Report of the Standing Committee on Agriculture and Agri-Food

[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?

[parsley]

charliep, you say, "An interesting discussion would revolve around why flour mills do not source more supplies directly themselves".

Local mills do TRY to source directly.
1. For example, in Manitoba, one on-farm entrepreuneur tried to source his own grain in his own bin on his own farm, in the same yard as his new plant. That's as local as you can get. The CWB would not allow him to use his own wheat in his plant because although he had a contract with the CWB , they hadn't called that contract yet...so the CWB's answer was no. Needless to say , he quit dealing with wheat and barley.

2. Small Mills try sourcing for a specific falling number for milling wheat so the farmer has to test it himself He pays for the CWB grade#1, #2, etc which the miller doesn't want. The falling number determines the bread making quality and is what the miller thinks is important.. The grade is what the CWB thinks is important. The famer needs the required testing according to the millers specifications , not what the CWB has deemed as important.

3. For both interprovincial and export licenses, the CWB always requires the buyback to be done even though it is not a legislative requirement. This is a procedure that prevents sales. It has for us and it has for a lot of farmers. Stops sales dead in its' tracks. (On the other hand, feed mills were able to negotiate a "no-buyback" license with the CWB)

4. I read this charliep, and had to make a few comments between some late seeding. I could fill up six pages. The bottom line is this, millers want grain and farmers have grain. We should have the following:

Willing Buyers willing Sellers= Wealth Creation

What we have is this:

Intimidated Buyers Captive Farmers = Diminishing supplies

Parsley

[chaffmeister]

As parsley suggests, there is a lot to this debate. But really, when you get right down to it, there are two types of people in the world – those that support the CWB and those that don’t. As I have said many times, my problem with the CWB’s defense is that the benefit of a single desk seller has never been substantiated. On top of that, there seems to always be other “benefits” thrown in to the discussion that don’t appear to be what was being addressed in the first place. What I would like to do is touch on all the “benefits” that have been presented recently and score the CWB on them.

1. Foreign buyers prefer Canadian wheat quality.
The CWB often takes credit for this. However, foreign buyers also like the quality of Canadian canola, oats, barley malt, Alberta beef, live hogs and chilled pork. They like our honey, alfalfa pellets and our potatoes – the list goes on. Let’s give credit where credit is due – farmers are the ones that are making the quality products, processors take some and further enhance the product, and the Grain Commission ensures consistent quality leaves the country.
The CWB plays a role in grain quality issues (varietal licensing, etc) but the single desk selling aspect of the CWB has nothing to do with why foreign buyers prefer Canadian grain quality.
This is not a benefit of single desk selling.

2. According to thalpenny, the KFT study determined the CWB captured an average $13/tonne premium on some CWB sales.
Although this can’t be substantiated, I’ll give ‘em this one.
This still doesn’t carry much water though, for a couple of reasons; (1) we don’t know what proportion of the total export program these premiums are captured on (maybe the study indicates this but I can’t find my copy right now) and (2) we don’t know how this compares to the overall performance of the CWB, relative to the market in general over a crop year. For instance, in any given year, the wheat market might fluctuate anywhere from C$2.00 to C$3.00 per bushel ($73 to $110 per tonne), or greater. That $13 per tonne premium can disappear pretty quickly if the CWB has poor timing on just a few sales and sells in the bottom end of the range.
Also, we don’t know how this $13 compares to the losses incurred by the CWB due to shipping higher protein than required and/or higher grades than required.
Before the CWB is in a position to brag about its “successes”, it should also be prepared to discuss its total performance in detail.

3. The CWB also has argued that it is cheaper to ship CWB wheat than canola and quotes the KFT study as evidence of this.
The KFT got the wheat to canola comparison totally screwed up. They assumed that since the canola basis in the country was $40 under Vancouver futures at the time, the cost of moving canola to port was $40 and compared it to the CWB’s “basis” of $25 (for handling and cleaning), both excluding rail freight. If they had done the analysis correctly, they would have seen that the cost to move canola to port was more like $22 at the time. In addition, the canola basis covers implied storage and interest, whereas the CWB “basis” of $25 did not include storage. Farmers have paid in the neighbourhood of $4 to $5 per tonne in storage and interest on CWB grain each year. Also, a proper comparison should include the added overhead (selling and administration) of the CWB, which although is separate from the “basis” on CWB grains, it is included or covered in the canola basis. This adds another $5-6 per tonne to the cost of shipping CWB grain.
Adding all this to the CWB “basis” to compare canola-apples to wheat-apples takes the CWB “basis” to about $36 vs canola at $22 – about $14 per tonne over the cost of shipping canola.
Throw in demurrage/dispatch (which the farmer pays/receives on CWB grains but which is absorbed by the exporter on non-CWB grains) and I’m not so sure the CWB would want to make these comparisons anymore.
The CWB should not be so proud of the results of the KFT study; evidence indicates that moving CWB grains is more expensive than non-CWB’s.

4. Thalpenny indicated that one benefit of the CWB is the roughly $70 million benefit from the government guarantee of credit sales.
I’m not sure how this is calculated but you know, it doesn’t really matter because this has nothing to do with the CWB as a single desk seller. Rather than take this government backing away from the CWB in a dual market as thalpenny suggests would happen, the feds could provide it to all exporters.
Government guarantees on credit sales are not there by virtue of the CWB being a single desk seller.

5. According to thalpenny, “there is evidence that the single desk….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)”.
It’s inappropriate for the CWB to take credit for the savings from the new transportation environment. Fact of the matter is that with the “old” system of car allocations and freight rates, there was no incentive to be an aggressive merchandiser of CWB grains because aggressively going after more deliveries from farmers would not provide any more movement through the elevator – grain companies were basically stuck with their historical car allocation with only limited means to grow.
Under the new freight environment including multi-car loading incentives we see that the use of trucking premiums has increased dramatically – on all grains. And, under the tendering process we see grain companies aggressively going after tenders to increase market share, something they could never do before. This is a function of a small crop as grain handling is a business of proportionately high fixed costs and where volume is paramount – handling grain at $3/tonne is better than handling none at $10/tonne.
To say that the CWB is responsible for these events is just wrong; to say it’s by virtue of being a single desk seller that the CWB can provide these savings is patently misleading. The reason that you don’t hear about “these savings on canola or peas” is because those margins were shaved long ago and are reflected in basis levels and trucking premiums. (See point 3. above.)

There are more points that could be made but I think I have taken enough time today. In my view, the CWB’s argument against a dual market and in support of keeping the single desk character of the CWB intact is weak. The CWB argues that under a dual market, the CWB as you know it will disappear and look what you will be giving up. I have looked and based on the arguments and “evidence” put forward, I don’t see much to keep. (And I haven't even touched on the issues around farmer involvment in value added and the buy-back. I'll get to those another time.)

My bottom line - you’ll need better arguments to convince me.

[ianben]

Being at the recieveing end of the Warburtoms contract ie. eating their bread.I am sure it is the Canadian quality and consistancy they require.

Comparing the premium they charge for the bread to the premium I understand they pay the Canadian farmer I would say the CWB had done a lousy job.

However when I look at our milk sector who removed their marketing board about 7 yrs ago. The individual and even groups of farmers have been a disaster at maintaining realistic prices.

I believe until farmers learn true value of their produce and are prepared to try to manage supply the way it is sold will be of little consequence. We will all have to take what is offered!!!

I say sold because I dont think any farmer truly markets grain.

Can the CWB do anything but sell either?

[ianben]

Parsely has left some misleading comments - if mills want to source their own product, and get the grain specifications they desire, they are free to do so. IN fact, most of the western mills do just that. If they want to pay a premium over the CWB price to the farmer, they do so, and in certan cases actually have paid considerably over the initial payment to get what is desired.

There is flexibility to allow the domestic mills to attain the quality of grain they desire, regardless of contract delivery calls.

And the claim isn't that the single desk can take credit for Canadian quality, but the CWB can take credit for capturing that value and passing ALL of it back to farmers.

The credit guarantee issue is about the fact the CWB can borrow at govt. secured rates and lend through the credit program at commercial rates. Farmers capture ALL the spread and that's where the $70 million comes from. The export guarnatee exists for exporters of other products through the Export Development Corp., but they cannot borrow at the govt. secured rate. That's where having the single desk provides a mechanism to pass these savings on to farmers.

REgarding basis, it's a mug's game to get into viewing basis as some sort of indication of costs to ship, and that's evidenced by Charlie's indication of the spread on canola of $40/t (almost $1.bu) The costs that get company incurs to elevate and transport grain, the interest carrying charges, terminal charges, cleaning and removal of dockage, and all other costs to get grain from a delivery elevator on board a ship at FOB position are the true costs to be compared. When those numbers are determined, then look at what the actual charges through basis deductions are to the farmer and see if there are any discrepancies. Sometimes the co may eat some costs to avoid higher costs for demurrage. Sometimes they collect mightily. What's the average? With CWB grains, most of those costs are reported on the cash ticket, and the balance are reported in $/t in the year-end financial statement. The commercial transportation system operates in a fashion to capture costs from non=performance by grain companies, so companies have to weigh their shipping priorities for board and non-board crops accofidngly and be prepared to pay for lack of performance. Big improvement in my mind.

KFT evaluated the returns from ALL sales of wheat over the period and the results were the NET benefits.

So if an open market is what farmers want, they should be prepared to forefeit these items. But a dual market can not exist in a sustainable way. Ont. mills are saying they want the single desk, or an open market. This inbetween stuff is dysfunctional, and uncertain and not good for business.

Tom