What Happens When the CWB Goes Away? Mike Krueger

[gustgd]

THE MONEY FARM

mike@themoneyfarm.com

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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.

[gustgd]

Some great questions from the Trade.

One I'm interested is was


"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."

Had an RBC exec ask me the same thing.

[charliep]

Perhaps the article highlights the opportunity for a renewed CWB with continued government guarantees to provide a service to the supply chain. Creativity and offering value to all supply chain members has to be the future of the CWB - not reliving the past and being self defeating.

I think many of the CWB staff are ready for the new world. Just needs leadership and support.

[charliep]

I note competitive price and forward contracts as being benefits to North African durum buyers. Competitive price is a price that will make a sale. Forward pricing means someone takes on price risk - in this case western Canadian farmers. There are no price risk management tools such as futures for durum. Durum sales are sporadic through the whole crop so something like the CWB pricing pace model approved by the board of directors/exececuted by the CWB operations doesn't work either.

I can see the re-newed CWB putting together durum programs for North Africa with grain companies. Will it be the current pooling system with a 15 month averaging period? Not likely but it could be a cash plus program for durum with a specific pricing period to meet a sales commitment into a North African country.

all is not doom and gloom. There are opportunities.

[btjadenlepp]

I've been thinking about just how smart
it was for Ottawa to put those
government guarantees into the
legislation. I'm puzzled by Richardson's
comments in the WP this week regarding
this potentially giving the new CWB a
competitive advantage. It seems to me
that the continued backstop of initial
payments is the carrot that ensures the
handlers come to the table. Sure,
they'll still need a lot more operating
credit to buy whatever portion of the
wheat crop that they end up handling for
their own sales program, but they won't
have to finance whatever they handle for
the new CWB. As long as they're not
short themselves, being able to handle
the wheat farmers want to pool with the
new CWB is a gift. You make a very good
point Charlie that this type of
arrangement will be especially
interesting for all parties involved
with durum.

[charliep]

Interesting to list the reasons why a major export customer like North Africa would like the CWB and why not so popular with farmers.

1) Exporters like the competitive price. Yes, CWB is the major seller but price reflects market fundamentals. Farmer sees a price forecast of $9/bu (1CWAD) but is paid $4/bu initial payment on delivery with the remainder of money handed out over the crop year.

2) Exporters have benefit of a logistic system which put durum in their hands when needed. A farmer has to contract (CWB determines how much is taken), waits for delivery calls (CWB) and then space at an elevator (grain company).

3) Exporters get consistent supplies of high quality product (probably better specifications than in their contracts). Farmers get paid for what they deliver relative to CGC specifications (maybe some blending upgrades).

4) Exporters get offered ability to forward price/other risk management tools to manage price volatility. Farmers who what to manage price risk/improve cash flow are offered $7.30/bu for a fixed price contract or $7/bu for a 100 % early payment option.

Perhaps the place the CWB needs to start offering better products is to the farm community. They do a good job of looking after export customers needs.

[malleefarmer]

when change occured in australia that was one of the negatives about in the scare campaign was the companies did not have a big enough balance sheet to buy the whole australian wheat crop for cash and the market would collapse once money ran out.
At the time we basically had AWB ABB now viterra,Cargill,Dreyfus WACBH and Glencore buying.
Now there are probably triple that amount of comapnies and it hasnt been a problem yet plus the fact the companies can buy from farmers basically 24/7 if need be throughout the year so they can manage there cash positions better.

Plus a number of smaller companies have emerged basically a group of traders have got together and they are active as well often filling the gap.

I really dont know what the % is but suggest 75% of wheat may be sold for cash and rest go into pools wereas when single desk was operating probably 80% pool and 20% cash which was domestic.

I really think AWB had a different mind set from cwb they knew chamge was coming and prepared well in advance and hit the ground running.

Funny there was alot of musical chairs with traders some going from awb to cargills etc then some traders left there companies and went to awb.

[charliep]

Interesting to list the reasons why a major export customer like North Africa would like the CWB and why not so popular with farmers.

1) Exporters like the competitive price. Yes, CWB is the major seller but price reflects market fundamentals. Farmer sees a price forecast of $9/bu (1CWAD) but is paid $4/bu initial payment on delivery with the remainder of money handed out over the crop year.

2) Exporters have benefit of a logistic system which put durum in their hands when needed. A farmer has to contract (CWB determines how much is taken), waits for delivery calls (CWB) and then space at an elevator (grain company).

3) Exporters get consistent supplies of high quality product (probably better specifications than in their contracts). Farmers get paid for what they deliver relative to CGC specifications (maybe some blending upgrades).

4) Exporters get offered ability to forward price/other risk management tools to manage price volatility. Farmers who what to manage price risk/improve cash flow are offered $7.30/bu for a fixed price contract or $7/bu for a 100 % early payment option.

Perhaps the place the CWB needs to start offering better products is to the farm community. They do a good job of looking after export customers needs.

[malleefarmer]

when change occured in australia that was one of the negatives about in the scare campaign was the companies did not have a big enough balance sheet to buy the whole australian wheat crop for cash and the market would collapse once money ran out.
At the time we basically had AWB ABB now viterra,Cargill,Dreyfus WACBH and Glencore buying.
Now there are probably triple that amount of comapnies and it hasnt been a problem yet plus the fact the companies can buy from farmers basically 24/7 if need be throughout the year so they can manage there cash positions better.

Plus a number of smaller companies have emerged basically a group of traders have got together and they are active as well often filling the gap.

I really dont know what the % is but suggest 75% of wheat may be sold for cash and rest go into pools wereas when single desk was operating probably 80% pool and 20% cash which was domestic.

I really think AWB had a different mind set from cwb they knew chamge was coming and prepared well in advance and hit the ground running.

Funny there was alot of musical chairs with traders some going from awb to cargills etc then some traders left there companies and went to awb.

[FarmRanger]

Bang on Charlie!

[FarmRanger]

When you have to please customers and
legislation guarantees don't have to worry about
what your suppliers think, this is the natural
outcome.

[parsley]

When you have to ask why any government is
continuing legislating wheat marketing, you know
there is open season on a free society. Pars

[Braveheart]

Charlie, how in the future would you see the CWB attracting supplies? The private trade uses strengthened basis to attract grain. A new tool they using is bundling seed, chem, and basis specials together.

But back to the question, how can the CWB attract supplies? They had a captive supply until 2012. Forward selling was easy under that system.

It sounds like North Africa had a "buyers market" with the board monopoly in place. Surity of supply, overdelivery of contract specs, and good delivery logistics sound sweet.

I know nothing about North Africa, but I know some of the players in the private trade and I am confident they can supply the durum, deliver on time, but not over deliver specs. The question is the forward selling.

Without a futures contract would or could grain co's or the CWB do back to back flat sales?

While some farmers may have some unease, I know business will happen. Somehow.

[Jfreedom]

Just reinforces what I have thought for a long
time the board has lost it's way and cares more
about the customers and their needs at all cost
because they are not held accountable to
farmers. Had they spent more time on the
farmers they were supposed to serve we would
not be seeing the antics that they organized
today.

[mbratrud]

Cant help but repost what i put on this forum back on Aug 14 My thoughts about Inventory Financing are even made easier with on going Government guarantees.

There are lots of things the CWB can do post monopoly..

I wish the Board of Directors of our organization (although it seems it more some than others) needs to start looking at the future.

The CWB as it is today is run its course and its time to move on. I am really getting tired of the Mr. Oberg and his propaganda machine spending our money. Who is footing the bill for the other side of the argument?

There are many important issues that need to be addressed, and I am wondering who is working on them? For instance who is looking at Transportation Issues, Inventory Financing for Terminals, Contracts and Cash advances, and maintaining customer relationships through the transition. What will the new organization look like?

The plebiscite that is out there is a joke. We know that when the ballot goes to every Tom, Dick and Harry that ever had a Permit book, the results will be skewed and do not show the will of many of the actual producers of Wheat and Barley.

Lets look at the problems that we face immediately in a change in the CWB.

Transportation - One common concern and one shared by me would be access of Grain Transportation to all areas and companies. The current Car allocation system, gives the CWB control over many cars that they try to distribute fairly. Instead of looking at this as a problem, maybe it is an opportunity to fix our transportation system. Some ideas that would go a long way towards to ensuring equal service opportunity would be opening up the rail running rights. Let the CWB II Transportation arm control the Cars the Farmers and the Government own. CWB II could be very key in a new Rail Allocation System.

Cash advances; there is no reason that CWB II Finance could not operate a Bank where producers could deposit Money into an account that makes a little better than Bank interest. Other services they could offer would be Cash advances or operating lines, to Grain Co's and Farmers. Would need seed money from Government, and if 50000 farmers had on Average of $5000 on deposit with them that’s $250000000 they could put to work. Of Course it wouldn't be interest free, but it could be low interest.

Grain Inventory Financing, a major concern is Grain Inventory Financing for Grain Terminals. Solution, more Condo Storage units, Companies can sell some of there storage to Farmers and Even the CWB Marketing Arm. Why Couldn’t CWB II buy or Lease space from Grain Companies to help them do business in the future? There is no way that most of the Grain Companies could finance their own inventories, and as a result have extra Capacity. For Example In Weyburn alone if the Terminal Capacity was full it would take more than 50 million to Finance the Inventory. Why would some of these companies not Lease some Storage to CWB II and establish a throughput agreement.

Pooling, despite Mr. Oberg's comments this is very doable for farmers that want that sort of thing. Producers would have to commit acres ahead of time and sign auditable contracts. Hell they could do it for all Grains not just Wheat and Barley.

Existing contracts, if they really cared about this they would have had it solved or still could. A like John Depape mentioned it’s outside the CWB Mandate to sell what would be 2012 crop. And this year’s pool should be a tonnage and grade commitment to be in the pool otherwise your work off the PPO’s, which would reduce the risk of making an uncovered contract.

Enough verbal vomit from me, I’m sure I have exposed myself to major picking apart, (especially grammatically) and believe me the above suggestions are not deeply thought out but just thrown out there. My point is its time to start looking at solutions. I want Market choice but I also think there are many talented people at the CWB and they are doing many good things, and I believe there can be a role for them in the future. I urge them to start thinking outside the box and looking forward.

Message to Mr. Ritz its time to be absolutely clear, and stop all this nonsense. If members of the current Board are struggling with change accept their resignations and move forward with some vision.

What are your thoughts on how CWB II could look?