CWB future Q&A

[btjadenlepp]

In response to the questions we've been
fielding from clients, me and my
Analytical Team posted a Q&A on our blog
regarding post-election CWB issues.

Q's we address include how shipments to
the U.S. would work, will the CWB be a
viable buyer post-monopoly, how will
pricing of wheat work into non-Board
markets, and how will shipping be
impacted. All interesting points, but
just a scratch on the surface of the
mountain of decisions and work ahead.

Look forward to hearing others' comments
and ideas.

www.farmlinksolutions.ca.

[dak7]

We ship alot of non board grain.

I think grain companies will fill in the market with pricing and options quickly.

[jdepape]

www.cwbmonitor.blogspot.com

When we talk about CWB reform, we often talk about what it means to farmers and the CWB itself. We often miss talking about the rest of the industry.

Undoubtedly the biggest issue going forward is the fact that the structure of the whole grain handling industry is based on financing via the CWB. First, the CWB finances over $4 billion (and as much as $7 billion) in annual wheat and barley sales (therefore, grain handlers and exporters don’t have to). Second, many grain handlers are reliant on CWB revenues – either paid directly by the CWB at the terminal, or paid by farmers at the country elevator. With a voluntary CWB environment, these companies will still earn revenues from handling wheat - CWB and/or non-CWB - but lower per-tonne revenues should be expected.

Financing the CWB and how that impacts its relationships with grain handlers will be key to the future structure of the industry. Moreover, financing will be an important consideration to all grain companies, impacting whether they aggressively trade wheat on their own, or partner with the CWB (assuming the CWB will have the appropriate financing available), or make some other arrangements. It will also influence who enters the market, who remains (who survives) and who is successful. This, in my view, is undoubtedly one of the largest issues facing responsible CWB reform.

The CWB currently enjoys a Federal Government Guarantee which allows the CWB to finance inventory – in country elevators and terminals – at better than commercial rates. It also provides a back-stop to the Initial Payments.

Over the past few years, the CWB has paid out between $4 billion and $7 billion annually to farmers. It raises the money to do this through various forms of borrowing, exploiting its government guarantee to assure it has access to the money needed and at preferential rates. In the event the CWB lost the government guarantee, it would not be able finance its purchases because it would not be able to borrow, let alone at government rates, since it doesn’t have enough assets on its balance sheet. In other words, without the government guarantee, or a capital base of some description, the CWB could not operate. This is an issue the CWB itself has mentioned time and time again – and they are absolutely right.

However, without the CWB and the government guarantee, many small grain companies will not be able to fill the gap – they too may not be able to raise the required finances.

In a voluntary market, the CWB’s financial needs will drop as it will undoubtedly lose grain volumes to grain companies and/or farmers dealing direct to end-users. That means the financing needs of those grain companies will go up. Although undoubtedly some companies will be able to handle this new burden, it remains to be seen if all companies will be able to; the amount of business some companies will be able to handle will be limited by their ability to get financing. It would be irresponsible to ignore this reality going forward; any transition plan will need to ensure that we don’t lose grain handling competition because the structure didn’t support some companies through a period of transition, acclimatizing to their new reality.

Possible solutions

If the CWB kept its government guarantees, opening up the market to any company will exclude companies that cannot get adequate financing; they would remain reliant on the CWB.

Ultimately, though, the guarantees are likely to be withdrawn at some point.
The CWB has indicated that, without the guarantees, it would need a capital base to be able to operate. The questions would be from whom (the government or producers?), and how much? Although this would allow the CWB to continue to operate as a marketer, it would be competing only with the larger grain companies that can self-finance their operations. The smaller grain companies that could not get the required financing would again be relegated to handling grain for the CWB on a toll basis (as it is now).

Another option would be to keep the Government Guarantees in place but make them available to all exporters of wheat and barley. This would help foster the inclusion of all potential exporters, big and small. A “transition period” could be established during which the guarantees are made available to all companies handling export wheat or barley. Over time, they could be tapered off, replaced by conventional lending or some other mechanism that may be designed between now and then.

What we want is a vibrant and robust marketplace. It serves no purpose to make a quick change if the industry isn’t ready. If it’s ready, great – but we need to have confidence that all players can operate and compete adequately – otherwise we are adding risk and ultimately playing favourites.

John De Pape