U. of S. Barley Study Released After 2 Years

[chuckChuck]

HFL. Further...Is it good management not to try understand the issues raised by this or any other study? Even if you don't agree with results of a study you should try at least to understand the arguments. It only takes a few minutes to read the executive summary. If you are not willing to do even that, then I wish you luck in your farming career because anybody who is not willing to do research and put effort in finding out what is going on beyond their own immediate experience is going to be at a disadvantage to those who are. Ignoring important sources of information because you have already made up your mind reminds me of the old saying that "only fools don't change their mind"

[charliep]

Actually we do have an open market that operates along side the CWB. Its called barley. The price of feed barley today in the open is higher than all CWB markets including malt barley. Schmitz,Schmitz and Gray never addressed this issue except for commenting on volatility.

Looking at the US is also relevant. A high percentage of both the domestic malt market and US sales are priced off Minneapolis malt barley market. Why shouldn't farmers use this as a bench mark for judging CWB performance?

Help me understand today in farmer terms why the CWB is benefit in malt barley. Heres what I see in Alberta - you can tell me where I am wrong.

New malt barley sales to a Alberta malt plant - $4/bu plus. You indicate directors would see this as with anyone with internet access.

CWB SS 2row PRO - $3.25/bu with the price potentially getting closer to $3.50/bu with trucking allowance, protein premium, VIP, some interest/storage, etc. The farmer sees $2.75 to maybe $3/bu at delivery with the promise but no guarantee of a final payment of 50 cents/bu.

Local feed market at least $3/bu.

Your answer may come down to this year and the pooling process. If it is, maybe you can help me understand how the CWB forward contracts barley on behalf of farmers to maltsters when they really do not have control/responsibilty until it is in a bin, a CWB contract has been signed by a farmer and it has been selected by a maltster/exporter.

[AdamSmith]

Chuckchuck, thanks for pointing me to the "law of one price" economic theory.

I googled it. And read (not entirely all the way through) about four different studies where "the law of one price" were used or studied.

Almost all the studies were done with the intent on determining whether law of one price applied to a particular sector of the economy. And if it did, using those formulas to determine how competitive that particular sector was.

There were as many studies that showed where law of one price failed to apply.

"Some pitfalls in the testing law of one price in the commodity markets"

by John Pippenger Llad Phillips
Dept of Economics
UC Santa Barbara

In his research on the US Wheat market and in particular US wheat sales to Japan he discovers that unless a number of things are taken into account like time lag and actual transportation and shipping costs and the use of forward contracts as opposed to spot prices, the law will fail.

The point is they took actual #'s and worked backwards to see if LOP applied. Unless everything was accurate and accounted for the theory failed.

The Usask barley study used LOP with zero knowledge whether LOP applies accuratly.

And to that point, in my opinion it is flawed and of no real consequence.

But I will say this if the authors of the study would put it up for peer review and let other economists like Pippinger have a go at it and if they saw merit in the results, I would consider the study to be recognizable.

But irregardless, I agree with HFL "show me the money" is the only thing that will convince me.

Interesting note. Just got a little brochure from the Brewers Association of Canada and in it they have a chart that shows that Brewers are consitently paying prices higher than farmers see.

This is consistent with what we've been told for some time now.

So the question for the CWB is where has all the extra money gone? Because we all know it isn't ending up in the farmers pockets.

[charliep]

Also interested if you care to comment on the document referenced on the Western Barley Growers Association website. Again, other market signal issues are the main theme/had industry agreement. Supply issues and problems are highlighted.

[Incognito]

"only fools don't change their mind"

ChuckChuck - when you gonna give the computer back to Vader anyways?

[parsley]

chuckChuck,

HFL says it so well, you should really read it again.

"Don't bother with these studies. Show us the money"

I posted an old study, yes, but
it's about the only study that reveals that the "American system has outperformed the Canadian one- at least on the basis of a returns-to-producers criterion"

"Returns to producer". That's the mind-screecher.

Gray et al has an obvious conflict of interest. The CWB is their only longtime funder.

The death of the single desk will mean that the farmer-funded CWB studies will dry up like a witch's cold teat.

Parsley

[chuckChuck]

Adam Smith. In your previous argument against the validity of the Gray study you selectively misquoted and/or misrepresented "Some pitfalls in the testing law of one price in the commodity markets" The author wrote about the pitfalls in testing the LOP but he went on to say that the LOP worked on the wheat market between the US and Japan. Please explain why you got this wrong? Was it intentional or was it just a mistake? Read below as I have cut and pasted the abstract and the introduction:

Some Pitfalls in Testing the Law of One Price in Commodity Markets
†
John Pippenger
*
and Llad Phillips
Department of Economics
University of California
Santa Barbara CA 93106
ABSTRACT
Several articles find no support for the LOP in commodity markets. A few articles find some support. Rejecting the LOP would strike at the heart of economic theory. Rejection would suggest that firms do not maximize wealth and households do not maximize utility. Our
objective is to show how four common pitfalls can cause tests of the LOP to fail when in fact the LOP holds. All tests that fail to support the LOP fall in to at least two pitfalls. All of
these pitfalls are the result of ignoring important practical implications of arbitrage.

16 June 2006
Startingwith early studies by Isard (1977) and Richardson (1978), rejections include Ardeni (1989), Fraser, Taylor and Webster (1994) Ceglowski (1994) Asplund and Friberg (2001), Engel and Rogers (2001), Haskel and Wolf
(2001), Parsley and Wei (2001), Lutz (2004) and Goldberg and Verboven (2005). A few studies such as Goodwin (1992), Michael, Nobay and Peel (1994), Obstfeld and Taylor (1997), Vataja (2000), Lo and Zivot (2001) and Sarno, Taylor and Chowdhury (2004) find some support. This failure to find clear support for the
LOP strikes at the heart of economic theory. A failure of the law of one price, as that law is generally
understood, implies that individuals and firms ignore risk free opportunities to increase wealth. Such behavior
raises serious questions about wealth and utility maximization, cornerstones of economic theory. Our objective
is to show how four common pitfalls can cause tests of the LOP to fail when in fact the law holds.
Section 1 briefly discusses the law of one price. The major objective of that section is to demonstrate that
the law of one price, as it is generally understood, involves arbitrage. All four pitfalls are the result of ignoring
practical implications of arbitrage. The pitfalls are: (1) using retail prices, (2) omitting transportation costs, (3)
ignoring time and (4) not using identical products. The last three pitfalls are widely recognized as problems for testing the LOP. The first pitfall is not.
Section 2 describes the data. Section 3 uses that data to show that the LOP worked in the wheat market between the United States and Japan. Section 4 describes and illustrates the pitfalls into which almost all tests
of the LOP, particularly those that have failed to find support, have fallen. The final section summarizes the
article and presents out conclusion. We conclude that, as a result of the prevalence of these pitfalls in the
literature, we know of no evidence that would lead us to reject the law of one price in commodity markets.

[HFL]

Adam Smith - Yes I just got the mail and have the brochure from the brewers assocation as well. Its very interesting and probably would make a great topic for a new thred. Could someone please tell me what the Card price is ( other than a lot higher then the CWB price ).
Chuckchuck - Thank you for your best wishes in my farming career. As far as trying to understand this study. If I, as someone who is cashing grain cheques and CWB payment cheques, needs a university professer to study grain prices and tell me what big price premiums I am getting from the CWB but can't see evidence of them on the cheques then you can have all the professers in north America study the thing and I won't pay any attention to that either. As far as a fool not changing his mind. Up to 2004 we grew quite a lot of malt barley. It grew good on our farm. However the returns were terrible so we gave up on it. So we changed our mind on malt barley.

[TOM4CWB]

ChuckChuck,

If the law of one price is so perfect... how does the US sell so much wheat to Japan... and if Canada gets more for wheat than anyone else... with wheat for Japan that is replacable with Ausie or US wheat... How can this law hold?

The law of one price would mean that the Northern tier US growers would quickly grow our CWRS varieties and undercut the CWB in any event!

There are absolutely no restrictions on our CWRS seed stocks going south INTO the northern states... in fact the CWB doesn't even charge a buyback if our seed exported is used for planting purposes in the US!

Can anyone explain why this is the policy?

Why the CWB gives our CDN "special" CWRS genetics away at zero cost?

Is it because the US DNS wheat quality is as good as our CWRS anyway?

What is the truth?

[AdamSmith]

Chuckchuck,

I believe you saw something in my post you wanted to see, not what I actually said.

This is what I wrote:

In his research on the US Wheat market and in particular US wheat sales to Japan he discovers that UNLESS a number of things are taken into account like time lag and actual transportation and shipping costs and the use of forward contracts as opposed to spot prices, the law will fail.

The point is they took actual #'s and worked backwards to see if LOP applied. UNLESS everything was accurate and accounted for the theory failed.

The key word I used here was UNLESS. That means the research showed that for LOP to apply, everything must be accounted for, EVERYTHING.

To use spot prices vs forward contacts for example LOP failed to be accurate.

The word UNLESS implies I accepted that LOP DOES apply providing all #'s are accurate and everything is done properly and taken into account.

Now I will say this I am not an economist and I am not here today pretending to be one. But I am capable of reading and grasping the simple basics behind most of what I read.

Within that report I also read where LOP also assumes perfect arbitrage, right?

Did Gritz or Schmay or whom ever, account for the arbitrage of the interior barley market, like ND or Mont. Competitive bids?

Did Schmay and Gritz account for perfect arbitrage with respect to basis levels at interior points?

Does the study measure the probable change in the supply and demand levels?

Does the study take into account that the sourcing of grain will change dramatically under a free market system where interior cash bid will be the driving force behind the decisions of buyers and sellers?

Do Schmay and Gritz take into account the financial and emotional impact on growers when barley is accepted for malt only to be rejected after having a birthday in the bin?

Does the study take into account the bio-fuels phenomenon?

I did read where the supposed CWB premium was greatest when EEP was the greatest, and negligible when EEP was negligible. Well today, it doesn’t even exist!

You can ask me more questions if you like about me questioning the study, and I will try my best to answer them but the whole thing just seems way too unbelievable to me, because the money just isn’t there to back up the claims.

But it’s just my opinion that the only people who will accept these results and believe them are the already converted.