The window is closing on the monopoly marketing system of the Canadian Wheat Board, but it’s opening wider for the free market.
All farmers should care about whether the coming free market for spring wheat, durum and barley is an open, transparent one that gives them market power through true price discovery, or becomes a murky one in which farmers never know their crop’s real underlying value.
That’s why farmers should hope that the ICE futures exchange in Winnipeg, or another commodity exchange elsewhere, can successfully launch new futures contracts for the three crops being removed from the wheat board’s control.
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If they don’t, farmers will be stuck calling around to grain companies and brokers and hoping that they’re not being fleeced when they’re told what price they can get for their grain.
There’s a brief chance here, about one year, to turn spring wheat, durum and barley into commodities that offer open price discovery and are easy to hedge, like canola or oats.
There’s also a good chance, probably a better chance, that they’ll fail to establish thriving new futures markets, because setting up such contracts is a task rife with difficulties. Most fail.
If new contracts aren’t successfully drawn up, spring wheat growers will have to look at Minneapolis Grain Exchange prices to get an indirect sense of their crop’s worth, then calculate differences in delivery basis, quality and the U.S. dollar. They may also face delivery problems associated with having to cross the not-always-open-to-Canadians border. That’s similar to the situation with oats today where basis variations can be huge.
It’ll be worse for durum growers if no working futures contract arises because that crop trades in its own market with different, overseas buyers.
The permutations with that will make it hard to get any real sense of what the crop is worth, except by word of mouth from brokers and elevator agents. That’s how a lot of special and small acreage crops operate and a lot of growers aren’t happy with their options.
The wheat board system and the futures market are fundamentally different ways of pricing and hedging crops, but both offer a wide-open window on expected prices in the future. They also, in their unique ways, offer farmers price fairness, in that farmers know they are getting the same base value for their grain as all the other farmers either in that pool, or who are selling futures contracts at the same time.
The Winnipeg exchange has been quick to announce its intentions to launch new contracts and should be commended for trying to fill the void. It has long complained that the board’s presence crippled its barley and feed wheat contracts. It now has a responsibility to prove that it really can offer a workable public alternative.
And farmers need to care about its success, so they should be pushing their commodity organizations, general farm groups, the grain companies they deliver to and their brokers to get involved with the exchange’s formulation of these new contracts, because if they fail for the 2012-13 crop year, there will probably never be another chance.
The Conservative government plans to end the Canadian Wheat Board’s monopoly in time for the start of the 2012-13 crop year.
The Western Producer’s Sean Pratt reports that industry observers and players say the change will strengthen major grain companies and affect the entire grain handling system.
However, the final picture will depend on what capabilities and assets the federal government gives the new CWB.
A review of alternative busin ess models will be on the agenda when Canadian Wheat Board directors meet this week for the first time since the May 2 federal election.
CWB chair Allen Oberg said the Conservative government’s pronouncement that it will end the board’s export monopoly didn’t prompt the review. It’s a topic the board discusses from time to time.
Directors will explore 10 business models ranging from the status quo to the board acting as a grain broker.
Three or four of those models deal with life after the single desk, which Oberg said would be fraught with challenges.
The biggest problem would be figuring out how to run a grain company without any capital after decades of relying on federal government loan guarantees to secure its borrowings.
The next monumental challenge would be the lack of physical assets in the country and at the ports, which would force the CWB to form an alliance with one of its competitors to use its facilities and logistical services.
It would also have to try keeping the one asset it does have: its people.
“Obviously, this would be a much diminished organization operating on a much smaller scale,” said Oberg.
“Would those top people be willing to stay around with that type of organization or would they move to the grain companies?”
Grain industry players and observers say the CWB’s future depends on what tools Ottawa gives it after removing its single desk powers.
“If they are left with nothing but their name and (told), ‘now you’ve got to survive in an open market,’ I don’t think their life will be very long,” said former CWB chief executive officer Adrian Measner, who is now president of Mission Terminal Inc.
He said the government will have to give the board capital to build or buy an export terminal and country elevators if it is serious about allowing it to thrive in the open market.
Oberg said there is no indication Ottawa would help.
“That is speculative at best.”
CWB minister Gerry Ritz believes a voluntary board could prosper in an open market, he added.
However, there are signs the government wouldn’t throw the CWB to the wolves without weapons.
A task force set up by former agriculture minister Chuck Strahl determined that the government should provide the CWB with assets and benefits as it switches to an open market.
The list included allowing the CWB to keep its fleet of hopper cars, the CWB building and its contingency fund, which were worth $109.7 million at the time of the 2006 report.
Government guarantees on CWB borrowings for up to $200 million of operating credit would be extended for two to five years, giving the CWB access to low interest rates, a benefit worth an estimated $10 million.
The task force also recommended that the CWB receive up to $75 million of its accounts receivable and cash deposits if needed.
John De Pape, a risk management specialist and CWB critic who writes a blog called theCanadian Wheat and Barley Monitor,believes the board does not need physical assets to prosper.
He envisions the CWB continuing to perform some of the same duties it does today, such as price pooling and exporting.
“I don’t think the fact that they will rely on grain companies to handle grain on their behalf should be seen as an impediment,” said De Pape.
No company would turn away a customer that represents 10,000 or 20,000 farmers and their grain, he said.
“My experience with grain companies is they would negotiate. They would absolutely negotiate.”
Measner thinks the CWB wouldn’t stand a chance if it was competing in the export market with the companies whose assets it had to rely on to sell the grain.
“You don’t need to be a rocket scientist to understand who is going to get second priority and who is going to be paying more money to go through those facilities,” he said.
He believes the CWB needs assets, and an export terminal would be at the top of its wish list.
Most of the existing export terminals in Vancouver, Prince Rupert and Thunder Bay are owned by the three big grain companies operating in Canada: Viterra, Richardson International and Cargill.
The Alliance Grain Terminal in Vancouver is owned by smaller grain companies, and Mission Terminal in Thunder Bay is privately owned.
Investment analysts who follow the prairie grain handling industry estimate 30 percent of the market is in the hands of small companies. Some of these assets could be up for grabs.
The CWB could face competition for assets from some of the world’s biggest grain companies.
“You’ll probably see them want to get more established in Canada,” said Measner.
There will also be competition from Canadian companies. In fact, Mission Terminal has shelved plans to build a country elevator this year.
“We’re going to step back now and let this new environment play out because I think there may be opportunities to purchase existing facilities rather than having to build,” he said.
Oberg said history teaches that the CWB couldn’t survive in an open market without an asset base. The prairie pools started with no facilities in the 1920s, renting space from grain companies.
“It didn’t take them very long to realize that was not going to be sustainable, so they started building assets as quickly as they could,” he said.
However, Oberg said the CWB would have difficulty marketing grain internationally even with a strong asset base because it is a risky and highly capital intensive business.
He cited the example of Harvest States Co-operatives, a U.S. co-op that was the size of Canada’s three former pools combined. The co-op could ship only 30 to 35 percent of its own product, with the remainder handled by the big grain companies.
He said it highlights one of his main concerns moving to an open market.
“What could a new organization offer that your direct competitors, the grain companies, could not?”
