Marketing Australia s wheat to the world

10 INTERNATIONAL SALES AND MARKETING IN BRIEF AUSTRALIAN WHEAT SOLD IN 36 MARKETS SUCCESSFULLY MANAGED LIMITED STOCKS TO SERVICE KEY CUSTOMERS TOP 10 MARKETS ACCOUNTED FOR 77% OF AWB NATIONAL POOL VALUE SHARE OF AWB NATIONAL POOL SALES TO ASIA INCREASED IRAQ UNITED NATIONS CONTRACTS EXECUTED DESPITE WAR BUILDING STRONGER PARTNERSHIPS INDONESIA, EGYPT, SUDAN, YEMEN, COLOMBIA Marketing Australia s wheat to the world Over the life of this AWB National Pool, 6.25 million tonnes of wheat (including core receivals and 2001 02 carryover) were sold in 36 countries around the world. This figure represents a reduction from previous years, a consequence of the drought conditions experienced across Australia. Reduced Pool volumes meant the sales and marketing team had to carefully execute the export program to maximise the value of wheat received, while ensuring continuity of quality and supply to premium customers. AWB s success in this regard is evidenced by the fact that 77% of value in the 2002 03 AWB National Pool was generated by the top 10 markets Indonesia, Japan, South Korea, Malaysia, Iraq, Sudan, Egypt, Thailand, Yemen and Kuwait. GLOBAL BUSINESS NETWORK Understanding customer needs and matching them with quality grain made to order is a key role of AWB s international sales and marketing team. Expanding the resources and global reach of this team is a focus for AWB as it seeks to secure long-term demand for Australian wheat. During 2002 03, AWB s international presence was strengthened in Asia (Hong Kong) and Europe (Geneva). Through this expansion, AWB is now not only closer to its customers, but is able to provide more timely and accurate information on world grain trading flows. This improves decision making by AWB on wheat products, allocations and pricing. An expanded international presence also means AWB can better satisfy customer demand with a value proposition that includes unique wheat products, innovative financial instruments and price risk management, and competitive chartering services. This, in turn, contributes to better returns for AWB National Pool participants. Information on international customer requirements feeds into the sophisticated premium allocation tool AWB has developed to determine appropriate prices and timing of sales for the AWB National Pool. This pricing tool examines the revenue that would be achieved under various marketing strategies, taking account of real world limitations. Based on these calculations, Pool wheat is allocated across markets and across time to maximise expected revenue.

11 In 2002 03, AWB successfully managed the export crop to allocate wheat stocks to premium customers in high-value markets. Target prices are then set for each grade in each market to reflect aggressive yet achievable price premiums over competitor grades of wheat. MANAGING LIMITED SUPPLIES Restricted supply presented a unique challenge for sales allocations in 2003. Specific customer targeting for wheat quality and premium Pool returns was the priority and demanded specific strategies to be implemented. One of the challenges was the allocation of scarce stock to service premium customers. A major benefit of the Single Desk system is that it allows AWB to maintain long-term customer relationships and to guarantee certainty of quality and supply for these customers. In a drought year, this benefit became even more important. In 2002 03, AWB successfully managed the export crop to allocate wheat stocks to premium customers in high-value markets. Of the AWB National Pool volumes, 34% was exported to South-east Asia and 23% to North Asia, with a clear focus on meeting the requirements of the top three markets Indonesia, Japan and South Korea. The Middle East accounted for 25%, with Africa and Europe accounting for 11%, and the Pacific and South America making up the balance. IRAQ CONTRACTS SUCCESSFUL Iraqi contracts were successfully completed despite the war during 2003. At the outbreak of war in March 2003, the AWB National Pool had outstanding contracts with the Iraqi Grains Board for more than 1.1 million tonnes of wheat (worth approximately US$250 million) from the 2001 02 and 2002 03 Pools through the United Nations Oil-for-Food program. When hostilities began in Iraq, AWB executed a comprehensive risk management strategy to ensure the sales program was protected. Working with the Australian Government, international organisations, and freight and insurance companies, AWB arranged for the shipments in transit to be delivered to a different AWB customer in a nearby country. The wheat was processed in this country and then the wheat flour was transported by land into Iraq. Following the end of the hostilities, the outstanding United Nations contracts were renegotiated with the new administration in Iraq and all were successfully executed. All contracts with Iraq were strictly under the terms and conditions stipulated by the United Nations and, later, by the new administration in Iraq and provided badly needed food supplies to the Iraqi people. The contract prices reflected embedded costs for delivery within Iraq, which incorporated shipping, port, inland transport, risk management and insurance costs.

12 INTERNATIONAL SALES AND MARKETING 2002 03 AWB NATIONAL POOL EXPORT DESTINATIONS A E C G B D F A 2% Europe B 9% Africa C 25% Middle East D 34% South East Asia E 23% North Asia F 5% Pacific G 2% South America As in previous years, the majority of 2002 03 AWB National Pool sales were in the Middle East, North Asia and South-East Asia. However, in 2002 03, the proportion of Pool wheat sold in Asia increased as AWB managed the small volumes available to meet premium customer requirements in these markets. CUSTOMER RELATIONSHIPS In 2002 03, specific marketing strategies were implemented to manage customer expectations and protect longer term relationships. These strategies included a range of programs designed to improve customer understanding of the Australian grains industry, the properties and specific processing qualities of Australian wheat, and the range of value-adding services available from AWB. Some of the activities undertaken in 2002 03 include: Crop quality updates provided to all customers in North Asia, South-east Asia, Middle East, Africa, Europe, the Pacific and South America. Collaborative research and development working with customers from Malaysia, Japan, Taiwan, Thailand and the Philippines to tailor Australian wheat varieties to their individual needs. Grain industry orientation hosted 34 business delegations in Australia from 12 different countries including tours of the wheatbelt and meetings with growers. Professional development training programs for customers in China on grain storage and hygiene, and in Malaysia, Indonesia and Thailand on Baking and Noodle Practices to improve the understanding of Australian wheat characteristics. Marketing events study tour of noodle production in Japan and South Korea for a key customer, Golden Rewards seminar in Kenya, and Association of Operative Millers conference and trade show for Middle Eastern and African customers. In providing these marketing services, AWB faces competition from Government-funded market promotion groups such as the US Wheat Associates and the Canadian International Grains Institute. For example, on top of the multi-billion dollar US Government export facilitation policies such as export credits and food aid, the US Government funds the US Wheat Associates by US$10 million annually to promote international sales of US wheat. In contrast, AWB receives no direct Government funding to support international marketing activities for Australian wheat. AWB has been building relationships with key customers that go beyond single-dimension transactional arrangements by offering risk management products, ship chartering and consumer marketing programs. The market development campaign to develop the wheat market in Indonesia was strengthened in 2002 03. This included the innovative AWB co-branding agreement with the world s largest private wheat importer, Bogasari Flour Mills, to increase awareness of the quality characteristics of flour produced from Australian wheat. The Pool s excellent trading relationship with Egypt s largest private mill, Five Star Flour Mills, continued in 2002 03. The Pool s position in the quality-discerning, premium

13 In 2002 03, AWB hosted 34 business delegations in Australia from 12 different countries. component of the Egyptian market is underpinned by its relationship with Five Star, a position which is reinforced by the fact that AWB Limited is a joint investment partner in this mill. Yemen and Sudan are two valued markets where the market development strategy is providing improved returns for growers through increased market share. The selected customers, in these markets are now two of AWB s largest private customers and in 2002 03 they demonstrated their ongoing commitment to AWB and Australian producers in very challenging circumstances. AWB also continued to pursue new markets for Australian wheat. Sales to Colombia, historically a purchaser of US and Canadian wheat, grew to 150,000 tonnes in 2002 03. AWB is keen to retain this market although the volatile freight market has a heavy impact on the viability of the business. This premium was calculated using a combination of the Carter-Knetter and Price Discrimination econometric models against base country prices for each grade. Neither AWBI nor AWB Limited fully endorse either of these econometric models as the best measure of AWB National Pool performance, but believe the Econtech study has contributed positively to the industry debate on the value of the current wheat marketing arrangements. This $200 million value of the Single Desk is a mix of the inherent advantages in Single Desk marketing, such as one face in international markets, and strategies that AWB has undertaken to increase the value of the Pool, including investments like the international office network and the pricing tool. SINGLE DESK VALUE A study of AWB National Pool prices by the renowned economic modelling group, Econtech, commissioned by the Board of AWBI, has found that, as the Single Desk manager, AWB achieves on average a premium of $13 per tonne on Pool export sales. Based on average Pool receivals over the past five years, this $13 per tonne premium translates into approximately $200 million in additional revenue for wheat growers every year generated by AWB s management of the Single Desk marketing system.

14 RISK MANAGEMENT IN BRIEF AVERAGE US AUSTRALIAN CURRENCY EXCHANGE RATE OF US$0.5446 FOREIGN EXCHANGE HEDGING GENERATES AN ADDITIONAL $12 PER TONNE POOL CREDIT RATING ENHANCED THROUGH INNOVATIVE RING FENCING MANAGEMENT OF SCARCE STOCKS IN A DROUGHT SEASON SHIPPING PROGRAM PREDOMINANTLY FROM WESTERN AND SOUTH AUSTRALIA 5.2 MILLION TONNES OF 2001 02 STOCK SOLD IN 2003 2002 03 AWB NATIONAL POOL HEDGED FOR PRICE RISK IN A TURBULENT MARKET Managing risk exposures to enhance returns In an international environment characterised by persistent economic sluggishness and political tension, AWB s management of currency and price risk on behalf of Pool participants took on great importance in 2002 03. Despite the reduction in AWB National Pool volumes, AWB still managed over $1 billion in international sales, mostly in US dollars. AWB managed the currency exposure involved in this export program, achieving an average US Australian exchange rate of US$0.5446 compared to an average over the period of US$0.6242. To protect AWB National Pool participants from price fluctuations, AWB is one of the largest participants in the wheat futures markets in Chicago, Kansas and Minneapolis. In undertaking this function AWB faced US wheat futures markets that traded between $183 and $320 per tonne during the life of the Pool, but was still able to achieve price stability for growers. FOREIGN EXCHANGE GENERATING VALUE For the 2002 03 AWB National Pool, AWB s management of the foreign exchange exposures began in March 2002, well before that season s wheat had been sown let alone harvested. Foreign exchange risk is primarily managed by AWB through forward contracts and options within risk parameters set by the Board of AWBI. The US Australia currency market is deep and liquid, trading an estimated average of $16 billion per day. A volatile day could see over $150 million in transactions by AWB s hedging team. AWB monitors the market 24 hours a day to capitalise on any potential opportunities. The US Australian currency exchange rate traded within a range of US$0.5170 to US$0.7984 during the life of the Pool. In this period, several factors impacted on global currency markets, including economic uncertainty in the aftermath of the September 11 terrorist attacks, the collapse of the stock market technology boom and the subsequent easing of interest rates around the world, the war in Iraq and the SARS epidemic in East Asia. In 2002 03, despite the US Australian currency exchange rate rising by 54%, AWB achieved an exchange rate of US$0.5446 compared to an average of US$0.6242. This means AWB s treasury division contributed over $50 million, or approximately $12 per tonne, in additional value for AWB National Pool participants over a passively managed currency exposure.

15 AWB is one of the largest users of the US wheat futures markets at the Chicago, Kansas and Minneapolis Boards of Trade. All AWB s foreign exchange activities are conducted under robust corporate governance structures involving the Boards of both AWBI and AWB Limited. These governance structures came under further review following issues involving currency trading encountered at other companies in 2003 and all was found to be in order. RING-FENCING With the removal of Government underwriting following privatisation and the subsequent diversification of AWB s operational base, pressure has been placed on the company s credit rating. In November 2002, the international rating agency Standard & Poor s lowered both the long-term and short-term ratings of AWB from AA-/A-1+ to A+/A-1 respectively. This re-rating could have resulted in increased borrowing costs for the AWB National Pool and therefore in reduced returns for Pool participants. Consequently, AWB worked with international ratings agencies to develop an innovative dual-rated AWB Group structure to insulate Pool growers from any increases in the cost of funds arising from the evolving commercial nature of AWB s operations. From 1 October 2003, AWB introduced structural changes to ring-fence operations relating to wheat exports with the creation of AWB Harvest Finance. This provides structural separation of the wheat export related activities from the risks associated with the wider commercial operations of AWB. The separation also protects the assets of those involved in the AWB National Pool from AWB s activities. This ring-fence structure is based on the latest global business practices and is one of the first of its kind in Australia. It has resulted in AWB Harvest Finance being awarded an AA- (long-term) and A-1+ (short-term) stable outlook from Standard & Poor s and P-1 from Moody s. ACTIVE EXPORT POSITION MANAGEMENT Scarce stock had to be carefully managed to ensure premium customer relationships could be maintained and price opportunities captured in the drought-affected 2002 03 AWB National Pool. Active stock and export position management is one of the major benefits of the Single Desk system and AWB was successful in managing the 2002 Australian crop to capture premiums in the international marketplace. This success was despite the great challenges faced by AWB s export position management team. Due to the drought, exports from Queensland, New South Wales and Victoria came to an almost complete stop and shipping requirements were moved to South Australia and Western Australia. This was a major undertaking for AWB as it required managing customer expectations and providing assistance to customers receiving shipments from previously untried states and shipping zones. For example, a premium AWB international customer of AH and APH, who traditionally was supplied exclusively out of the Port Kembla zone in New South Wales, was forced to receive the majority of their hard

16 RISK MANAGEMENT AUSTRALIAN US DOLLAR RATE VERSUS AWB ACHIEVED RATE 0.81 0.79 0.77 0.75 0.73 0.71 0.69 0.67 0.65 0.63 0.61 0.59 0.57 0.55 0.53 0.51 PRE PLANTING PLANTING AND GROWING HARVEST As the graph highlights, the AWB National Pool achieved an average currency rate of US$0.5446 that was well below the seasonal average, which generated value for Pool participants of $12 per tonne. Mar 2004 SALES AND SHIPPING POOL CLOSURE Spot rate Season average 0.6242 AWB rate of 0.5446 Mar 2002 Jun 2002 Sep 2002 Dec 2002 Mar 2003 Jun 2003 Sep 2003 Dec 2003 wheat stock from the Geraldton/Fremantle zone in Western Australia. The AWB export position team worked in conjunction with AWB s technical experts to minimise the problems associated with processing wheat with different varietal characteristics and performance. To maintain international customer relationships, avoid lowpriced competition in 2002 and service drought-affected domestic customers, the Pool management group decided to make available 5.2 million tonnes of wheat from the 2001 02 Pool in 2003. This was done by extending the life of the 2001 02 AWB National Pool and carrying over two million tonnes into the 2002 03 Pool. These actions meant vital customer relationships could be maintained and, as the 2001 02 Pool report documented, generated approximately $300 million in additional value for Pool participants. However, it also created some customer management issues as the 2001 season stock had quite different quality characteristics to 2002, meaning additional care was required when allocating stock to buyer specifications. The logistics of accumulating stock for vessels was also particularly challenging in the last quarter of 2003, as stock availability fell to levels rarely seen before in Australia. The AWB National Pool management team had reduced stocks to less than 500,000 tonnes, which when spread across 18 port zones and multiple grades resulted in a large number of dispersed unshippable grain parcels prior to the availability of 2003 season stock. Finally, a short supply of bulk ships in the Asia-Pacific region, in conjunction with a rising Australian dollar, the small crop, and demand from some customers for container shipments, resulted in increased use of containers for AWBI wheat in 2002 03. This trend has continued into 2003 04, although bulk shipments have remained the primary form of exports. AWB only exports wheat in containers on behalf of the AWB National Pool. Pool participants are the exclusive beneficiaries of these sales. For AWB, the decision whether to ship in containers or in bulk is determined in line with the mandate to maximise returns to growers. Consequently, AWB s use of containers does not impact non-awb exporters servicing legitimate niche markets. PROTECTION FROM PRICE RISK AWB's commodity futures hedging activities are important in achieving price stability for growers in Australia. AWB is one of the largest users of the US wheat futures markets at the Chicago, Kansas and Minneapolis Boards of Trade. The liquidity of these exchanges is limited in size in comparison to the depth of the foreign exchange market, which can make a large-scale hedging program difficult to execute. The volume traded daily across exchanges in Chicago, Kansas and Minneapolis ranges from two to seven million tonnes. On an average day, AWB hedges up to 300,000 tonnes for the AWB National Pool.

17 FUTURES MARKET PRICES VERSUS AWB NATIONAL POOL PRICES ($ per tonne) This graph shows the movements in futures prices compared to the APW and ASW Pool prices. As it illustrates, the Pool price is far more stable than the futures price. However, a direct comparison between US futures prices and the AWB National Pool price is often not valid due to issues such as currency rates, quality variations and the inherent difference between a cash and a futures market. 350 330 310 290 270 250 230 210 190 170 150 Mar 2002 PRE PLANTING PLANTING AND GROWING Jun 2002 Sep 2002 Dec 2002 HARVEST SALES AND SHIPPING Mar 2003 Jun 2003 Sep 2003 Dec 2003 POOL CLOSURE Mar 2004 Chicago Kansas Minneapolis APW ASW In 2002 03, a difficult external environment was encountered in undertaking the commodity hedging function for the AWB National Pool. Pricing of wheat within the 2002 03 Pool occurred over a period of significant price volatility. US hard wheat export prices rallied in the futures markets from $183 in May 2002 to a high of $320 in October 2002 and then back down to $231 in April 2003. These price shifts were exacerbated by a lack of liquidity in the physical market as buyers were understandably reluctant to price significant volumes during the market rally. Nonetheless, AWB's commodity hedging activities for the 2002 03 AWB National Pool added stability to Pool returns. This is an important benefit to growers of the orderly marketing approach under the Single Desk system. All AWB commodity futures exchange activities are executed under robust corporate governance structures to ensure compliance with AWBI Board policy and the rules of the exchanges themselves. As a result of the extension of the 2001 02 AWB National Pool, the hedging capability of the AWB National Pool price risk management was applied over both 2001 02 and 2002 03 Pool stock. The 2001 02 Pool was stable through the price decline in 2003, while the 2002 APW Pool did decline in value from a peak of $297 (28 October 2002) to $251 (24 June 2003) and was finalised at $258.39. This initial decline was a result of the drop in futures prices combined with the impact of uncertainty over United Nations Oil-for-Food contracts to Iraq after the outbreak of war. Eventually, the war in Iraq resulted in the movement of some Iraqi sales out of the 2002 03 Pool which had a negative impact on AWB National Pool equities, as some stock had to be resold to alternative destinations at a time when the market had declined to lower prices.

18 SUPPLY CHAIN MANAGEMENT IN BRIEF REDUCTION IN SUPPLY CHAIN COSTS DESPITE DROUGHT INSURANCE ON THE WESTERN AUSTRALIAN RAIL FREIGHT CONTRACT CREATING AN INNOVATIVE AND FLEXIBLE SECTOR CONDUCIVE TO INVESTMENT IMPROVED RAIL LOADING ARRANGEMENTS NEW RAIL CONTRACTS IN QUEENSLAND AND SOUTH AUSTRALIA GRAIN DIRECT LAUNCHED WITH CBH IN WESTERN AUSTRALIA PUBLISHING ESTIMATED SILO RETURNS IMPROVES TRANSPARENCY Improving efficiency and cost transparency On behalf of growers and others who choose to deliver wheat to the AWB National Pool, AWB manages the logistics of optimally matching wheat to sales contracts. This involves the allocation of vessels to the 18 Australian bulk ports and the coordinated movement of the selected parcels of grain to port and subsequently on to international customers. Execution of this process through the supply chain requires access to infrastructure and services. This involves AWB negotiating, on behalf of Pool participants, with companies providing services ranging from wheat receivals, to storage and handling, to transport and shipping. COSTS DOWN DESPITE DROUGHT AWB s management of the supply chain for AWB National Pool participants is driven by the obligation to seek efficiencies and reduce costs. AWB fulfiled its mandate in this regard by achieving the sixth consecutive reduction in real national supply chain service provider charges. These charges relate to transport, storage and handling, and port-related services that AWB negotiates on behalf of the Pool. Real national supply chain service provider charges (standardised) fell from $42.08 per tonne to $41.83 per tonne in 2002 03, down from a high of $48.32 per tonne in 1997 98. New contracts negotiated with service providers contributed to AWB achieving this reduction in costs while maintaining and increasing the level of service required to receive, store and move AWB National Pool wheat. On behalf of growers, AWB enters into complex contractual relationships with service providers based on a "risk-reward" principle to increase value for the AWB National Pool. For example, a new contract with Queensland Rail provides for more cost-reflective rail rates and establishes a joint management team to manage the freight task. These arrangements will reduce freight rates for growers in that state plus increase the efficiency of the supply chain.

19 These domestic supply chain costs represent a national average standardised to account for fluctuations in volume and location, thereby giving an accurate picture of AWB s performance in managing the domestic supply chain. AWB NATIONAL POOL REAL SUPPLY CHAIN COSTS ($ per tonne) 50 45 40 35 30 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 03 In South Australia, AWB, AusBulk, ABB Grain and the Australian Railroad Group negotiated a two-year industry rail agreement. The focus of this agreement was to take an integrated view of the South Australian supply chain to ensure the optimal mixture of road and rail usage. The overall result of this joint integrated approach has been a 4% rail freight reduction and a commitment from industry to a planning process to ensure the supply chain has the necessary assets and operational arrangements to support the industry in the long-term. To minimise risk for Pool participants, AWB has also used, where appropriate, insurance arrangements to manage the financial exposure in Pool supply chain contracts. For example, AWB took out insurance on the Western Australian rail freight contract. This insurance was put in place to cover the risk of low crop yields and the impact this has on the fixed cost component of the contract. In 2002 03 this insurance cover provided partial protection for growers from the risk associated with the low tonnage. GENERATING EFFICIENCIES A worldwide trend in supply chain management is the move to a consolidated and integrated approach to the supply chain. The benefits from this approach come from enhanced information, greater asset utilisation and leverage in negotiation through economies of scale. The aggregation of the wheat crop under the Single Desk system gives AWB National Pool participants the benefits associated with a national holistic planning process. It also provides growers with greater bargaining power in negotiations with service providers, who often enjoy regional monopoly positions in the supply chain, than they would have as individuals. A critical component of AWB s long-term strategy to reduce supply chain costs is to create a more commercial and transparent supply chain sector favouring innovation, flexibility and investment. Improvements will not occur without ongoing investment and enhanced operational arrangements. AWB has been working with Australia s bulk handlers, transport companies and the Government to seek efficiency gains through increased investment and improved operational arrangements. This includes upgrades to key storage facilities, improving rail-loading infrastructure, the introduction of more efficient rail wagons and rail-track infrastructure. A major focus has been to put in place operating arrangements that allow key storage sites to be available to load wheat to rail 24 hours a day.

20 SUPPLY CHAIN MANAGEMENT Estimated silo returns can be viewed on the AWB website. The site-tosea estimate at the local site is the most accurate representation available to growers from any grain marketing or trading company in Australia. In the life of the 2002 03 AWB National Pool, the supply chain group successfully negotiated with its freight providers to move towards a more cost-reflective pricing structure based on the rail out-loading characteristics of each individual storage site. These rates benefit the AWB National Pool by increasing the AWB National Pool stock ownership in storage sites that are rail efficient. As a result of these initiatives, GrainCorp and Ausbulk have opened up a number of storage sites with 24-hour availability for rail loading. AusBulk have also invested in new mobile rail loading technology called the Ausrail Loader. These mobile rail-loading units increase the capability at some sites by up to 1,000 tonnes per hour. In addition, all new GrainFlow storage sites (owned by a subsidiary of AWB Limited) are available to load to rail 24 hours a day. These arrangements dramatically improve asset utilisation for rail operators, leading to reduced costs for AWB National Pool participants. Another important step towards improved supply chain efficiency is a joint venture agreement signed in late 2003 between AWB and the Western Australian bulk handler CBH. The joint venture, Grain Direct, plans to reduce costs for AWB National Pool participants through further integration of planning and logistical execution to generate improved management of grain logistics in Western Australia. Grain Direct will also manage negotiation and monitoring of contracts with logistics service providers. The aim of this partnership is to deliver net savings in storage, handling and freight costs for Western Australian growers. Savings are expected to be in the order of $35 million per annum by 2008 09, which translates into a net reduction in charges of $3.30 per tonne for Western Australian Pool participants. The savings will be realised over five years. The joint venture is subject to approval by the Australian Competition and Consumer Commission. IMPROVING TRANSPARENCY AND PRICE SIGNALS In response to calls from growers for clear supply chain cost signals, during 2002 03, AWB made available on its website estimated silo returns (ESRs) for every approved storage facility across Australia. On the website, AWB National Pool participants can view the ESR, that is the gross Pool return for a particular grade of wheat minus the estimated site-to-sea costs for delivering to an export position from their local site. This means growers now enjoy open access to current information on all three elements that comprise site-to-sea costs up-country storage costs, freight costs from storage to port, and port costs including bulk handling companies port costs.

21 AWB s strategy to reduce AWB National Pool supply chain costs is to create a more commercial and transparent supply chain sector. The site-to-sea estimate at the local site is the most accurate representation available to growers from any grain marketing or trading company in Australia. Unlike cash price sales the AWB National Pool process is an accurate representation of anticipated Pool returns and charges that will be incurred. No grain trader or other Single Desk operator in Australia provides this same level of transparency. Providing the site-to-sea cost estimate is an ongoing undertaking. The estimates on the website are updated as new information becomes available, including changes to the sales program, crop estimates and service provider charges. Consequently, the estimates will change over time. For example, increases in estimated crop production could lead to an increase in the estimated storage cost. Conversely, increased demand for Australian wheat could improve the forecast sales program, which would reduce storage charges. All information can be accessed from the AWB home page under the growers section at www.awb.com.au. STOCK RECONCILIATION At any one time, AWB holds several seasons of physical AWB National Pool stock. This can occur for a range of reasons. For example, in New South Wales, AWB has held Pool wheat for several seasons due to the difficulties encountered in clearing stock which has been blocked in by more recent receivals and instances of the quality characteristics of old season stock not meeting the required cargo accumulation profiles during the periods of potential access. The 2002 03 drought provided AWB with the opportunity to clear much of the older AWB National Pool stock from the system and as part of this process identify and reconcile any residue wheat parcels. In so doing, some difficulties were encountered. Complexities in stock accounting due to the inability to weigh individual rail wagons on outloading inevitably leads to variations in intra-system tonnage allocations. To address some of the variations that were uncovered in 2002 03, AWB and GrainCorp are currently completing a detailed stock reconciliation across three states and six seasons of deliveries. While this process is incomplete, it has highlighted a potential negative physical and accounting position which has been provided for by AWB. AWB's ability to handle the complexities associated with this reconciliation has been significantly improved by AWB's investment in and implementation of improved companywide inventory management systems. AWB is also working with GrainCorp to review their stock management practices and introduce new contractual and processing arrangements to protect the value of all wheat held on behalf of the AWB National Pool.

22 GROWERS SERVICES IN BRIEF RESPONDING TO GROWERS NEEDS IN A DROUGHT SEASON IMPROVING GROWER PAYMENTS BETTER COMMUNICATION POOL FORUMS, GROWER CONSULTATIVE GROUPS, GROWER ROUNDTABLE INTRODUCTION OF A FORMAL COMPLAINTS PROCESS AND GROWER ADVOCATE GOLDEN REWARDS II WITH MOISTURE SCALE LAUNCHED DEBATE OVER SINGLE DESK AT PORT INDEPENDENT SURVEYS CONFIRM SUPPORT FOR THE SINGLE DESK AND AWB Working with growers to improve returns The interaction between the manager of the AWB National Pool and growers is a critical component of AWB s performance as the Single Desk manager. In 2002 03, AWB introduced measures to improve services to growers, including Golden Rewards II, special drought segregations, the AWB National Pool forums and the Grower Consultative Groups. DROUGHT RESPONSE A key benefit of the Single Desk system is that AWB acts as the growers buyer of last resort. Acting under this obligation, AWB often opens up off-grade segregations to ensure growers are still able to sell their wheat when it fails to meet normal receival standards. The drought meant many growers struggled with high screenings and, as a result, AWB extended screenings levels for Australian General Purpose to 15% and for Feed to 30%. A segregation known as Australian Extra Hard was also established to capture as much high-protein, low-screenings wheat as was available to ensure premium customer requirements were met and grower returns maximised. AWB s active management of the export crop also had tangible benefits for the broader rural sector domestically. By redirecting shipments away from the east coast and making available Pool stocks in Queensland, New South Wales and Victoria for farmers and other domestic users, AWB maximised returns to Pool participants while also creating a crucial source of grain that would otherwise have been unavailable. New South Wales Premier Bob Carr recognised the benefits of AWB s actions in relation to the drought, stating in 2003: I pay tribute to the AWB for thinking of our farmers first.

23 RURAL PRESS SURVEY (Percentage) How do you rate AWB s management of the Single Desk? 50 40 30 20 The survey was conducted by Rural Press Ltd and published in Rural Press publications on 28 August 2003. The survey involved interviewing 1,011 Australian grain growers and should yield a result within plus or minus 3%, 95 times out of 100. 10 0 Excellent Very Good Good Fair Poor Unsure AWB staff also made their own contribution to droughtaffected communities. Combined staff and company fundraising activities in 2002 raised $35,000 to support activities such as concerts and children s Christmas parties in 24 drought-affected towns across the wheatbelt. GROWER PAYMENTS One of the most important activities AWB undertakes is to pay growers accurately and on time for their AWB National Pool deliveries. The Board of AWBI monitors AWB s payment performance against a target of 99.5% of AWB National Pool distribution payments to growers being made within seven days of payment rates being determined. The execution of payments and the related paperwork has become more difficult as complex pay arrangements under Golden Rewards have been introduced at the same time as more growers have been taking advantage of greater flexibility in marketing, risk management and payment options. In addition, accounting for the goods and service tax is now required. Nonetheless, AWB is determined to overcome these complexities and improve its performance in this area. AWB recognises the difficulties and frustration late payments have caused many growers in the past, and policies are in place to ensure growers are compensated out of AWB Limited s funds for delays or incorrect AWB National Pool payments. Furthermore, AWB is currently addressing the underlying causes of problems with payments and paperwork, and is committed to providing growers with better service. Improved performance has already been seen in this area, with 99.5% of growers paid on time for the final distribution of the 2002 03 AWB National Pool. Also, at the time of writing this report, 99.65% of growers who delivered to the 2003 04 AWB National Pool had been paid within the set timeline. COMMUNICATING WITH GROWERS A major initiative to improve grower communication, the AWB National Pool forums, was launched during the life of the 2002 03 Pool. These forums provide growers with the opportunity to hear first-hand from AWB staff on the operations, performance and future strategies of the AWB National Pool. In 2002, AWB held the first forum in Dallwallinu, Western Australia, with more than 300 growers in attendance. In 2003, AWB extended the concept, holding four more forums in Bendigo, Victoria; Clare, South Australia; Narrabri, New South Wales; and Corrigin, Western Australia, with well over 1,000 growers attending. AWB plans to continue the Pool forums in coming seasons. In August 2004, AWB National Pool forums will be held in Morawa, Western Australia; Esperance, Western Australia; Cummins, South Australia; and Wagga Wagga, New South Wales.

24 GROWERS SERVICES Grower, Craig Prescott (left) and Matthew Holgate (State Grain Manager, Victoria). Golden Rewards eliminates cliff face pricing so there are no severe penalties for growers if their wheat narrowly misses the mark on one of the designated quality attributes. AWB has also established a national Grower Consultative Group (GCG) network. Across the wheatbelt, 14 GCGs have been created, consisting of up to 12 growers each and reflecting a diverse range of views, priorities and production levels. These GCGs act as a medium for growers to provide input into AWB s operations and direction. In early 2004, GCG members congregated in Canberra for their first national meeting the Single Desk Summit. The summit, held over two days, brought together more than 150 growers from the GCGs with farm lobby group representatives and the grower-elected AWB Board members to interact with key national decision-makers and to discuss the future direction of the AWB National Pool and the Single Desk. Another step to improve AWB s consultation with growers has been the formation of the Grower Roundtable. This brings together around 20 of Australia s leading growers to meet regularly with AWB s Managing Director, Andrew Lindberg, to advise on new initiatives and strategic direction. To safeguard individual growers in their dealings with the AWB National Pool, AWB has formalised a complaints process and has appointed a Grower Advocate. Under the new system, the Grower Advocate seeks rapid and mutually beneficial solutions to growers complaints. The process complies with the Australian Standard for complaints handling (AS 4269) and offers the right for growers to request intervention (by the Grower Advocate) if they feel their rights have not been observed in the process. GOLDEN REWARDS II Since 2000, AWB has operated the Golden Rewards payment system for the AWB National Pool. This innovative system consists of a series of discrete paygrades incorporating active payment scales for protein and screenings levels. Golden Rewards eliminates cliff face pricing so there are no severe penalties for growers if their wheat narrowly misses the mark on one of the designated quality attributes. AWB developed Golden Rewards so that growers are more accurately rewarded for the quality of their wheat. The system provides a financial incentive for growers to improve the overall quality of the AWB National Pool and better match Australian production with international demand. In line with these goals, a third active payment scale, for moisture content, was introduced to Golden Rewards in 2002 03. This was launched under the title Golden Rewards II. Dryness in wheat is an attribute valued by most processors, and now AWB rewards growers for responding to this specific market signal. Golden Rewards II, incorporating a scale for moisture, means AWB now operates the most sophisticated wide-scale payment system for wheat producers anywhere in the world. The value of Golden Rewards for wheat growers is demonstrated by the average payment made for APW in 2002 03. While the APW paygrade was finalised at

25 BINNING LINES VARIETAL PAYGRADES 0.4% APH2 9.5% H1 11.4% H2 2.5% AUH2 0.6% APW1 31.2% APW2 0.7% PWT 22.2% ASW1 10.5% AGP1 0.2% FEED1 0.5% SFT1 8.3% ANW1 1.1% DR1 0.2% DR2 0.6% DR3 0.9% APH 10.0% AEH 19.5% AH 1.9% AUH 34.4% APW 0.7% APWT 17.7% ASW 2.9% AGP 0.2% FEED 0.5% ASF1 9.9% ASWN 2.0% DURUMS The improved distribution of equity resulting from the Golden Rewards payment system is illustrated when paygrade tonnes (varietal paygrades) are compared to the way wheat was received and binned (binning lines). For example, 30% of AWB National Pool tonnes were paid in the Hard wheat paygrade (AH and AEH) while only 21% of wheat was actually binned as Hard wheat (H1 and H2). This shows how the value of growers wheat is being improved through Golden Rewards. $258.39, the average payment made to growers was increased by additional payments of $15.82 per tonne for protein, $5.47 for screenings and $6.43 for the new moisture scale. This means that, thanks to Golden Rewards, the average APW grower who delivered to the AWB National Pool in 2002 03 actually received $286.11 per tonne, a bonus of $27.72. DEBATE OVER SINGLE DESK AT PORT During 2002 03, some domestic commercial interests promoted removing AWB from the domestic supply chain and moving the Single Desk to a free-on-board (FOB) or at port position as a way of reducing supply chain costs. While they were at times vague about their preferred model, these groups were effectively advocating the abolition of AWB s role in negotiating storage, handling and transport rates on behalf of AWB National Pool participants. AWB raised serious concerns over this proposal because it would remove the Single Desk manager s crucial role in total crop management from paddock to plate while doing nothing to reduce supply chain costs. Under the FOB Single Desk model, the AWB National Pool would receive the grain at port and simply act as an international sales agent for the wheat crop. AWB believes this would increase risk to growers, while eroding the quality profile of the crop and making it far more difficult to meet premium customer requirements. Removing AWB s direct interface with growers would also mean blending revenue would be received by bulk handlers rather than growers. Golden Rewards would also be rendered unsustainable. A constructive industry debate took place on the benefits of a move to an at port Single Desk and the proposals of the regional monopoly bulk handlers were rejected by the vast majority of growers at a range of meetings and forums across the country. During 2002 03, growers reaffirmed their support for the current Single Desk system. In a comprehensive, independent national survey undertaken by Rural Press and published in August 2003, 82% of growers supported the system and 79% regarded AWB s management of the Single Desk as good, very good or excellent. A Kondinin Group survey, published in 2004, found 82% of growers supported the principle of Single Desk marketing and 78% supported the current arrangements for the export of Australian wheat, managed by AWB.

26 CROP SHAPING AND RESEARCH AND DEVELOPMENT IN BRIEF INDEPENDENT APPOINTMENTS TO THE WHEAT CLASSIFICATION PANEL INAUGURAL AWB NATIONAL POOL WHEAT BREEDERS FORUM CROP SHAPING WEBSITE LAUNCHED STRATEGY TO INCREASE MARKET SHARE IN ASIA WORKING WITH THE GRAINS RESEARCH AND DEVELOPMENT CORPORATION MULTIPLE RESEARCH AND DEVELOPMENT PROJECTS POSITIONING THE POOL ON GENETICALLY MODIFIED GRAINS Shaping the Australian crop AWB s ability, as the service provider to AWBI, to capture and feed back critical information to growers and the grains research community about international market requirements and preferences for Australian wheat, is an important benefit of the Single Desk system. It allows AWB to directly and indirectly shape the quality profile of the Australian crop. There are a number of tools currently used by AWB to shape the Australian crop including sending pricing signals through Golden Rewards, classifying new varieties into grades, setting wheat receival standards and providing market information directly to wheat breeders and growers. Achieving the AWB National Pool goal of selling 60% of export wheat to Asia by 2008 requires active shaping of the profile of the Australian crop. In 2002 03, a number of measures were launched to improve the quality profile of the crop and better link it with international demand. These included expansion of the Golden Rewards payment system to include an active payment scale for moisture, improvements to the variety classification process, the introduction of a range of new information sources for wheat breeders and the launch of a strategy to enhance market share in Asia. Combined with the annual setting of wheat receival standards, these measures ensure Australian wheat maintains a competitive advantage with premium customers over other suppliers. WHEAT VARIETY CLASSIFICATION One of the primary tools in crop shaping is variety classification. This involves categorising varieties into a commercial type or style of wheat recognised for its enduse capabilities. End-users require wheat that delivers consistent processing performance, so it is imperative that classification is undertaken with detailed knowledge of the world market and customer preferences. AWB classifies wheat varieties to ensure Australian growers can access new varieties confident they will meet the requirements of international customers. In undertaking this role, AWB is driven by the obligation to maximise grower returns by improving both the quality and size of the Australian crop. With the changing, increasingly privatised, structure of wheat breeding in Australia, attention has been focussed on the transparency and independence of AWB National Pool s wheat variety classification process. AWB is committed to managing the classification process in a transparent manner that has the confidence of the industry. Correct variety classification is the first step in ensuring maximum returns for growers and so is of primary importance to AWB as the Pool manager. Consequently, AWB undertook a review of existing processes and procedures to identify areas where changes could be made to give growers and breeders greater confidence while maintaining the integrity of the system.

27 AWB, as the single seller of Australian wheat overseas, is able to provide strategic market signals to wheat breeders. This review resulted in a number of initiatives addressing the issues of transparency and independence. These included creating a more formal process with fixed dates for the review of new varieties and restructuring the Wheat Classification Panel, the body responsible for classifying wheat varieties acceptable for delivery to the AWB National Pool. This restructuring involved opening up three new, independent positions on the Wheat Classification Panel. Two positions were made available to industry experts external to AWB and a third to the Flour Millers Council of Australia. In addition, an appeals process was established, chaired by the Grains Council of Australia, to hear any cases from breeders who feel their variety has been incorrectly classified. These moves are part of an ongoing effort by AWB to improve the approval process for wheat variety classification and give heightened confidence that this process is independent and does not conflict with the mandate to maximise returns to the Pool participants. LINKING BREEDERS AND THE WORLD MARKET Developing mechanisms to provide market information to the wheat breeding community to facilitate the creation of new varieties that meet the needs of customers now and in the future is a key AWB objective. Two achievements in this area in 2002-03 were the first annual National Wheat Breeders Forum and creation of the crop shaping website. Given the long-term nature of wheat breeding, AWB, as the single seller of Australian wheat overseas, is in a strong position to provide strategic market signals to those who operate breeding programs. The inaugural AWB National Wheat Breeders Forum was held in Melbourne in January 2003. Over 100 plant breeders, cereal scientists, representatives of the Grains Research and Development Corporation (GRDC) and marketers attended the forum. The aim of the forum was to provide breeders with clearer market signals and increased information on demand as well as consumption trends for Australian wheat. AWB presented information on AWB National Pool pricing, supply and demand analysis, and future market strategies to ensure a complete information loop between international wheat buyers and the domestic research community. This forum will now be a regular event and is crucial to the long-term improvement of the Australian crop quality profile. To complement the Wheat Breeders Forum, a crop shaping website was launched in 2002 03. The website is designed to provide sensitive market and quality information from the AWB National Pool to wheat breeders in Australia. This is an important innovation that has been developed to continue to build the competitive advantage of Australian wheat internationally.

28 CROP SHAPING AND RESEARCH AND DEVELOPMENT Pricing Strategist Campbell Roydhouse To maintain high returns to Australian growers, AWB needs to boost its program of exporting Australian wheat as a branded, differentiated product to premium customers, particularly in East Asia. Access to the website is free, although site access is controlled and monitored to ensure valuable AWB National Pool information does not fall into the hands of Australia s international competitors. The site is updated regularly to ensure that breeders have access to the most current information available. ASIAN MARKET STRATEGY At the 2003 National Wheat Breeders Forum, AWB announced its Asian market strategy to increase exports of Australian wheat to Asia to 60% (or 10 million tonnes in an average year) by 2008. This strategy has been developed to combat increased low-priced competition from non-traditional exporters, such as the countries of the former Soviet Union, into markets traditionally considered Australian. These nontraditional exporters have been increasing their global market share over the past few years by significantly undercutting world prices. To maintain high returns to Australian growers, AWB needs to boost its program of exporting Australian wheat as a branded, differentiated product to premium customers, particularly in East Asia. AWB s Asian strategy builds on Australia s natural freight advantage into East Asia and reflects the quality discerning and often premium paying nature of the Asian market. To achieve the AWB National Pool s goal for Asian sales, the industry needs to develop products better suited to the requirements of Asian customers. Like the successes in the past of developing targeted noodle wheat varieties for North Asian markets, AWB and the grains industry need to develop varieties and blends that meet customer expectations. AWB is currently working with breeders to develop hard varieties better suited to bread production techniques in Asia to displace US Dark Northern Spring and Hard Red Winter, and Canadian Red Spring wheat, as well as developing softer varieties for the production of biscuits, cakes and pastries to compete with US Western White and Soft Western White varieties. ACTIVE RESEARCH AND DEVELOPMENT Each season, a grain industry levy is collected from all grain producers, matched by the Federal Government. These funds form the research budget of the GRDC. The GRDC represents the primary source of funds for research into wheat varieties in this country. AWB has invested in a range of research and development projects designed to benefit the AWB National Pool, and in the future we will be looking to develop a closer alliance with the GRDC to streamline and better focus these investments in wheat research and development.

29 NON-TRADITIONAL EXPORTERS INCREASING GLOBAL MARKET SHARE (Millions of tonnes) 120 100 80 60 40 20 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 Traditional exporters (US, Australia, Canada, EU, and Argentina) Non-traditional exporters (Russia, India, Ukraine, Kazakhstan, etc...) Low-priced non-traditional exporters have increased their share of world wheat trade significantly in recent years. A major challenge for the AWB National Pool is to combat this competitive threat by enhancing its strategy of marketing Australia s wheat as a branded, differentiated product. Successful crop shaping and research and development programs are crucial to realising this strategy. During 2002 03 activities and projects AWB has invested in include: A project evaluating the quality of wheat from international competitors compared to Australian grades. A project evaluating the impact of flour improvers on the end use capability of Australian wheat and how this information can be used to increase the marketability of Australian wheat. A project evaluating the quality differences between different mill streams and how this information can be used to improve the usability of Australian wheat. A project to enhance crop forecasting capability particularly in relation to the quality profile. A traceability project looking at the capacity in Australia to handle heightened identity preservation within the central storage system. In 2003, AWB undertook a comprehensive survey of customer views on agricultural biotechnology and GM grains to better position the AWB National Pool in relation to the new technology. This survey covered the potential impact of the commercial release of GM wheat varieties, as well as issues relating to the adventitious presence of GM material in non-gm wheat shipments. The findings of the survey have been shared with key stakeholders, including grower groups, life-science companies and State and Federal Governments, to ensure the release of GM grains occurs to the benefit of AWB National Pool participants. GENETICALLY MODIFIED GRAINS During 2002 03, AWB has been an active participant in industry committees and discussions to assist with the responsible management of any introduction of genetically modified (GM) grain varieties into commercial production in Australia. Both internationally and domestically, GM grains have become a contentious issue and AWB is actively working with customers to understand their preferences on this issue. In the GM debate, AWB is driven by its mandate to maximise returns to growers who deliver wheat to the AWB National Pool.