In recent years, many people have grown accustomed to thinking of the prairie wheat pools as ailing institutions.
Throughout the 1990s, the companies used a variety of explanations to describe why they were losing money, paying no dividends and selling facilities or divisions of the company.
But for the farmers who step back and take a longer view of the prairie pools, the change of position in just 10 years is remarkable.
In the early 1990s the pools reigned supreme. Today, two are gone and a third is struggling for survival.
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“We took a fairly fiscally conservative company…that had been very cautious on expenditures, with good earnings, with huge farmer support,” said Swan River, Man., farmer Ken Sigurdson, a former delegate of Manitoba Pool Elevators and Agricore. “We took the equity we had built up with Manitoba farmers over 70 years and squandered it.”
Art Macklin, who farms near Debolt, Alta., offers a similar view, adding all farmers will suffer from the loss of Alberta Wheat Pool and Manitoba Pool Elevators, and from the weakening of the Saskatchewan Wheat Pool.
“To lose so much farmer control so fast is a catastrophe,” said Macklin, a Canadian Wheat Board director and dedicated co-op supporter.
Analysts agree that in the 1980s, the prairie pools dominated the western grain industry.
The farmer-owned co-operatives, each financially strong and supported by tens of thousands of loyal members, looked forward to a future of continued dominance.
But when the 1990s arrived, the pools faced a fork in the road.
The route the pools chose saw each farmer co-op crash into a ditch of indebtedness.
Manitoba Pool Elevators and Alberta Wheat Pool, which merged to become Agricore, gave up their co-operative structure and their legacy of farmer ownership when they merged with United Grain Growers, a move many view as a takeover by UGG.
Sask Pool, after selling numerous assets once considered key to the company’s future, has narrowly avoided bankruptcy.
While the fall of the pools seemed to happen quickly, interviews with grain company officials suggest that by the mid 1980s, all three co-operatives could see storm clouds on the horizon.
The late 1980s was a time of great economic change in Canada, and although the Canadian grain industry was still insulated from U.S. competitors by a unique system of federal regulations, farmers involved with running the pools sensed great pressure would soon be placed on the industry.
“You could see a lot of things coming at us,” said former MPE vice-president Ken Edie.
Greg Arason, Manitoba pool’s last chief executive officer, agreed.
“We could see changes coming,” said Arason, former chief executive officer at the CWB.
The most obvious changes centred around the prairie rail system.
Pressure to deregulate the rail system and remove the Crow Benefit transportation subsidy meant prairie elevators would soon face massive realignment and foreign competition.
The pools considered a potential merger of all co-operative-minded farmers and the possible formation of an all-encompassing prairie pool that would include facilities in Manitoba, Saskatchewan and Alberta.
In 1987 and 1988, pool officials discussed the idea on several occasions but failed to reach a consensus.
In the early 1990s, the issue arose again, leading to a 1991 Winnipeg meeting in which delegates from all three pools encouraged their directors and managers to study the issue and determine how a merger could be achieved.
Bringing the three pools together would allow the pools to achieve greater efficiencies in grain handling, pay for upgrades to grain handling facilities and maintain their appeal with prairie farmers who still supported the co-operative model, but wanted an organization with a clear vision that could compete in the private grain trade.
In retrospect, Edie thinks a three-pool merger would have radically changed the future of Western Canada’s grain industry.
“If we had been able to achieve a merger, then there would have been a different story now,” he said.
“It would have had the critical mass to support it.”
As some farmers were discussing ways to put together a giant, prairie-wide co-operative, other farmer-directors were looking at different options.
Sask Pool’s leading voices were wary of the potential capital drain when tens of thousands of farmers would retire and remove their equity in the co-operative.
Sask Pool directors, who desired a company structure that would allow them to raise money from investors, became committed to the idea of making Sask Pool a hybrid.
According to their vision, Sask Pool would become a publicly traded co-op that was simultaneously able to raise equity in the stock market and be controlled by producers on a one-farmer, one-vote basis.
As the drive to make Sask Pool a publicly traded company built steam in 1994 and the change-over began in 1995, the vision of a three-pool co-operative weakened and eventually died.
When Sask Pool became publicly traded, many farmers in the Alberta and Manitoba pools stopped thinking of Sask Pool as a co-op.
Others said it would have been too difficult to meld the traditional co-operative structures in Manitoba and Alberta with Saskatchewan’s radical new design.
Sask Pool charted its own course and quickly set out to fill the gaps in its elevator network.
Soon after the reorganization, Sask Pool announced it was building a huge new system of concrete grain terminals under a plan called Project Horizon. Half of its new terminals would be in Saskatchewan but the other half, to the shock of many farmers, would be located in Alberta and Manitoba.
Sask Pool leaders were determined to make their company the dominant player in the prairie grain industry.
Unfortunately for Sask Pool, the other farmer co-ops were not willing to passively accept a smaller share of the prairie grain pie.
They also began building large terminals, as did publicly traded grain companies such as UGG, and private companies such as Pioneer.
As many had predicted, foreign companies including Louis Dreyfus and ConAgra also began building facilities.
By the late 1990s, there was intense competition to hire terminal construction companies. Pre-emptive efforts to tie up construction crews and delay the expansion plans of competing grain companies took place. Costs rose and the pace of construction was intense. The fight to redivide the prairie grain market was on.
While Sask Pool was building elevators and investing in a wide range of businesses, such as hog barns and port facilities in Mexico and Poland, the Alberta and Manitoba pools weren’t resigning themselves to being provincial players.
They spent more slowly and less expansively, but steadily built facilities to prepare for the competitive future they saw coming.
The pools, still harbouring hopes of becoming a prairie-wide organization, initiated a hostile takeover bid for UGG, which had a well-developed network of grain handling facilities in Saskatchewan and would fill the hole in their elevator network.
UGG shareholders rejected the plan.
Instead, they accepted an offer from Archer Daniels Midland that gave the U.S. multinational a 19 percent minority stake in the company. The move gave the UGG more money to pay down debt and finance its own expansion efforts.
Alberta and Manitoba pools did not admit defeat after the setback. If they couldn’t buy a Saskatchewan network, they would build one together.
In 1998, the Alberta and Manitoba pools merged to form Agricore.
Once Agricore was formed, the concrete began flowing even faster, debt continued to mount, and the visions of industry dominance became more pronounced.
“We will move forward on our strengths as we continue to position Agricore as a leader in the industry and an organization committed to the success of our farmer owners,” said the 1999 Agricore annual report.
“Agricore is working hard to be one of the agri-businesses that will serve western Canadian farmers in the next millennium.”
To decision makers at Agricore and Sask Pool, competing for industry dominance seemed an inevitable course of action but to others, this aggressive competition was crazy.
“Instead of going forward co-operatively as farmers, they decided to compete farmer against farmer,” said Javier Caceres, a grain industry consultant who was executive director of Prairie Pools Inc., the co-ops’ joint agent, during merger talks. “It was an internal civil war among the farmers of Western Canada.”
The aspirations of the prairie pools were growing and their visibility in the market was stretching outward.
But at the same time, their expanding hopes relied on expanding grain volumes and increasing profits to service their burgeoning debts. That happened for a while, but then the tides began to turn.
After an initial surge in the mid-1990s, volumes at the major grain handling companies started to fall. And as they reduced operating costs and closed facilities, the pools were also losing farmer loyalty.
The decision to close smaller, less-efficient elevators did not sit well with producers.
More than any of the other grain handling companies, the prairie pools’ elevators were located in close proximity to their farmer members. But when the grain transportation system was deregulated and wooden elevators started to disappear, the co-ops saw one of their most important competitive advantages disappear.
According to Arason, pool officials knew their companies were in trouble when the rail system was partially deregulated.
“Our geographical presence and our ability to relate to farmers at the local level was very important to keeping our market share,” he said.
“Once we started to go dramatically away from that, you just became another player. People don’t see you as anything more than just another option.”
Ex-Agricore farmer-director Eric Fridfinnson concurred.
“Some farmers didn’t see the farmer-owned companies as being particularly valuable to them,” Fridfinnson said.
With the loyalty of farmer-members waning, the co-ops placed more emphasis on prices, forcing more closures of older facilities.
The pools’ reversal of fortune in the late 1990s can be seen in graphs that chart their financial results.
After 1996, debt levels increased sharply as the co-operatives built new facilities and invested heavily. Revenues and net earnings also rose, at least temporarily, but then began to fall.
In the late 1990s, commodity prices bottomed out and farmers cut back on input purchases from the pools, causing further reductions in revenue.
Profits from commodity sales also dropped significantly as margins became razor thin in a grain-glutted global economy.
During the same period UGG saw a similar, but much less extreme, rise and fall of revenue.
Profits from commodity sales dropped significantly as margins became razor thin in a grain-glutted global economy.
And while the pools’ debt spiraled in the mid- to late-1990s, UGG’s grew gradually and at some points actually declined.
Brian Hayward, chief executive officer of UGG and later Agricore United, said the key to the pools’ failure was not their decision to expand but their inability to raise capital.
Before they went public, farmer co-ops, including UGG, relied on their own savings or borrowed money to finance expansion.
Co-operatives did not have the ability to sell shares to raise capital, but capital was badly needed.
UGG saw the writing on the wall and converted from a co-operative into a publicly traded company in 1993. It then followed a conservative course of company renewal and secured outside investment from U.S. agribusiness giant Archer Daniels Midland.
UGG expanded in the 1990s by building new concrete terminals to replace its old wooden network, but its growth and replacement strategy was more gradual than the pools’.
The UGG also paid for its expansion differently, Hayward said.
While the pools borrowed money to pay for terminal construction, UGG borrowed over the short-term and then turned to investors to sell shares and pay down its debt.
Essentially, UGG got private investors to take over the debt in exchange for part of the company in the form of shares rather than the right to demand interest payments.
The company’s decision to partner with ADM also allowed UGG to reduce its debt further and paved the way for the takeover of Agricore.
The move to join forces with ADM was considered a key part of UGG’s effort to establish itself as the dominant player in the prairie grain industry.
“(ADM’s involvement) would mean a capital infusion for the company, most likely, and that would be very positive,” the Dominion Bond Rating Service’s David Schroeder said at the time. “This (the UGG) is a company with too much debt.”
In the mid-1990s Sask Pool followed suit, became a publicly traded company and gained the ability to issue equity to raise capital for expansions and debt reduction.
But it only used that option once, in 1998, when it raised $103 million in new share capital.
At the time, the company said it did not want to issue any new equity until share prices approached $21.
Today, with Sask Pool carrying a near-crippling debt and shares trading at less than $1, many analysts say the company may have passed up a golden opportunity to pay for its massive expansion program through equity issues.
Colleen Vancha, Sask Pool’s manager of investor relations, said directors at the time thought they were following a prudent course.
“At that time the industry was different,” Vancha said. “The vision of the management team was different. They were in expansion mode. And they chose to finance that expansion through a combination of debt and equity.
“It was appropriate given the balance sheet structure at that time.”
Even today, with the Sask Pool narrowly defying financial collapse, Vancha maintains the pool’s debt to equity ratio isn’t alarming. Sask Pool is reducing its debt and its problems are the result of bad crops, she said.
“The big issue really is the drought,” she said.
“It’s a time issue. We believe we’ve got a good operation that can be profitable in normal years, but right in the midst of our productivity enhancements and all the programs we’ve been putting in place to reduce costs and improve our operations we got hit with back to back droughts.”
Schroeder, who has studied the Canadian grain industry extensively, said there is some truth to the co-ops’ claims that drought was the main problem.
“If there had been a good crop last year the AU merger may not have had to happen,” he said.
“Sask Pool would have had more breathing space. If they had had bumper crops, they would probably have had decent numbers.”
But the companies paid the price for making heavy investments on the assumption of good times ahead.
“Sask Pool wanted to become another Cargill, but the execution wasn’t there, the investments weren’t good, most of them failed.
“When you spend a lot of money and what you buy doesn’t turn out to be very good, it really wreaks havoc on the balance sheet.”
Fridfinnson, meanwhile, wishes it had all worked out differently.
The pools, formed as part of a swell of farmer solidarity in the first half of the 20th century, have forfeited their spot as dominant players in an industry that lives off the grain they grow.
“It’s a loss to prairie farmers,” said Fridfinnson. “I don’t think there’s any doubt to that. Those organizations are something that’s going to be difficult to replace. In today’s world, they’ll be impossible to replace.”
Edie, the former Manitoba pool president, agreed.
“Not all change is progress,” he said.
