February 3, 2006

Australia Wheat Inquiry Threatens Rift with U.S

By Michael Byrnes

SYDNEY -- A wheat war between Australia and the United States has threatened a political rift between the two allies after dramatic allegations of kickbacks to the regime of Saddam Hussein by Australia's monopoly wheat exporter, AWB Ltd.

The Australia-U.S. alliance, strengthened during the 2003 military invasion of Iraq, is showing cracks as the world's two biggest wheat exporters slug it out over Iraq -- one of the world's largest markets for the grain.

A 2005 U.N. report into the now-defunct oil-for-food programme has accused the AWB, the main exporter of food to Iraq in the 1990s, of paying up to $222 million to Saddam's government under the program.

A government inquiry now underway into whether the AWB broke Australian laws in its Iraq wheat deals has uncovered AWB documents showing wheat contracts were inflated with "trucking and service fees" which went to the Iraq regime.

Local media on Thursday published a letter from the head of a U.S. Senate subcommittee investigating oil-for-food, asking a former Australian ambassador to Washington to explain why he told the committee in 2004 to ignore media reports of AWB kickbacks.

"I am deeply troubled about your emphatic denials ...," Norm Coleman, a Republican senator from Minnesota, wrote in the January letter.

The Sydney Morning Herald said Coleman also wrote to the current Australian ambassador, Denis Richardson, saying evidence suggested Australian officials were complicit in AWB activities.

The letters prompted a sharp reaction from Prime Minister John Howard, who accused Coleman of misstating facts.

"His letter actually alleges that evidence has been provided of complicity by the government. Now that's wrong," Howard told Australian television on Friday.

"Let's not get starry-eyed about the Americans, they're going in hard to protect their commercial wheat interests," he said.

Foreign Minister Alexander Downer said any suggestion that the Australian government knew of any illegal AWB activities were a "preposterous distortion."


The inquiry has fractured the Australian grains trade, with competing interests now maneuvering to grab the government-granted monopoly from AWB, say industry analysts.

"It is exactly what the Americans want," a wheat trader said.

Australian wheat trade is worth about A$4.0 billion (US$3.0 billion) a year and Iraq has been the country's largest market.

Saddam locked out American wheat from Iraq after the Gulf War of the early 1990s, leaving the market largely to Australia. This added to American anger over Australia's wheat monopoly export system, which U.S. producers say hinders competition.

On the other side of the Pacific, Australian wheat producers accuse their U.S. counterparts of distorting world markets through Washington subsidies.

Wheat producers in both countries have political clout in conservative electorates which can sometimes determine elections.

A former Australian diplomat who helped negotiate wheat deals in the Middle East said U.S. wheat traders would love to see the Australian monopoly system dismantled and saw the latest revelations in the AWB inquiry as strengthening their case.

"There's a feeding frenzy going on," said Bruce Haigh.

Last October's U.N. report by former U.S. Federal Reserve Chairman Paul Volcker said that under the oil-for-food program, Iraq sold $64.2 billion worth of oil to large corporations in the United States, Russia, France and Germany to pay for food and humanitarian supplies.

A former AWB executive told the Australian inquiry this week that paying fees was common practice in the Iraq wheat trade by not only Australian but European and Russian firms.

The main lesson in the AWB's oil-for-food revelations was just how dirty and brutal the world-wide commodity trade was, said former Australian diplomat Haigh.

"It's a pretty rough market out there. Commissions and other incentives have to be given. But was A$300 million ($222 million) too much? It becomes a commercial question, not an ethical and moral question," he said.