Last week’s increases to initial payments indicate the federal government still lacks faith in the Canadian Wheat Board’s pool return outlooks.
That was evident at the start of the crop year when initials were guaranteed at a level well below the usual 75 percent of the PRO.
Now, with the latest increase, the wheat initial stands at about 76 percent of the PRO, durum and barley are 69 percent, and designated barley 80 percent.
With a quarter of the marketing year complete, the situation should be clear enough to at least get to 75 percent for all classes.
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The explanation appears to be the $85.4 million deficit in last year’s wheat account and the damage that has caused to Canada’s case against American wheat tariffs.
The details of that situation are addressed on page three this week.
The collapse of grain prices due to an unexpected surge of exports from the Black Sea region surprised everyone in the market, including the CWB. The loonie’s rapid appreciation was also a surprise. But the debate about whether the board could have handled the situation better will go on a long time.
Ottawa’s attitude toward initial price guarantees now appears to follow the adage of once bitten, twice shy.
But do market realities this year support such caution?
The wheat market at this point in the year should hold few surprises. Stocks are tight. The traditional exporters have, or are about to harvest, more normal-sized crops. Last year’s wild cards, Russia and Ukraine, had terrible crops and have become importers.
The only big market wildcard is potential Chinese demand and that is a positive, not a negative. It still hangs over the market, although overblown speculation about its immediate needs were deflated last week when Canada, not the United States, signed a wheat supply deal.
Exchange rates are another uncertainty.
The U.S. deficit and trade balance are still in sorry shape. That means the greenback could fall further, causing the loonie to climb.
The lesson the wheat board might take from all this is to try to improve its intelligence about nontraditional exporters in the former Soviet Union, India and Pakistan.
And while no business can eliminate currency exchange risk, the board should consider extending its risk management program to soften the impact of a galloping loonie.
By doing so, it might restore Ottawa’s trust in its pool return outlooks.
