Is the Video Working! You bet your ASS it is!

[charliep]

Just to correct you chuckChuck, I will note that the US remains the largest
world wheat exporter with volumes closer in the range of 25 to 35 million
tonnes range. That compares to Canada at 15 to 18 million tonnes. If your
arguments about single desk/price differentiation were accurrate in the
real world (not the theoretical world of University), then Canada would
extract premiums and have higher returns. Your comments highlight the
fact that the CWB price differentiates which means they do obtain
premiums in some markets, other markets they sell at effectively US prices
and other markets, they effectively give wheat away in competition with
the lowest price markets or by applying higher grades than necessary on
sales contracts. The net costs of selling in highlight competitive lower
price wheat markets out weights the benefits of the so called premium.

On the premium, you have never indicated how much of the premium is
single desk and how much is Canada ability to supply high quality product
and superior service. If the driver is high quality product and superior
service, why couldn't an open market provide the same thing. Or heavan
forbid I would say this, make a CWB relevant in an non single desk/open
market.

To put the ball in your court, neither you or the CWB has shown CWB
benefit.

[chuckChuck]

John, You explained the theory of arbitrage but what actually happens in the real world day to day year to year?

Perhaps markets arbitrage efficiently some of the time but what about when the price discovery of futures markets isn't working properly? See link from March 2008 NY Times that discussed the problems in the wheat futures of 2007 2008.
http://www.nytimes.com/2008/03/28/business/28commodities.html?pagewanted=1&_r=1&ref=business& adxnnlx=1206705601-Zl5nd64ni9QdCjmIUaDPQg works

Charliep in the previous comment confirms what I have been talking about is that some markets pay more than others. I am not sure why arbitrage alows that to happen?

When the CWB posted a premium of 6.65 in 2008/2009 that includes all grades of wheat. It is unlikey that there is little if any premium in the highly competitive lower grade markets. But it is likely there is a lot more premium in the top quality grades. I am assuming that the premiums are passed on to farmers with higher prices for higher grades.

What happens in commodities without good public price setting mechanisms like futures market? I suspect that these markets are not as efficient.

Charlie, I know that the US is a very large exporter but they also consume alot more of their own production proportionately than Canada. If North America is a premium price market for high quality which I believe is true, then the higher proportion of domestic consumption in the US would be a price advantage to US traders and farmers.

Another way to put it is we are more dependent on a basket of export markets many of which do not have much premium if any because of competition from other suppliers.

The premiums you talk about it are undoubtedly due to service and quality. The question is would the open market pass on the premiums as effectively and fairly as the CWB?

I know that in markets without good public price discovery there are a wide range of farmer selling prices and this results in a range of margins for traders. Do traders always pass on the good margins? I don't think so.

In an open market without a guaranteed supply it would be unlikely that the CWB could provide the same level of service.

Whether we like it or not we have little choice but to sell most of our wheat production each year. Unfortunately we are competing with very low quality suppliers. There is a small limited premium market for Canadian high quality and service.

In an open market system the job of the trader is not to maximize returns to the farmer. Their job is maximize returns for the owner shareholder by maximizing margins between buying and selling prices.

[charliep]

So growers of 1CWRS 13.5 protein are paid the full value of the grain
that is sold to the Japanese/other premium markets? Likewise,
growers of mid quality grain or grain that is sold at discount into a
highly competitive market (say against Ukraine/Russian competition) is
signaled back to the farmers that grew the grain for those markets?

My understanding is that the benefit of premiums sold into some
markets is shared in the pooling of grain prices as is the pain of
discount markets. Perhaps in the most telling component is the
average price of Canadian wheat by your own admission is less than US
grain. Both the US and Canada sell competitively into similar markets.
The only difference is the US farmer is able to make decisions on
market signals with the ultimate threat to leave their grain in the bin.
The Canadian farmer is denied this opportunity and instead is expected
to respond to a command/control system. The Canadian farmer is able
to survive in an open market setting for most crops including the lentil
examples you use. Both lentils and durum prices went into the
crapper. They just took different roads to get there with different
supply chains along the way.

Don't agree with argument about the percentage domestic share
Canada versus the US. The most the 2 markets should vary is freight
costs. Works that way with oats. Canola (except the freight direction
is north). Even US corn. Arbitrage does work as long as there are no
artificial barriers. The bogey man is the US shutting down the border
but note that hasn't happened with other crops. You will have to do a
better job of demonstating your logic.

[charliep]

Perhaps the weirdest concept I ever heard while I was inside the
CWB and on the outside was the CWB could manipulate US prices
by choosing to sell or not sell into that market. My thoughts that
not selling the highest priced market on a return to pool basis (US
is likely more like what I would call a mid priced market by the
way) and then selling outside off shore markets for lower prices
was just plain stupid. But maybe I never had it explained right.

Perhaps an even weirder concept was denying a farmer the right to
sell their grain (not the CWB's wheat, not other farmers in western
Canada, not their neighbors grain) for best price available in the
market place on a given day at their farm gate. Could they leave
money on the table - absolutely. But what is the cost of the
current regulated command and control system?

[dak7]

Interesting thoughts Charlie.

Sounds like the CWB internal culture is flawed...they think they can manipulate the price of a commodity like wheat in this global market.

[bucket]

When I market my peas and a mistake is made, I look the guy in the mirror and give him a good talking to.

When the cwb makes a mistake marketing my grain there is no one to answer for the incompetence. You can't talk to the people responsible.

That's why I wish for the cwb to be out of my business or at least accept responsiblity for their mistakes.

[jdepape]

chuckChuck:

You’re getting scattered again. Let’s focus on just a couple of things – the ones that might have an impact on the premiums question.

Arbitrage is not a theory. It is how all markets work “in the real world” – unless they are interfered with or manipulated.

Your example of futures markets does not invalidate the concept of arbitrage in cash markets. In futures, the funds are very large players that can have an impact on the relationship between cash and futures. When you have large players distorting the relationship between two cash markets, then we can talk about how arbitrage isn't working.

Oh yeah – we have that already with the CWB. In feed barley and feed wheat the CWB doesn’t allow the domestic feed markets to arbitrage to the offshore markets.

Poor arbitrage = poor price discovery = poor efficiency.

chuckChuck on premiums:
“When the CWB posted a premium of 6.65 in 2008/2009 that includes all grades of wheat. It is unlikey that there is little if any premium in the highly competitive lower grade markets.
But it is likely there is a lot more premium in the top quality grades. I am assuming that the premiums are passed on to farmers with higher prices for higher grades.”

<b>You “assume”? "Likely"? I’ve never seen anything from the CWB indicating that. But the CWB has said that the grade spreads in the pool accounts are “market-based” spreads. This means that any premiums the CWB might get on high quality sales are shared. You might want to check with the CWB on that.</b>

chuckChuck on the US market:
“If North America is a premium price market for high quality which I believe is true, then the higher proportion of domestic consumption in the US would be a price advantage to US traders and farmers.
Another way to put it is we are more dependent on a basket of export markets many of which do not have much premium if any because of competition from other suppliers.”

<b>You don’t seem to get the idea of arbitrage.

Perhaps this is where we are on different wavelengths. I think what you are saying is that our whole wheat crop is worth less because we sell more of our crop into lower quality markets. But what I’m saying is that when we compare Canadian to US prices, we compare on a grade-to-grade basis - not the whole “basket”.

THERE IS NO REASON TO BELIEVE THAT THE CWB GETS MORE THAN ANYONE ELSE FOR WHEAT OF THE SAME QUALITY AND SALES TERMS.

I don’t want to get distracted away from the earlier discussion about premiums vs costs. You still have not come back with your response.

I would like to get closure on that before we go on.

How about it?

NEGATIVE $3.49/tonne.

CWB’s own numbers. Do you agree with it or do you still refute it?</b>

[chuckChuck]

John,

Below is what the CWB says about many similar points you have raised. I think it well refutes many of your key arguments.

All your musings about arbitrage and your comparisons of US to Canadian prices seem out the window based on what Ian White is saying.

Why you continue to say the CWB doesn't earn premiums after the Informa report clearly says they do, is beyond me.

I am not an expert in this area nor do I have enough information to research this issue further.

Since we elect farmer representatives to oversee the work that the CWB does I will put my faith in them to make sure that they represent the various points of view that are out there on various issues around the operation of the CWB.

I would assume that they are well briefed on the issues.


Alberta report misuses data to reach false conclusions: CWB

August 8, 2008

Winnipeg – An Alberta government report has used false assumptions and selective data to undermine the value of the CWB, its president and CEO Ian White said today.

“This study is badly flawed,” White said. “The authors have made sweeping assumptions to create comparisons so simplistic that they are meaningless.”

The report, commissioned by the Alberta government and prepared by Informa Economics, was released last week. It calculates on page 34 that the CWB earned significant premiums (prices above market values) of up to $33 per tonne in 10 of 11 markets studied, but then uses a number of incorrect assumptions to discount them.

The report wrongly assumes that all wheat is the same and that overall market share is what determines the CWB’s ability to exercise market power, White said. It ignores the crucial fact that the wheat market is not homogeneous, but made up of many segments that purchase specific kinds of wheat. In certain segments, the CWB will hold a very large market share for a particular kind of wheat and thus earn substantial premiums.

Because of its flawed premise, the report selectively focuses on only 11 of the 60 to 70 actual wheat markets the CWB sells into each year – rejecting important, high-value markets like Canada, the U.S. and Europe. Based on false assumptions about what grades or qualities of wheat these markets were buying from Canada, the report then wrongly adjusts and discounts the higher prices achieved by the CWB in 10 of the markets.

“This adjustment does not reflect how grain marketing works in the real world,” White said. “Wheat is different, markets are different and our strategy as a single seller takes advantage of exactly that fact.”

The report also blatantly misuses grain handling and transportation data published by the respected Quorum Corporation, which produces the quarterly Grain Monitor report under contract to the federal government. Quorum emphasizes in its reports that efficiency comparisons cannot be made between wheat and canola based on its calculations of export basis and producer netback for each crop. Yet that is precisely what Informa has done.

Examples of other flaws include:

* Lack of acknowledgement that the CWB’s dominant position in the durum market supports the overall price structure.
* Comparisons to U.S. elevator prices, which are based on a different set of market factors than Canadian wheat returns. American wheat has an intrinsic price advantage due to factors such as the dramatically lower proportion exported from the U.S. (40 per cent compared to 80 per cent in Canada). This means less U.S. grain is sold into diverse markets outside North America where prices tend to be lower and transportation logistics more expensive.
* Handling system costs are counted twice in the comparison between U.S. and Canadian returns for wheat and durum. Farmgate values that already account for system costs are used, then a canola-versus-wheat comparison is added that also accounts for those same costs.
* Failure to account for the CWB’s ability to assure customers of long-term and consistent-quality supply, which is a valuable competitive market advantage, attributable to the single-desk structure.
* Failure to acknowledge the dramatic differences in U.S. and Canadian rail capacity. The study also fails to account for the important role played by the CWB in keeping regulated rail freight rates in Western Canada lower than American rates.

Based on all of the above, the CWB completely refutes a key finding of the report that an open market would generate significantly more revenue for Prairie farmers than the single-desk system.

“It is ironic that this false conclusion is being circulated in a year when the CWB marketing approach has delivered extraordinary returns to farmers,” White said. “We’ve conservatively pegged that benefit at $560 million for 2007-08.”

White said the CWB will conduct further, more in-depth analysis of the report’s methodology and conclusions and intends to share those results when completed.

Controlled by western Canadian farmers, the CWB is the largest wheat and barley marketer in the world. One of Canada’s biggest exporters, the Winnipeg-based organization sells grain to over 70 countries and returns all sales revenue, less marketing costs, to farmers.

-30-

Maureen Fitzhenry
CWB media relations manager
Tel: (204) 983-3101
Cell: (204) 227-6927
maureen_fitzhenry@cwb.ca

[jdepape]

chuckChuck:

Minus $3.49 per tonne.

Agree or disagree?

[chuckChuck]

Disagree! Is Ian White wrong?

[jdepape]

This is a good indication of the problem.

According to its Annual Report, the CWB earned premiums totaling $6.65 in 08-09.

(You seem to agree with this.)

The Federal Grain Monitor reports CWB cost information (provided by the CWB). For 08-09, it (the CWB) reported costs to market wheat of $10.14.

Not a made up number, bot spun to embarrass the CWB - its the CWB's own number.

Add them together and you get a minus $3.49.

And you disagree.

But you don't say why.

Typical.

[chuckChuck]

Jedpape,
Ian White's media release said why your analysis is wrong.