Nielsen is president of the Western Barley Growers Association.
A farming friend of mine asked the other day what I thought of changes to the Canada Grains Act, specifically the government intent to end producer payment security or, as it is commonly called, bonding.
I told him I wouldn’t miss paying for something I don’t need for most of my production.
I also told him I could use some coverage at times but bonding rarely provided coverage where I needed it.
The Western Barley Growers Association did a study on bonding a while back because some of our members were becoming increasingly concerned about their lack of default risk coverage. The results were startling.
Since 1980, farmgate receipts from crops in Western Canada are in the range of $190 billion. In that same time frame the Canadian Grain Commission handled default claims for $13.7 million, of which $9.2 million came from securities it held paid by licensed grain buyers.
The federal government, through the CGC, paid out another $3.1 million during that time so unsecured exposure cost some farmers $1.4 million.
The problem was that the taxpayers of Canada during that same period paid out an estimated $20 million to administer the program and crop producers paid an estimated $ 110 million in higher fees so grain companies and other buyers could secure bonding.
The directors of the WBGA felt there must be a better and more cost effective way to manage contract and payment exposure. In their research, the idea of a clearinghouse came up as an option that might work.
The WBGA began modelling a clearing concept for agriculture based on the Natural Gas Exchange (NGX) in Calgary, which clears billions of dollars of gas and energy contracts every day.
The NGX saved its customers hundreds of millions of dollars when Enron defaulted simply by being able to monitor markets and the financial wherewithal of companies daily as part of a clearinghouse operations.
The barley growers question was, “how could clearing be applied to the physical trade of agricultural commodities?”
This question led to a project, funded by the Private Sector Risk Management Partnership program, to evaluate the concept of clearing in agriculture.
A clearinghouse is simply the moniker used to describe the facility that handles the execution of transactions between parties.
There are several important aspects to the operations of a clearinghouse but by far the most important feature is its independence from either counterparty in a transaction.
The essence of clearing is allowing two entities to transact business in a secure environment even though they may never have done business with one another before.
The project has verified a number of benefits that could be addressed by a clearinghouse and forward contract clearing, including:
- Increased transactional risk management via performance assurance, standardized rules and procedures, arbitration procedures and dispute resolution by impartial judges.
- A more competitive marketplace with narrower bid/ask spreads, improved contracting options and improved price transparency.
- The potential for improved value capture in forward contract sales and in doing so strengthening the industry’s financial performance while facilitating improved marketing and logistics management.
The reality, though, is that there has to be more than the barley growers who want a clearinghouse to make it a viable business proposition for a service provider.
There must be broad based farmer support for this new infrastructure. It is important to note on this point that all the research we have done strongly suggests that once farmers are aware of opportunities clearing creates, they will use it.
Additionally the clearing concept and the mechanisms associated with improving producer margins have been fully vetted with the major agricultural lending institutions across Canada, with overwhelming support.
We believe there is a good case for a clearinghouse and over the next few months we will be approaching farm groups to gain a perspective on whether farm organizations on behalf of their members are prepared to throw their support behind the clearinghouse concept.
If they do, we know we can leverage that support to achieve the support from the federal government to keep the business development focus of the project alive.
It is the barley growers’ view that this represents a great chance to introduce significant new marketing and risk management infrastructure to the industry.
We respect the government’s decision to end the producer payment security and we truly want to move forward with a clearing-house offering in the marketplace. To do that we need to hear from farmers and will focus on that over the coming months.
More details on the agricultural commodity clearinghouse project are available at www.agclearing.ca and from the WBGA office.