Australian wheat exporters’ relationship with disgraced Iraqi president Saddam Hussein is under intense scrutiny and the days of AWB’s ‘single desk’ wheat pool may be numbered. David Robertson examines a scandal that could topple a monopoly and impact on wheat growers and food manufacturers worldwide.

About the time Australian troops were preparing to join the American-led invasion of Iraq, Australian wheat exporters were padding Saddam Hussein’s bank account with millions of dollars in kickbacks – money that critics say could have been used to fund attacks on coalition troops.

This arrangement is being investigated in Australia by an independent inquiry, which has been set up to establish just how deep into the storage silo wheat exporter AWB got with the erstwhile Iraqi president. The public airing of AWB’s dealings in Iraq has become a fully fledged scandal that may have long-term implications for wheat growers and food manufacturers around the world.

Australia is one of the largest exporters of wheat shipping 15 to 20 million tonnes a year – about 15% of the global market. Wheat growers who want to export their grain out of Australia must sell it into a national “pool” that is managed, marketed and sold by AWB – a situation that infuriates American growers who attack this monopoly as unfair.

The “single desk” arrangement, as it is called, gives AWB considerable competitive advantages and economies of scale in everything from hedging crop prices to distribution costs. The single desk also means Australian growers are not competing against each other in the global market and the pooling system allows AWB to negotiate huge deals with foreign governments and companies (AWB currently sells nearly 3m tonnes a year to Indonesia, 2m tonnes to China and over a million tonnes to Japan).

AWB started selling wheat to Iraq in 1999 as part of the United Nation’s oil-for-food program. By 2003, shortly before the Iraq invasion, AWB was billing the UN (which was responsible for dispersing Iraq’s oil revenue) about US$250 for a tonne of wheat when international prices were typically about US$200 a tonne.

The extra money was euphemistically described as being for “inland trucking fees” and “after-sales service fees”. These “fees” were paid to a company called Alia, which in turn passed the money on to Saddam and his cronies.

Canadian and American wheat growers tried to highlight what was going on with these unusual fees but AWB insisted that it was doing nothing wrong – until it became clear that the A$300m (US$220.2m) Alia had collected was being used to inflate Swiss bank accounts and marble Saddam’s palaces.

The inquiry into AWB’s Iraq dealings, led by Commissioner Terrence Cole, was due to report its findings by the end of this month but that has now been delayed at least another two months as more evidence is collected and more companies are implicated in bribing Iraqi officials.

However, it is already clear from the scale of the kickbacks that AWB will face some degree of censure. JP Morgan analyst Stuart Jackson wrote in a recent research note: “The information being provided to the Cole inquiry has severely dented AWB… and changes to the current Australian wheat export system are extremely likely.”

The most devastating punishment would be for the single desk monopoly to be scrapped. American wheat growers have been pushing for this for many years claiming the arrangement is anti-free trade (although some argue that listening to American farmers lecture the world on fair trade is almost as implausible as taking lessons on farm economics from the French). But the Americans do point out that it is because of these monopoly powers that AWB has felt itself able to act in the way that it has.

US Wheat director of public affairs Dawn Forsythe said: “We praise the way the Cole Commission is being conducted as it has brought sunlight to a very dark part of corporate behaviour. We are happy that what is coming out of the inquiry proves what we have been saying all along, that AWB’s monopoly should be dismantled because it doesn’t serve the public good.”

Australian wheat growers have been forced to defend their monopoly claiming that the single desk is good for international buyers because it allows them to get a guaranteed delivery from a single supplier and that it cuts costs to the consumer. Furthermore, if food companies want a specific variety of wheat the Australian “pool” is so large that even unusual varietals can be supplied in bulk.

In reality, scrapping the single desk looks to be an unlikely outcome of the AWB scandal as there is little political will in Australia for this. According to JP Morgan’s Stuart Jackson: “We believe that a dismantling of the single desk itself is unlikely given that farmers are in favour of retaining this marketing advantage. However, this does not mean that AWB needs to manage the single desk.”

AWB could be dumped as Australia’s single wheat exporter in punishment for the Iraq scandal, although it is unclear if any other company is in a position to take over the role. More likely is that AWB’s monopoly on exports could be loosened allowing other companies to set up distribution deals with overseas clients – something that is already happening with Iraq.

The new Iraqi government banned AWB from supplying wheat to the country after the Saddam bribery scandal was uncovered but ABB Grain, GraIncorp and Cooperative Bulk Handling have been allowed to tender for a 350,000 tonne shipment worth about $70m.

ABB spokesman Ken Pearce said: “We are doing everything we can to ensure that Australian wheat growers have an opportunity to sell to the Iraq market. We cannot second-guess the Cole Commission or the decisions that might be made about AWB’s single desk but we are aware of the potential opportunities.”

A weakening of AWB’s monopoly export powers would be considered a major breakthrough for other Australian grain companies, but it falls far short of what the American wheat industry wants and they will continue pressing for change.

AWB, meanwhile, must live with the stigma of financing a tyrant’s slush fund and its rivals are sure to capitalise on this (there are already rumours that other countries are prepared to blackball the Australians).

AWB is about to discover what its wheat growers have always known: you reap what you sow.