Barley plan lacks price transparency
John DePape, Special to The StarPhoenix
Published: Thursday, January 17, 2008
This viewpoint was submitted by DePape, an independent consultant who has worked as a floor trader at the Winnipeg Commodity Exchange and held merchandising positions with a multinational grain company. He was a consultant to the Auditor General's Office on the special audit of the Canadian Wheat Board.
We've heard by now about the Canadian Wheat Board's new CashPlus program for malting barley. Apparently aimed at solving the enormous marketing and pricing problems in malting barley, it unfortunately falls far short.
Many issues around this program make it unworkable, but the most important is the lack of price transparency -- the ability to show the true value of grain at any given time and location.
The CWB says this new program provides price transparency because farmers will know exactly what their guaranteed price is when they sign their contract. But true transparency is when farmers know the actual "market price," not just what they are paid for it. What they get could be quite different from its true value as being paid by an end-user.
The CWB recently suggested that the guaranteed farm price for malt barley under the CashPlus program would be "over $5 a bushel" in west-central Saskatchewan if the program was running now. On that day, the selling price indications by the CWB to maltsters were well above $6 per bushel. Offshore markets reflected similarly significantly higher prices.
So why is there a difference between the "market price" and the CWB "guaranteed farm price"? Although the board won't share exactly how it comes up with its price, we can make an educated guess.
At any given time, one maltster could be selling malt into Japan at a higher price than the malt being sold by another maltster in, say, Mexico. The CWB will sell barley to these two maltsters at different prices at the same time -- what it calls price discrimination.
Indications are that the guaranteed farm price in the CashPlus program would be based on the lowest CWB sales prices. So, even though malt barley may be worth $320 a tonne to one maltster and $280 to another, the guaranteed farm price paid by both (on behalf of the CWB) is something closer to the lower price.
The CWB argues that, under this program, the maltsters can offer premiums to farmers above the guaranteed farm price in order to get the barley. On the surface this may seem to solve the price discrepancy problem between maltsters as well as the transparency issue.
But the price the maltster pays for barley is set already by the CWB. The guaranteed farm price is being paid by the CWB through the maltster or a grain company acting only as an agent of the CWB. If the maltster pays top dollar to the board, then paying a premium to farmers on top of that would mean he's paying above the market price.
This is neither sustainable nor is it attractive to potential new investors in the Canadian malt industry. Globally, the malting industry is short capacity by about a million tonnes; but it's this kind of thinking by the CWB that has kept new investment in the malt industry flowing to Europe and Asia, and definitely not into Canada. Pity.
The real market value is the highest price someone is willing to pay, not the lowest. And there's still a problem at seeding time.
A dollar per bushel difference to a farmer could shift needed acres away from malt barley and into other crops even though better market values are available for malt barley.
So, at a time when Western Canada could be poised to become an even bigger player in the global malt industry, we are running the risk of sending investors away and sending the signal to farmers that they should focus on other crops.
But it's not all about price. Ask any maltster or grain company. Price means nothing if the barley isn't coming up the driveway.
The CWB tries to tell you that the malt industry and grain handlers want deregulation so they can buy barley for less. The truth of the matter is maltsters and malt barley exporters want to be able to pay true market value to farmers. It's just good business.
CWB prices do not have a good track record in this regard. It won't be any better under the CashPlus program.
The CWB is trying to bill this program as satisfying the needs of the industry. I suggest it does absolutely nothing to help the sorry situation we're in. In fact, it could make it even worse.
(Background details about the information and comments in this article can be obtained by contacting barley@depape.ca.)
John DePape, Special to The StarPhoenix
Published: Thursday, January 17, 2008
This viewpoint was submitted by DePape, an independent consultant who has worked as a floor trader at the Winnipeg Commodity Exchange and held merchandising positions with a multinational grain company. He was a consultant to the Auditor General's Office on the special audit of the Canadian Wheat Board.
We've heard by now about the Canadian Wheat Board's new CashPlus program for malting barley. Apparently aimed at solving the enormous marketing and pricing problems in malting barley, it unfortunately falls far short.
Many issues around this program make it unworkable, but the most important is the lack of price transparency -- the ability to show the true value of grain at any given time and location.
The CWB says this new program provides price transparency because farmers will know exactly what their guaranteed price is when they sign their contract. But true transparency is when farmers know the actual "market price," not just what they are paid for it. What they get could be quite different from its true value as being paid by an end-user.
The CWB recently suggested that the guaranteed farm price for malt barley under the CashPlus program would be "over $5 a bushel" in west-central Saskatchewan if the program was running now. On that day, the selling price indications by the CWB to maltsters were well above $6 per bushel. Offshore markets reflected similarly significantly higher prices.
So why is there a difference between the "market price" and the CWB "guaranteed farm price"? Although the board won't share exactly how it comes up with its price, we can make an educated guess.
At any given time, one maltster could be selling malt into Japan at a higher price than the malt being sold by another maltster in, say, Mexico. The CWB will sell barley to these two maltsters at different prices at the same time -- what it calls price discrimination.
Indications are that the guaranteed farm price in the CashPlus program would be based on the lowest CWB sales prices. So, even though malt barley may be worth $320 a tonne to one maltster and $280 to another, the guaranteed farm price paid by both (on behalf of the CWB) is something closer to the lower price.
The CWB argues that, under this program, the maltsters can offer premiums to farmers above the guaranteed farm price in order to get the barley. On the surface this may seem to solve the price discrepancy problem between maltsters as well as the transparency issue.
But the price the maltster pays for barley is set already by the CWB. The guaranteed farm price is being paid by the CWB through the maltster or a grain company acting only as an agent of the CWB. If the maltster pays top dollar to the board, then paying a premium to farmers on top of that would mean he's paying above the market price.
This is neither sustainable nor is it attractive to potential new investors in the Canadian malt industry. Globally, the malting industry is short capacity by about a million tonnes; but it's this kind of thinking by the CWB that has kept new investment in the malt industry flowing to Europe and Asia, and definitely not into Canada. Pity.
The real market value is the highest price someone is willing to pay, not the lowest. And there's still a problem at seeding time.
A dollar per bushel difference to a farmer could shift needed acres away from malt barley and into other crops even though better market values are available for malt barley.
So, at a time when Western Canada could be poised to become an even bigger player in the global malt industry, we are running the risk of sending investors away and sending the signal to farmers that they should focus on other crops.
But it's not all about price. Ask any maltster or grain company. Price means nothing if the barley isn't coming up the driveway.
The CWB tries to tell you that the malt industry and grain handlers want deregulation so they can buy barley for less. The truth of the matter is maltsters and malt barley exporters want to be able to pay true market value to farmers. It's just good business.
CWB prices do not have a good track record in this regard. It won't be any better under the CashPlus program.
The CWB is trying to bill this program as satisfying the needs of the industry. I suggest it does absolutely nothing to help the sorry situation we're in. In fact, it could make it even worse.
(Background details about the information and comments in this article can be obtained by contacting barley@depape.ca.)
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