The Real CWB Balance Sheet

[chaffmeister]

Pooling is based on equity – everyone in the pool gets the same basic price with the only difference being freight and handling charges. The guys with higher “valued” wheat – because of certain quality characteristics or location – share the benefit of these characteristics with the guys in the regions that don’t produce these characteristics. (I’m not talking about grade spex – I’m talking about unique characteristics.)

So Agstar, your premise that “If your model doesn't work when you pay the same price for raw product as your competitor, you are doomed” doesn’t take into account these kind of comparative advantages.

Let’s say you farm around Moose Jaw and you and your neighbours produce durum with some very unique characteristics. Because of your unique combination of growing conditions, altitude, and location, your durum has characteristics that others can’t match. Your durum is truly worth more.

Now say you went to the CWB and said, I have a business plan to process Moose Jaw area durum into a specialty food and extract a premium while doing it. You tell the CWB that the only ones that can produce the raw materials are Moose Jaw area farmers, because of some quirk of nature. But even so, the CWB tells you that you must first sell this special durum into the pool and buy it back at DHC price.

You argue that the only way this will work is if you use Moose Jaw area durum (it’s different remember - you have a comparative advantage) and you see no reason to participate in the pool. You suggest that pooling shouldn’t apply because the premiums you can achieve are not achievable anywhere else – other regions just don’t have the right combination of growing conditions, etc.

The CWB is telling you that, to be fair and equitable, you must share this “premium market” with everyone else growing durum in Western Canada. So even though they can't participate in it, the CWB ensures they gain by it.

You say that it is only fair that you and your neighbours benefit from the value that only you and your neighbours can add. You understand their need for better returns but you feel strongly that the results of your entrepreneurial actions, if shared with others, reduces your incentive and effectively subsidizes those that are not involved in the business.

So it comes down to fair value and who gets it – not the price of the raw materials. In the interest of maintaining the pool, initiative comes in a distant second.

Believe me, business plans are often based on being able to do something better, faster, cheaper than the incumbent competition - it's your comparative advantage. And that includes sourcing raw materials.

The idea of a business plan standing on the premise of paying the same price for your raw materials as every one else fortunately only counts when you’re dealing with the CWB (unfortunately for entrepreneurial farmers and their communities).

[agstar77]

Yes and what happens when your farm with your"special" durum has a crop failure or whats worse the whole area goes crap? Where do you get that special durum? Not as cut and dried as you would have everyone believe. Not only that, most people who have tried this have found they must devote all their time and resources to one or the other not both. Value added only serves us when it provide a market for what we produce that is different and has greater returns than we can get otherwise.

[chaffmeister]

Are you suggesting that the purpose of the CWB policy toward farmer-owned processing is to protect them from climatic disaster?

What do you mean "most people who have trid this"? Who's been able to? Besides, shouldn't people have the right to take these risks if that's what they want to do?

Rewards have their risks. Pooling dilutes the rewards while doing nothing to help with the risks (as you have made clear - "what happens if you have crop failure"); changes the whole risk/reward thing.

Those that are willing to accept the risks should get the rewards.

[agstar77]

There is a reward for a consistency of supply which individuals can't guarantee. All flour mills like to have the same grain for a particular run of production and they are willing to pay a premium for that uniformity. They won't get that from one grower. You may have a special grain but it does not mean any mill wants it.

[parsley]

Agstar, you sound just like the CWB 20 years ago undermining organics, essentially telling organics they would fail and to get out of their face.

"Pasta plants and flour mills are high volume low percentage businesses. Only vertically integrated corporations can compete on mass production."

You want more of the same, complain about more of the same, and are totally negative towards anyone willing to try something different.

agstar the grain-world and their markets have changed, so let's get on with it.

Waist-folding isn't benefitting farmers.

Parsley

[chaffmeister]

Agstar - you're points would be valid if we were talking about one producer supplying one flour mill with a specialty grain. But that's not at all what I was talking about. Re-read my story - a number of farmers in an area wanted to develop a business around their "comparative advantage". They didn't want to sell their grain to a mill - they wanted to be the mill.

Take a look at http://www.wheatmontana.com/index.php

Wheat Montana is a very successful family farm business that grows wheat, mills it, bakes bread and ships it's branded loaves as far away as New York where it is highly regarded and commands a premium. And no, they aren't torn between farming and milling, only able to one or the other. they have about 100 people working for them.

Are they like the guys around Moose Jaw in my earlier story. Don't know. They may have had a "comparative advantage" or they may have simply had a good business sense and some moxy. But look what they're selling. Not wheat, not flour, not bread. they're selling wholesome goodness. (Remember - forget the steak; sell the sizzle.)

Imagine. Farmer-owned and operated. Local business. Local jobs. Contributing to the local tax base. The whole ten-yards.

This is the kind of enterprise I would love to see in Western Canada. Now don't go saying something like -

"This isn't the solution. You can't expect enterprises like this to pop up all over Saskatchewan".

You'd be wrong - and you'd be right. I think you're wrong - it is the solution. And I think you're right - there couldn't be dozens of them all over Sask. But even one enterprise like Wheat Montana would be a huge success and an inspiration to many others.

Imagine.

[chaffmeister]

I was hoping to get more input into this exercise of figuring out whether the CWB contributed financially to farmers or is a burden to them (especially from those that could contribute from the CWB’s perspective). Only AdamSmith added to the calculation. (Sorry Parsley – your item is valid but is already included in the admin costs) And sorry Jman but we’re talking about CWB grains, not canola.

If we include AdamSmith’s $45 million liability from the CWB’s marketing of mid-quality wheat, the total is a liability to the tune of $193 million annually. (I don’t know if AdamSmith’s proposition is correct, but I didn’t see any argument against it either.)

I’d really be interested in Vader’s reaction or thoughts about exercise. Back in Jan (Jan 31st at 23:31 to be exact) Vader said the following in a post:

QUOTE
I do not favor pooling and I am open to any suggestion as to how to improve the CWB and make more money for farmers. In fact if the CWB comes with a HUGE price tag that outweighs any value proposition then I might even be convinced to wind it down.
END QUOTE

So Vader – does this exercise lead to the conclusion that the CWB comes with a HUGE price tag? Or are we missing something? (There’s still time to contribute to the “balance sheet”…)

[chaffmeister]

Correction:
I meant to write

"I’d really be interested in Vader’s reaction or thoughts about THIS exercise."

I really am not concerned about his position on exercise. What Vader does with his spare time is his business.

[Vader]

Chaffmeister,

I don't know if any of the above "costing" estimates is valid nor are they comprehensive. I do not accept that this analysis has any merit whatsoever.

I will comment on whether $193 Million is HUGE.

I was on the board of directors when Terminal 22 at Balcarres was being formed. We were in negotiation with various grain companies to find an operating partner. During one meeting a potential operating partner wanted to know if our group was thinking in business terms and advised that "we intend to make $20.00 per tonne on this project... do you have a problem with that"?

If you read the Bill Wilson paper on they way firms bid on grain supply contracts his examples show that some companies build in profit margins as large as $40.00 per tonne. By way of contrast the CWB returns all profits after administration expenses to producers.

Crush margins today are in the range of 80.00 per tonne and have ranged upwards of $100.00 per tonne.

So your figure of $193 million divided by a CWB sales program of 20 million tonnes works out to $9.56 per tonne. This is far from HUGE in the current environment.

Again I do not accept this figure at face value. I believe there are many other benefits of the CWB which have not been quantified. How do you measure the value of having some market power?

The current study by Hartley Furtan shows that the loss of the CWB would cost producers an additional $30.00 per tonne in increased freight costs alone. This would amount to $600 million dollars per year which is about the same amount of money coming to western Canada in the Grains and Oilseeds Program.

[charliep]

Just to highlight, everyone is talking about $80 to $100/tonne crush margins. I suspect this is a board crush based on futures markets and not a cash crush. See below

http://www.wce.ca/DeliveriesCashMarket.aspx?first=canolaboardcrushma rgin

Chaffmiester has highlighted the differences and the fact that the above does not include any costs of operations (let alone any cash premiums/discounts on meal and oil). Crushers are doing well but I suspect not to the extent you indicate by your assumptions. Is this a bad thing? I note that canola exports to March 17 are running 50 % ahead of the pace in 2004/05. Crush is 8 % ahead.

Vader - I am curious how you would see a CWCB (Canadian wheat and canola Board) which is either voluntary or compulsory pricing to domestic crushers? How would it price into the export market? Realizing there are lots of other elements to a companies decision about where to locate (including all forms of government support), would having a CWB role in canola be a positive or negative in a business decision about where to locate a bio diesel plant?

[AdamSmith]

Here's another liability, I don't know if this one is a current cost but the impact of having a single desk system for all these years has cost farmers dearly.

We have to go back to the late 60's and early 70's here, this was the time frame when the US modernized their inland terminal system. They built monster inland storage facilities. Mega Terminals if you will. They were built with probably $5/yd concrete and steel was cheap and labour was maybe $3-$5/hr. By the time we decided we needed more than 1950's technology in our grain handling system, the industry built only what they thought they needed and that was just bigger throughput elevators, Not the mega storage terminals. We used $70-$80 yd concrete and were paying probably $25-$30 hr wages to build them.

By the time we got around to modernizing and going into massive debt to do it, the US had their's built and payed for many times over already.

This cost goes in the higher handling fees category. But this also goes to Almoy's beef about delivery oportunity. We built a throughput system (that does a real poor job of throughputing)instead of a storage system and we did it late in the game.(A day late and a dollar short)

The entire, higher than need be, costs of storage are born by individual farmers.

This is the legacy of 70 years of "orderly marketing"

What will the next blunder and missed trend be? GM Wheat? Something else?

We can't afford to be 30 years behind the rest of the world anymore.

What's the actual cost? $100 million/yr?, $300 million a year?

We may not no the exact $ figure but it is just as real as the ones that we can quantify!

[AdamSmith]

Vader, I haven't read Furtan's latest novel but if his past work is any indicator, Furtan makes the simple assuption that farmers will not react or make adjustments to any changes that occur. He assumes (wrongly IMO) that we'll just keep doing what we've been doing with out reacting to changing realities. If transportation costs go up by $30t (which I don't believe for one moment) farmers will make adjustments by drasticly lowering the amount of grain grown on the prairies to be shipped overseas.

Furtan has never heard of the word Arbitrage. Doesn't know what it means, doesn't understand the concept.

Vader, this is crunch time for the CWB, The old arguments aren't going to save your A this time. U of S economic professors and their junk economic theories carry little weight with the guys who are in power in Ottawa today.

Vader the CWB needs to find it's niche, and focus on doing what it thinks it can do best.

The days of an open market are very near. Are you going to help the CWB negotiate this new path or are you going to be like so many others and be left sitting in a corner mumbling to themselves, If only...., If only...., If only.... ?

My last posting for awhile, going to California with the family to do the Disenyland and Seaworld thing for spring break.

[Vader]

Charlie, I think that canola crush margins are terrific. I wish that farmers could tap into some of these profits. In fact I believe that they can based on selling into a biodiesel market and not having to compete for existing food markets for canola oil.

The possibility of the CWB being involved in canola business on a voluntary basis should not have any impact on where biodiesel plants are located. In fact my preference is that the biodiesel industry evolve at the community level to minimize freight costs.

[chaffmeister]

Vader – Check out the Grain Monitor’s report. In there they show what the costs to handle and ship grain are in different regions in the prairies. I checked out North West Sask. From this I was able to calculate that grain companies were charging an average of about $8.78 per tonne to handle wheat – before blending revenue, screenings, and multi car shipping. And I can assure you, that these other revenue sources will not generate enough to get them up to $20 per tonne in total revenues (I’ve done the math before many times) – and certainly not $40 profits.

As for canola – the report shows that, in the same time frame, grain companies made about $5.35 per tonne on average. Also, a far cry from $20-40.

And if I was a farmer I would be offended by your reference to how the CWB returns all profits after admin fees “by contrast”. By the way – these figures about grain handling are not profits – they’re total revenue. Depending on volume handled, revenues like this may not even be enough to generate profits.

You ask “How do you measure the value of having some market power?”

IMHO - market power is measured in premiums achieved or being able to make sales where all others would fail. If you want to factor in a number for premiums in our calculation, be my guest (that was the idea of the exercise anyway). Not sure where the CWB could make sales where all other would fail though.

Concerning freight rate increases: How does a freight rate increase of this magnitude occur with the Revenue Cap in place? (Just to make sure I haven’t missed something, I called a friend at one of the railroads – he confirmed what I thought. The CWB has no impact on regulated rates under the Cap.)

[Vader]

On the profitability of the grain companies. When Terminal 22 did their business plan they were banking on doing 10 turns of the facility per year. If you take the total volume of grain handled in Western Canada and divide by the facilities there is only enough to average 4 turns.

The impact on grain company profitability is obvious. How grain companies will behave in the future is uncertain.

I believe that their corporate target still is $20.00 per tonne and they will not be happy with current levels.

So who do we let drive this agenda? What is market power worth? It is worth a lot to those who have it. If farmers give up what power they have today then the value increases geometrically to those who stay the course.