The recent announcement that the Canadian Wheat Board will make its producer direct sales, or buyback, program easier to use is good news for farmers who market organic and non-organic grain outside of the CWB system.
The wheat board has proposed that farmers will no longer have to use an accredited grain company to administer the paperwork for buybacks.
This will save farmers from $5 to $16 per tonne in grain company fees.
The board will also offer credit to farmers for the difference between the initial price and the buyback price. This will eliminate up-front costs and help ease cash flow concerns.
The board will hire a full-time organic specialist, who will administer the buybacks and work with the organic industry to research and analyze the organic marketplace and promote Canadian organic grain.
This position will ensure that farmers will have access to market information and resources that will help them better understand and access the growing international market for organic grain.
Farmers opposed to working together co-operatively under the discipline of single-desk marketing may still want an exemption or a zero-cost buyback. What these organic farmers rarely recognize is that single-desk selling adds value to organic grain.
While the wheat board does not market organic grain, it does extract premium prices for conventional grain.
Many organic farmers sell organic grain in the conventional market because it doesn’t meet the high quality requirements demanded by organic buyers.
Customers pay a premium price for high-quality conventional Canadian grain in Japan, Europe, and North America. These markets are also the primary markets for organic grain.
As a result, a portion of the organic premium comes from the conventional premium in these markets.
The wheat board represents all farmers who pool their grain. It sells on their behalf, returning all revenues less costs to farmers.
Pooling is an effective form of price risk management. Farmers can use futures markets to manage price risk in some non CWB grain, but few do. Pooling systems such as the wheat board are less expensive to operate and easier to use.
When farmers complete a buyback from the pooling system, they are required to pay other farmers (through the wheat board) for the value of the grain that the CWB could get if it sold the same conventional grain in that specific market on that specific day.
This price is based on the spot market price, as established in the open marketplace.
Because grain prices fluctuate daily throughout the year, sometimes the buyback price is higher than the pooled price and sometimes it is lower.
When the buyback is higher, organic marketers should be able to extract the additional conventional value in that specific market, at least equal to the buyback price, which offsets the additional cost of the buyback. If they are not, then they are not marketing organic grain
High value conventional markets make up only a portion of the final pooled price all farmers get for any specific grade in the conventional market.
The pool return that all farmers get is a combination of pooled prices from lower priced and higher priced markets.
In a simplified, hypothetical example, if the wheat board sells 4,000 tonnes of No. 1 spring wheat to Germany at $210 per tonne and then sells 4,000 tonnes of No. 1 wheat to Brazil at $190 per tonne, the pooled price farmers receive from these two sales would be $200 per tonne.
When an organic farmer completes a buyback for Germany, he must pay other farmers through the wheat board the difference between the pooled price of $200 and the market price of $210.
Some farmers say the $10 difference between the buyback and the pooled price is unfair.
In my opinion, it is not unfair, because the $10 is a compensation payment to the pool account that represents the additional value that the German market pays for conventional wheat over the conventional pooled price.
Organic farmers who want a zero-cost buyback or an exemption are partly asking for the ability to cherry pick higher priced conventional markets, because the majority of organic grain is sold in high priced conventional markets.
Since these markets already pay a conventional premium and then a further premium for organic, it can be argued that in the interest of equity, paying a small compensation payment into the pool for the benefit of all farmers is only fair.