It is not all that easy now to appreciate that until three years ago, for a period of time not much short of human life
expectancy, the Canadian Wheat Board dominated the western grain trade. Without any market or commercial disciplines
but with a law that survived at least six legal and political challenges, the Board ran things in wheat and barley.
It determined what grain companies were paid to handle its grain, which companies (and even delivery points) received
rail cars and how much space in the grain handling system was left for non-Board crops. The saving graces
were that the Board assumed all risk, and that its inventory management was so sloppy that owners of elevators collected
millions every year in unnecessary, excess storage. At times storage and handling revenue from the Board
made nearly half of some grain companies' revenues.
It was always the case that if the Board lost its monopoly it would shrink like a raisin in the sun. For decades it was
obvious that then Board could never sustain itself as a voluntary version of the enforced single desk monopoly. Price
pooling was rammed down western grain growers' throats for decades. When it became no longer compulsory farmers
abandoned it, even though the post-monopoly Board did everything it could to keep things as exactly as possible as
they had been for 70 years, and even though a sizable percentage of farmers still valued the pooling system because it
relieved them of the responsibility of selling their own grain.
The Board, probably more from the influence of its government-appointed board of directors than management,
concluded that the only path to survival was to become a conventional grain firm. It used all the money it had and all
it could borrow to buy some small companies and to build four high-performance inland terminals. But that was it.
The new CWB has around 10% of western primary elevator capacity, which is approximately also the maximum market
share it can hope for.
In last week’s announcement of its reorganization as a private company, CWB said it evaluated 50 possible opportunities
to obtain the capital needed for expansion. It was never in the cards that an existing grain company would absorb
CWB. In the end there were only about three credible bidders, large companies with little or no presence in the
primary elevator business in western Canada: Bunge, ADM and Scoular.
Bunge has worldwide revenues of $61 billion, but gets into the western grain business for roughly (or presumably,
since its interest in G3 was not revealed) ) $125 million, which is petty cash. Bunge, ADM or Scoular or a dozen other
companies could have done the deal alone, but the juggernaut Bunge felt it needed a partner, in the persons of the
Saudi royal family, which is the beneficial owner of Saudi Arabia. Obviously the CWB situation was not seen as
much of a heart-rate-raising opportunity.
It was a condition of the deal, the necessity of involving farmers as equity owners, that complicated it and reduced
its appeal. Before CWB Ltd had any notion of how hard or easy it would be to attract investors, it committed to a
scheme to obtain farmer business with the promise of an equity share. Farmers who sold grain to the CWB during the
last two years are now entitled to $5 per tonne in equity. There is no other way that farmers can acquire it, such as by
buying shares. In effect the CWB is giving away up to half its value in the form of an incentive to customers. Of
course to will never reach half. Five dollars a tonne is about 15% of the farm-to-terminal margin, or more than net
profit. The Bunge-SALIC deal values CWB Ltd at $500 million. If it receives 10% of deliveries for seven years,
farmer equity could reach $140 million, spread out among 20,000 or so farmers. If this interest by that time has a
value, G3 has the option to buy it out.
With the money it now has and what it can borrow, CWB Ltd can build another dozen large primary elevators. The
problem is that there probably are not a dozen logical places in western Canada to put them. New elevators should be
built in underserviced districts where competition is less fierce, but the best locations are long since taken by larger
companies. On the whole, making something out of the Wheat Board dregs will be a challenge for its new management.
Creating the new, all-private CWB will have little or no benefit from what came before. Customer loyalty, even of
farmers who were ardent supporters in the past, proved thin. It is now equivalent to a start-up. The privatized company,
without government backing, will have to produce proper return on investment in a very competitive and demanding
environment. The possibilities are that CWB Ltd can become a mid-sized and modestly successful grain
firm, or it may not, and its assets could eventually be dispersed among other companies.
expectancy, the Canadian Wheat Board dominated the western grain trade. Without any market or commercial disciplines
but with a law that survived at least six legal and political challenges, the Board ran things in wheat and barley.
It determined what grain companies were paid to handle its grain, which companies (and even delivery points) received
rail cars and how much space in the grain handling system was left for non-Board crops. The saving graces
were that the Board assumed all risk, and that its inventory management was so sloppy that owners of elevators collected
millions every year in unnecessary, excess storage. At times storage and handling revenue from the Board
made nearly half of some grain companies' revenues.
It was always the case that if the Board lost its monopoly it would shrink like a raisin in the sun. For decades it was
obvious that then Board could never sustain itself as a voluntary version of the enforced single desk monopoly. Price
pooling was rammed down western grain growers' throats for decades. When it became no longer compulsory farmers
abandoned it, even though the post-monopoly Board did everything it could to keep things as exactly as possible as
they had been for 70 years, and even though a sizable percentage of farmers still valued the pooling system because it
relieved them of the responsibility of selling their own grain.
The Board, probably more from the influence of its government-appointed board of directors than management,
concluded that the only path to survival was to become a conventional grain firm. It used all the money it had and all
it could borrow to buy some small companies and to build four high-performance inland terminals. But that was it.
The new CWB has around 10% of western primary elevator capacity, which is approximately also the maximum market
share it can hope for.
In last week’s announcement of its reorganization as a private company, CWB said it evaluated 50 possible opportunities
to obtain the capital needed for expansion. It was never in the cards that an existing grain company would absorb
CWB. In the end there were only about three credible bidders, large companies with little or no presence in the
primary elevator business in western Canada: Bunge, ADM and Scoular.
Bunge has worldwide revenues of $61 billion, but gets into the western grain business for roughly (or presumably,
since its interest in G3 was not revealed) ) $125 million, which is petty cash. Bunge, ADM or Scoular or a dozen other
companies could have done the deal alone, but the juggernaut Bunge felt it needed a partner, in the persons of the
Saudi royal family, which is the beneficial owner of Saudi Arabia. Obviously the CWB situation was not seen as
much of a heart-rate-raising opportunity.
It was a condition of the deal, the necessity of involving farmers as equity owners, that complicated it and reduced
its appeal. Before CWB Ltd had any notion of how hard or easy it would be to attract investors, it committed to a
scheme to obtain farmer business with the promise of an equity share. Farmers who sold grain to the CWB during the
last two years are now entitled to $5 per tonne in equity. There is no other way that farmers can acquire it, such as by
buying shares. In effect the CWB is giving away up to half its value in the form of an incentive to customers. Of
course to will never reach half. Five dollars a tonne is about 15% of the farm-to-terminal margin, or more than net
profit. The Bunge-SALIC deal values CWB Ltd at $500 million. If it receives 10% of deliveries for seven years,
farmer equity could reach $140 million, spread out among 20,000 or so farmers. If this interest by that time has a
value, G3 has the option to buy it out.
With the money it now has and what it can borrow, CWB Ltd can build another dozen large primary elevators. The
problem is that there probably are not a dozen logical places in western Canada to put them. New elevators should be
built in underserviced districts where competition is less fierce, but the best locations are long since taken by larger
companies. On the whole, making something out of the Wheat Board dregs will be a challenge for its new management.
Creating the new, all-private CWB will have little or no benefit from what came before. Customer loyalty, even of
farmers who were ardent supporters in the past, proved thin. It is now equivalent to a start-up. The privatized company,
without government backing, will have to produce proper return on investment in a very competitive and demanding
environment. The possibilities are that CWB Ltd can become a mid-sized and modestly successful grain
firm, or it may not, and its assets could eventually be dispersed among other companies.
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