Report of the Standing Committee on Agriculture and Agri-Food

[chaffmeister]

I would like to respond to some of thalpenny's comments (I apologize for the length):

"The benefits of single desk selling would disappear under the proposal the Standing Committee put forth."

What ARE the benefits? This was the point I was trying to make earlier in this thread - the benefits of the CWB (if any) have not been demonstrated. Period.

"It's interesting that the list of attendees to the Committee's Prairie meetings would not have exceeded 100 people, and there was very little time devoted to the meetings by the Committee (max 2-3 hours)."

I'm confident that the committee based its recommendations on more input than just the country meetings. This committee has been hearing the problems associated with the current CWB for some time now; please don't try to condemn the process simply because you don't agree with the outcome.

"The best indication of farmers' desire for this type of change will be through the upcoming election of CWB directors."

What about the private surveys the CWB has commissioned that are rumoured to have indicated that 2/3rds of all farmers surveyed want either the end of the CWB or a dual market? Do these surveys not count? Aren't they "pretty good indications of farmers' desire for this type of change?

"Price pooling would have to change. Cash buying will diminsh the risk management value of pooling prices."

I've never seen how price pooling has "risk management value". So you sell all my wheat for me and I get the average of all sales that you make - export and domestic. But if you do a lousy job of selling my wheat (and you haven't proven otherwise) then I could get the average of a bunch of lousy sales. I still have risk - the risk that you may not perform very well. (And you haven't proven otherwise.)

"The principle of farmers receiving the same value for the same quality of grain (adjusted for their location) regardless of the timing of sale through the year will disappear."

Trust me Tom, this a good thing.

"As farmers receive all the revenue from sales net of costs, its pretty tough to argue the CWB is the buyer of the grain."

Tell that to the organic farmers who are trying to export their wares.

"A free market for CWB grains will introduce competitive bidding for rail capacity, and competitive undercutting of prices to customers to get market share."

I think you're saying that competitive bidding for rail capacity among the grain companies will drive rail costs higher. Part of the argument for the revenue cap for RRs (an argument that I think the CWB supports) is that the Canadian RRs were capturing higher rates than their US counterparts (who operate in an environment where there is "competitive bidding"). On one hand the US rates look good, but on the other, "competitive bidding" for freight doesn't look good. How can you argue it both ways?

You also suggest that competitive undercutting of prices to customers to get market share will drive prices lower. I don't buy this; along with competition for export grains will come enhanced price visibility and price signals to the farmer. If I'm an exporter, I will try to be as competitive as possible when selling, otherwise I shouldn't expect to get the sale. But I also recognize that my bids to farmers in the country will only be as good as my sale allows - if I have the "low-ball" sale, I will have the "low-ball" bid at the elevator. I know that my competitors will also be doing export business and if they do a better job at selling (getting higher prices or better terms), they will "kick my butt" at the elevator because they will be able to pay more than I can; to compete with them I will need to match their price and squeeze my margins.

What will really happen in the competitive environment that the CWB is afraid of is that the farm-gate market will gravitate toward the best sales, not the worst. According the Auditor General, the CWB is an effective marketer of grain on behalf of farmers; she also noted that the CWB is a "tough negotiator" when making sales. If this is true, shouldn't the CWB be able to compete with other exporters and still be effective in a dual market?

By the way - in my view, the benefits of effective price visibility and market signals far outweighs any benefit from a single desk seller. But that's just my opinion.

Regarding Directors attending political functions - do you really think that going to a fund raising dinner is an effective forum to "profile agriculture and these issues directly or indirectly to decision makers"? I think farmers who want the CWB to be their voice want to get bang-for-their-buck. (Even those that don't support the CWB and are forced to "use" it, want the CWB to spend thier money wisely.) Spending time in front of the Standing Ag Committee (as the CWB does many times in a year) enables the CWB to detail its positions on all these issues. At a fund raider you may get 5 minutes with one MP as you wait in line for drinks at the bar (and depending on how many times you see him at the bar, he may not even remember talking to you).

How does going to a fund raiser enhance what the CWB is already doing in Ottawa?

[charliep]

Just a couple of more interesting sites that the CWB has posted.

Presentation to the house of commons standing committee on agriculture.

http://www.cwb.ca/publicat/speeches/2002/060602.shtml

Press release with regards to standing committees recommendations.

http://www.cwb.ca/publicat/nr/2002/061202.shtml

Tom H. is right in that the only way currently to get change is elect the right people to the board of directors. When this happens, the change will occur.

I push us back to the threaded web discussion on CWB Director elections. Should they be one stakeholder/one vote (even down to landlords) or voting based on impact on stakeholders business interest (one acre cropped/one vote)?

http://www.agri-ville.com/cgi-bin/forums/viewThread.cgi?1020523606

[chaffmeister]

I need some clarity – on one hand AdamSmith says the CWB Act states that the government can effect a change to a dual market; thalpenny and charliep say that the only way is for the CWB board of directors to make the decision. They can’t both be right.

How would this freedom to market come to pass?

[AdamSmith]

caffmeister, let me propose a not so out of this world hypothetical situation to explain the reasoning behind my belief that this type of change can be done at the ministerial level.

Let's say after a few years of negotiations the World Trade Organization signs a new world trade agreement and in this agreement State Trading Enterprises such as the CWB, would be illegal. In order for this agreement to take effect all countries would be asked to ratify it. After ratification they would then be asked to adhere to its new rules.

Also in my not so hypothetical situation the CWB refuses to give up it's monopoly(your right it's a monopsony but old habits die hard).

Under my hypothetical situation the Canadian federal govt. has two options, it could either 1. abide by the CWB's decision, which would place the whole WTO agreement at risk and/or risk Canada being offside with the WTO and considered a rouge trading nation or 2. it could over rule the CWB and make the neccesary changes itself.

My guess is they would do the latter.

Here's another scenario. The people of Canada get so sick of JC and the liberals that in the next election they elect Stephen Harper and the alliance as the next govt. Harper would wait about 5 seconds before he removed the CWB monopoly.

So there's no question about Ottawa's ability to unilaterally deal with this issue.

But with this Minister and this govt. we've seen no desire from them to make this change. In fact the changes to the CWB Act were designed less to give farmers control over the CWB than they were designed to take the pressure off Ralph. Every time some issue regarding the CWB flares up, all he has to say is "That's up the CWB itself to deal with" and he's off the hook.

So to wrap this up, it is my belief that the Minister has not surrendered total control of the CWB and the grain industry at large over to 10 farmers.
He still controls the keys to the kingdom.

Whether he wants to use them is a whole other proposition.

AdamSmith

[parsley]

chaffmeister, This is how the Canadian Wheat Board Act itself legally answers your question:

Section 18.2 The Minister may by order direct the Board

Parsley

[parsley]

That should read 18.1
Parsley

[parsley]

Chaffmeister - there is a key point that your comments highlight, which is one of the most valuable things about single desk selling. Because the CWB has the say on where the grain is sold, when and to who, it provides some leverage to be the tough negotiator. It also provides a potential benefit of reilability of supply for those buyers who desire that. The trade off here, is at what price.

For a part of the overall trade in wheat globally, there are those buyers who want to buy Canadian quality first. And under these circumstances, supply agreements can be achieved, in exchange for returns above the market.

This will disappear under your scenario. To propose a dual market is to ignore the fact that this price differentiation exists. But it does, and it benefits farmers, because all the revenue is passed back. The KFT study pegged that value from 86-96 at an average $13/t or so.

This is where price pooling is a complement to this, as how would you determine the price differentiation back to farmers on any given day given the organization passes on all revenue to farmers? When you have a sale on a given day for the same grade of grain at the same port of exit at sales values $10/t different- what cash price would you post? And when you have no elevators, how do you pass this back to farmers? Price pooling preserves the ability to price differentiate, and ensures farmers risk of delivering to different priced markets is eliminated.

In the US and non-board crops, the basis is adjusted to tell farmers when to deliver. Any market gain on a sale above visible market value is retained by the grain dealer. Will all the wheat move under an open market system? Likely. Will farmers overall receive as big pile of money for the sale of that grain? In my mind, no.

Regarding US rail rates - the single car rates in the US are significantly higher than Canada. The revenue cap was a compromise that recognizes that many western Canadian farmers are captive shippers. You inmply that there is an endless supply of rail capacity in which case bidding competition would reduce rail costs. But it is finite, and many times the demand exceeeds the supply, particularly Oct-Feb, the peak shipping period. In this case, proponents will bid higher to capture the rail capacity share. This can only come from higher prices from customers, or lower prices to farmers. You pick which is more likely to occur.

The government guarantee on borrowing would be in jeopardy in my mind because grain companies would complain that they don't have a level playing field. This is about $70 million per year, passed back to farmers.

Things changed in 1998 when the government changed the governance structure of the CWB. There is a prescribed process to add or delete crops from the CWB, which prescribes that the Minister may not introduce any bill that would exclude any kind, type, class or grade from the Act for any period without consulting wiht the board, and the producers of the grain have voted in favour of the exclusion or extension. So this act is really farmer's Act, and the linkage with government on an operational basis is virtually non-existant.

So in the open market world, I will be pursuing the high value markets as fast as possible until the premiums get totally eroded. And are customers are no dummies - they are sophisticated and intelligent, geared to serve thier shareholders as well. There are no free lunches, and if acquisition costs can be reduced and quality maintained, buyers will do just that.

The bottom line is:
- there is no such thing as a dual market, because the CWB will not be able to operate the same,
- an open market system will return less money overall.

Tom

[charliep]

Tom H.

I have to get clarification on this statement.

"In the US and non-board crops, the basis is adjusted to tell farmers when to deliver. Any market gain on a sale above visible market value is retained by the grain dealer. Will all the wheat move under an open market system? Likely. Will farmers overall receive as big pile of money for the sale of that grain? In my mind, no."

What evidence do you have that this is the case? No grain company is excessively profitable with competition keeping margins tight.

My experience would suggest that margins for grain companies are better for CWB crops than non board. The exception may be the current tendering process but the grain companies are doing this to maintain country handle/utilize terminal capacity. Longer term, this activity may not be healthy for the industry?

Another way that a farmer can capture value is moving from a commodity based marketing to value based. An advantage of a more open system would be a directer relationship between farmers and buyers better quality signals through price. The current system (at least in my opinion) doesn't allow these relationships to be established with benefits (if not lost) flowing to the CWB pricing pools.

As we look out 5 to 10 years, how will the CWB modify itself to move to a value based marketing system? Will the CWB allow direct relationships between farm managers and processors with the benefits of the relationship flowing to the parties involved?

[charliep]

Charlie, you ask simple questions, but I think I should share my thoughts, lengthy as they are.

Let's think about this in two parts - FOB forward, and FOB backward. I was referring to the fact that in an open market if a price could be obtained by a grain dealer over visible FOB values on a sale, there is no obligation to pass that on to farmers.

In the grain business, there are numerous examples of commercial grain dealer-buyer agreements that may have financial benefits to the grain dealer, but does that show up in the return to farmers? It may, if product supply is low, get passed on through a reduced basis. If there is ample supply, the grain company will not pass on these benefits.

The slim margins that exist in the grain industry are more a symptom of the high capitalization costs companies have incurred, the fact that the total production last year of all crops was down about 20% over longer term averages, and farmer inputs purchases have temporarily declined. No question there is fiscal pressure at the moment.

The margins companies make on CWB grains have also become slimmer by virtue of the tender process and reduced turnaround times with fewer crib elevators. Next year with 50% tendering and the forecast of a smaller export number again, those conditions will continue to exist.

But they are near term problems, focused on FOB backward. As this shakes out, will farmers have the market flexibility in the rationalized system of the future? Whether it is the CWB or grain companies guiding what comes into the elevator, it will be based on sales commitments. That is the reality of the future.

So I said that farmers won't see as big a pile of money on the total crop marketed under the open market system. You seem to be saying that farmers will make more money. There is no evidence that is the case, whereas there is evidence that the single desk provides value from the FOB forward, and that it is capturing value in the new commercial transportation environment (over $40 million for the first three quarters of this year, not to mention any trucking or other incentives that get paid). With the tight margins out there, would farmers be receiving this transportation benefit with no single desk? Has anyone noticed these savings on shipments of canola or peas? Perhaps you can direct me to the studies showing that.

Regarding risk - what is the range of fluctuation over the past 2-3 years on canola basis? I recall 2 falls ago when canola basis fluctuated by $25/t. How do you manage basis risk in a simpler way than the CWb does by coordinating the shipping with the sales program?

Regarding farmers moving up the value chain - let's be clear. The CWB is not an impediment to farmers building relationships with buyers. Buyers can pay farmers any premium over the CWB’s domestic human consumption price, which is a transparent North American price, adjusted for mill location. With the pricing options, the farmer can lock in the return from the pool accounts, and receive all the money within 10 days of the delivery. For international buyers, same thing. Farmers can capture any price over the CWB’s price in a given market. So if they offer a specialized service that differentiates their product, and have a market that they’ve developed that will pay more than the CWB can capture in the market, they can do that through the Producer Direct Sales process. This prevents the bidding down of the market structure that has developed by virtue of the single desk for Canadian grain.

Warburton’s is a larger scale example of how value can be captured and passed directly to farmers. But it’s the dual market mirage again that has people forgetting that the reason price premiums exist in different markets is because there is a single desk with the CWB. Remove that, and all of a sudden the price premiums disappear.

I think there are some things the CWB can do to foster better farmer-customer relations. But let’s be serious. How many customers want to deal directly with farmers to coordinate a 25,000t shipment, or even bi-monthly 5,000t shipments. Grain companies will do this business. There will continue to be a significant export business in the future - in fact virtually all the grain companies in Canada have staked their financial life on it by the type of facilities they built.

Tom

[charliep]

Tom

I will let others comment but I have to throw in another two bits.

You are right there is variability on canola basis. The same basis relationships exist in the wheat market but this is hidden by the fact individual sales are not reported/prices are pooled. With both systems, you have to understand the factors impacting the relationship between the cash and futures (local supply/demand, quality of the crop, transportation/storage issues, etc.).

I like to think of basis as an adjustment factor and understand what is a good basis and what is bad. Picking on Calgary, canola basis has varied anywhere from $20 over to $20 under over the last 2 years. $20 over occurred in the summer when supplies were tight, grain companies had oversold the market and new crop was at a steep inverse. $20 under occurred in the fall when mega supplies where available and the elevator system was overflowing with canola relative to sales. Normal basis is around $10 under. Early spring basis contracts are normally $6 under with this last spring many companies offering $0 basis. With some fore thought and understanding of basis/alternatives, you can use this knowledge to minimize this cost/adjustment.

With regards to Warburtons, my suspision is they pay the premiums because they find value in the grain provided, not because of the CWB pooling system. The premium comes with a cost to the farmer in terms of certified seed for the varieties required, strict protocals on agronomy and record keeping and a system that brings the grain forward when needed. Would the same level of premiums be paid under an open market? Hard to say other than we don't know the level of premiums paid by Warburton in total under the current situation and how this is shared up and down the value chain. I can only say the same value chain would likely exist in a more open market.

You are right in many cases, export buyers would not source directly from farmers. Perhaps I have to indicate my bias is that your best customer is your next door neighbor versus someone across an ocean. Examples of processing industries that source crop directly is feedlots and domestic maltsters (depending on company - 50 % plus/minus of needs depending on their business approach). Dealing with individual farm managers is more difficult than grain companies but the processors are able to obtain a more consistent quality product versus an elevator system where blending is practiced. An interesting discussion would revolve around why flour mills do not source more supplies directly themselves but I will leave for others.

What are others thoughts?