THE MONEY FARM
mike@themoneyfarm.com
www.themoneyfarm.com
877-877-7810
1630 1st Ave South
Casselton, ND 58012
Daily E-Mail Commentary
Friday, October 28, 2011
I am attending a wheat conference in Morocco and participated in a panel discussion with three other industry people on the impact of the departure of the Canadian Wheat Board (CWB). The CWB has played an important role in spring wheat and durum marketing in North Africa for a very long time. North Africa is a major durum buyer and the CWB has dominated the business to this part of the world. No one knows for certain if or when the CWB will lose their monopoly on spring wheat and durum export sales, but it seems like a sure bet that it will happen by late next summer at the latest and perhaps much sooner. This panel drew a lot of questions from durum importers here who have been very well served by the CWB. Some are “preferred” customers of the CWB who have received very favorable treatment in terms of price and quality coupled with the ability to price durum many months in the future. The fact that the CWB basically owned Canada’s durum production and therefore did not have the market risk of selling something you don’t own gave them a huge advantage in many markets, including the U.S domestic market. Once the wheat and durum trade across Canada is privatized the buyers and sellers will have market exposure. That might put an end to sales in new crop positions. This was an obvious concern of a few of the countries (Morocco & Algeria) at this meeting.
One of the questions to the panel was why does the U.S. import so much wheat and durum from Canada when we have surpluses in the U.S.? The biggest reason has been the ability (and willingness) of the CWB to forward price new crop production, especially flat priced (crops with no futures markets) commodities like durum and barley. The CWB’s advantage was always in the new crop positions. The loss of this function will have an impact on those buyers who relied on the CWB for coverage in deferred positions. That was coverage rarely available from U.S. suppliers. U.S. farmers can sell to anyone at any time, but rarely would sell crops like malting barley and milling durum that are so susceptible to quality discounts before they actually harvest those crops. They won’t sell it until they know what they have. This fact alone could hinder sales of Canadian wheat, durum and barley into the U.S. because the competitive edge of guaranteed ownership will be gone.
The panel cited several other issues that will surround the eventual changes to the CWB including:
· Logistics. Will rail logistics finally improve in Canada when the private trade competes for and assigns rail cars rather than the railroads working around CWB allocations? One would think that will be the case.
· What about cross border trade? Will Canadian farmers discover a new market and start selling directly to U.S. companies and deliver across the border? What about U.S. farmers selling north? One would think that the market (prices) will sort this out.
· What about the difference in grading factors between the U.S. and Canada? Will we eventually have one North American grading system? That is yet to be determined, but the Canada Grains Commission could be threatened by the loss of the CWB.
· Will shipments into the U.S. have to be segregated across the entire system? Current law specifies that any food aid or sales made under GSM credit programs must be U.S. produced wheat. There will certainly have to be some degree of segregation of identity preservation in the potential cross border trade.
The private trade in Canada, as we have written before, is well prepared to make a quick transition to private trade in barley and wheat. Many of these commercial companies have been in Canada a very long time and have been trading grains, oilseeds and pulses not covered by the CWB. In many cases private wheat and barley trade has been happening under the auspices of the CWB. Perhaps the biggest change will be the requirement to expand lines of credit to cover the requirement to pay farmers when crops are delivered and sold, but that process has been in motion for some time.
The other very important issue that is already affecting the day to day operation of the CWB is the defection of key employees (traders) to private companies both in Canada and the U.S. This process has already started and we are still many months away from the actual transition from single desk seller to the private trade. Cenex Harvest States (CHS) has hired a key CWB trader and opened an office in Winnipeg. More negotiations between private companies and CWB people are under way.
The CWB announced yesterday they plan to file suit against the Canadian government in an attempt to preserve the CWB. Here’s a link to this story in the Winnipeg Free Press:
http://www.winnipegfreepress.com/local/cwb-takes-ottawa-to-court-over-its-demise-132680023.html
This saga will continue to be an interesting one to watch. Unfortunately, the longer it takes to get resolved the more the CWB will be operating as a lame duck.
mike@themoneyfarm.com
www.themoneyfarm.com
877-877-7810
1630 1st Ave South
Casselton, ND 58012
Daily E-Mail Commentary
Friday, October 28, 2011
I am attending a wheat conference in Morocco and participated in a panel discussion with three other industry people on the impact of the departure of the Canadian Wheat Board (CWB). The CWB has played an important role in spring wheat and durum marketing in North Africa for a very long time. North Africa is a major durum buyer and the CWB has dominated the business to this part of the world. No one knows for certain if or when the CWB will lose their monopoly on spring wheat and durum export sales, but it seems like a sure bet that it will happen by late next summer at the latest and perhaps much sooner. This panel drew a lot of questions from durum importers here who have been very well served by the CWB. Some are “preferred” customers of the CWB who have received very favorable treatment in terms of price and quality coupled with the ability to price durum many months in the future. The fact that the CWB basically owned Canada’s durum production and therefore did not have the market risk of selling something you don’t own gave them a huge advantage in many markets, including the U.S domestic market. Once the wheat and durum trade across Canada is privatized the buyers and sellers will have market exposure. That might put an end to sales in new crop positions. This was an obvious concern of a few of the countries (Morocco & Algeria) at this meeting.
One of the questions to the panel was why does the U.S. import so much wheat and durum from Canada when we have surpluses in the U.S.? The biggest reason has been the ability (and willingness) of the CWB to forward price new crop production, especially flat priced (crops with no futures markets) commodities like durum and barley. The CWB’s advantage was always in the new crop positions. The loss of this function will have an impact on those buyers who relied on the CWB for coverage in deferred positions. That was coverage rarely available from U.S. suppliers. U.S. farmers can sell to anyone at any time, but rarely would sell crops like malting barley and milling durum that are so susceptible to quality discounts before they actually harvest those crops. They won’t sell it until they know what they have. This fact alone could hinder sales of Canadian wheat, durum and barley into the U.S. because the competitive edge of guaranteed ownership will be gone.
The panel cited several other issues that will surround the eventual changes to the CWB including:
· Logistics. Will rail logistics finally improve in Canada when the private trade competes for and assigns rail cars rather than the railroads working around CWB allocations? One would think that will be the case.
· What about cross border trade? Will Canadian farmers discover a new market and start selling directly to U.S. companies and deliver across the border? What about U.S. farmers selling north? One would think that the market (prices) will sort this out.
· What about the difference in grading factors between the U.S. and Canada? Will we eventually have one North American grading system? That is yet to be determined, but the Canada Grains Commission could be threatened by the loss of the CWB.
· Will shipments into the U.S. have to be segregated across the entire system? Current law specifies that any food aid or sales made under GSM credit programs must be U.S. produced wheat. There will certainly have to be some degree of segregation of identity preservation in the potential cross border trade.
The private trade in Canada, as we have written before, is well prepared to make a quick transition to private trade in barley and wheat. Many of these commercial companies have been in Canada a very long time and have been trading grains, oilseeds and pulses not covered by the CWB. In many cases private wheat and barley trade has been happening under the auspices of the CWB. Perhaps the biggest change will be the requirement to expand lines of credit to cover the requirement to pay farmers when crops are delivered and sold, but that process has been in motion for some time.
The other very important issue that is already affecting the day to day operation of the CWB is the defection of key employees (traders) to private companies both in Canada and the U.S. This process has already started and we are still many months away from the actual transition from single desk seller to the private trade. Cenex Harvest States (CHS) has hired a key CWB trader and opened an office in Winnipeg. More negotiations between private companies and CWB people are under way.
The CWB announced yesterday they plan to file suit against the Canadian government in an attempt to preserve the CWB. Here’s a link to this story in the Winnipeg Free Press:
http://www.winnipegfreepress.com/local/cwb-takes-ottawa-to-court-over-its-demise-132680023.html
This saga will continue to be an interesting one to watch. Unfortunately, the longer it takes to get resolved the more the CWB will be operating as a lame duck.
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