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CWB ocean despatch, costs us $6.66 million

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    CWB ocean despatch, costs us $6.66 million

    The CWB claims Despatch refunds on shipping a victory, but are they?

    At a meeting on December 5th, 2000 Sask Wheat Pool held a Transportation and Grain Logistics Meeting in Kindersley.

    Mr. Tim Kennedy, Manager of Rail Logistics for Sask Wheat Pool clearly stated, unless a shipper pays a little demurrage from time to time, freight will likely be more expensive than it could be, if shipping logistics are efficiently managed.

    The fact is a boat loading 45,000 tonnes at one berth, in one day, would be ideal.

    In a perfect world, this shipment with neither despatch or demurrage would be best!

    Because a ship owner can make back some money when a boat goes back to sea earlier than expected, despatch returns about half the cost to book the boat for the loading period planned.

    However, the other half, already built into the base freight cost, never appears on any CWB financial statement.

    So how does the CWB spin this?

    CWB Despatch in 1998-99 was as follows(the latest year on the CWB web site):

    1.Wheat; “Efficient loading of grain vessels led to net despatch earnings of over $5.4 million this year, $0.43 per tonne, far surpassing last year's record of $3.7 million or $0.25 per tonne.” (http://www.cwb.ca/publicat/annual/html9899/wheat.htm)

    2.Durum; “Efficient loading of grain vessels contributed to net despatch earnings of $1.2 million this year, representing the second highest level in the history of this pool account.” (http://www.cwb.ca/publicat/annual/html9899/durum.htm)

    3.Barley; “In addition, the pool the account earned net despatch earnings of $63,558, representing $0.03 per tonne, as a result of efficient loading of grain vessels.” (http://www.cwb.ca/publicat/annual/html9899/barley.htm)

    From my calculations, the CWB by earning $6.66 million in despatch actually cost us about 13.3 million in extra shipping costs, for a net extra cost of about $6.66 million dollars, directly out of western Canadian farmers pockets, through the pooling accounts!

    Am I wrong?


    #2
    Yes Tom, you are mistaken. Demurrage and dispatch are parts of a loading agreement for a vessel. The ocean freight costs are separate. So if a vessel is loaded beyond the agreed to timeframes, additional charges accrue. If the vessel is discharged sooner than the agreed to timeframe, the shipper gains dispatch. Dispatch is usually agreed to be one half the rate of demmurrage.

    The shipping and loading contract may or may not include freight. Some customers arrange their own freight agreements. Some want the CWB to arrange all costs and freight. In either case, the demurrage/dispatch clause of a loading agreement are separate from any freight negotiations.

    So what you see in the CWB statements is the net amount of all demmurrage and dispatch that accrued to each pool account in the given year.

    Tom

    Comment


      #3
      Not so fast. I think TOM4CWB has a point - at least there's more to it that meets the eye.

      How do we know if the CWB isn't negotiating load terms that are "more generous" than what can be expected. For example, if the standard loading/waiting time in Vancouver is 10 days, what happens if the CWB negotiates more conservative loading terms of say, 15 days. Every vessel booked this way that loads in LESS than 15 days will earn despatch. Assume $10,000 per day costs, or $5,000 despatch; if a vessel booked with a 15 day allowance actually loads in 10 days (the standard time), it would earn $25,000 in despatch (5 days times $5,000 per day) EVEN THOUGH THERE IS NO APPARENT EFFICIENCY - THE BOAT LOADED IN STANDARD (OR AVERAGE) TIME.

      But there's a ripple effect. If the loading terms are "extended" in this manner, the vessel operator must cover these additional costs of sitting longer and/or paying despatch. It seems to me this would come out of the freight rate. (Vessel rates are based on daily rates, whether they are sitting idle or sailing.) In other words, higher costs in port = higher total freight rates.

      Since Canada competes with other wheat exporters (Australia, US, EU, etc) on a delivered basis, the delivered price has little room to give - raise your delivered price due to higher freight and you lose the business to someone else. In other words, higher freight costs do not translate into higher delivered prices. Something would need to give, and that would have to be the FOB selling price for the wheat.

      Freight rates go up due to longer load times, and the price of wheat drops accordingly.

      Why would the CWB do this? Ever since the CWB took abuse in the Estey/Kroeger debate because of high demurrage bills, it has been able to show despatch instead of demurrage. Now they can safely deflect this criticism with impunity because no one knows the freight rates and terms being negotiated nor are the CWB FOB prices public.

      So sorry to say, TOM4CWB, I think you are wrong. If the CWB is in fact doing as suggested above (which is what I think you were getting at), $6.6 million in despatch will mean the CWB is also paying $13.2 million more in freight than they need to (and getting back half in despatch). And because higher freight costs mean lower wheat prices, it could be argued that, in this scenario, the CWB would need to drop their price on wheat sales to compensate.

      So really, farmers could be out $13.2 million based on despatch "earnings" of $6.6 million.

      Comment


        #4
        Just looked at TOM4 CWB calculations again. Afraid I have to admit his math is right and mine was wrong.

        CWB may have paid $13.3 million in extra freight, of which $6.66 was returned as despatch. Net loss $6.66 million.

        Comment


          #5
          Thanks Chaffmeister,

          In talking to some shippers the easiest way to cover this kind of scheme would be to lower Vancouver selling prices, because the freight the customer will pay is higher, and this way since most CWB sales are FOB Vancouver, then the Auditor General couldn't even accuse the CWB of fixing the books!

          This could be another reason why the CWB Vancouver buy-back price is so low, it actually reflects this kind of discount!

          The CWB is shipping alot of 1 and 2 CWRS right now, and these are the grades at a buyback for #1CWRS 13.5 at $196.00/t in store appears much lower than the Portland Dark Northern selling price!

          Comment


            #6
            TOM4CWB:
            I placed some thoughts on another thread - "CWB and rats" that I hope you will find interesting. It concerns thalpenny's comments about the costs of the CWB vs the non-CWB (canola) market. I'd appreciate your thoughts as well as those of others.
            cm

            Comment


              #7
              I got the Canola basis, and couldn't agree more!

              Go to the open and competitive feed grain market in western Canada, I think Charlie could tighten up his barley basis, $20.00/t is really missing, just as the high buy-back indicates!

              I hope the CWB can get the hint that responsible people allow those most gifted and best at doing a job to do that job! If the CWB actually owned the grain, not just pooled it, and were at risk if they messed up, we would have a much more accountable system! No one goofs up on purpose, just some people make sure they don't goof up, or they get fired!

              Comment


                #8
                It's a long stretch to imply that the CWB has covertly changed its shipping terms on contracts. Remember, these are negotiated contracts that must be competitive. A vessel owner is not going to go for a deal that puts his vessel in a port for a longer period of time before demurrage accrues, as you suggest.

                Come on guys, it wouldn't be a pox on your name to admit that the CWB has been doing a good job of coordinating shipping over the past couple of years.

                Regarding my comments on flucutating canola basis - my point is that basis volatility cannot be hedged. Single desk selling and price pooling are risk management tools that provide protection from this volatility.

                I don't know of any marketers who are delivering grain for customers below the acquisition cost plus transportation cost to the point of transfer (freight, etc, to instore or FOB port). They won't remain in business if that is their practice.

                So the 'baseline' is the costs of getting product to position, which is transparent with the CWB. Farmers can see the freight, handling and removal of dockage charges. They can see the costs incurred at the port by the tonne for each pool account.

                Although comparisons of the cash price to the futures price determines posted basis, most buyers are doing the calculation from the Vcr cash price to determine their street price. Does this futures contract converge with the cash price at Vancouver?

                The point is that I was noting the significant volatility in basis levels, and that in comparison the total admin costs of the CWB are relatively small ($2.70/t vs volatility of up to $25/t on canola basis), not comparing CWB admin costs directly to the basis.

                Tom

                Comment


                  #9
                  Tom:
                  Thanks for your response.

                  Regarding your comment:
                  "It's a long stretch to imply that the CWB has covertly changed its shipping terms on contracts."

                  It's not that much of a stretch, and certainly not impossible.

                  Re your comment:
                  "A vessel owner is not going to go for a deal that puts his vessel in a port for a longer period of time before demurrage accrues, as you suggest."

                  I believe he will - all you need to do is pay him (which was the premise being presented). If the daily rate for a 35,000 tonne ship is $10,000 per day, and a shipper says "I'll pay you $1.50 a tonne ($52,500 in total) over your standard freight rate if you agree to 5 additional load days", this is $10,500 per day, slightly more than the daily rate.
                  If the ship is loaded quickly and doesn't need the extra five days, the owner gives up half his daily rate on those five days (5 x 5,000) = $25,000, so he gets an additional $27,500 (52,500 - 25,000) by agreeing to the extended terms and subsequently loading in standard time.
                  Ocean freight rates are based on total time (number of days) for the sailing, including loading, intransit and unloading. Vessel operators negotiate their rates based on their best expectations of the total time required (plus other factors such as supply and demand for freight in the routes they are active). (If the ship unloads in a destination port where it is unloaded by hand, the freight rate is higher because of the longer time to unload.) If he gets paid a daily rate equal to his negotiated rate for the voyage, why wouldn't he extend his loading time?

                  Re your comment:
                  "...the CWB has been doing a good job of coordinating shipping over the past couple of years."

                  Assuming you are right, what changed within the CWB to make that so? And what prompted the change? (Please, I am not being insincere - I truly want to know.)

                  Regarding your comment:
                  "I don't know of any marketers who are delivering grain for customers below the acquisition cost plus transportation cost to the point of transfer (freight, etc, to instore or FOB port).

                  Neither do I - I hope you didn't misunderstand me.

                  Re your comment:
                  "So the 'baseline' is the costs of getting product to position, which is transparent with the CWB. Farmers can see the freight, handling and removal of dockage charges. They can see the costs incurred at the port by the tonne for each pool account."

                  I agree that farmers can see these charges, in fact, with very little research (mostly from the CWB website), I was able to present these charges (and more) in my message that you are responding to. What I find curious is that you didn't present them. You presented the tired CWB argument saying that the CWB's admin costs are a sound reflection of the costs of the CWB system. I have yet to see the CWB do the same cost comparison that I did. Why is that?

                  What is your calculation of the total cost of moving CWB grains to market? How does it compare to the figures I came up with?

                  I hope you can also see and admit that the costs of non-CWB (canola) marketing are equally transparent.

                  Re your comment:
                  Although comparisons of the cash price to the futures price determines posted basis, most buyers are doing the calculation from the Vcr cash price to determine their street price. Does this futures contract converge with the cash price at Vancouver?

                  I don't understand the reference to futures converging with cash in Vancouver. The canola futures contract does not converge with the Vancouver cash market because the futures contract is not supposed to - it's delivery point is Saskatoon.

                  Re your comment:
                  "The point is that I was noting the significant volatility in basis levels, and that in comparison the total admin costs of the CWB are relatively small ($2.70/t vs volatility of up to $25/t on canola basis), not comparing CWB admin costs directly to the basis."

                  I'm sorry but I am still unclear why you would make this comparison.

                  By the way - I appreciate this dialogue. I firmly believe that in the context of market efficiency and the CWB vs open market debate, we need more clarity in the costs and benefits.

                  cm

                  Comment


                    #10
                    Tom,

                    I find it interesting you said,

                    "I don't know of any marketers who are delivering grain for customers below the acquisition cost plus transportation cost to the point of transfer (freight, etc, to instore or FOB port). They won't remain in business if that is their practice."

                    I would agree with you, if we had a voluntary CWB with competition.

                    However, since the grains you handle are all pooled, so other than buy-back prices disclosed, I cannot find what price the CWB sells my wheat for.

                    I cannot tell what kind of discounts are applied by end users when they collectively bid for our grain.

                    Therefore I look for an overall comparison with another marketer to see if CWB returns to Canadian grain producers compare with US returns to US grain producers along the US border.

                    When I compare Portland-Seattle prices with CWB prices in Vancouver B.C., I see the returns are less for Canadian Farmers, and we additionally deliver higher quality!

                    All I am trying to figure out is the pieces of the puzzle that cause this shortfall.

                    As I said earlier, Estey and the grain co's agree $250 million is missing, and the despatch issue is one small clue to where savings could come from to cause this $250 million in inefficiencies.

                    Competition through tendering could create a more efficient system, and this was the reason for my topic about CWB control ending at the primary elevator pit.

                    Is this tooo hot a subject to talk about?


                    Comment


                      #11
                      This subject is not too hot to talk about. Chaffmeister did some pretty sophisticated explaining. And I appreciate that.

                      These is so much dishonesty these days, we should all be very finely tuned to every possibility, even the ones we wish we didn't have to think about.


                      The $250M that is "missing" should be in farmers pockets. That's a lot of cash. The CWB Directors should be chasing it like a dog after a squirrel.

                      halpenny, are you at all interested in taking these concerns back to the cwb Perhaps they just land in the CWB burn-barrel anyhow.
                      Parsley

                      Comment


                        #12
                        Parsley,

                        I am afraid that the CWB is like an elephant in a bathtub!

                        They really like making waves, and on transportation and grain handling logistics they really have thrown their weight around!

                        Meanwhile others are getting squished and mangled, and the floor in the bathroom has 6 inches of water on it and the water is drowning farmers, grain handlers, and anyone else within splash distance of the CWB.

                        Too bad they wouldn't turn off the bathtub tap, and settle down and really look at what they are doing for a second!

                        I bet some one will eventually turn off the water supply on them, and tell them to get out of the bathtub!

                        Comment


                          #13
                          Regarding the convoluted ocean freight arguments - a key question is - how much despatch has the non-board shipments earned over the last couple of years? No where to find out. Is that money passed back to farmers? No way to find out.

                          For example, vessel clearing for August/00 to January/01 from Vancouver shows that CWB vessels cleared in an average of 10 days, and canola vessels were an average of approximately 7 days. Considering that there are seven classes of wheat and two classifications for malt barley and feed barley, (with varying grades and specifications) compared to canola or peas with a couple of grades, this performance is pretty good for both groups of shippers. A good portion of CWB and non-bd shipments should fall within the range of despatch so far this year. Remember, you have to have twice as much despatch as demmurrage to break even. The CWB certainly isn't holding out for longer wait time for vessels, as chaffmeister would have you believe.

                          So, will farmers be seeing any despatch returns from non-board marketers? No way to know. In fairness, if non-board marketers incur demurrage, they pay that as well.

                          This is a fine theory if you think there is a conspiracy, but the review of vessel clearing times shows it definitely falls into the category of "misinformation".

                          Regarding basis issues, chaffmeister, I looked at your comments in the other thread.

                          You say "Now let's look at canola: Export basis is currently about $20 over the futures basis instore Vancouver. Street prices in Alberta are about $20 under the futures including freight (Canbra is closer to $10 under). So, the difference between the price received by farmers and the current export price in Vancouver is about $40 total. However, this includes freight of, say $25. Taking the freight away (so we can compare CWB apples to non-CWB apples) we get $15 per tonne of non-freight costs from farm to export position. This is what should be compared to the CWB's non-freight costs of $20 per tonne."

                          Again, a comparison of spot canola basis values versus the costs in the CWB system over the whole marketing period is not an accurate comparison.

                          My point was that CWB costs have little variation over the course of the year, compared to non-board basis levels which fluctuate widely through the year.

                          Chaffmeister, you neglected to consider the very real amount of trucking premiums that are being paid to farmers. That would change your figures. Say this is an average $4/t benefit and subtract it off the CWB cost.

                          Also, what about the Fobbing charges which are $8-10/tonne? They are taken into account with the CWB costs, but you reference prices in-store so they are not taken into account in your canola calculation. So add $8 per tonne to the non-freight canola costs.

                          So that brings the CWB cost, before interest revenue to $19/t net of rail freight and the non-board costs net of freight in your example to $23/t. ($15 8 fobbing cost). And the interest earnings are real - farmers receive that benefit despite the fact I've netted them out for this comparison.

                          Looking at the canola basis variability of up to $20/tonne you would agree that these are amounts over and above the true costs to get the grain to port, (which there is firm agreement in principle from parsely, tom4cwb and yourself that no grain merchant is moving grain below the acquisition cost to them plus freight). In comparison, I think the CWB numbers, which are there for everyone to see, look pretty attractive.

                          Where are the aggregate costs for the year for non-board movement that farmers pay? This would be useful to know to do the direct comparison with the non-board grains. I don’t think they are assembled anywhere because there is not the disclosure from the private trade. I don’t have public confirmation of the sales value of a single canola sale out of the port of Vancouver. Asking prices don't reflect tradable values. I don’t even have the aggregate annual value of all canola sales, which farmers have with CWB grains - so how do farmers know what they are truly being charged??

                          Perhaps the direction you should be looking is for full and complete disclosure on costs from the other system participants.

                          Tom

                          Comment


                            #14
                            thalpenny,

                            I understand the CWB does not pay the ocean freight bill.

                            But clearly this freight bill is affected by the port of origin, and the types of "encounters" the ship owner must put up with when loading the cargo.

                            The point in the begining was that a 3 day loading window, with despatch and demurrage both absent, would allow for the most efficient shipping system.

                            Isn't this about what happens in Prince Rupert? What about selling more grain through this port facility?

                            Comment

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