Canola crushing margins excessive in Canada?

[jdepape]

ChuckChuck: "The important point to consider is that canola crushers will take excess margins when the market conditions alow it to happen."

I agree.

The next thing to consider seriously is what has caused the "market conditions" to allow it. And this where you fail - you don't even want to consider that this is a CWB issue. But you cannot fail to acknowledge that the "market conditions" that impact on crush margins include the substantial and wide-reaching impacts of the CWB in its former structure (with a single desk). In other words, what you are complaining about happened in a CWB single desk environment.

To have a credible argument you need to be open to all possible factors.

[sumdumguy]

As an economist Rossassen should know the
laws of supply and demand.

[chuckChuck]

Depape. Okay just to to satisfy your penchant to blame the CWB for farmers taking a drubbing in canola market after harvest. Let me agree with that suggestion since, you agreed the crushing industry is taking excess margins when it can.

But what happens after the CWB in a fully open market when the supply of many grains exceeds the demand in a recession? Farmers still have cash flow needs. If excess margins are currently occurring in the canola market with public price discovery and risk management tools imagine what is happening in special crops.

Take red lentils right now. The current price sucks at .15 cents because of oversupply. What are the overseas buyers paying now versus when the price was closer to .30 cents? Do you think traders might be taking extra margin? Has the price at the retail level dropped by 50% in consuming countries? If it hasn't dropped by 50% where is the difference going? Who is taking the extra margin?

By the way much of the recent increase in prices for many commodities is being driven by ethanol and bio-fuel policy in the US which is pushing corn acres up at the expense of other crops. Essentially farmers are benefiting from government intervention in the ag. markets.

When commodity prices fluctuate significantly lower are the savings always passed to consumers? No. Retail prices seem fairly constant.
Excessive margins are a reality in many parts of the food chain.

How often do farmers benefit from excess margins?

[TOM4CWB]

Chuck,

In my experience the CWB was the fastest to lower the PRO... then stop growers from selling... even if the price ended up dropping another 20 percent the next crop year.

The CWB never knew the future... just as you cannot know what wheat prices will be in 18 months.

It is clearly much more intelligent and reasonable to allow growers to sell now than force them to hold wheat till next year... a million tonnes sold now by western Canadian wheat growers out of a 650M tonne plus wheat market means diddly.

Back to reality for just a second... the 'single desk' was a farce... market discipline by growers is 10 times more effective than the CWB 'single desk' ever was!

And Canola prices... prove this beyond the shadow of a reasonable doubt!

Nice try though... my bet is now fall prices in Canada will get better... basis will tighten up... as cash flow needs are met by wheat and canola market forces must bid up prices to buy acres and deliveries!

[charliep]

chuckChuck

I assume profitability in all aspects of the supply
chain is a good thing. What is your definition of
excess margin? Do all businesses including farmers
have the same cost structure?

If you believe there is excess margin (I assume you
mean profit), what system would you suggest to
deal with this? More regulation? In a world where
Canada competes for investment dollars for
processsing, would more regulation be a good
things or bad thing? Is investment in logistic and
processing capacity in Western canada a good thing
or bad thing?

[charliep]

I will note crush capacity in western Canada has gone
from about 1 million tonnes to over 7 million tonnes in
the past 20 years. Is this a good thing for western
Canadian farmers? In terms of profit per acre, where
does canola rate relative to other crops? How about
ability to generate cash flow when money is needed to
pay bills?

[jdepape]

chuckChuck:

I think we need to be careful with our language – we may be misconstruing each other. Wide basis levels at harvest don’t necessarily mean farmers are taking a “drubbing” – inefficiencies in the market are creating distortions, but I still believe that the price farmers are getting are correct, given the structure of the market. They may be lower than what they would get with different market conditions, but I don’t believe it’s because the crushers are taking advantage of them – market factors are creating the distortion. These include cash flow needs of farmers (partly due to the CWB) as well as crushing economics. (If the oil contributes more value than the meal – an oil-led crush – then canola margins will be greater than bean margins because canola has more oil. Is that the fault of the crusher? Is there some way you’d like to see them share this margin with farmers? When crush margins are small (or negative) are you willing to provide your canola cheaper to ensure a “reasonable” margin for the crusher?)

I think to you, crushers taking “excessive margins” means that they are taking more than their fair share. But then we need to then determine what their fair share is.

To me, “excessive margins” means greater margins than “normal” or “typical”. It is everyone’s job to capture margins when they can, as long as they do it morally and legally. In 2008, when wheat hit $20/bu in the US, American farmers who had wheat available to them could have (and should have) sold at that price. Did they get “excessive margins”? Absolutely – they were greater than “normal” or “typical”. Is that a bad thing? Of course not.

It appears your argument is that farmers don’t get to capture “excessive margins” as often as others. If that’s the case, then it would make sense to look at the root causes and not simply throw out arguments against the open market in principle.

I believe the two biggest issues are that farmers – as a group – don’t have strong hands (they often are forced to sell for cash flow, not market opportunity) and they need to improve how they respond to market signals (many would if they could but cash flow needs kick in again.

How many farmers sell futures, hold them almost until the delivery month, then, if the spread to the next month is at a wide carry, buy their futures in and sell the deferred contract? (Its called rolling your hedge and it actually pays you to store your grain.)

The single most important issue to improve market performance for farmers is to solve these issues. Do that and you will see a more balanced market where farmers will be able to capture a greater share of “excess margins”.

[jdepape]

Missed a point...

How many farmers sell futures, hold them almost until the delivery month, then, if the spread to the next month is at a wide carry, buy their futures in and sell the deferred contract? (Its called rolling your hedge and it actually pays you to store your grain.)

If cash flow allowed it, holding your grain like this and not delivering it, would force basis to tighten (if enough farmers did this).

[crusher]

Let those crushers make gobs of money. And then what are they going to do? Invest in more crushing capacity. Then we will have lots of buyers, who will take a smaller margin, but buy more canola. Gotta look a little further down the road my friend.

[FarmRanger]

Not looking down the road had been the CWB's
problem for as long as I've been farming, and
probably longer.

The CWB's ability to skinny the margins of durum
processor's margins in Canada (only), has had
the side-effect of encouraging all new value
adding industry to locate outside of the
designated area. Instead of being an asset, the
single desk has managed to make sure that all
durum freight costs have been much higher than
they would otherwise have been.

This is a stark contrast to the canola industry
where if an industry partner does charge "too
much", then other players move in with increased
crush capacity, and therefore increased demand
(and therefore higher prices) for our canola.

Maybe the wheat and barley markets can finally
be allowed to do the same, for the benefit of the
whole industry in Canada, instead of the
continued encouragement of exports of raw
product.