Free Market Malting Barley - Is it close to reality?

[AdamSmith]

Here's some good news



Winnipeg Commodity Exchange Inc. Supports A Voluntary Market In Canadian Barley

July 11, 2002 - Winnipeg - The Canadian House of Commons Standing Committee on Agriculture and Agri-Food recently released a report titled “The Future Role of the Government in Agriculture”. Recommendation 14 of the report states;

“Whereas additional on-farm activities and local value-added processing are an excellent way to give farmers more influence in pricing, the Committee recommends that the board of directors of the Canadian Wheat Board authorize, on a trial basis, a free market for the sale of wheat and barley, and that it report to this Committee on the subject.”

Mr. Robert Dzisiak, Chairman of the Board of Directors of Winnipeg Commodity Exchange Inc. (WCE), said “WCE supports this recommendation and in particular, a voluntary market for Canadian barley”.

The domestic feed barley market has become the dominant market force in recent years. Throughout the 1980’s Canadian Wheat Board sales accounted for, on average, in excess of 30 per cent of the total available Canadian supply of barley in any given year. This market share dropped to an average of slightly over 20 per cent during the 1990’s, and is projected, according to Agriculture and Agri-Food Canada Supply/Demand forecasts, to represent only 14 per cent of the Canadian barley supply in the 2001-02 crop-year.

For 2001-02 and subsequent years it is anticipated that the vast majority of Canadian barley will be marketed via the open market system. The infrastructure, lines of trade, risk management products and knowledge levels required to support an orderly transition to a voluntary barley market are already in place.

Page 2 - WCE Position of Canadian Barley Marketing

The malt barley segment of the barley market (both the buy and sell side of the market), a small but high value component, could function in an efficient manner by using a pricing mechanism based on premiums to the open-market feed barley futures contract. WCE is committed to working with all segments of the barley market including producers, feed consumers, grain handlers, malt barley buyers and the Canadian Wheat Board to continue to develop an effective and efficient marketplace.

WCE looks forward to being an active and valuable contributor to the future achievements and success of Canadian agriculture and is committed to providing quality, customer focused products and services with integrity and professionalism.

WCE provides public price discovery and price risk management tools for canola, canola meal, flaxseed, field peas, feed wheat and feed barley.


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For more information, please contact:
Bruce Love, Vice-President of Marketing and Corporate Development
Phone: (204) 925 - 5003
E-mail: blove@wce.mb.ca

Adam's comments:
How soon could this become reality?

We all know how successful the WCE feed barley contract is, What could be more logical and simpler than having the malt side of barley join in that success?

One and maybe two companies have just stated to build multi-million dollar facilities in the NW US, Idaho I believe. They wanted to build in Alberta but with the CWB monopoly they couldn't be assured that they could access the supplies the needed to make it viable in Alberta.

Maybe we're already to late for value added in barley? Just like we're 10 years to late for pasta.

Had the WCE's proposal been public policy in 2000, that investment and money would have been made in Canada not the US.

Are we too late?

[chaffmeister]

A few points to add:
1. The WCE never took this kind of position before as a significant proportion of the WCE membership were grain companies – both elevator operators and exporters – whose business depended on the CWB; none ever wanted to publicly come out with a statement or policy that would antagonize the CWB for fear of “commercial retribution”. Now that the WCE is a “for-profit” organization, it is freer to take public positions that it feels would benefit its markets and participants. I would say look for more of this in the future.
2. Studies I have seen indicate that the Western Barley futures contract would work very well for the North American malt market.
3. As well, the contract would work very well for the global barley trade (there is no other barley contract in the world).

The CWB once took the position that the Western Barley futures market is too small for them; the open interest was not big enough for the CWB and either it would be able to push the market wherever it wanted it to go or it would not be able to “hedge” as much as it needed to. The response to this is quite simple:

If the CWB would trade (sell) export cash barley (both malt and feed) basis Western Barley futures, and if they would “arbitrage” the export cash and futures markets (stand for delivery and/or deliver against futures when appropriate from a cash perspective), the Western Barley futures would work extremely well for the CWB and all its customers. (A few years ago, a survey of global trading interests indicated overwhelmingly that they would support Western Barley futures if it were “allowed” to reflect global market values; there is no current hedge vehicle for them and they’re hungry for one.) Therefore, the export barley trade would trade Western Barley futures “toe-to-toe” with the CWB; not just the CWB’s customers but the other exporters around the world as well. This added liquidity would benefit the domestic trade as well. Combine these players with the domestic trade and the CWB becomes dwarfed. But more importantly, the barley futures contract would become a world market where export and domestic values are arbitraged – not a bad thing. In fact, I think Western Barley futures would become bigger and more liquid than canola futures; it would provide excellent price discovery for the whole barley trade – domestic, export, feed, malt.

Of course, the other option would be for the CWB to get out of barley altogether.

One last thing – the name “Western Barley” should be changed to “Barley”. A meaningful first step to show the CWB and the world that the contract is not as parochial as the CWB would have everyone believe.

[TOM4CWB]

Chaffmiester;

If the CWB were to become a facilitator, to benefit "designated area" barley producers, then this could all become possible...

However, as I read the CWB, they have no interest in supporting any Canadian marketing organization,(the WCE especially) particularily if they actually helped to strengthen their... enemy... (again the WCE)

We will not get to first base fixing the marketing systems we have in western Canada, until we get leadership from some government that is willing the force the CWB to dump its communist roots...

For this reason, I cannot see how marketing choice is now any closer than at least a year away... August 1, 2003 at the earliest.

[chaffmeister]

I don't disagree Tom. The CWB has never shown an interest in "helping" the local futures markets work - it would rather use Minneapolis futures than support a Canadian contract. My comment above is not to show that making the barley contract a global contract would be simple - rather it was to show that the steps the CWB could take to make it so, would be simple.

[TOM4CWB]

Chaffmeister,

I agree, and I believe the Parliamentary Standing Committee on Agriculture saw that the CWB is not helping risk management or prosperity in western Canada because of the CWB's attitude...

If the CWB is to survive it must overcome the selfserving attitude it has fostered for too many years, and begin valid real reforms that marketers like the OWPMB and AWB Ltd. offer their clients.

Thapenny,

Isn't the CWB feed barley contract an insult to any marketer, and what about malt barley worth significantly less than feed barley???

How can the CWB claim it extracts a premium, when it offers a dollar a bushel less than fair market value???

If the CWB is asking fair market value for this premium product, why wouldn't it trade at a premium to feed barley prices, and why wouldn't the CWB want farmers to see the premiums and cash a cheque for this Fair Market Value???

[AdamSmith]

Chaffmeister and Tom4CWB do you fellows want marketing chioce or do you want the CWB to become a better monopoly buyer?

I have no interest in seeing the CWB maintain its monopoly and wouldn't even suggest ways for the CWB to become a better monopoly buyer.

The CWB can take good ideas and mutilate them by trying to make them work within this ludicrous (sp?) system.

Do you fellows wish to see the WCE become beholden to the CWB just like the grain companies and the railways are?

It's bad enough that we have one totaly dysfunctional price discovery system in western Canada, Why in Gods green earth would you guys want two?

[chaffmeister]

AdamSmith - not sure what you read into my comments, but allow me to clarify.

My comments were meant to highlight that the CWB is currently an impediment to the barley trade by not doing what it could to make barley futures work better.

I don’t see how the CWB trading cash and barley futures the way I indicated would make the barley futures a “totally dysfunctional price discovery method”. Keep in mind that the CWB trades Minneapolis, Chicago and Kansas wheat futures, but clearly not to the detriment of those contracts; and those exchanges are not “beholden to the CWB” either. For what its worth, the CWB trades western barley futures – and from your earlier comments you seem to think the contract is doing well. Let’s not lose sight of the real issue – that is, how the CWB deals in cash, particularly pooling, initial prices, PROs, etc. and how their actual sales performance is not publicly measurable.

As for the CWB monopoly and your apparent belief that allowing the CWB to trade barley and cash as I suggested would make them “a better monopoly buyer”, please consider this: the global barley market is about 95 million tonnes with about 12 million in trade (from major exporters) with the EU the biggest (about 6 million) and Australia the second largest (about 4 million). This year the CWB will likely not exceed one million. Add to this the domestic feed trade in Canada at about 10 million and domestic US trade about half that. And don’t forget about all the spreaders and arbitrageurs that would spread barley futures to corn futures (if the barley contract was global). I hope you can see why I suggested the CWB would be “dwarfed” in the barley futures market by the rest of the trade if the barley futures contract were allowed to reflect world (and domestic) values and the international trade were enticed to trade here.

In my view there is no need for the CWB to be in the barley market at all – it is a small player both offshore and domestically and has not demonstrated real value. The only thing the CWB really does in barley is pool prices, to the detriment to the barley trade and to most of those involved in the barley trade. It will argue that it captures premiums for malt barley; we’ll see how that works this year.

I believe that one reason why the CWB wants to keep pooling is to keep hidden its sales performance. If the CWB doesn’t have to expose what it's really doing, by the end of the year (or later) it can come out with results that defy meaningful analysis. If it traded openly and on the basis of a valid futures contract (as I was suggesting), it no longer could hide what it is doing. AdamSmith, In my scenario where you feared that the CWB could be a “better monopoly buyer”, the CWB would be a very small fish in a very large and clear fishbowl. Even with the CWB responsible for all offshore exports, everyone would be better off. Please note my other comment: "Of course, the other option would be for the CWB to get out of barley altogether."

I’m not looking for ways to make the CWB better – I’m looking for ways to make the barley trade better. My point was (and is) to show how insignificant the CWB is in the barley market (domestically and offshore, hence the term “dwarfed”) and yet how much of an impediment the CWB is simply because it won’t get out of the way.

Where else does the tail wag the dog?

[AdamSmith]

Thanks for the clarification chaffmeister.

My point of the WCE possibly becoming dysfunctional is this, if as you point out, the WCE barley contract becomes a world contract with optional delivery points and is used extensively by the buyers and sellers of barley be it physical or just paper, I agree the CWB’s influence would be minimal at best.

But if the contract were to be limited in scope to just prairie production and should the CWB establish a pricing and marketing mechanism for designated area farmers using the WCE for price discovery of malting barley and the whole malting complex becomes accustomed to this new way of doing things, the CWB is then in a position of greater influence.

The CWB is not afraid to use it’s power of retribution to those who challenge it and it’s monopoly powers. It is under this scenario only, when the CWB could exert influence on the WCE to do certain things or not do certain things for political as opposed to practical reasons. This ties into my beholden comments. If the barley has to cross the desk of the CWB in order to accommodate the make delivery/take delivery process (for export) the CWB has enormous influence over the success or failure of the contract.

Yes the CWB is in Minneapolis and KC and Chicago but the CWB has no regulatory authority over the physical products that are traded there. Maybe dysfunctional is not the most appropriate word but I’m not sure what else you would call a system where the regulator is also a major participant. And a regulator who regulates entirely for self as opposed to regulating for the general good.

I guess you could call it orderly marketing.

[chaffmeister]

AdamSmith - you rightfully point out some of the possible pitfalls in any futures contract design.

Rule number one in futures design and administration: Never, never, never (did I say never) allow anyone to be, or become, dominant in the trade.


Back onto the topic of this thread -
Looking at what is going on in the barley market this year (so far) makes me wonder how the CWB will fare in malt barley marketing this year. Already it is no doubt out of the offshore feed barley market and now domestic feed prices are higher than malt PROs.

I heard a rumour that the CWB recently passed on two malt tenders - one to China and one to Columbia. Is there more of this to come? Is the CWB going to be shut out of the malt export business? Is the pooling system going to jeopardize the malt program as it did the feed barley progam?

[AdamSmith]

Is the CWB passing on tenders because it’s waiting for a higher price? Or is it passing on tenders because it can‘t guarantee access to the barley? I would suspect the latter.

With the severe drought area overlapping the major malting barley producing area, the CWB may very well get shut out of the malting barley market. There is barley in SE Sask and Manitoba but I doubt that the farmers in these areas are very eager to go the malting route when feed barley prices are so attractive.

There is some pretty decent crops of barley here in Manitoba but the selectors don’t want malting barley from Manitoba and not many farmers want to sell to the CWB. So there we are.

The frustrating thing is that this same barley that is rejected in Canada is in demand south of the border.
I asked my local Agricore-United agent how many barley samples they sent away last year, he thought about 50. I then asked how many were accepted for malt, he said 2 were on hold. Yet my neighbour has sold his Robust barley as malting barley into North Dakota for 5 straight years and no one will even look at it up here. The down side to this is he said it almost makes him cry when he thinks of all the cheques he’s written the CWB to facilitate those sales.

Last year, after getting barley accepted for malting , I heard of guys throwing sunflower seeds into check samples just so they could get out of their malting contacts and sell into the feed market. I doubt many will even submit samples this year. It’s just to risky.

[TOM4CWB]

AdamSmith,

I have always maintained that we need marketing choice (although my dear partner says I am foolish to stick with point of view)...

I am afraid this drought will change much on the prairies... big companies will take more risk, as farmers who were risk takers are squeezed out...

As Chaffmeister correctly stated, any one player, if too big, can control and make a futures contract unstable and not reliable...

If my vision of the future value chain system, which includes transnational food companies, a strong and viable CWB, that must compete in the market place, is bound to be a healthy for the market place itself...

I didn't ever mean that I though the CWB should keep a monopoly that is not even now legal, as section 32 of the CWB has always had the word "offered" as key to the CWB's orderly marketing mandate.

If the CWB were to respect section 32 of the CWB Act, then they would only have marketing access, power, and authority over the grain that was offered to them, which intrinsically means that competition is a given.

At this stage export licenses for those "designated area" barley producers, who did not offer their grain to the CWB, would be issued no more differently than for Manufactured feed, Pedigreed seed, or for the OWPMB.

From this perspective the Standing Committee got it right, a change in legislation is not needed for choice, cause the CWB Act already inherently includes marketing choice...