In material that accompanied its Aug. 1 announcement, the Canadian Grain Commission states that a fee reduction wasn’t part of its decision for the surplus due to the notion that it wouldn’t likely translate into benefits for producers. The CGC has positioned this as a major factor as to why it opted to keep the money.
It is alarming that the CGC does not understand how any fee reduction, not just likely, but absolutely, will be passed through to farmers as part of a grain company’s basis calculations. That is: cash price minus futures price equals basis. Basis may include charges for several things, such as freight, elevation, cleaning, storage, interest, inspection fees, administration costs and profit (margin) for the buyer.
Grain buyers use basis levels to attract grain when they need it or discourage delivery when they don’t. The amount of margin the company can earn is confined to the rules of competition. The grain company isn’t only considering margin on a single transaction but is offering its price with a view to retaining that producer customer on a long-term basis.
A CGC fee reduction would reduce the cost item in each company’s basis calculation. If the company sees an opportunity to earn more, it will try to increase the margin component. Likewise, if receipts are threatened, they will reduce the margin component to retain market share.
However, it is completely separate from CGC fees.
This raises the question that if grain companies wouldn’t keep the fee reduction, why do they care if the CGC keeps the surplus? The WGEA’s objections are rooted in the costs for the CGC in comparison with competing jurisdictions.
Grain sales are subject to global market conditions and prices, which are outside the control of any company, government or country for that matter. One-third of the costs in the United States and approximately 40 percent of costs in Australia are covered by their governments for similar services. Not only does the CGC operate in a near 100 percent cost recovery model, but now it has overcharged by $130 million and has no plan to return it.
To make matters worse, these new expenditures will cause a further fee increase in the following five-year budget cycle, due to an ongoing commitment to maintain these new and expanded programs.
This makes Canada less competitive, reduces the amount of value that exporters can earn on sales and reduces how many dollars can be returned through the supply chain to farmers.
We are disappointed in the apparent lack of understanding of the basic tenets of the cash basis from our leading regulator.
The CGC was either unwilling or unable to acknowledge that both costs and benefits are ultimately passed through the system to farmers. It works both ways.
So what is the solution? Earlier in 2018 the government created six economic strategy tables to drive innovation and growth in Canada’s priority sectors including agri-food.
As an outcome, the grain sector requires a complete and independent review of the CGC and the Canada Grain Act with a view to keeping its role as a regulator, while removing its presence as a duplicative and costly service provider. CGC costs need to go down, not up. We need the attention of the federal government for a complete overhaul of our primary regulatory agency.
Wade Sobkowich is executive director of the Western Grain Elevator Association.