CWB PROs

[nashty]

Looks like the CWB is posing as Santa Claus- and all malt growers have been given a huge gift-$2/t on the PROs, but a lump of coal is in order for the wheat growers.....

[chuckChuck]

Nashty. So who do you blame when the price of non-board grain falls? When all else fails, blame the Wheat Board.

[charliep]

chuckChuck

I would take it you are happy with current initial payments/forecast finals? How do you benchmark these payments to know the CWB is managing your price risk/getting you a reasonable return for the year?

I use some of the CWB own numbers to measure their performance. The daily price contract is based on a CWB survey of north state wheat prices. Based on CWB prices, I note there is anywhere from a 50 to $1/bushel premium to current the CWB PRO and FPC offerings. Help me understand the difference.

I can also phone a maltster and find out prices they are paying the CWB pooling system for malt barley. They are likely (haven't checked lately) at least a buck bushel higher than the current malt barley PRO. Where does the money go?

[carebear300]

Nobdy knows for sure. Maybe the contingency fund? Maybe the severnece package for Measner? Maybe the Liberal pary of Canda election fund? That my friends is the problem nobody knows for sure!!!!!!!!

[chuckChuck]

charliep. Since the pool returns reflects values in all our markets
(some lower and some higher) over the entire sales year why would you expect it to be equal to spot market prices in 1 market? Does everyone sell their non-board grains at the peak of the market? The answer is no, so why would you compare pool return prices to only the North American market? It would be great if we could all sell all our product in the US or to Canadian maltsters but we can't. Richard Gray suggested several benchmarking options and the CWB Board of Directors sees all sales contracts with each sale compared to the competitions prices. Whether you believe the CWB maximizes returns or not is up to you, but Kraft, Furtan, Tyrchn.. Gray, Fulton and others have determined through economic analysis and study that the CWB achieves a premium over what multiple sellers would. That does not mean that spot prices would not sometimes be higher in the US. But we cannot all get those spot prices, it is impossible.

[liberty]

The more I look into the daily price contract the more I have to come to the conclusion that the CWB offers it merely as window dressing. You'd have to be in dire straits cash flow wise to even consider taking this option. In practice, this price signal is pretty much useless to farmers.

Because of the CWB monopoly, there's no incentive to offer a DPC that more closely reflects current market conditions. In fact, there's an incentive to make it unattractive: it's a lot easier, in terms of effort and risk, for the CWB to simply shunt producers into the pools.

[liberty]

"Since the pool returns reflects values in all our markets...over the entire sales year why would you expect it to be equal to spot market prices in 1 market?"

In answer to this question, the wheat board offers what is essentially a "spot" price in the DPC and it's nowhere near what similar markets offer that are very close geographically. You don't see this kind of divergence in non-board crops.

I've also done some investigation through the U.S. Wheat Associates website by comparing PNW port prices over the period of a crop year with the CWB's total payment, after adjusting for the value of the Can$. My study is not exhaustive, but thus far I've found that the CWB pooled price was about the same as for PNW ports in around two months of the crop year (2005). The rest of the time it varied up to a dollar a bushel less on our side of the border. Where are the premiums for Canadian producers? I'm not even finding them at port position.

Which brings me to the next point that this reader raised: "...the CWB Board of Directors sees all sales contracts with each sale compared to the competitions prices." If that is all the argument for the CWB "premium" is based on, and I gather that this is the case, then the argument is hugely flawed. It's only looking at maybe 1/10th of the picture. It's as if I judged the performance of my farm by only looking at gross sales receipts, and ignored my costs of production.

Every sale in any industry incurs costs. In the case of the CWB, did the directors look at things like how much it cost to transport, blend, and handle the grain for each sale? Did they independently check the grade for each sale to verify that the CWB doesn't engage in "grade giveaways"? If the sale was made by an accredited exporter, what was their commission on the sale? How does that compare with their service costs for other commodities? I haven't heard a peep out of any director on these issues. I get the impression that this is information the CWB may be reluctant to let out to anyone.

[charliep]

liberty

Don't ignore the daily pricing contracts. Anyone who has used the program over the past two years will put at least 50 cents a bushel in their pocket over and above other programs for the amount they contracted. Again, I encourage you to look at the historical charts and let them speak for themselves.

chuckChuck

I understand the CWB payments are a blend of prices starting with CWB sales prior to harvest and sales at the end of the crop year that are sold in competition with new crop North Hemisphere wheat. I simply note the Daily Pricing Contract is consistently higher than any of the other pricing tools. It is also money in the bank versus a vague promise. Promises and academic studies versus a real price.

I will bet a dinner (or perhaps a bottle of your favorite malted product) that the CWB will not achieve the current 2006/07 PRO forecast for 1CWRS 13.5 when final payments are announced December 2007. I am being a chicken here given low wheat carryovers/bullishness in other crops - any other time, I would have given you odds.

Didn't answer the question on malt. Everyone will be asking this question in January and February.

[charliep]

liberty, I hate the CWB to be blunt. But I'm forced to sell through them. I don't quite see myself how you figure to use DPC's you would have to be in "Dire Straits" for cash flow??

Anybody who looks at the historical charts can see it is a paying proposition. It's sad that guys that don't use FPC's and DPC's reap the rewards for those of us that do use them.

[disker]

Nashty, it sounds like you lost another bet on those Pro's, worse than betting on the Oilers. Besides, maybe its better now that the CWB keeps the Pro's low so everyone doesn't forget and get the big screw over like they just got on their finals.
Disker

[chuckChuck]

Liberty and charliep.
The DPC tracks minneapolis DNS fairly closely as far a I know. How DPC prices are arrived at I am not exactly sure although I did hear the explanation but it is better if it comes from someone at the CWB who knows for sure.

Liberty, your point "by comparing PNW port prices over the period of a crop year with the CWB's total payment, after adjusting for the value of the Can$. My study is not exhaustive, but thus far I've found that the CWB pooled price was about the same as for PNW ports in around two months of the crop year (2005). The rest of the time it varied up to a dollar a bushel less on our side of the border. Where are the premiums for Canadian producers? I'm not even finding them at port position."

And charlieP, "I can also phone a maltster and find out prices they are paying the CWB pooling system for malt barley. They are likely (haven't checked lately) at least a buck bushel higher than the current malt barley PRO. Where does the money go?"

My answer to both these points is essentialy the same whether it is malt barley or CWRS. The pooled price will reflect sales to North American markets and all the other markets we sell to. Since some of those sales will be at lower values than what we can get in North America the pool return will reflect the average weighted value. When you try to compare North American spot market prices, or the DPC price to pool returns, you are comparing only one market to the pool return results from the average of many markets. That is not to say the CWB is not selling into the North American markets at the higher value you are seing in ND or at the Canadian maltsers. But these values can be diluted with sales at lower values in other markets such as China, Indonesia, and Colombia. North America, the EU, and Japan are higher value markets but we cannot sell our entire crop to these markets so our overal pool return prices is going to be lower most of the time. The $1 dollar difference between Canadian Malt prices and the current pool price for malt barley is not lost. The CWB will be capturing that price and putting it into the pool account for each grade and quality.

Richard Gray et al.have just released a study on the CWB and barley from 1994 - 2004. I only heard a few details on the news this AM so I need to see the study. What Gray said on the Radio is that the CWB's single desk premium for malt barley is worth about $60 million a year or about $1.00 per bsuhel. He also said that the benefits of the CWB on feed barley are harder to determine and much lower or nonexistant because most of the feed barley grown here does not go through the CWB. In effect the feed barley market is a dual market and probably illustrates the difficulty of being effective in a dual market situation.

When we debate this issue about whether the CWB is of benefit or not we need to realize that there is alot more complexity to this than first meets the eye. Simple comparisons of prices do not tell the whole story. I don't have all the answers so I think we have rely on those best qualified to do the analysis and then make our own minds up based on the best information possible.

[charliep]

A farmer can believe studies or they can look at prices. That is their choice. I will highlight the issues raised in the study noted on the WBGA website.

[charliep]

chuckChuck

Since you are particating here, I hope you can help all of us (including me) understand the law of one price. It would seem to indicate farmers are not able to differentiate markets based on consumers needs/wants, quality characturistics and supply/logistics commitment. I note that farmers already do this for oats, peas, specialty oil canola, organic crops. What makes malt barley different?

[poorboy]

In most years lately the Malt price has just barely beat the domestic feed price where I live.

If the CWB is doing such a great job and getting $1 more per bushel, then no one would grow malt barley if the CWB was gone, because it would consistently be lower than feed barley price. I seriously doubt this would happen, and therefore conclude that there is no premium of $1 per bushel being gained.

[chuckChuck]

THE CANADIAN WHEAT BOARD
AND
BARLEY MARKETING Gray et al 2005
EXECUTIVE SUMMARY
The operation of the CWB as the singledesk
seller of Western Canada’s feedbarley
and malting barley for export and
for domestic human consumption within
Canada is at the centre of ongoing
debate and controversy in Western
Canada. Some key issues raised are:
1) Does the CWB deliver higher returns
to Western Canada’s feed-barley and
malting-barley producers than would
be the case in a multiple-seller
environment?
2) Are there benefits provided to
producers through the price-pooling
operations of the CWB (i.e., risk
management)?
3) What are the inherent problems of
arbitrage between the annual pooled
return (APR) provided by the CWB
and the cash off-Board market price?
4) Are there additional marketing costs
that are unique to the operation of
the CWB as a single-desk seller?
• Recent studies that have examined
the economic issues surrounding
barley marketing in Western Canada
and North America have focused
primarily on feed barley, with less
emphasis on malting barley. Thus the
lack of focus on the interrelationship
between these two different barley
markets has limited the usefulness of
many earlier studies when
determining the implications of
various possible marketing
arrangements for barley producers,
the livestock industry, and the
malting industry. In addition, these
studies have major data limitations
because they have had little or no
access to actual CWB sales prices
and contract terms.
• The specific objectives of this study
are:
1) To provide an overview of the world
barley trade for both malting and
feed barley (Section II);
2) To review previous studies
examining the role of the CWB in
the domestic and international barley
market (Section III);
3) To develop a theoretical framework
to examine the role of the CWB in
domestic and international feedbarley,
barley-malt, and maltingbarley
markets, and the potential for
the CWB and other market
participants to exercise market power
(Section IV);
4) To test whether the CWB exhibits
market power in the international
feed-barley market when utilizing
actual CWB contract data for the
1995/96 to 2003/04 crop years
(Section V);
5) To estimate the returns from a
single-desk-seller marketing system
using an economic model that uses
actual CWB sales transaction data
(Section V);
6) To review and evaluate the
additional marketing costs found in
previous studies that have been
attributed to the CWB (Section VI);
7) Discuss price variability in the
Canadian and U.S. barley markets;
8) To discuss barley marketing in a
highly volatile market setting; and
9) To provide a summary and
conclusion of the analysis (Section
VIII).
• World barley production has dropped
sharply since the 1980s. The largest
decrease has been in the production
of feed barley. Historically, the
ii
largest barley producer has been the
European Union. The major barley
exporters are the European Union,
Australia, the Ukraine, and Canada.
Trade in malting barley has
accounted for roughly 30% of world
barley trade. Since 1994/95, world
malting-barley trade has increased by
roughly 45%. The major maltingbarley
exporters are the European
Union, Australia, and Canada but the
European Union, Russia, and the
Ukraine dominate the feed-barley
export market. The European Union
is by far the largest barley-malt
exporter, followed by Canada, which
exports primarily malt and malting
barley. The largest importers of
malting-barley from Canada are
China and the United States. Most
feed-barley produced in Canada is
used as feed domestically and is not
marketed through the CWB. World
barley markets are influenced highly
by political interventions and by
agricultural policy.
• Earlier work pointed out that the
CWB has been able to price
discriminate among markets
(Schmitz et al. 1997). The average
difference between CWB contract
prices for Japan and the United
States over the 1980/81 through
1994/95 period was significant and
averaged $25.29/mt. The difference
between CWB contract prices for the
U.S. and ROW markets was also
significant, with an average price
difference of $4.46/mt. The
difference between CWB contract
prices to Japan and the ROW
markets was significant and averaged
$20.73/mt.
• In this study, data were used from
every CWB sale of feed barley, 6-
row malting barley, and 2-row
malting barley for the 1995/96 to
2003/04 crop years. The data were
compiled from CWB contract
records. All prices were brought to a
common basis point of either FOB
Vancouver or St. Lawrence. The
sales data were aggregated into the
following nine market segments: 1)
Japan’s feed-barley market; 2) U.S.
feed-barley market; 3) all other feedbarley
markets; 4) Canada’s
domestic 6-row malting-barley
market; 5) U.S. 6-row malting-barley
market; 6) offshore 6-row maltingbarley
markets; 7) Canada’s
domestic 2-row malting-barley
market; 8) U.S. 2-row malting-barley
market; and 9) offshore 2-row
malting-barley markets. In the
analysis, the CWB allocates the total
quantity of barley it receives from
producers in a given crop year across
the above 9 markets in such a way as
to maximize total sales revenue. In
order to measure the impact that
multiple sellers of Canada’s feed
barley and malting barley would
have had on returns and trade flows,
a comparison was made between the
actual market structure (i.e., prices
and quantities) observed under the
CWB and the prices and quantities
that would have existed if there had
been multiple sellers of Canada’s
feed barley and malting barley.
The key difference between the
CWB system and a multiple-seller
system is the ability to price
discriminate. In the absence of
constraints on the quantity of feed
barley, 6-row malting barley, and 2-
row malting barley available for sale
iii
by Canada’s producers, the law of
one price must hold for all
international and domestic barley
sales in a multiple-seller
environment. In the model used,
multiple sellers were assumed to be
fully competitive, and this
competition resulted in one market
price for feed barley and one market
price for malting barley at any point
in time, which is a characteristic of
all competitive markets.
• The impact on prices and revenue of
replacing the CWB with multiple
sellers of feed barley, 6-row malting
barley, and 2-row malting barley for
each year from 1995/96 through
2003/04 are as follows:
1) The annual average price increase
earned by the CWB for 6-row
malting barley relative to what a
multiple-seller marketing structure
would have had from 1995/96 to
2003/04 was $35.25/mt. This number
was computed as the simple average
of the difference in the weightedaverage
price of 6-row malting
barley under the CWB versus what
the equilibrium price of 6-row
malting barley would have generated
under the multiple-seller model. For
example, the 2000/01 price
difference was $43.19/mt, which is
equal to the difference between the
weighted-average price of 6-row
malting barley under the CWB and
the weighted-average price of 6-row
malting barley under a multiple
seller scenario. Relative to multiple
sellers, the CWB is estimated to have
captured higher prices on sales of 6-
row malting barley in all years
except 1995/96.
2) The calculated annual average price
difference between what the CWB
received and what a multiple-seller
structure would have received on
sales of 2-row malting barley for the
1995/96 to 2003/04 crop years is
$40.29/mt. Relative to multiple
sellers, the CWB is estimated to have
captured higher prices in 2-row
malting-barley markets in every year
considered here. Under the CWB,
the lowest price premium for 2-row
malting barley was $19.64/mt in
2003/04 and the highest price
premium was $61.82 in 2002/03.
3) The impact on producer revenue
from replacing the CWB with
multiple sellers of Canada’s barley is
large. For example, the introduction
of multiple sellers of Canada’s feed
barley and malting barley in 2000/01
would have caused Canada’s barley
producers to lose $128 million in
total revenue. Over the 1995/96
through 2003/04 period, the
introduction of multiple sellers
would have resulted in an annual
average loss of $59 million in
revenue accruing to Canada’s barley
producers. Multiple sellers of
Canada’s barley would have caused
losses in revenue to Canada’s barley
producers in every year considered
here.
• Results were derived using different
values for the price elasticity of
demand for Canada’s feed barley in
the rest of the world (ROW) and the
price elasticity of domestic demand
for Canada’s feed barley. Under
these alternative assumptions over
the 1995/96 to 2003/04 crop years,
the introduction of a multiple-seller
marketing system would have
iv
resulted in an annual average loss of
between $36 million and $58 million
in revenue accruing to Canada’s
barley producers. Also, results were
obtained in which the malting barley
selection rate under a multiple-seller
marketing system was constrained.
Under restricted malting barley
selection rates over the 1995/96 to
2003/04 crop years, the introduction
of a multiple-seller marketing system
would have resulted in an annual
average loss of between $17 million
and $28 million in revenue accruing
to Canada’s barley producers.
• The impact of replacing the CWB
with multiple sellers of Canada’s
barley was estimated by Schmitz et
al. (1997) for the 1985/86 to 1994/95
crop years. On average, the revenue
accruing to producers of Canada’s
barley would have been reduced by
$72 million per year under multiple
sellers of Canada’s barley. This
number is higher than the $58
million per year estimated for the
1995/96 to 2003/04 crop years in this
study. There are at least three major
reasons for the differences between
the two studies. First, Canada was a
significant net importer of feed
grains (barley and corn combined) in
several years over the 1995/96 to
2003/04 crop years (especially
2001/02 and 2002/03) whereas
Canada was not a net importer of
feed grains over the 1985/86 to
1994/95 period. Second, there are
several years over the 1995/96
through 2003/04 period in which the
ROW feed-barley-export market was
not the lowest priced market; this
was not the case for the 1985/86
through 1994/95 period. This could
have implications for the results due
to the fact that the price elasticity of
demand for Canada’s feed-barley
exports to the ROW is set at a
relatively high level (i.e., –20.0
associated with the base results).
Third, the CWB’s ability to attain
price premiums increased in the
presence of the Export Enhancement
Program (EEP), which was
terminated in the late 1990s.
• Some authors argue that the singledesk-
seller marketing system has
larger system costs than does a
multiple-seller marketing system.
While most of the costs identified are
present in Canada’s system, they are
not unique to CWB grain marketing.
Most, if not all, of the costs that
earlier studies identified would have
been incurred in the absence of the
CWB as a single-desk-seller
marketing system and likely in the
same order of magnitude. The CWB
currently uses an annual pooled
return to distribute sales revenue to
producers. This mechanism does not
provide a signal to producers that
fully responds on a timely basis to
changing market conditions within a
given crop year. If export market
prices change substantially during a
crop year, the prevailing pooled
return will not reflect this change on
a timely basis. This creates some
economic losses because the export
value of feed barley at a given point
in time is not fully reflected by the
CWB pool return outlook (PRO) and
by the cash off-Board market price in
the domestic feed-barley market in
Western Canada. A situation in
which export feed-barley prices rise
during the crop year and the PRO
does not increase as rapidly, more
barley is used as feed in Western
v
Canada than would result under a
multiple seller marketing system
without price pooling. This creates
an economic loss. A loss also results
when export barley prices fall during
a crop year and the PRO does not fall
as rapidly. In this situation, the PRO
and Canada’s domestic feed-barley
prices are above the prevailing world
price. As a result, less feed barley is
fed domestically and feed-barley
exports to the world market are
larger than would otherwise occur.
Recent changes instigated by the
CWB as price signals to farmers,
such as cash off-Board market
pricing and two shorter pooling
periods, are expected to reduce the
issue of incomplete arbitrage.
• To analyze barley price variability,
an earlier study compared Lethbridge
AB off-Board feed-barley prices to
U.S. feed-barley-prices at Great Falls
MT and Devil’s Lake ND as well as
to other U.S. points. The average
annual standard deviation in the
Lethbridge AB cash off-Board
market price for the 1988/89 to
1995/96 crop years was $7.88/mt.
The average September cash off-
Board market price in Lethbridge
AB was on average $7.88/mt above
or below the average price for the
crop year. This compares to $7.88/mt
and $7.23/mt measured at Great Falls
MT and Devil’s Lake ND,
respectively. However, from 1999 to
2003 feed-grain price variability was
slightly higher for Lethbridge AB
than it was for Great Falls MT.
However, barley prices were
consistently higher in Lethbridge AB
than in Great Falls MT.
• The single-desk-seller marketing
system of barley creates more sales
revenue for Western Canada’s
farmers than would be the case under
a multiple-seller marketing system
due to the ability of the CWB to
exercise market power. The
magnitude of the additional revenue
created varies by year depending
upon factors that include the
occurrence and degree of export
subsidization in feed-barley and
malting-barley markets. The benefits
of the CWB single-desk-seller
marketing system are largest for
malting barley.
• Feed-barley prices from 1999 to
2003 are consistently higher for
Lethbridge, AB than for Great Falls
MT by an average of roughly
$20/mt. Second, during the drought
period of 2002, there was significant
variability in barley prices, but this
was clearly reflected in the CWB
malting-barley-price forecasts.
Imports of malting barley that year
were due largely to shortages in
malting barley in Canada. Because of
the 2002 drought, Canada also
imported large quantities of corn
from the United States to make up
for the shortage of feed barley. As a
result, it is difficult to argue that
barley markets are not arbitraged.
• There have been many studies
conducted on the CWB in the
marketing of barley that support the
notion that the CWB can price
discriminate in international markets
and, hence, can earn price premiums
above what a multiple seller of
Canada’s barley would earn. Results
consistent with those presented in
this report were used in at least two
legal cases involving the CWB– the
Charter Case and the U.S.
Countervail Beef Case against
Canada. In both cases, allegations
that the CWB was highly inefficient
in barley marketing could not be
supported.
• When analyzing the international
barley market we emphasize that it is
ever changing especially the feedbarley
markets where Canada’s
exports have decreased along with
CWB sales of domestic feed barley
within Canada. In addition, over the
last several years, barley producers
in Canada have not been subsidized
through the CWB as there has been
no deficit in the barley pool and
government credit guarantees on
sales have been negligible. Also, at
least since 2000, Canada’s feedbarley
prices have been consistently
higher than those in the United
States.