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

[bucket]

chuckchuck

You do realize that the US buys grain from the cwb and then are able to export their poorer quality around the world, currently at a premium to the cwb?

In durum, they buy our product so they can access the higher quality pasta markets like Japan.

Unfortunately, the cwb never allowed a pasta plant to be built, so the US did it and buys our durum. Its called a value added business. the US just buys durum, pretty simpple compared to a canadian that has to re buy something they already own.

BTW, on the canpotex thing, do you think that mosaic buys back its product to sell into the US????

Trucks come up with feed wheat to terra and reload with potash or nitrogen, and back to the US.

[chuckChuck]

Bucket,
What was the US market for Durum indicating at the same time? Why not just use US market indicators if you don't trust the PRO?

[bucket]

chuckles

The point being the US market was also positive on durum BUT they could sign a contract for that price at the time. Farmers couldn't get close to 7bucks USD in feb 09.

If a western canadian farmers could sign a contract for durum based on the PROs, there is a pretty good chance the cwb would gain some support. But when they put out a PRO and lower it continually and then only accept one third of the 09 production that is incompetence. AND someone at the cwb should have been taken to task on that.

[jdepape]

In the interests of “informed debate” I will venture into your discussion topics, assuming in good faith that you will get back to me on CWB premiums vs costs. But before I do, one more thing to think about on premiums, from a previous post:

The other way to look at it is to look at the price the CWB got in comparison to "the market" over the crop year. I can’t speak for you, but if I’m going to hire someone to market my grain for me, I expect them to get me better than average prices. When you compare the final pool return to whatever relevant market you want, it is lower than the crop year average for the crop year. In fact, if you compare CWB farmgate returns to US prices over a crop year, in most years the CWB pool return is lower than the lowest US price of the year and never is it much higher than the lowest US price.

<b>The US farmer can sell his whole crop at the lowest price of the year and still get a better price than you through the CWB.</b>

chuckChuck: your thoughts on this please.


Your questions:
“What advantage does the higher domestic usage give to American farmers and their prices?”

Let’s assume for a minute that you are right that American farmgate wheat prices are higher because of a higher domestic usage proportion (at least I think that’s where you were going with this). The US also exports wheat, as you know. And to the same “lower value” destinations that Canada does: Bangladesh, Indonesia, China, El Salvador, etc.

If, as you say, the US has higher prices to farmers because of a large domestic market, at what price do these other destinations pay for US wheat? Do they pay as much as the domestic market - or something less? I’m going to guess that your answer would be they pay less.

The CWB has always said that multiple sellers would push prices down to the lowest market value. What you are saying is that doesn’t happen in the US.

Can you explain how your theory and the CWB’s don’t match?

Next question:
"Also why not look at the costs and profit margins in the open market to compare performance?"

I’ve already done that – you must have missed it. There’s plenty of evidence that non-CWB margins are slimmer and costs charged to farmers are lower – that with the CWB.

[chuckChuck]

John I haven't forgot about you. I am still working on a response to CWB premiums vs costs.

In the mean time, I think you you are dismissing the point I am trying to make about the price advantage of the larger domestic usage in the US market.

As an example only: If a US mill pays $300 per tonne in Minneapolis and the cost of getting it there is $30 a tonne from Fargo ND the net is $270. If the same quality is sold to an off shore customer and the cost is $60 per tonne to get it there the net is $240. This is assuming that the off shore customer and the US mill are paying the same price because of competition from other suppliers.

Since the US market consumes more of its' domestic production over 50%, and Canada less < 30%. (Charlie gave the precise numbers earlier) Then Canadian farmers are putting a larger percentage of lower value returns into their pooled prices from off shore markets. #1 Is this true from your perspective?
#2 What is an approximate value advantage to US farmers of this higher domestic usage?

Your generalization about lower costs in the open market is just not always true. Making wide sweeping generalizations is always dangerous.

I pointed out earlier a glaring example of the pricing problems in an oversupplied lentil market by Marlene Boersch. What is your response?

I also noted that the basis for yellow peas in the quorum report ( I don't remember which year) was very high.

The reality is there has not been a study that has looked at performance, costs and profits in a wide range of open market crops. Please correct me if I am wrong.

I think you are being somewhat selective in your arguments.

[jdepape]

chuckChuck:

For some reason you have the US mill in Minneapolis and the offshore buyer (somewhere else) paying the same amount - $300. Why? There is no market reason that would happen – other than coincidence.

Another problem - in your example, the farmer is being presented with two prices - $270 if he sells to the domestic market and $240 if he sells to the offshore market. How can that happen?

Before I can answer your questions, I need to be clear on what you’re trying to say.

On the other topics – patience, we’ll get there.

[chuckChuck]

John,
It was simplified example for ease of an explanation.

Actual prices will vary for each market depending on location and costs to deliver plus competitors bids of similar quality.

Another example: If lentils in Spain are worth 50 cents per pound. Lentil producers in Spain will reap a higher net price than producers in Canada who have a much higher freight bill to land their lentils in Spain if all other factors are equal.

US traders can pass on the freight savings of a larger US domestic market for wheat and Durum to US producers because a larger share of their market basket is domestic. Of course they can be selling to both domestic and off shore markets.

I am not suggesting that traders offer a separate domestic price or offshore price. Their returns from each market will be factored into their offers.

Does our basket of markets return less than the US basket of markets because of their higher domestic usage gives them a freight advantage in their own market if all other things are equal?

This is an important point because you have to account for the advantage in a direct price comparison.

If we could sell all our durum and wheat into the US it would be a non issue. But the reality is we are selling into a different basket of markets with a different percentage of domestic usage in our respective countries.

[bucket]

chuckchuck

You said

" Another example: If lentils in Spain are worth 50 cents per pound. Lentil producers in Spain will reap a higher net price than producers in Canada who have a much higher freight bill to land their lentils in Spain if all other factors are equal. "

How come that doesn't happen with cwb milling grain to the millers in Canada. Farmers get exactly the same price if they ship to the elevator or the mill?????

[jdepape]

chuckChuck:

Something needs to be very clear before we go on. Markets interact with each other. Some call it arbitrage.

If the US domestic market is paying $6.00/bu to farmers in North Dakota, we need to ask: what will cause farmers to sell to offshore markets at something less?

What happens when the domestic market is $6.00 and because of competition from other countries, the best the offshore market will pay is only $5.50? Who sells their wheat to the offshore market? If acting rationally, no one.

If the country in question (USA) needs to clear tonnage to offshore markets, one of a number of things needs to happen. First, the offshore buyer could agree to pay more to compete with the domestic buyer. But why would he if he could buy from another country cheaper?

Or, the domestic buyer could lower his bid to farmers, knowing that the only other opportunity for the farmer is to sell offshore at a lower price. Why would he continue to pay $0.50/bu more than his competitor?

Or, the farmer could only sell to the highest bidder – in this case, the domestic buyer – until he’s satisfied and then sell to the lower priced markets.

In reality, in a fully functioning market, all three happen at the same time. The offshore buyer acts rationally, buying from the best seller; the domestic buyer bids only as much as he needs to, to buy what he needs; the farmer acts rationally by selling only to the highest bidder.

The end result is, for equal quality and terms, the domestic and offshore markets merge – the farmer effectively sees but one price.

So it’s not a case of US traders passing on the freight savings – offshore markets compete with domestic markets for the same grain. If there is a glut of wheat in the world, the US price needs to drop in order to compete. In other words, domestic buyers will follow suit and lower their prices accordingly. If the global market is in tight supply, prices will move higher and domestic US buyers will need to raise their price to compete.

What makes you think that US domestic buyers will buy at higher prices than they need to?


You make an interesting comment: “I am not suggesting that traders offer a separate domestic price or offshore price. Their returns from each market will be factored into their offers.”

How so? Are you saying that the grain companies make more on one market than another?

To your question:
“Does our basket of markets return less than the US basket of markets because of their higher domestic usage gives them a freight advantage in their own market if all other things are equal?”

The simple answer is, no. Both markets need to clear to offshore markets, so both are a function of the interaction of those markets and the domestic markets.

[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.