Just for you three amigos Agstar and Burbert, cchurch.

[chaffmeister]

And thanks for making my point.

If the computer manufacturer did pay for the freight to the store, what would that do to the price they would charge the store for the computer?

In the end, it matters little who pays the actual freight bill. The manufacturer still receives the "market price" for the computer.

[dmlfarmer]

chaff and hopperbin. Either of you ever hear of Walmart. Number one company in the world in terms of sales! And their business model is to sell cheaper, (by buying cheaper) than anyone else. why won't grain companies follow this proven business model?

Oh, and why would a multinational grain company buy grain from a central Sask farmer, if a farmer in Australia or Brazil or Russia is willing to sell it cheaper, or if it is cheaper to ship to a buyer from another country. Will not that grain company try to maximize profits by buying as cheaply as they can and minimizing costs of handling?

Like it or not we live in a Walmart world and an individual farmer is and always will be a price taker.

[chaffmeister]

ado - you really have an unfortunate misunderstanding of how grain merchandising works.

Let me explain and take a shot at the CWB at the same time.

CashPlus on malt barley. The brain-child of the CWB. The CWB sets the price to the maltster and then tells the maltster what he can pay the farmer. No pooling, just "cash prices".

So maltster A sells malt to the US and maltster B sells malt to an offshore buyer. Let's say the US malt market works out to a price on the barley of $200 to the farmer. But the offshore market works out to only $160 to the farmer.

So here you have two buyers competing for the same barley but one can only pay $160 while the other can pay $200.

Who gets the barley?
(Hint: Maltster A at $200/t)

Is maltster B happy with this situation?
(Hint: No.)

So here you have a situation where one buyer can't compete with the other because the price he can pay is too low.

That was my shot at the CWB.

_______________________________________


Now for the point on grain merchandising. You're right - your example was over-simplified. Handling grain is NOT made up of a series of discrete sales (tenders), covered individually, then onto the next. Grain merchandising is dynamic and fluid - selling and buying on the same day, carrying inventory, shorting, basis appreciation, hedging, lifting hedges, rolling hedges, spreading, blending, logistics, arbitrage, optional origins (for you, Larry) and so on.

On any given day or any given period there are numerous potential trades to make - some good, some not so good. A merchant's job is to find the good ones and execute. Go for the highest priced sales because those are the ones that'll pay the margins and allow you to lead in the country by paying more than anyone else.

The last thing a trader wants to do is to have to tell his boss that he got all the low priced sales and it's going to be tough to compete in the country. Margins will be thin.

When Japan is paying $450 for canola but Mexico is only willing to pay $400, do you think anyone sells to Mexico? Based on your logic, they would do it for the volume. But they don't - if you wanna know why, just re-read what I just wrote.


You wanna divorce grain handling and purchasing - "we would see a benefit from competition but not with the bastardized system we have now."

Guess again.

The CWB system already separates grain handling and purchasing - and that's why we have the bastardized system we have - and why you end up with elevation and cleaning deductions that confuse you to think you're paying for something someone else should pay for.

[chaffmeister]

dmlfarmer:

You ask: "Will not that grain company try to maximize profits by buying as cheaply as they can and minimizing costs of handling?"

Absolutely.

What I don’t get is how you guys can see THAT part of the equation but don’t see the obvious other side:

<b>Will not that grain company try to maximize profits by SELLING as high as they can and minimizing the cost of handling?</b>

To me it’s obvious. They won’t sell into a hole any more than they will buy on the rooftops.

[dmlfarmer]

chaff, you just answered your own question. All buyers will buy as cheaply as they can, including the US maltster in your own example. Buying price is not set by the highest seller, but by the lowest seller. In your malt example, if someone is willing to sell at the $160 per tonne, very soon the US buyer will drop his offer to that $160 level too. It makes no differenc in a global market if that seller is your next door neighbor, or a farmer in Brazil. If the US malt buyer continues to pay $200 for malt when sellers are accepting $160 the US malt company shareholders are not going to be happy campers.

The other factor which you ignore is there is a finite number of dollars which are available to purchase the grain. Do you think the one billion people currently mal nourished are hungry by choice or is it a lack of money to buy food? As prices rise, volume drops in all commodities(remember potash). Grains are no different. As price goes up the amount traded drops. So grain companies maximize profit by minimizing costs (as you agreed with) and by maximizing handle. Getting the highest grain price MAY not be as profitable as getting a lower price and selling more grain. Remember Walmart.

[chaffmeister]

Dmlfarmer:

It was unfortunate to use the malt example – I just wanted to highlight what was REALLY happening under the CWB, but it may have just confused the matter.

Let’s get back to the issue – ado’s contention that “At the end of the day if the board is scrapped there will be about six grain co.'s fighting not to purchase our grain a higher price but to sell it at a lower price”

I get concerned when people think that when grain companies compete they have an incentive to drive the price to zero. My point is – as a trader you want to make the high-priced sales.

When you think about the price getting driven down, look in the mirror or around the table in the coffee shop. Farmers pressure prices lower (for cash flow), grain companies will only offer at prices where they know they can buy it from farmers. Think about why basis levels in canola are weakest in the fall and get better over the rest of the year. Selling pressure from farmers followed by a lack of selling by farmers.

Sage advice I got when I was a trader: “don’t sell a market the farmer won’t sell.”

Yes, grain companies want volume. They get that by keeping their costs low and making sure they are the best sellers out there – not the cheapest.

Think of my canola example. No one sells to Mexico when others are selling to Japan at a higher price. Why? Because they would have to compete with the Japanese business at higher prices.

WalMart is different. Because of its size, manufacturers fall over themselves to do business with them. Before they can even get their product on a Walmart shelf, manufacturers get pummelled by Walmart for price and volume commitments. Walmart then can go out with the lowest prices to the consumer.

I don’t know of any grain company that does that. “I’ll take 90% of your production capacity over the next three years at 50% lower than the rest of the “market”. No farmer would do it either.

[dmlfarmer]

"My point is – as a trader you want to make the high-priced sales."

Sorry Chaff, I disagree. As a trader I want to maximize profits! That can be done by getting the maximum possible for my product (ie potash corp) or it may be by maximizing volume (ie Walmart). Both are valid business models. Unfortunately the Walmart model has proven more successful because the final consumer does not want to pay a high price for anything - including the food that they eat. They too want to buy as cheaply as possibe.

While you as a grain seller wants a high price, you as a buyer of farm imputs wants a low price. There is even a thread on Agri-ville celebrating who buys fertilizer this year the cheapest. Do you really think the fertilizer manufacturers or retailers appreciate farmers competing to see who can purchase the cheapest fertilizer any more than farmers appreciate countries and corporations trying to minimize the price they pay for the grains we have to sell?

I agree fully with your statement "don't sell a market that a farmer won't sell" however "farmer" does not just include western Canadian farmers but every farmer reached by the companies buying the grain. Given the 4 major grain companies are multinational and can source grain anywhere in the world - the price we get is set not by western Canadian costs of production but by the lowest price farmers around the world are willing to sell for.

Finally, with your Japan/Mexico example- what happens when Japan is no longer buying? If Mexico is the only other buyer at that time and farmers need to sell, will not the price fall to what Mexico offers? Then when Japan needs more canola, will they again pay what they were paying or will they offer what Mexico is paying?

My point is: In a competitive selling enviornment with many sellers and few buyers, who sets the price the seller who wants a high price or the buyer who wants a low price?

Both the cattlemen and pork producers have learned this lesson the hard way. Why cannot grain producers understand this?

[ado089]

How many times do I have to say I don't support this board, I support the concept so stop arguing the stupidity that we've all acknowledged is the current CWB. One of the reason we have this b.s. rip off of a handling/purchasing system is because one way or another we already open market selling, it just get's pooled up before it hit your bank account. All our grain co.s are out there selling our wheat on our behalf as lisecened merchants of the wheat board, tripping over each other so they can win those tenders and handle that grain. SO there's problem number 1 the fox is guarding the hen house. As far as the shipping goes, my 1,500mt of wheat/yr is peanuts, but someone buying a vessel of wheat is probably going to demand and get a better shipping and handling rate, so yes it does make a difference who foots the bill. To your trader 5 years out of commerce, looking to make the big bucks and maker big, he's not going to want report to his boss and tell him that he lost $10million in handling proffit because he was 10 cents a bushell on a 200,000mt tender. I really don't know how you are figuring that price discovery in the country is going to lead to anything but the absolute lowest price farmers are willing to pay. I'm pretty sure last time viterra was $60/mt cheaper for urea you didn't go running to JRI to pay more beacause you were able to sell your canola at higher price. To that mexico/japan scenario, as nice as it is to think things work that way, they don't. They may have different limits on what they pay and they may give clues to that via their hedging activity and resulting market reaction, but at the end of the day there is a tendering process and may the lowest bid win.

[chaffmeister]

To dmlfarmer:

"My point is – as a trader you want to make the high-priced sales."
Sorry Chaff, I disagree. As a trader I want to maximize profits!

And you do this by avoiding high-priced sales?

You make my point over and over. The best one is this: “the price we get is set not by western Canadian costs of production but by the lowest price farmers around the world are willing to sell for”.

I also like: “I agree fully with your statement "don't sell a market that a farmer won't sell" however "farmer" does not just include western Canadian farmers but every farmer reached by the companies buying the grain.”

I note you correctly identified farmers as the sellers that determine the market price and I agree it doesn’t matter where those farmers are.

By the way, nor does it matter that “the 4 major grain companies are multinational and can source grain anywhere in the world” – they compete at the consumer’s door. Even if a particular seller can’t source from say Australia, they still compete with Australia and the prices Australian farmers are willing to accept.

You also support my position with “While you as a grain seller wants a high price, you as a buyer of farm imputs wants a low price.” (Yet you disagree with me when I say a trader wants to make high-priced sales. Hmmm….)

There are three ways to make money in merchandising: sell well (high), buy well (low) and reduce costs.

Walmart has chosen to be the best at buying well and reducing costs. Because they have such low costs they can offer prices below everyone else and still make money.

But Walmart – like grain traders – don’t sell anything at a price that their suppliers won’t sell for.

Now if I could talk you and other farmers into selling your grain to me cheaper than you sell to anyone else, then I could become the Walmart of the grain business.

On fertilizer etc, I doubt fertilizer companies give much thought about farmers “competing” to see who can buy fertilizer cheaper. They expect it. Farmers should expect the same from their buyers.

About Japan/Mexico – if there is a need to sell more canola than the traditional buyers like Japan and domestic crushers will take, supply exceeds demand at those prices. Economics 101 says the price will need to drop to increase demand to clear more canola from the market. This drop in price attracts new buyers (Mexico) and market equilibrium is achieved.

To your point: “In a competitive selling enviornment with many sellers and few buyers, who sets the price the seller who wants a high price or the buyer who wants a low price?”

Answer: both.

[ado089]

Wow, I don't know how I could have been so wrong to think that a company is going to pay the least they can for the goods that they are re-selling and that they would compete with their rivals for the customers buisness and that people will alway buy the cheapest product that satisfies their needs. Where did I ever get that idea from. Damn I'm glad someone was here to straighten me out on that.