CWB’s Smear of Informa Report Doesn’t Stand up to Scrutiny

[Fransisco]

<b>3) CWB statement: “The report wrongly assumes that all wheat is the same and that overall market share is what determines the CWB’s ability to exercise market power.”</b>

Wheat Grower response:

The CWB’s claim that the report “assumes that all wheat is the same” is a baseless accusation. For example, Informa’s selling price analysis specifically adjusts the data to account for quality differences. As Informa states: “It is critical however, to recognize that the quality of wheat plays a large role in the price paid by an importing country.” (Page 30). Throughout the report, Informa takes great care to account for quality differences and, as noted in the weighted average analysis above, gives the CWB the benefit of the doubt in those cases where direct comparisons cannot be made.

The report doesn’t “assume overall market share is what determines the CWB’s ability to exercise market power”. Instead Informa states the following:

While market share is not, in itself, a sufficient measure to declare that an organization holds market power, it is certainly an important prerequisite. In order to have a significant influence on prices, a seller must have sufficient market share in order to exert market power over buyers. Generally, economists regard that 25% of a particular market is deemed to be a minimum threshold share in order to exert market power.” (Page 11).

Informa notes the CWB continues to claim that it “is the largest single seller of wheat and barley in the world, holding more than 20 per cent of the international market.” (Page 11). Informa shows that Canada’s share of global wheat exports has averaged 14.5 percent over the past decade and has not exceeded 20% since the 1994/95 crop year. In barley, Canada’s share of global barley exports has averaged 9.3 percent over the past decade and has not exceeded 20% since the 1990/91 crop year. (Pages 13 and 15).

If anyone makes erroneous and baseless claims, it’s the CWB. One would think that at least one of the 450 employees at the CWB would have noticed they haven’t enjoyed a market share over 20% in either wheat or barley in more than a dozen years.

In any event, the Informa study does identify 11 export markets in which Canada’s share of the country’s wheat imports has exceeded 25% over the past five years. It concludes that “only one [Ecuador] would potentially exhibit characteristics suggesting that Canada has sufficient market power to leverage prices.” (Page 20). Informa’s selling price analysis subsequently confirms that the CWB is not able to exert market power and obtain premium prices in any wheat markets, with the possible exception of Japan.

For durum, the Informa study identifies 13 export markets in which Canada’s share of the durum imports exceeded 25% over the past five years. Of these, Informa states that “market influence by the CWB could potentially be exercised in six.” (Page 21). Its subsequent selling price analysis confirms that Peru is the only market (for which data is available) “in which Canadian durum appears to consistently achieve a higher CIF price. In Algeria, Morocco and Venezuela, Canadian durum is not the premium-priced product with any consistency or not at all.” (Page 37).

With respect to barley, Informa states that “Canada holds more than the minimum 25% threshold of total imports in only four countries. As a share of the total supply (production plus imports) of barley in those markets however, Canada does not account for over 25% in any of the markets. Variability is relatively low in two of the four markets. These measures indicate that Canada does not hold sufficient market power in any of the 20 markets to which it has exported barley over the five year period under examination.” (Page 21).

[Fransisco]

<b>CWB statement: “Because of its flawed premise, the report selectively focuses on only 11 of the 60 to 70 actual wheat markets the CWB sells into each year – rejecting important, high-value markets like Canada, the U.S. and Europe.”</b>

Wheat Grower response:

In the case of the U.S., Informa notes that Canada held a 33.6% share of its wheat imports over the five year period examined. However, it did not select it for specific analysis as Canada’s share of total supplies in the market were less than 1%, far less than the threshold needed to exert market influence. (Page 20).

The CWB is correct in noting that Informa only examined export markets and did not consider the CWB’s domestic sales in its selling pricing analysis. However, the CWB has previously indicated that its domestic pricing policy for wheat sold to Canadian mills is based on Minneapolis milling values, with an adjustment for freight depending on the location of the mill. In effect, Canadian millers buy wheat from the CWB on a North American pricing basis so that they are not at a competitive disadvantage to U.S. or foreign millers. We are not aware of any change in this policy that would suggest the CWB extracts a price premium from Canadian millers.

With respect to Europe, Canada’s share of imports is below the 25% threshold, so it is not included in the Informa analysis with respect to wheat. It is considered in the durum analysis, although in this case Canada’s share of total supplies in Europe is 7.8%, which again is a threshold that is considered to be far below the level necessary to exert market influence. (Page 21).

Informa does however comment on why Canada’s selling prices can be higher in certain markets:

“Even though the CWB does not exhibit sufficient “market power” characteristics to extract premiums, Canadian wheat and barley may be higher priced in certain markets. The reasons for these premium prices however have little, if anything, to do with single-desk selling. The CWB states in the most recent annual report that the `single desk adds value for western Canadian farmers by enabling them to capitalize on Canada’s reputation for grain quality, consistency, food safety, customer service and reliability.’

Several of the strengths indicated in this quote are not dependent on a single-desk selling approach. In Canada, the responsibility for maintaining grain quality and consistency in export shipments rests with the Canadian Grain Commission, not the CWB. Food safety is handled by the Canadian Food Inspection Agency. Customer service and reliability are a key requirement for any successful trading organization, whether public or private.” (Page 22).

The Wheat Growers agree with the gist of Informa’s assertion here, although we maintain that Informa has not fully and properly acknowledged the role played by western Canadian farmers and grain handlers in securing Canada’s reputation for delivering a high quality, consistent and safe product to customers. We note for example that Canada has a strong reputation for delivering consistent, safe and high quality canola, oats and other crops with no intervention by the CWB and with only nominal roles played by the Canadian Grain Commission and the CFIA.

[Fransisco]

<b>CWB statement: “The report also blatantly misuses grain handling and transportation data published by the respected Quorum Corporation, which produces the quarterly Grain Monitor report under contract to the federal government. Quorum emphasizes in its reports that efficiency comparisons cannot be made between wheat and canola based on its calculations of export basis and producer netback for each crop. Yet that is precisely what Informa has done.”</b>

Wheat Grower response:

Informa does indeed draw on the Quorum report to compare the “export basis” for wheat, durum, canola and peas. The Wheat Growers have scrutinized the latest report from the Grain Monitor and while Quorum does note that the methodologies for calculating the export basis and producer netback differ for CWB crops and non-board crops, it does not (contrary to the CWB’s claim) “emphasize” that efficiency comparisons cannot be made between wheat and canola based on its calculations. It merely encourages the reader “to become familiar with this material before attempting to draw any specific conclusions from the information presented in the discussion that follows”.

If the CWB believes the Grain Monitor has erred or that Informa has wrongly taken data from the report, then the CWB should document its concerns. Furthermore, the Grain Monitor has been calculating the export basis and producer netback since 2002. If the CWB believes there are major deficiencies in the way these are calculated, why hasn’t it raised these concerns before now?

Unless the CWB can provide concrete evidence that Informa “blatantly misuses” the Quorum report data, the CWB’s accusation is nothing more than an unsubstantiated smear.

[Fransisco]

<b>CWB Statement: “Examples of other flaws include: Lack of acknowledgement that the CWB’s dominant position in the durum market supports the overall price structure”.</b>

Wheat Grower response:

The mere fact that an entity may hold a dominant position does not necessarily increase the overall price structure. If the CWB holds durum supplies off the world market, then yes, that temporarily supports the overall price structure. However, once those supplies are released onto the market, it depresses the overall price structure.

Also, if the CWB does periodically withhold supplies from the market, it means that Canadian farmers are forced to hold on to supplies that they might otherwise wish to sell. The Wheat Growers believe that each individual farmer should be free to determine the timing of their sales, including the contracting of any supplies to the CWB in a voluntary marketplace. In that way, it is the individual farmer deciding what is in his best interest (including whether to carry inventory from year-to-year), instead of the CWB presuming to know what is in the best interests of all durum growers.

[Fransisco]

<b>CWB Statement: “American wheat has an intrinsic price advantage due to factors such as the dramatically lower proportion exported from the U.S. (40 per cent compared to 80 per cent in Canada.) This means less U.S. grain is sold into diverse markets outside North America where prices tend to be lower and transportation logistics more expensive.”</b>

Wheat Grower response:

Our first reaction to this rather incredible admission is: If the U.S. market does indeed provide a higher return, then why doesn’t the CWB sell more into this market, rather than offshore markets “where prices tend to be lower and transportation logistics more expensive”? Shouldn’t the CWB be seeking out the best paying markets? That is what sellers do in an open market.

If the CWB does indeed sell less grain into the U.S. market than the market demands and instead sells more grain into distant offshore markets, then this goes a long way to explaining why Informa found that CWB returns are so much lower than the returns obtained by U.S. farmers for grain of identical quality.

The Wheat Growers also note the CWB is wrong in asserting that Canada exports 80 per cent of its wheat production. Over the past 10 years (1998/99 to 2007/08), Canada has produced an annual average of 23.4 million tonnes of which 15.7 million has been exported as wheat or wheat products. This works out to an export ratio of 67%, not 80%.

The CWB’s claim that U.S. exports are about 40 per cent of production is also wrong. Over the past 10 years, U.S. wheat production has averaged 57.2 million tonnes and its exports have averaged 28.2 million tonnes. This works out to an export ratio of 49%, not 40%.

It would appear that in its zeal to discredit the Informa study, the CWB does not feel compelled to be bound by the constraints of truth.

We also note that in its comparison, the CWB is guilty of “assuming that all wheat is the same”, an accusation it levels at Informa. We note, for example that the U.S. exports a higher percentage of its spring wheat than other types of wheat. In the past 10 years (1999 to 2008), U.S. hard red spring wheat exports averaged 7.1 million tonnes, which represents 56% of their average hard red spring wheat production of 12.6 million tonnes.

Thus, the proportion of hard red spring wheat production that is exported from the U.S. (56%) is not far below the proportion of wheat production exported from Canada (67%). Given that U.S. hard red spring wheat represents the main competing wheat for the CWB in many markets, it seems rather ridiculous for the CWB to claim that American wheat “has an intrinsic price advantage” because a “dramatically lower” proportion of it is exported. In our view, 11 percentage points does not constitute a dramatic difference.

It’s worth noting too that overall U.S. wheat exports are 80% greater than Canadian wheat exports (i.e. an average of 28.2 million tonnes compared to 15.7 million tonnes). If offshore markets truly are lower-priced, why does this not affect the U.S. to the same extent as the CWB? Are U.S. exporters really that much more aggressive, successfully capturing the best return markets, while leaving the scraps to the CWB? It would seem so.

[Fransisco]

<b> CWB statement: “The study also fails to account for the important role played by the CWB in keeping regulated rail freight rates in Western Canada lower than American rates”.</b>

Wheat Grower response:

The regulated freight rate structure (including the revenue cap) is in place under an Act of Parliament and applies to CWB and non-CWB crops alike. It’s not clear what special role the CWB plays in keeping this legislation in place. Several commodity groups and farm organizations, including the Wheat Growers, can just as easily claim that they play an important role in maintaining our regulated rates.

The CWB has also been known to backtrack wheat from Montreal and Churchill to meet sales commitments in Vancouver, so any claims the CWB makes with respect to playing an important role in keeping freight costs low for farmers ought to be viewed with a healthy degree of skepticism.

Furthermore, if the CWB is successful in keeping freight rates lower, than why isn’t this reflected in cross-border price comparisons on wheat, durum and barley (as is the case for canola)? If the CWB’s marketing performance was half as good as it claimed, then you would see U.S. farmers champing at the bit to deliver their wheat and barley to Canadian elevators. U.S. farmers often deliver canola north of the border, and yet we see no such similar pressure for them to deliver milling quality wheat or malting quality barley in Canada. Given the CWB’s historical marketing performance, it’s no small wonder.

[Fransisco]

<b> CWB statement: “Based on all of the above, the CWB completely refutes a key finding of the report that an open market would generate significantly more revenue for Prairie farmers than the single-desk system. ‘It is ironic that this false conclusion is being circulated in a year when the CWB marketing approach has delivered extraordinary returns to farmers,’ White said. ‘We’ve conservatively pegged that benefit at $560 million for 2007-08.’” </b>

Wheat Grower response:

The Informa study stands up well to the largely groundless accusations being leveled against it by the CWB. Even in the one instance where the CWB argument may have merit, the CWB’s own admission that regulated freight rates in Canada are lower than in the U.S. only serves to strengthen Informa’s argument. One would expect this freight rate differential to work in the CWB’s favour (i.e. Canadian farmgate returns should be higher than U.S. farmgate returns), and yet Informa’s findings demonstrate that the CWB squanders this freight advantage.

With respect to the CWB’s claim that it has generated a net benefit of $560 million for prairie farmers in this crop year, the Wheat Growers asked the CWB to provide us with the data and calculations it used to arrive at that figure. This information has now been provided to us (August 13). Once we have had an opportunity to review this information, we will be in a position to comment on the methodology the CWB used to derive its claim, and the merits of its argument.

[Fransisco]

Conclusion

Given the baseless accusations and factual errors in the CWB press release, the Wheat Growers can only conclude that it was hastily crafted in response to media stories that recognized the significance and credibility of Informa’s findings.

It is disappointing that the CWB would engage in such “drive-by” smear tactics and not give the Informa report the proper consideration it deserves. In a report that is as extensive and comprehensive as Informa’s, there are invariably points of debate. While there may be reason to quibble with certain approaches or findings, nothing the CWB has demonstrated thus far undermines the key finding of the report – that there’s no evidence the CWB monopoly provides western Canadian farmers with higher returns. Instead, the evidence points strongly in the other direction

Based on the concerns the CWB has raised to date, there are certainly no deficiencies in the Informa report that would allow the Board to castigate the report in the manner that it does. In our view, the CWB’s diatribe only serves to further undermine its credibility and is not in keeping with the professionalism that farmers expect and deserve from their CWB.

The Wheat Growers will continue to engage in constructive commentary and debate as we pursue the goal of marketing freedom for western Canadian farmers.


Western Canadian Wheat Growers Association
August 14, 2008

[parsley]

The WCWGA point that the "existence of these interest earnings in the final pool returns has the effect of masking the CWB’s true marketing performance" is an excellent one.

Parsley

[TOM4CWB]

Parsley,

I must agree with Wilagro...

This 'single desk' is one mean old hound dog... that steals eggs, denies it... and then piddles on folks legs....

So...

Its About time for the 'lead pill' as Wilagro put it!