Wilson Report - Old News

[Vader]

The Wilson Report dated June 2000 is old news.

Wilson observes that

"Effects of Canadian offers in bid functions were not statistically different from U.S. origins"

This has been confirmed by many NAFTA challenges wherein the CWB has been found over and over to be a fair trader and that they operate in a commercial fashion.

Were it otherwise the CWB would be severely sanctioned in world markets.

Wilson goes on to say that when considering a Canadian bid as simply one more bidder added to the process no different than the addition of any other bidder:

"The effect of this was to reduce optimal bids for HRS by $0.50/mt". (introduction page iv)

This is supported by simple logic as well as Wilson's own statistical analysis. No surprse that sellers objective would be to reduce the number of sellers and to gravitate as much as possible to a sellers monopoly. This is probably the single most important driver of corporate consolidation in the grain industry.

One might assume that as the number of grain sellers is reduced that grain values would go up (a minimum of 50 cents per tonne for each seller eliminated but probably a larger increase as the level of monopolistic control increases).

This is not so because as Wilson's study shows as the number of bidders is increased the bidder simply widens his profit margin.

Quite interesting to note that at the heart of the study is this equation

E(d)=(B-C)*P(W)

where E(d) is the payoff, B is the bid, C is the cost and P(W) is the probability of winning. Again this is completely intuitive. The more bidders the lower the probability of winning a bid. The higher the bid the greater the payoff but the lower the probability of winning.

Wilson says,

"Reduction in the number of bidders increases the P(W), and as a result the E(d) increases, as does the optimal bid and expected payoff to bidder." (page 3)

(Optimal bid - Maximizing the probability of winning yields the lowest payoff while targeting the maximum payoff yields the lowest probability of winning. The optimal bid balances the payoff with the probability of winning.)

Bidding strategy is heavily dependant on knowing the bidding history of your competitors. This is a sticking point with US firms and the CWB as the CWB is not required to provide public statements of successful bidding values. Now we have two really good reasons why US firms would like to eliminate the CWB.

Table 2 on page 9 shows a range of expected profits by firms bidding on the same contract. This is the part of the payoff equation represented by the function (B-C). For HRS wheat this function varies from a low of $.82 to a high of $10.48. Obviously the firm who bid low at .82 did not bid anywhere near the optimal level and did not get a very large payoff. Neither did the firm who bid 10.48 approach the optimal bid level. They got no payoff. This is all good for the buyers and it would not be in their best interest to see a reduction in the number of bidders.

In the case of HAD the expected profit (B-C) ranged from a low of $9.57 per tonne to a high of $15.86 and for HRW wheat the expected profit ranged from a low of $29.73 per tonne to a high of $41.14 per tonne.

In his analysis Wilson assumes uses cost based on applicable futures or C&F values. In other words as the firms vary their bids there is no impact on acquisition costs, only profit margins. If anything as time goes on and as each successful low bidder finds that profits were sub-optimal there is pressure to lower acquisition prices.

So folks read the Wilson report carefully. It is quite technical but the message is clear. A multiple bidder environment lowers prices for buyers. Eliminating competition is good for selling firms as is acquiring knowledge about those other firms engaged in the business as it allows them to widen their profit margins.

The difference between US firms and the CWB in this quest for monopoly powers (elimination of competitors / corporate concentration) is that US firms return their profits to shareholders and the CWB returns profits to farmers.

[Incognito]

Oh wait, you mean Wilson knows what he is talking about now?

You crack me up...lol

[Vader]

When you interpreted Wilson's work to be a condemnation of the CWB I assumed that your interpretation was accurate and that Wilson was wrong.

When I read the paper and found that you were completely wrong, well of course that makes Wilson absolutely correct.

LOL

[Incognito]

I gave it as to a balanced approach to bidding on international wheat sales.

Balanced approach - are you capable of that?

[chaffmeister]

I have not read the report so I will only ask a question of those that have.

Does the report consider acquistion costs and approaches for those that are bidding on tenders? It's one thing to say that multiple sellers push prices lower for the buyer, but what about multiple buyers for farmers grain?

Vader, you have interpreted Bill's analysis as saying the more sellers you have the better it is for the buyer. But as I've said many times here on Agri-ville, that is only part of the equation. These multiple sellers are also multiple buyers - from farmers. So as these exporters shave their prices to get the business on the tender, they are VERY VERY cognizant of the fact that they also have to compete for the farmers' grain. So, to be clear, what they are shaving is their own costs and margins, but not their acquisition costs. Sure on deferred business, they may choose to get aggressive and cut their price to get the business, taking the RISK that they may not be able to cover the sale from the farmer at a profit. If they are wrong, they lose (not the farmer).

This is important in the discussion about the CWB. The CWB doesn't need to worry about acquisition costs like other exporters.

As a trader I was always told, "don't sell a market that the farmer won't sell". What that means is, don't sell below where you'll be able to cover from the farmer. That's why grain traders are so interested in farmers' thoughts about price and what their "magic numbers" for pricing are.

Unfortunately, the CWB system does not accommodate this basic tenet of grain trading. From what I gather, the CWB will often sell at prices that many farmers wouldn't.

So my question - what does the report say about acquistion costs? Can we interpret Bill's analysis as saying multiple sellers are good for the buyer and not good for the farmer?

[Vader]

The report says little about acquisition except that costs are taken from futures and C&F values.

Grain companies are multiple buyers of producers grain. In a sellers market this would be great as buyers would have to bid up the price. That is simply not the case. It is a buyers market. A sellers market in grain is as rare as the proverbial unicorn. This is why we have lentil prices down at 3 cents per pound.

5 companies control 80% of the worlds grain trade and I am sure it is their intention to whittle that down, as per my previous post. There are probably hundreds of companies in that remaining 20% including the CWB and the AWB. It is very easy for the big five to make acquisitions. Bunge who is number 3 on the list doubled in size over a 10 year period through mergers and acquisitions. There are rumors that Cargill is going after Smuckers who now own Robin Hood, and one must wonder when SWP will be the target of a take-over.

[charliep]

Would the reason for 3 cent/lb lentils (#3 grade) be the same as the reason for a "B" pool feed barley PRO of $115/tonne ($1.43/bu Alberta)? Perhaps the factor that saves both these markets is the local feed one.

If you are looking at factors that influence price, how much impact does an 80 % call on the "A" series and a 50 % call on the "B" series CWB contracts have on domestic feed prices. I note that wheat exports (excluding durum) are running about 19 % below a year ago and deliveries about 10 % below a year ago.

[chaffmeister]

Vader: You’re confusing market prices with negotiated prices.

Market prices are prices in general – a reflection of all commercial activity in the commodity.

Negotiated prices are what you and I negotiate as a buyer and a seller. As a buyer I will negotiate my costs and margins – but not the market price. What we eventually negotiate as a small portion of the whole market hopefully has an impact on market prices. In an open market it does and this is a good thing. It’s called transparency. The information gets around, and others – both buyers and sellers – adjust to the commercial reality being negotiated around them.

I’m afraid you missed my point about grain companies as multiple buyers. To blame the grain trade and open market structure for lentils at 3 cents a pound – suggesting that the price is so low because the grain companies don’t really need to compete for them – is simply, well, wrong. When grain companies are multiple buyers, remember – they are not setting the market price – they are reflecting the market price in their bids. Their competition between them impacts their handling margins – but has little to do with market prices.

I’ve often read here on Agri-ville that we shouldn’t blame the CWB for low prices. Perhaps the EU and USA subsidies – but not the CWB. And I agree with this logic (to a point). But in the same vein, we can’t blame low prices on the open market structure either.

[Vader]

I blame low prices on oversupply and farmers willingness to sell into these markets. I do agree that the market price is an aggregate over time. I still maintain that HUGE corporate concentration in the industry can impact on the market.

[silverback]

Well Vader, I am a farmer who actually grows products that I am forced to sell to your beloved company, and there is no choice for me to sell at these prices!! Based on the price signals given to me by your company, I grew some products hoping to move them at some point this year. However, the beauty of the CWB is that they can change the prices as it goes along, and if they have not forward sold or hedged the dollar, they now have no chance of moving what is in the bin.

Now you come along and say that it is somehow our fault for being willing sellers at these terrible prices???

Many of us have no choice right now and will take whatever we can get to pay off some bills. I am glad life in Winnipeg is so grand that there is no reason to worry about the future, or the present, down on the farm.

Do us all a favor and take the elected and unelected board members on a long sebatical.

[chaffmeister]

Vader, I took your advice and read Wilson’s report closely. I think you misunderstood some of it.

ONE – Wilson said:
"Effects of Canadian offers in bid functions were not statistically different from U.S. origins"

You said:
This has been confirmed by many NAFTA challenges wherein the CWB has been found over and over to be a fair trader and that they operate in a commercial fashion.

Does this not also suggest that the CWB does not get a premium?


TWO – You said:
“Table 2 on page 9 shows a range of expected profits by firms bidding on the same contract.” And “For HRS wheat this function varies from a low of $.82 to a high of $10.48.”

These values are the difference between the tender bids for each bidder and the “Cost Indicator” – B-C. This is NOT the expected profit margin. For HRS wheat the cost indicator was the C&F value – NOT the replacement cost for the firm. For HRW, the cost indicator is Kansas futures. These relationships were explored to see if bidding behaviour could be predicted – not to indicate profits (because they don’t).

THREE
Interesting to also look at the standard deviation of B-C – also found in table 2 on page 9. When the B-C value was 10.48 (the one you referred to), the standard deviation was 22.89. This suggests that the mean bid was 10.48 above the cost indicator; the standard deviation being larger than 10.48 suggests some bids were even below the cost indicator. Wilson indicated that these ranges in bids demonstrated the wide range in costs between bidders.

FOUR
Interesting to note Figures 10 and 11 on page 17, showing tender bids for HRS and CWRS in Figure 10 and HAD and CWAD in Figure 11. No sign of premiums for Canadian wheat here.

FIVE
Also – According to Wilson: “These results indicate that a supplier’s bid function is not affected by whether Canadian origin is offered as an alternative. This suggests that the supplier’s bidding behaviour is the same for U.S. or Canadian wheats. Strategically, this suggests that at least in this market which uses very micro-data, there is no evidence that Canadian wheat is sold at a premium.” (Page 18)

[Vader]

The good new is that the CWB does not depress prices other than being one more bidder in the market place.

Wilson also indicated that actual selling prices by the CWB were not available to the commercial trade and as such made it difficult for firms to strategically asses the CWB as a competitor.

No evidence of distortion in the marketplace and CWB maintains confidentiality of its customer relationships.

[Incognito]

Balance Vader....thats what this excercise was about. Can you have balance?

1) where are the premiums

2) farmers vote CWB directors in; however woeful the voter turnout is.

Should it not be in farmer's best interest to see the what premiums are generated on how many tonnes and what kinds of wheat?