------------------------- Chapter 4:2.4

AWB does not have the capability to cross-subsidize its sales between
its domestic and overseas markets.  AWB sells wheat on the domestic
market, but it must compete with other sellers.  According to AWB
officials, AWB only accounts for 30 to 40 percent of the domestic
wheat market; however, other sources claim that this figure is as
high as 80 percent.\4 Additionally, AWB does not have any control
over the import of wheat to Australia, so it cannot control the
entrance of other sellers to the domestic Australian wheat market. 


--------------------
\4 In 1995, a consultant to the Grains Council of Australia reported
that the AWB commands 65 percent of the domestic milling wheat
market.  USDA claims that AWB controls 80 percent of the wheat sales
to domestic mills, and that wheat imports are effectively prohibited
by phytosanitary standards. 


   AWB-GOVERNMENT RELATIONSHIP: 
   BOTH DIRECT AND INDIRECT
   GOVERNMENT SUBSIDIES HELP AWB
---------------------------------------------------------- Chapter 4:3

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. 


      NATURE OF GOVERNMENT
      SUBSIDIES HAS CHANGED OVER
      TIME
-------------------------------------------------------- Chapter 4:3.1

Before 1989, the Australian government provided economic support to
wheat farmers through a number of mechanisms, including guaranteed
minimum prices and an artificial premium on domestic wheat prices. 
Unit-pooled returns to growers were guaranteed at a certain level by
the federal government, at least for a limited volume of exports,
with the guaranteed price based on cost of production estimates by
the Australian Bureau of Agricultural Resource Economics.  Economic
assistance to AWB also included a home consumption price that was set
in line with the guaranteed price, based on the assessed cost of
production.  Generally, domestic end-users paid a higher price for
wheat than foreign buyers under this scenario. 

The guaranteed minimum price for wheat was ensured through a
stabilization fund.  If export prices exceeded a trigger price, an
effective export tax was imposed.  If prices fell below the
guaranteed price, a deficiency payment to growers made up the
difference between the actual price and the guaranteed price, up to a
specified limit.  If the stabilization fund was depleted, the federal
government made up the difference.  When the fund was first
established, growers paid into it.  However, from 1958 to 1974, the
federal government was forced to heavily subsidize the fund. 

After other changes in the 1970s and 1980s, including altering the
baseline of stabilized prices, establishing guaranteed minimum
delivery prices, and allowing AWB to borrow on the commercial money
market, major reforms were introduced in 1989.  The most important of
these included deregulation of the domestic market, establishment of
WIF, and abolition of the government's guaranteed minimum pricing
scheme.\5 AWB was given some flexibility in the commercial market;
besides other activities, AWB may buy and sell a variety of grains. 


--------------------
\5 The AWB's main functions now include (1) buying and selling grain
in Australia and overseas; (2) importing wheat into Australia or
engaging in any trading arrangements that are consistent with its
objectives; (3) storing, handling, or transporting wheat or buying,
establishing, or owning and operating such facilities; (4) entering
into wide-ranging financial arrangements consistent with its
commercial orientation; (5) providing a range of services associated
with wheat marketing and charging for those services; and (6)
appointing agents in Australia or overseas and engaging in
value-added activities, including establishing subsidiaries or
entering into joint ventures both on- and offshore. 


      GOVERNMENT GUARANTEE MOST
      LIKELY RESULTS IN LOWER
      INTEREST RATES
-------------------------------------------------------- Chapter 4:3.2

Since 1989, the Australian government has guaranteed a portion of the
AWB's borrowings to pay farmers at harvest time.  This guarantee
covers, at a minimum, between 80 and 90 percent of the aggregate
estimated net pool return.\6 According to the Industry Commission,\7
this guarantee has risen in value from $21.5 million in 1989-90 to
$26.4 million in 1992-93.  The government guarantee was initially
established to last until June 1994, but was extended at that time to
continue until June 1999 at a maximum of 85 percent. 

Both AWB officials and the Industry Commission agree that the
government's guarantee translates into real savings on interest
rates, since the guarantee transfers the risk from AWB to the
taxpayers.  This guarantee results in increased net returns to the
wheat industry because of the lower interest charges. 


--------------------
\6 The Australian government provides a borrowing guarantee of up to
85 percent of the AWB's aggregate estimated net pool return from the
sale of wheat.  The Minister of Primary Industries and Energy
calculates the size of the guarantee based on current and forecast
outlooks for international grain prices. 

\7 The Industry Commission was established by the Australian
government as a review and advisory body on industry matters.  Its
role is to conduct independent public inquiries into a broad range of
issues in the economy. 


      WIF PROVIDES REVENUE FOR
      CAPITAL BASE AND INVESTMENTS
-------------------------------------------------------- Chapter 4:3.3

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. 


      RESEARCH FUNDS AND OTHER
      RELIEF ALSO AVAILABLE
-------------------------------------------------------- Chapter 4:3.4

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. 


   AWB-FOREIGN BUYER RELATIONSHIP: 
   MONOPOLY STATUS ALLOWS FOR
   FLEXIBLE PRICING
---------------------------------------------------------- Chapter 4:4

The AWB's monopoly over wheat exports allows it to set prices without
fear of competition from other Australian wheat exporters.  This
allows for price flexibility; however, we were unable to determine
whether AWB engaged in any form of price discrimination or
cross-subsidization between foreign markets since data were not
available from public or private sector wheat traders.  Australian
government-sponsored reports have suggested that the wheat industry
would benefit from complete deregulation and should focus more on
market-based activities. 


      AUSTRALIAN GOVERNMENT GIVES
      AWB SOLE EXPORT AUTHORITY
      FOR WHEAT
-------------------------------------------------------- Chapter 4:4.1

The Australian government has authorized AWB to be the sole exporter
of Australian wheat, through legislation that is reviewed every 5
years.\8 As mentioned earlier, AWB also has the right to buy and sell
wheat on the domestic market, but it must compete with other firms. 
This differs from the pre-1989 arrangement, when AWB maintained
monopolistic control over both the domestic and export markets in
Australia. 

Since AWB is a monopoly, it may set prices for Australian wheat
abroad without competition from other Australian exporters.  This
status may provide some advantages of a cartel in that individual
producers are unable to undercut a particular price that AWB sets. 
In situations where there are limited alternatives to Australian
wheat, this might enable AWB to charge higher prices and capture
higher returns for Australian producers.  Additionally, AWB's
single-desk seller status gives it a sure source of supply for its
export sales. 

Similarly, the averaging of all sales may allow the sales at prices
that are lower than a primary seller would be willing to accept. 
This could be done either to match lower prices of a competitor or to
ensure sales to a particular buyer for other reasons.  This could
lead to lower returns to Australian producers. 


--------------------
\8 The Wheat Marketing Act of 1989 does not have a 5-year sunset
provision. 


      PRICE DISCRIMINATION,
      CROSS-SUBSIDIZATION NOT
      DETERMINED
-------------------------------------------------------- Chapter 4:4.2

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. 


      REPORTS ENCOURAGE GREATER
      DEREGULATION AND STRONGER
      EFFORTS TOWARD MARKET-BASED
      ACTIVITIES
-------------------------------------------------------- Chapter 4:4.3

In 1993, the Australian government released a report on National
Competition Policy, also known as the "Hilmer report." This report
clearly stated that STEs, known in Australia as "statutory marketing
authorities," should not exist except for certain situations based on
public interest grounds.  It stated that statutory marketing
authorities' anticompetitive practices such as compulsory acquisition
of product and monopoly marketing arrangements are often grossly
inefficient.  Another report indicated that grain marketing boards
cost more than private traders to perform similar services. 

In 1989, the Grains Council of Australia initiated the Grains 2000
Project.  It identified a number of issues critical to the long-term
profitability and sustainability of the Australian grains industry. 
Subsequently, the Grains Council of Australia established several
strategic planning units to address these issues as they relate to
specific grains.  One of those units, the National Grain Marketing
Strategic Planning Unit,\9 commissioned a report on the Australian
milling wheat industry.  The study focused on issues that may affect
the industry for the next 20 years and made recommendations that the
authors believe would lead to greater efficiency. 

The Grains 2000 study concluded, among other things, that the
benefits of single-desk selling currently outweighed the costs. 
However, it noted that this situation might change once the effects
of GATT reforms take hold; that is, when effective subsidies are
reduced and price differentials between subsidized and unsubsidized
markets shrink, or if the market no longer supports the
differentiation strategy.  The study also reported that the net
effect of AWB to the Australian grower in 1992-93 fell somewhere
between a loss of $1.22 per ton and a gain of $4.93 per ton.  Thus,
it is unclear how much AWB benefits wheat farmers, if at all.  The
report made additional recommendations that, in its view, should
result in greater efficiency and support for sustainable practices. 
These other recommendations included (1) protecting core markets and
developing targeted defenses against Canada, (2) allowing AWB to
trade all grains,(3) allowing AWB investment in wheat handling and
elevation, and (4) making AWB a corporation with grower ownership. 


--------------------
\9 This group includes members of AWB, the Grains Council of
Australia, the Australian Grain Marketing Federation, the Bulk
Handling Authorities of Australia, the Australian Flour Millers, the
National Agricultural Commodities Marketing Association, the
Australian Mallsters and Brewers, DPIE, and the Grains Research and
Development Corporation. 


NZDB RECEIVES LITTLE GOVERNMENT
SUPPORT, BUT SIZE AND SUBSIDIARY
STRUCTURE PROVIDE ECONOMIC
ADVANTAGES
============================================================ Chapter 5

NZDB is a major player in the world dairy trade.  Individual domestic
producers have some involvement in NZDB activities and participate in
a pooling process, thus dispersing risk across the entire New Zealand
dairy industry.  NZDB has successfully weathered the removal of
government subsidies in 1984 and maintains about a 25-percent share
of the world dairy market.  The NZDB's statutory authority allows it
to maintain a monopoly over dairy exports, but does not allow it to
maintain control over the domestic market or collect tariffs on
imports of dairy products.  The NZDB's network of subsidiaries allows
it to sell a greater amount of its goods at the best possible price
in other countries' markets, especially those with a controlled dairy
import market. 


   BACKGROUND
---------------------------------------------------------- Chapter 5:1


      STATE TRADING IN WORLD DAIRY
      TRADE
-------------------------------------------------------- Chapter 5:1.1

State trading also plays a role in international trade in dairy
products.  Although the United States is among the world's largest
milk producers (see fig.  5.1), the country is not a substantial
exporter of dairy products because the great majority of U.S.  dairy
production is sold to U.S.  consumers.  Among the top exporters of
skimmed milk powder shown in figure 5.2, three of the five countries
listed maintained STEs in their dairy sector:  Australia, New
Zealand, and Poland.  In the case of the major cheese-exporting
countries, shown in figure 5.3, Australia and New Zealand again
appear among the listed countries.\1

   Figure 5.1:  World Milk
   Production by Country, 1993
   Estimates

   (See figure in printed
   edition.)

Source:  International Dairy Arrangement. 

   Figure 5.2:  Major Exporters of
   Skimmed Milk Powder by Country,
   1993 Estimates

   (See figure in printed
   edition.)

Note 1:  EU estimate excludes trade between EU countries. 

Note 2:  "Other" not specified in source. 

Source:  International Dairy Arrangement. 

   Figure 5.3:  Major Exporters of
   Cheese by Country, 1993
   Estimates

   (See figure in printed
   edition.)

Note 1:  EU estimate excludes trade between EU countries. 

Note 2:  "Other" not specified in source. 

Source:  International Dairy Arrangement. 


--------------------
\1 Although Switzerland has reported that it maintains an STE in the
dairy sector, its STE is limited to trade in butter. 


      NEW ZEALAND DAIRY TRADE
      SIGNIFICANT
-------------------------------------------------------- Chapter 5:1.2

NZDB operates within the terms of the Dairy Board Act of 1961, as
amended.  Its group mission is to maximize the sustainable income of
New Zealand dairy farmers through excellence in the global marketing
of New Zealand origin dairy products.  According to NZDB officials,
NZDB helps New Zealand farmers obtain the maximum return possible by
acting as a single agent on the export market for New Zealand dairy
products.  This eliminates possible "undercutting" by individual
dairy cooperatives and reduces the number of global players in the
competition for dairy sales. 

Dairy exports constitute a significant portion of New Zealand's
overall export trade; approximately 90 percent of New Zealand's dairy
products are exported.  According to MAF, in the year ending December
1993, dairy product exports totaled $1.9 billion.\2 This figure
represents 33 percent of New Zealand's agricultural exports and 18
percent of New Zealand's total merchandise exports.  (See fig.  5.4.)

   Figure 5.4:  New Zealand
   Agricultural Exports, Year
   Ending December 1993

   (See figure in printed
   edition.)

Source:  MAF. 

In recent years, New Zealand has been a leading supplier of most
dairy produce to world markets; in particular, it supplies a
significant percentage of the world's exports of milk powder, butter,
and cheese.  Conversely, New Zealand's dairy imports are minimal.  No
dairy products are subject to import-licensing requirements, and no
quantitative restrictions apply to dairy products entering New
Zealand. 


--------------------
\2 All monetary references are expressed in constant 1994 U.S. 
dollars. 


   NZDB-PRODUCER RELATIONSHIP: 
   POOLING DISPERSES RISK; CROSS-
   SUBSIDIZATION BETWEEN DOMESTIC
   AND FOREIGN MARKETS NOT
   POSSIBLE
---------------------------------------------------------- Chapter 5:2

New Zealand domestic producers participate, through elected
representatives, in NZDB policy direction.  NZDB is accountable to
its producers and reports back through a number of vehicles,
including annual reports and efficiency audits.  Individual producer
risk is dispersed across the entire industry through the pooling
process.  The small New Zealand domestic market is deregulated, so
any company may sell dairy products domestically.  NZDB cannot engage
in cross-subsidization between domestic and foreign market sales
because it neither has control over imports nor does it sell its
dairy products in the domestic market. 


      PRODUCERS PARTICIPATE IN
      NZDB ACTIVITIES
-------------------------------------------------------- Chapter 5:2.1

NZDB is owned by the New Zealand dairy industry.\3 Policy direction
is determined by a managing board of 13 directors, 11 of whom are
elected by the cooperative dairy companies and are themselves both
directors and shareholders of their own companies.  The other two
directors are appointed by the New Zealand government, on the
recommendation of NZDB, on the basis of their commercial expertise. 

NZDB reports back to the dairy industry through a number of vehicles. 
Its publications include an annual report, which has financial and
marketing information, and newsletters.  It also conducts annual
general meetings for farmers and meets with producer organizations,
such as the Federated Farmers of New Zealand. 


--------------------
\3 According to New Zealand government officials, some dairy industry
groups are concerned that relative equity in NZDB is not
appropriately reflected in the current ownership arrangements.  NZDB
is working on a proposal to provide more direct ownership to the
producers while maintaining the principles in the 1961 Dairy Board
Act. 


      AUDITS ASSESS NZDB
      PERFORMANCE AND EFFICIENCY
-------------------------------------------------------- Chapter 5:2.2

MAF acknowledged that producer boards\4 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. 


--------------------
\4 Five of the 11 producer boards in New Zealand are single sellers
on the export market:  NZDB, the Apple and Pear Marketing Board, the
Kiwifruit Marketing Board, the Raspberry Marketing Council, and the
Hop Marketing Board. 


      POOLING DISPERSES PRODUCER
      RISK
-------------------------------------------------------- Chapter 5:2.3

Individual producer risk is dispersed through the pooling system. 
According to its enabling legislation, NZDB has the statutory power
to purchase and market all dairy products intended for export.\5 NZDB
acquires these products from approximately 14,000 milk producers
through a series of 15 dairy cooperatives.  The processed milk is
sold on the export market, and returns (minus marketing and operating
costs) are distributed to the cooperatives, which in turn distribute
them to the individual farmers.  Cooperatives pool the milk
separately, so producers are paid according to the quantity of milk
provided to the individual cooperative.  More efficient cooperatives
will have lower operating costs and will thus provide higher payments
to the producers.\6 NZDB sells its products in export markets through
a worldwide network of holding companies and subsidiaries. 

The number of cooperatives has decreased over time, but the volume of
dairy products has generally increased.  The number of dairy
cooperatives in New Zealand has fallen from 95 in June 1970 to 15
companies as of May 1995.  However, the volume of dairy products
manufactured, in actual tons, has grown in several sectors.  NZDB
officials credit this phenomenon to the increased efficiency of the
cooperatives and their operations and the effect of a free market
system. 


--------------------
\5 Dairy produce intended for export, as defined in the 1961 Dairy
Board Act, includes (1) any goods or produce manufactured in New
Zealand and intended for export that contain more than 30 percent by
weight of dairy produce and (2) any milk or cream acquired by NZDB
from a cooperative dairy company for the purposes of manufacture into
a product intended for export. 

\6 Producers may choose which dairy cooperative will receive their
milk.  Thus, they will choose the most efficient cooperative in order
to receive the highest return.  Officials speculated that the
less-efficient cooperatives may have gone out of business due to this
process of natural selection. 


      DOMESTIC MARKET DEREGULATED,
      BUT SMALL
-------------------------------------------------------- Chapter 5:2.4

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. 


      CROSS-SUBSIDIZATION BETWEEN
      DOMESTIC AND FOREIGN SALES
      NOT POSSIBLE
-------------------------------------------------------- Chapter 5:2.5

Since NZDB does not have control over the domestic dairy market,
cross-subsidization between domestic and foreign sales is not
possible.  The NZDB's control over imports of dairy products was
removed in the mid-1980s, and it does not receive any tariffs from
imported dairy products.  Moreover, NZDB does not even sell dairy
products in New Zealand; individual dairy cooperatives may compete
for shares of the domestic market. 


   NZDB-GOVERNMENT RELATIONSHIP: 
   GOVERNMENT ASSISTANCE IS
   LIMITED
---------------------------------------------------------- Chapter 5:3

Even though NZDB has sole export authority for New Zealand dairy
products, it has not received direct government subsidies since 1984,
when a governmentwide reform removed most agricultural subsidies. 
The New Zealand government continues to support NZDB indirectly
through a research grant scheme, which benefits the dairy industry as
a whole.  However, the New Zealand government has removed some of the
NZDB's advantages, including its access to New Zealand's Reserve Bank
credit. 


      DIRECT GOVERNMENT SUBSIDIES
      REMOVED
-------------------------------------------------------- Chapter 5:3.1

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. 


      INDIRECT SUBSIDIES SUPPORT
      MISSION, RESEARCH GOALS
-------------------------------------------------------- Chapter 5:3.2

The NZDB's mission is further enhanced by enforcement actions written
into its enabling legislation.  The New Zealand government, through
the Dairy Board Act of 1961, may impose fines on persons or companies
that circumvent NZDB and try to export dairy goods without a license. 
This fine may not exceed $1,187.  According to NZDB officials, such
fines have not been imposed at any time. 

NZDB does not receive any direct grants or concessionary loans from
the government for research, but its research affiliate may compete
for government research grants.  Through its Public Good Science
Fund, the government sponsors a variety of projects; funds are bid
upon by a variety of research institutions.  NZDB sponsors the New
Zealand Dairy Research Institute, which focuses on fundamental,
long-term dairy research; NZDB also maintains research centers in
Singapore, the United Kingdom, Japan, and the United States.  Other
research on dairy issues takes place in New Zealand universities and
at Crown Research Institutes.\7


--------------------
\7 In 1992, the government formed 10 Crown Research Institutes to
take over the major research responsibilities from previous
government agencies.  These institutes do not have any core funding
but operate as science contractors and are expected to be viable
businesses. 


      NZDB LOST OTHER ADVANTAGES
-------------------------------------------------------- Chapter 5:3.3

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-FOREIGN BUYER
   RELATIONSHIP:  SUBSIDIARIES AND
   OUTSIDE INVESTMENTS ALLOW FOR
   GREATER RETURNS
---------------------------------------------------------- Chapter 5:4

NZDB's sole export authority affords it the opportunity to achieve
economies of scale and provides other benefits.  By using its
statutory authority to export dairy products to the United States and
other countries, NZDB benefits from its extensive subsidiary network
and higher U.S.  prices, since the U.S.  price for dairy goods is
higher than the standard world price.  The NZDB's ability to invest
in outside companies also allows it to diversify its economic
interests.  While price discrimination is possible and not prohibited
under GATT, we were unable to analyze the extent to which NZDB or
other exporters engage in this practice because we did not have
access to public or private companies' transaction- level data. 
Likewise, we were unable to determine whether NZDB engaged in
cross-subsidization between its higher- and lower-priced foreign
market sales. 


      NZDB HAS SOLE EXPORT
      AUTHORITY OVER ALL NEW
      ZEALAND DAIRY PRODUCTS
-------------------------------------------------------- Chapter 5:4.1

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. 


      U.S.  DAIRY MARKET BENEFITS
      NZDB
-------------------------------------------------------- Chapter 5:4.2

NZDB benefits from the U.S.  market, as well as other restricted
markets around the world, because of its subsidiaries and domestic
dairy price support programs.  NZDB sells its products through 88
subsidiary companies in more than 60 countries around the world,
including each of New Zealand's largest trading partners.  These
companies are managed by geographically oriented holding companies. 
NZDB believes that this subsidiary framework allows it better access
to markets, and these subsidiaries appear to offer particular
advantages in markets restricted by quotas, such as the United
States.  The NZDB's subsidiaries, such as Western Dairy Products,
Inc., can import New Zealand cheese that is subject to quota and help
NZDB realize profits that would otherwise go to unaffiliated U.S. 
importers.  For example, under the U.S.  quota system, New Zealand's
allocation of cheese can be assigned to any licensed U.S. 
importer.\8 The New Zealand government has the authority to choose
the U.S.  importers of New Zealand cheese.  NZDB may encourage the
New Zealand government to select the NZDB's own subsidiaries to
import the cheese, thus keeping the cash flow within the
organization. 

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. 


--------------------
\8 For a more comprehensive explanation of the U.S.  cheese quota
system, see GAO/RCED-95-280R. 


      NZDB CAN INVEST IN OTHER
      COMPANIES
-------------------------------------------------------- Chapter 5:4.3

As of 1988, the New Zealand government granted NZDB the "powers of a
natural person." This allowed NZDB to, among other commercial
practices, enter into contracts and invest in other businesses.  NZDB
has taken advantage of this privilege by investing in businesses in
other countries and thus diversifying its economic interests.  For
example, during the 1993-94 season, NZDB formed New Zealand Milk
Products (Egypt) Ltd., a 100-percent subsidiary to manufacture and
market ghee, and New Zealand Milk Products Treasury (S) Pte Limited
in Singapore as a treasury and reinvoicing center for the South East
Asia region. 


      PRICE DISCRIMINATION,
      FOREIGN MARKET
      CROSS-SUBSIDIZATION NOT
      DETERMINED
-------------------------------------------------------- Chapter 5:4.4

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. 


FRAMEWORK AND COUNTRY INFORMATION
=========================================================== Appendix I

                      CWB                 AWB                 NZDB
--------------------  ------------------  ------------------  ------------------
                      In 1993-94, more    In 1993-94, more    New Zealand
                      than two-thirds of  than three-         exports about 90%
                      Canada's wheat      quarters of         of its dairy
                      production was      Australia's wheat   production. In
                      exported. Canada    production was      1993, NZDB had
                      has about a 22%     exported.           about an 11% share
                      share of world      Australia had       of world exports
                      exports of wheat    about a 13% share   of skimmed milk
                      and wheat flour.    of world exports    and a 13% share of
                                          of wheat and wheat  world exports of
                                          products.           cheese.

Relationships of
STEs

Relationship with
producers

Management and        CWB is a quasi-     AWB works to        NZDB exports dairy
ownership             governmental        maximize the net    products on behalf
                      organization that   returns to          of producers. Its
                      markets grain on    Australian wheat    managing board is
                      behalf of Canadian  growers by          mostly elected by
                      farmers.            securing,           dairy
                      Government-         developing, and     cooperatives. NZDB
                      appointed           maintaining         reports to the
                      commissioners       markets for wheat   dairy industry
                      administer the      products. Its       through a variety
                      program, while      managing board      of mechanisms and
                      farmers are         includes            undergoes a
                      represented by an   producers.          performance and
                      11-member                               efficiency audit
                      producers'                              once every 5
                      advisory                                years.
                      committee.

Pooling               Pooling western     AWB pools its       Dairy farmers
                      Canadian wheat and  returns for each    deliver their milk
                      barley production   variety and class   to dairy
                      (1) removes the     of wheat and        cooperatives that
                      timing of sales as  distributes them    pool and process
                      a factor for        to the farmers      the milk
                      farmers and (2)     minus marketing,    separately, then
                      distributes the     operating,          turn the dairy
                      market risks and    storage, and        products over to
                      advantages to all   transport costs.    NZDB. Market risk
                      farmers while also                      is dispersed, and
                      allowing them to                        dairy farmers
                      share resources.                        receive their
                                                              payments based on
                                                              the efficiency of
                                                              the cooperatives.

Authority (domestic   CWB has authority   AWB handles         NZDB does not sell
and imports)          over all Canadian   anywhere from 30%   dairy products in
                      wheat and barley    to 80% of the       the deregulated
                      export sales, as    domestic trade in   domestic market.
                      well as over all    wheat.              The dairy
                      western Canadian                        cooperatives
                      wheat and barley    AWB does not have   compete for
                      sold for domestic   control over wheat  domestic sales.
                      human               imports.
                      consumption.                            NZDB does not have
                                                              control over dairy
                      CWB had control                         imports.
                      over all imports
                      of wheat and wheat
                      products until
                      August 1, 1995.\a

Potential ability to  CWB has limited     AWB does not have   NZDB does not have
cross-subsidize       potential to        the potential to    the potential to
between domestic      cross-subsidize     cross-subsidize in  cross-subsidize in
and                   wheat exports, and  this manner.        this manner.
foreign market sales  somewhat greater
                      potential to
                      cross-subsidize
                      barley exports in
                      this manner.

Relationship with
government

Direct subsidies      The Canadian        The Australian      Direct government
                      government has      government's price  subsidies to the
                      covered CWB wheat   support schemes     dairy industry
                      pool deficits       were removed in     were removed in
                      during 3 crop       1989.               1984. NZDB has not
                      years, and barley                       received subsidies
                      pool deficits       AWB benefits from   since 1983 when
                      during 7 crop       a government        the New Zealand
                      years, requiring    guarantee on its    government allowed
                      over $1.2 billion   borrowing to pay    NZDB to take out a
                      in government       wheat producers     long-term loan on
                      payments.           (up to 85% of       extremely
                                          expected net        favorable terms.
                                          return).

Indirect subsidies    As a crown          AWB officials       NZDB indirectly
                      corporation, CWB    acknowledged that   benefits from
                      is able to          the government      research subsidies
                      maintain a high     guarantee may       to its research
                      credit rating on    translate to        affiliate.
                      its commercial      favorable interest
                      loans for initial   rates.              NZDB has a good
                      payments.                               credit rating,
                                          AWB receives levy   which may be
                      CWB pays no taxes   funds to support    related to its
                      to the federal      capital             status as an STE.
                      government or any   investments and     The NZDB's
                      other provincial    domestic trading    retained earnings
                      government.         operations. AWB     are subject to
                      Returns to the      does not pay tax    taxation.
                      producers are       on its commodity    Producers' incomes
                      taxed as regular    sales, but pays     are also taxable
                      income.             corporate tax on    under New
                                          holdings and        Zealand's income
                      The Canadian        investments.        tax system.
                      government          Returns are
                      provides some       considered
                      domestic support    personal income
                      (crop insurance,    for the farmers
                      research, and       and are taxed
                      income support) to  under Australia's
                      farmers, as well    income tax
                      as indirect         system.
                      subsidies covering
                      the transportation  Research funds and
                      of grains.\b        other economic
                                          relief are also
                                          available.

Relationship with
foreign buyers

Single seller         CWB has authority   AWB has authority   NZDB controls all
                      over all Canadian   over all            New Zealand dairy
                      wheat and barley    Australian wheat    products destined
                      destined for        destined for        for export. Thus,
                      export.\c Thus, it  export. Thus, it    it has a sure
                      has a sure source   has a sure source   source of supply
                      of supply and can   of supply and can   and can use
                      use economies of    use economies of    economies of scale
                      scale to disperse   scale to disperse   to disperse the
                      the cost of         the cost of         cost of
                      operations.         operations.         operations.

                                                              It may grant
                                                              export licenses to
                                                              other companies
                                                              that wish to
                                                              export dairy
                                                              products.

Commercial practices  The lack of         Price flexibility   The NZDB's
                      transparency in     and foreign market  subsidiaries allow
                      the CWB's pricing   cross-              it to benefit from
                      methods may         subsidization are   the U.S. dairy
                      provide CWB with    possible due to a   market's quota
                      greater pricing     lack of             system and price
                      flexibility than    transparency.       supports. Price
                      is found among      Stronger efforts    discrimination and
                      private sector      toward market-      predatory pricing
                      traders and the     based activities    are possible, but
                      ability to cross-   were encouraged in  not confirmed.
                      subsidize between   a recent
                      foreign market      government-
                      sales.              sponsored report.
--------------------------------------------------------------------------------
\a On August 1, 1995, the licensing procedure was replaced by a
tariff-rate quota, negotiated by the Canadian government under the
terms of the GATT.  This tariff-rate quota is administered by the
Canadian federal government.  Canada removed the import-licensing
requirement for U.S.  wheat and wheat products entering Canada in May
1991. 

\b The transportation subsidy ended on August 1, 1995. 

\c This control extends to the exports of the Ontario Wheat Board as
well.  However, farmers are allowed to buy back their wheat and
barley from CWB and sell it for export themselves. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE U.S.  DEPARTMENT
OF AGRICULTURE
=========================================================== Appendix I

Now on p.  16. 

Now on pp.  18 and 46-47. 



(See figure in printed edition.)

Now on pp.  6 and 23. 

See comment 1. 

Now on pp.  26 and 45. 

See comment 2. 

Now on pp.  70-71. 



(See figure in printed edition.)


The following are GAO's comments on the Department of Agriculture's
letter dated May 2, 1996. 


   GAO COMMENTS
--------------------------------------------------------- Appendix I:1

1.  Although cross-subsidization is an issue that spans many topics,
we believe the structure of our framework is best left as is, given
the relationships between the sections.  We took a number of
considerations into account when developing our economic framework,
including natural progression and logical flow. 

2.  In chapter 3, we outline the Joint Commission on Grains'
recommendations and its discussion on discretionary pricing.  We also
have incorporated summaries of the two academic studies in chapter 3. 
We believe that we have adequately covered the benefits of indirect
subsidies in chapters 3, 4, and 5. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

Phillip J.  Thomas
Kimberly M.  Gianopoulos
Michael Kassack
Rona Mendelsohn
Robert E.  Sanchez
Walter E.  Bayer, Jr. 


   RESOURCES, COMMUNITY, AND
   ECONOMIC DEVELOPMENT DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:2

Carol E.  Bray


   OFFICE OF THE CHIEF ECONOMIST,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:3

Loren Yager


RELATED GAO PRODUCTS
============================================================ Chapter 1

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

State Trading Enterprises:  Compliance With the General Agreement on
Tariffs and Trade (GAO/GGD-95-208, Aug.  30, 1995). 

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

International Trade:  Canada and Australia Rely Heavily on Wheat
Boards to Market Grain (GAO/NSIAD-92-129, June 10, 1992). 

*** End of document. ***