The Real CWB Balance Sheet

[chaffmeister]

The real CWB balance sheet for farmers (in millions of dollars) - for discussion purposes:

Assets – financial benefits of the CWB system
1. Interest revenue $56
2. Premiums to Japan $24
3. Premiums on durum to the US ?
4. Other premiums ?
4. Market development ?
5. Others ?

Liabilities – costs of the CWB system
1. CWB overhead $68
2. Higher handling/storage charges$100
3. Lower non-CWB prices $60
4. Low market impact on large sales ?
5. Community losses from less value added ?
6. Marketing mistakes ?
7. Others ?

Notes on assets:
1. Interest revenue – this was taken from the most recent CWB Annual Report
2. Premiums to Japan – this was taken from another thread – I think Incognito had it figured: 1.2 mmt times $20 per tonne. I think that’s hefty, but let’s go with it.
3. Premium to the US on durum – any thoughts ?
4. Other premiums Any thoughts?
5. Market development – not sure how to quantify this. Again – any thoughts anyone?

Notes on liabilities:
1. CWB overhead – from CWB Annual Report
2. Higher handling/storage charges. Assuming the CWB pays elevated handling fees of about $10 per tonne on 10 mmt (both primary elevator handling and terminal handling), this works out to about $100M.
3. Lower prices for non-CWB – non-CWB crops are used for cash flow because CWB grains don’t provide much cash flow. Over deliveries relative to demand depresses prices (especially in the fall). Assuming $20 per tonne on 3 mmt, this works out to about $60M.
4. Low market impact on large sales – this is the market reality that when the CWB sells large quantities to end users, the market doesn’t feel the impact (this is beneficial to the buyer but not the seller. One reason why millers like the CWB system. Not sure how to quantify this – any ideas?
5. Community losses from less value added – the CWB was an impediment to two value added projects that I know of – Prairie Pasta (may have bought the Borden Pasta plant in Lethbridge (since closed down) if the CWB was more supportive from the beginning) and IMC (malt company that built in Idaho instead of Alberta – because they wanted to deal directly with producers and not the CWB). How much these two losses cost western economies is up for discussion. Any other projects gone awry because of the CWB?
6. Marketing mistakes - believe me, the CWB makes them. After all, the people there are just that – people. For example – a number of years ago a multinational AE sold three cargoes of feed wheat to South Korea. Nothing is secret in the grain trade so the guys at the CWB caught wind of who made the sale. When the AE went to the CWB to negotiate a purchase to cover the sale, he found the CWB particularly firm on their relatively high price for this sale of about 100,000 tonnes – I think it was about $10 per tonne above the market. The CWB was trying to extract a premium from the AE whom the CWB knew to be short. What the CWB didn’t know was that the sale was made on the basis of “optional origin” meaning the seller could cover the sale from where ever they chose. Finding the CWB particularly difficult to deal with, the AE eventually covered the sale out of Australia. Canada lost the sale altogether – in a year when we were swimming in feed wheat. So, instead of extracting a USD $1 million premium, the CWB lost a sale worth, let’s say about USD $10 million.

And let’s not forget the Churchill to Vancouver fiasco.


I’ve intentionally left the lists short – I have more ideas but also want to draw out others. Please add whatever you think should go on either side of this ledger. Whatever is reasonable should go in. The bottom line should reflect the true value of the CWB to farmers in dollar terms.

[parsley]

Liability:

CWB Constantly Plays Santa Claus with our Pooling Accounts dollars according to the Orders in Council passed.


1.In 2005-10-25, with farmers really hurting:

"Order authorizing THE CANADIAN WHEAT BOARD to make a donation towards the construction of the University of Alberta's AGRI-FOOD DISCOVERY PLACE.

Her Excellency the Governor General in Council, on the recommendation of the President of the Treasury Board and The Canadian Wheat Board, pursuant to subsection 39(2) of the Canadian Wheat Board Act, hereby deems the payment of a contribution by The Canadian Wheat Board from the separate account referred to in that subsection of not more than $500,000, on the condition that the funds are available, to fund the construction of the University of Alberta’s Agri‑Food Discovery Place to be for the benefit of producers of wheat and other grains."


Does Alberta need the cash and farmers don't?

2.Every year since 1999-12-02 , DA farmers are paying for scholarships:

"Authority for a yearly allocation from the separate account of $400,000 to cover expenses associated with The Canadian Wheat Board's SCHOLARSHIP AND ASSISTANCE PROGRAM."


Couldn't we use almost another $million in our pools from just these two items in 2005?

Parsley

[Jman]

I got one too.......

Canola balance sheet:

2005 Production: 9.6 MMT.

Average near-by canola basis (weighted by production region -$8.0/tonne

Average 2005 crush margin: $78/tonne

Total cost (i.e."margin"):
$86/tonne x 9.6MMT = $748,800,000.

Ironic that this is equal to the amount the Federal government paid out to us in emergency aid to help us poor beggars.

This sure could have went a long way in building producer-own bio-diesl plants in our small towns???

[Jman]

Oops forgot the $8/tonne basis. The actual total = $825,600,000. That could have paid for even more crush plants on the prairies.

Cinderella isnt so pretty anymore.

[AdamSmith]

US 1 Hard Red Winter Wheat - (Exporter bids-falling numbers of 300 or
better)
Ordinary protein mostly $ 4.60 , ranging $4.60 -4.67 up 5-up 9
10 pct protein mostly $ 4.60 , ranging $4.60 -4.67 up 5-up 9
11 pct protein $4.74 -4.77 up 6-up 8
11.5 pct protein
Feb mostly $ 4.81 , ranging $4.81 -4.87 up 5-up 9
Aug NC $4.90 -4.94 up 11-up 13
12 pct protein $4.81 -4.90 up 5-up 9
13 pct protein mostly $ 5.01 , ranging $5.01 -5.03 up 7
13 pct protein - $5.01 -5.03 up 7
Milling Quality Montana Origin

US 1 Dark Northern Spring Wheat (with a minimum of 300 falling numbers and a
maximum of one percent total damage)
12 pct protein $4.46 -4.54 up 7
13 pct protein $4.86 -4.94 up 7
14 pct protein
Feb mostly $ 5.31 , ranging $5.26 -5.34 up 7
FH Aug NC $5.17 -5.29 up 8
LH Aug NC $5.12 -5.24 up 8-up 6
15 pct protein $5.50 -5.58 up 7
Guaranteed 15 pct protein NA


Using the above as a reference to real world values and from the Dec. Stats Can Production Report, MB, Sask, and Alb. grew 17.5 million bushels of winter wheat this year. Stats Can doesn’t break down spring wheat classes so for arguments sake lets just double the winter wheat production to account for the CPS wheat and other mid quality wheats.

So we have 35 million bushels

Basic winter wheat #1 is $1.12 less than 12% Protein #1 CWRS from the CWB. The above table actually shows that basic 10% protein winter wheat has a value that is $.16 /bu above 12 % protein red spring.

That equals 35 million bushels @ $1.28 bushel =$44.8 million dollars the CWB costs us on this one item alone.

CWB marketing of mid quality wheat $44.8 million liability

[AdamSmith]

Yes Jman the crush margins are way out of line this year but I see you took the entire crush margin of $78 dollars as a liability to the open market. I would say that only $30-$35 of that $78 could be classified as eccessive cost. But many years crushers operate at a loss. My winter wheat example exist every year no matter what.

It amazes me that any sound minded person with one dollar to invest would want to invest in a country where so many people see any profit as bad. I'm not trying to defend the crushers but I guess in your world bio diesel plants will operate on a non profit basis. If you want value added you have to accept that anyone who invests in those ventures will need to make a profit for it to remaian viable and sustainable.

The reason why crush margins are so high is because farmers have been forced to sell into a low market and the market really doesn't want all that canola right now but farmers just keep on selling. Wouldn't it be nice to be able to keep canola in the bin and sell wheat for full market value and into a rising market to boot?

[AdamSmith]

Jman, lets assume you had a couple million to invest would you think you could get a good return by investing in canola crushing? Yes or No?

[charliep]

Just curious where the $78/tonne came from. Is that a board crush margin or a cash one?

[agstar77]

I guess by your logic A.S. , why would someone invest in a pasta plant or a flour mill? Especially cash strapped farmers.

[AdamSmith]

Agstar77

My logic is why would anyone invest in anything unless you thought there was a decent profit potential.

My question to Jman was that by his assumption of grotesque profit in crushing, one would assume that those who have already invested into that activity would be most eager to reinvest and expand that activity in order to generate even higher profits, right? So if crush capacity expands at least that is a benefit is it not?

But if farmers convince themselves and government regulators that we need to limit processors profits then were not going to see value added processing. By anyone, farmers included. I don't know about you but if I'm going to make an off farm investment, I'm going to want to see a decent return on my investment. Wouldn't you?

[chaffmeister]

Jman – some questions/comments on the crush:

First, I don’t know where you got the $78 crush margins for 2005 – but it’s exactly what you can calculate using the prices on the Canola Council’s website. These are Vancouver prices for seed (instore), meal (FOB) and oil (FOB).

Assuming these are the numbers you used, you shouldn’t further deduct an $8 cash seed basis – it’s already in there. Further, you really should back off the freight back to the crush plant – I don’t know what the rates are but I’m going to guess they’re different for seed, meal and oil and so will make a difference. At a minimum, you should back off the oil and meal from FOB to instore – which would make the calculation about $68 per tonne.

The whole crop isn’t crushed. So if w go with $68/tonne margins, they should be applied on the amount crushed – let’s call it 3.3 mmt. So this would make your calculation $224 million.

I can’t remember the actual number, but I was once told that breakeven – although different for each crusher – was about $35 per tonne. Perhaps someone else can correct this if I’m wrong. If it is right, then we should be talking about the $33 per tonne “profit” – the amount of the margins above breakeven. (Which makes the calculation $109 million.)

Now – although we’re really fishing in the dark here – the question should be, is this reasonable?

Part of the reason why crushers are making money is that they understand how to respond to market signals. Collectively, farmers sell and deliver about 50% of their canola crop before Christmas each year, even though prices are lowest (basis is weakest) then. This is (1) for cash and (2) to avoid storing canola. This is often done while the market is giving all sorts of signals to sell canola on a DDC and store it. The crushers read these signals and built huge storage capacity. So, when you’re selling canola in the fall at $50 under, the crusher is happy to take it and store it.

I’d be willing to suggest that $20 of those crush margins are solely due to early marketings by farmers (depressing basis levels). We really need to find a way for farmers to be in a position to make better marketing decisions. (I recognize that many farmers may be forced to sell at harvest due to cash needs. To me this is the real market villain.)

Jman - what I find curious is that you appear to feel that it’s unacceptable for the crushers to make a margin at all – let alone a profit. I’m not defending excessive profits, but we need to make sure we’re addressing the right issues.

Jman – I appreciate your thoughts on canola – but do you have any thoughts, comments or additions on the CWB balance sheet that started this thread?

[agstar77]

Exactly Adam. Pasta plants and flour mills are high volume low percentage businesses. Only vertically integrated corporations can compete on mass production. Only a few specialty mills can survive not nearly enough to use all the grain in Tom's designated area.

[AdamSmith]

Agstar77, I agree. Western Canada will always export bulk grain, and probably a always a majority share.

But I believe we should still continue to adopt policies which make it easier, not harder for those who do think there is an opportunity to establish value added processing. Would you not agree?

The one thing that must change is the attitude by many farmers to villanize those who are successful at adding value to our grain or our farms. Whether that be a small , medium, or giant multinational business.

It seems to me that many don't understand that whaet really has no value until it has been turned into flour, and flour really has no value until it has been turned into bread, or cookies or cakes or crackers or pasta or whatever else people like to eat.

Wheat farmers need to have, not just good relations, but great relations with all those involved. Yet the whenever the CWB or the NFU demonize the multinationals they are demonizing our literal meal ticket.

Another liability on the CWB balance sheet.

No matter what kind of sweet deals the CWB sales dept. might offer the big multinational vertically intergrated companies, The politicos like Vader and the communiction dept. with their rants against them, can still have negative effects and can cost all of us. No one likes to be constantly trashed and villified. They just say to themselves, "Life's too short to dance with ugly women" and look elswhere.

[agstar77]

We should not demonize Multi's .but .They will work with us as long as they feel they can make more money. Neither should we kiss their butts. Wheat is grown almost universally, very difficult to capture that elusive added value unless you have an edge . Everyone can make bread or pasta. Governments won't let you make a decent return because people{voters) want cheap bread and pasta. We must think outside the box and find unique uses fpr the crops we grow outside the food area. An example is plastic made from oilseeds or other plant materials or cellulose for biodegradeable packing material. The only way this can happen is with investment of that grain subsidy money into small business which can develop these products. I see no future in value added as defined by farmer owned pasta and flour mills. This has nothing to do with freeing up grains from the CWB. If your model doesn't work when you pay the same price for raw product as your competitor, you are doomed.

[chaffmeister]

For outside the box thinking, go to:

http://www.auri.org/
AURI is the Agricultural Utilization Research Institute in Minnesota. Their online newsletter shows all kinds of new and innovative thinking.

http://www.wheatworld.org/pdf/NAWG%20New%20Improved%20Uses%20Report%20Final.pdf
A few years ago National Association of Wheat Growers (NAWG) had a study done on alternative uses for wheat.

Both are US-based - I can't seem to find any similar resources in Canada. Pity.
(Can anyone help me?)