Excerpts from western grain marketing panel report

Selecting the options

. . . The Panel believes there are two developments which are likely to exert increasing pressures on the current marketing system if change is not introduced; one, desire for greater flexibility and a move away from the compulsory aspects of the present system and two, the desire by government for budgetary and trade reasons to reduce its commitments. . .

The Panel is strongly of the view that the divisive debate which at times has been destructive to the best interest of farmers and the industry, must come to an end so that the western grains industry can focus on the growing opportunities that exist in the domestic and export markets. . .

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In dealing with the fundamental issue of how western wheat and barley should be marketed, it is necessary to deal with each commodity separately as they differ considerably from each other in terms of their production, their end use and their division between domestic and export markets. . .

Wheat marketing options

Production of all wheat during the past three years has averaged close to 27 million tonnes annually. Durum production has averaged about 3.7 million tonnes with most of the balance being made up of western red spring wheats.

The export market is the largest market for wheat with about 25 percent being used domestically and 75 percent exported. Canada exports wheat to many countries around the world. About 70 percent of annual sales are done directly by the CWB with the balance done through accredited exporters (AEs) and international exporters (IEs) who act as agents for the Board.

As many of Canada’s customers are offshore the Panel paid particular attention to this market in assessing the present system for marketing. As part of its research program, and in direct meetings with customers, the Panel received considerable feedback from Canada’s major buyers of milling wheats.

Deregulation is occurring among some of the buyers of wheat throughout the world. This can work to Canada’s advantage as processors who secure their own supplies give more attention to obtaining quality wheat. In general, there was evidence of considerable satisfaction with the quality of Canadian wheat and with the consistency and level of services being provided to the customers. The majority of milling wheat importers, particularly those with central buying agencies, prefer buying from the CWB as opposed to multiple sellers. Even in deregulated markets, Canada has been successful in maintaining or increasing market share, through a combination of CWB direct selling and the use of AEs and IEs.

There is also some evidence that Canada has been able to obtain premiums in some markets for its top grades of milling wheats. On the domestic market, the CNMA who represent the major users of wheat for products of human consumption, have indicated satisfaction with the system of buying Canadian wheat as it allows them to be competitive on a North American basis by being able to daily price their purchases and hedge their risk through the Minneapolis Grain Exchange. The Bakery Council and the Pasta Manufacturers Association would prefer a more open system for buying their wheat requirements. The Panel heard mixed views from farmers …

In arriving at conclusions regarding the system for marketing wheat the Panel was influenced by the desire to retain and improve those elements of the system which are functioning reasonably well, and at the same time, introduce adjustments which recognize the need to meet changing conditions. The Panel also recognized that variations in the system are necessary to deal with specific classes of wheat.

The proposed system for marketing wheat may be described in broad terms as follows:

(1) Licensed classes of wheat

The CWB single-desk system should be retained for licensed classes of wheat for exports and domestic sales for human consumption.

An option of spot and forward cash prices should be made available to farmers by the CWB for a portion of their sales they may wish to make to the Board in this manner.

In the case of Canada Western Spring (CWRS) the cash option can be made available by providing basis contracts referenced on futures prices established on the Minneapolis Grain Exchange.

In the event that a viable spring wheat futures contract can be developed for the WCE, it could become the reference point for providing the basis contracts.

In the case of the other classes of wheat except durum, it may be necessary to also consider the use of the Chicago and Kansas City futures markets as reference points for the basis contracts.

The priority in establishing the cash option should be on the CWRS wheats, which are by far the largest volume class, but should be available for the other classes.

(2) Durum wheat (CWAD)

Canadian production of durum wheat has averaged 3.7 million tonnes the past three years with more than 80 percent going into export markets. Movement of Canadian durum into the U.S. market has been a trade irritant between the two countries. Durum pricing is a major concern to farmers and other stakeholders in both Canada and the U.S. At the present time, there is no futures market available for price discovery and hedging risk.

The cash market for durum also lacks transparency and does not provide clear price signals. Inadequate price discovery mechanisms for durum made the Panel’s task particularly difficult and the existence of this problem equally in the U.S. impeded the design of a “made-in-Canada” solution.

While the Panel believes that durum wheat should continue to be marketed through the CWB, it does propose the following:

Unlicensed varieties of durum grown for sale other than food, should be placed under a controlled Identity Preserved (IP) system supervised by the CGC and exempt from marketing through the CWB. This would not preclude the CWB being involved on a voluntary basis.
Farmers wishing to market licensed durum varieties to the U.S. can use the existing buy back program.

Issues of Canada-U.S. concern including the matter related to North American pricing of durum wheat should be referred to the bilateral, producer/industry Consultative Committee which was recommended in the final report of the Canada – United States Joint Commission on Grains, tabled in October 1995.

(3) Unlicensed wheats

Unlicensed wheats, other than feed for sale, should be marketed under a controlled IP system supervised by the CGC. Marketing of these varieties would be outside the jurisdiction of the CWB, but this would not preclude the CWB being involved in marketing on a voluntary basis.

(4) Organic wheats

Organic wheats should be exempted from the jurisdiction of the CWB and marketed through a controlled IP system supervised by the CGC. This would not preclude the CWB being involved in marketing on a voluntary basis. The organic associations and the federal government need to complete efforts to establish a recognized certification program.

(5) Possible exemption of a class

In respect of licensed classes of wheat, excluding durum, it was proposed at 1) above that the cash option for CWRS should also be made available for these wheats. The Panel considered the possibility of a further recommendation pertaining to the exclusion of a class of wheat such as CPSR or CPSW. This was to place one or both of these wheats outside CWB jurisdiction and therefore available to be marketed freely through the private trade but not precluding the CWB. Exports sales of these two classes of wheat are presently small, but they have been forecast to increase substantially over the next decade.1

The main argument for wanting to establish an open market on one or both of these wheats was to accommodate the various demands for greater freedom made by farmers to the Panel and to see how such a system would work in the world trading environment. This would allow farmers to gain experience in trading on an open market in case this was forced on Canada on a wider scale by international trade pressures over the next decade. Stakeholders would be able to develop marketing skills, marketing intelligence and customer relationships and have greater price visibility; grain handling companies could search out alternative logistical arrangements for handing this grain; and the open market might facilitate increased production of the CPS grains. This would be the first licensed Canadian wheat handled on an open market basis and some members of the Panel thought that it would be particularly useful to see how the open market fared with a variety of wheat specifically developed for Canadian conditions. In summary, it was felt that an open market for one or both classes of CPS would allow any problems that would surface to be at least on a small scale.

There were also considerable objections among some Panel members to the possibility of having an open market in CPS wheat. These varieties are small in terms of volume and futures markets could not be developed specifically for these varieties. There could be misrepresentation of other wheats as CPS in the marketing chain. An open market in CPS could disrupt price signals for other wheats. This could add to border conflicts with the U.S. There is already an open market in canola and other non-Board grains and it is questionable whether the introduction of an open market in a CPS grain would allow the demonstration of the effects of potential change to a greater extent than is already available from the present marketing of non-Board grains. Some regions in the Prairies are not suitable for CPS production and this could lead to pressures to free other varieties of spring wheat from CWB control. Some Panel members therefore indicated an unwillingness in principle to see any licensed varieties of wheat outside the system.

After consideration of the arguments for and against taking one or both varieties of CPS to open marketing, the Panel was unable to reach a consensus and no recommendation is therefore made.

Returning to the discussion on licensed classes of wheat in #1 above, further commentary on the rationale for the approach taken is required.

The Panel wished to maintain the benefits of the present system for marketing wheat including the integrity of price pooling, while at the same time recognizing the need to provide additional options to farmers and greater flexibility to the CWB to meet its commitments.

The proposal of adding a forward cash option should be viewed as the beginning of a process to introduce further changes to the system of marketing wheat which will respond to farmers needs in the future.

It must be recognized that there are a number of constraints facing the industry at the present time which means that further changes must be staged in step with the elimination of these constraints.

The Canadian grain trade, apart from the CWB, is not established at this time to compete effectively in the international wheat market.
The entry threshold is difficult due to a high degree of concentration in the industry.
Cost of financing inventories may be too high as there is no effective mechanism in place to shift risk.
Many of the companies have limited equity capital.
Concern exists among some farmers about their ability to make sound pricing and marketing decisions under a more open system.
A fair mechanism must be developed for allocating access to markets in the context of Canada’s regulated grain handling and transportation system.

Barley marketing options

Production of barley during the past three years has averaged about 12 million tonnes. Approximately 70 percent of this production has been utilized in the domestic market and 30 percent has been exported. If malt barley is separated from these figures and feed barley is considered alone, then about 77 percent was used in the domestic market and 23 percent was exported during this same period.

These figures are in sharp contrast to wheat where about 75 percent was exported and 25 percent used domestically during the comparable period.

The major exports of feed barley have been to the U.S., Japan and Saudi Arabia. Exports of malt barley have primarily been to the U.S., China and Colombia. …

Some of the main problems associated with the marketing systems for western feed barley are identified as follows:

Canadian feed barley is not judged to be a superior barley in the export markets and there is no evidence that it has been able to command a quality premium.
Inadequate price signals from the CWB on export prices and the lack of any spot or forward price signals.
A consequent periodic lack of arbitrage particularly between the offshore export prices and domestic prices and also between U.S. prices and western Canadian domestic prices.
A view on the part of a significant number of western farmers that they have not always been able to access the highest price markets and therefore have lost income.

The situation with malt barley is considerably different from feed barley. Selection has averaged about 1.7 million tonnes the past three years with about 76 percent, including malt, going to export markets and 24 percent going to domestic use. Malting barley has been a growing market and prospects are good for continued growth in sales of malting barley and malt.

The major exports have been to the U.S., China and Colombia. Most world markets prefer the two-row malting barley but the U.S. is predominantly a six-row market. In the case of malt barley there is no futures market available to establish price or hedge risk. The CWB has used the Minneapolis cash price as a basis for establishing prices in Canada and the U.S.

The competitive prices of Australia and the E.U. have tended to provide guidelines for pricing in the offshore export market.

Canadian Harrington has been recognized as a premium two-row malt barley and it was tentatively concluded by KenAgra that the CWB has likely been able to obtain a price premium on most of the two-row sales. This has not been confirmed by Canada’s international customers and some have expressed concern over the quality of Canada’s malt barley but not its malt.

This situation may in part be explained by the current selection system that is used to obtain malt barley for export.

Following its review of the barley marketing situation, the Panel has concluded that there could be substantial improvement in its functioning and a lessening of tension among western barley growers and users if certain changes were made to the present barley marketing system.

It is the consensus of the Panel that feed barley should be placed under an open marketing system for both the domestic and export markets. All companies and the CWB would be free to buy and sell feed barley. In the case of malting barley, where growth in the malting industry has been significant, where further expansion is anticipated and where the present system is working reasonably well, the Panel proposes that malt barley continue to be marketed through the single-desk system of the CWB.

The merits of moving barley marketing to the proposed system can be summarized as follows:

(1) Better price signals in the western feed barley market should give farmers and other barley users more confidence that they are selling and buying at competitive price levels.

(2) Arbitrage between export and domestic prices for feed barley should improve.

(3) The provision of additional access to the U.S. market should improve arbitrage between domestic feed barley prices and U.S. feed barley prices.

(4) An opportunity is provided for the CWB to design and test a contractual pool.

(5) In the case of malt barley it will continue a system which has functioned reasonably well and where there has been growth and expansion in production, malt processing and in the export of malt and malt barley. …. In the absence of any futures market for malt barley, risk for both the producer and Canadian maltsters is reduced under this system.

The Panel does have two concerns with the above proposal which will require careful attention should it be selected for implementation:

(1) There is no assurance that a voluntary feed barley pool can be operated effectively on behalf of those farmers who may wish to continue pooling their barley sales.

(2) Given an open border for feed barley between Canada and the U.S., it will make it more difficult for the CWB to ensure that all sales of Canadian malt barley to the North American market are taking place under the single-desk system.

The Panel concluded that these two concerns should not preclude implementation of the preferred option.

The Panel in reaching its consensus considered other options for barley which included the following:

A. An adjustment to the present marketing system for barley whereby the CWB would maintain jurisdiction over feed barley sales to the U.S. and offshore markets but would offer a daily cash price in western Canada which would reflect market conditions in both the export and domestic feed barley market. Gains and/or losses from cash trading would either be kept in a separate account or combined with the regular feed barley pool account.

The major improvement to the existing system seen in this adjustment is that it should cause better price arbitrage between the export and domestic feed barley markets. It is not clear, however, whether such an adjustment to the present system would be sufficient to resolve the outstanding issues.

B. An open system under which all feed and malt barley would be sold by both the private trade and the CWB.

This option would place the marketing of all barley on an equal footing and provide maximum freedom of choice. It would however, leave malt barley producers without a mechanism to hedge their risk. It would also be contrary to a strongly stated preference by the Canadian maltsters to continue the present system.

Recommendations for implementation

Timing and staging changes to the marketing system are important … The CWB will continue to play a major role under the Panel consensus proposal and it is therefore important to make changes in its governance at the earliest possible time. Greater flexibility in decision making by the CWB was also stressed by participants in the consultation process.

During its presentation to the hearings, the Board itself acknowledged the need for greater flexibility and indicated that an amendment to the Canadian Wheat Board Act would be necessary to accommodate certain changes requested.

In order to respond to these needs for a change in governance and greater flexibility, the Panel recommends that the Canadian Wheat Board Act be amended in the 1996 fall session of Parliament.

The principle behind these amendments would be one of making the Act a more enabling piece of legislation thereby giving the Minister responsible more authority to make changes by regulation rather than having to refer the Act to Parliament for amendment on each occasion.

Amendments to the Act would be made to accommodate, but not necessarily be limited to, the following changes:

Restructuring the governance of the CWB in accordance with the guidelines outlined below.
Permitting the CWB to make cash purchases.
Permitting CWB payments to farmers for grain storage and/or carrying costs.
Allowing deliveries to farmer owned condo storage without regard to delivery quotas or contracts.
Permitting the CWB to purchase grain from other than an elevator or rail car or from other origins.
Allowing for pool accounts to be terminated and paid out at any time following closure of the pool.
Allowing for the assignment of negotiable producer certificates.
Clarifying the Board’s authority to utilize risk management tools including futures and options in dealing with farmers and customers.
Providing for a mechanism to establish a capital base.

The Panel further recommends that immediately following amendments to the Canadian Wheat Board Act, the CWB be restructured to establish a new framework for governance. …

The Panel would propose the following set of guidelines under which changes to governance of the CWB should be implemented.

The CWB should be governed by a Board of Directors composed of not less than 11 and not more than 15 elected and appointed members, including its Chair.
The Board of Directors should be composed of a majority of farmers, a minimum of three representatives from the related trade and a minimum of two representatives from the Federal Government.
The Board of Directors would hire a Chief Executive Officer who would act as the senior management person responsible for the overall operations of the CWB and reporting to the Board of Directors through its Chair.
The Chief Executive Officer would establish the appropriate structure for senior management and would appoint senior managers, subject to approval of the Board of Directors.
Existing Commissioners and senior management of the CWB would be eligible as candidates, but not exclusive candidates for positions on the Board of Directors and in the senior management of the restructured CWB.
In order to ensure a smooth and rapid transition to the new governance structure, all the first members of the Board of Directors including its Chair, would be appointed by the Minister of Agriculture and Agri-Food.
In making appointments, the Minister would consult with but not be bound by advice from major farm organizations, trade organizations and such other parties as the Minister deemed appropriate.
Following the initial appointment of farmer representatives to the Board of Directors, elections would be held under terms agreed to by the Minister and the Board, to elect future farm directors to the Board.
The Minister would continue to appoint the remaining members of the Board as long as the government continues to guarantee the initial payments of any pools which the CWB may operate or assumes any other financial obligations related to the operations of the CWB.
The CWB Advisory Committee would continue to function under new terms of reference established by the Board of Directors until all farmer members of the Board are elected.

With respect to the proposal for changes to the system for marketing wheat and barley, the Panel recommends the following guidelines for implementation:

Wheat

The Panel has proposed earlier that there should be an option of spot and forward cash prices made available to farmers by the CWB for a portion of their sales of licensed wheats excluding durum which they may wish to make to the CWB in this manner.

The details of this option will have to be established by an implementation committee convened by the Minister with representation from the CWB, the trade and other relevant stakeholders. The Panel suggests that the appropriate mechanism be based on the following principles:

For CWRS, the CWB would commit to buy specified amounts of wheat offered by farmers at designated positions at a price related to the futures price on the Minneapolis Grain Exchange.

Premiums and discounts are specified at Minneapolis for differences in grade and protein content from the standard specified. These could either be used by the CWB for Canadian pricing or, alternatively, the CWB could publish premiums and discounts which would more appropriately reflect marketing conditions for Canadian wheat sales. When determining the cash price to be offered in Canada, the CWB would also need to make a further adjustment, which is described below as the “CWB adjustment”.

The “CWB adjustment” would reflect CWB administrative costs, other appropriate items such as costs of cross-hauls of grain in Canada, and a risk factor, together with a deduction if the wheat were of greater value at the CWB designated positions than the futures value at Minneapolis.

The “CWB adjustment” should only require change periodically. Some costs within the “CWB adjustment” can be measured objectively, but there is an element of subjectivity in determining other costs. The aim is to ensure that there is no transfer from pooled sales to cash market sales, or to pooled sales from the cash market. It may be difficult to make this requirement operational and this process may require monitoring.

Prices offered by the CWB at the designated positions would fluctuate in relation to the Minneapolis futures, together with appropriate premiums and discounts for grade and quality. The farmer delivering CWRS wheat to his local elevator would receive the current cash price at the designated point minus the handling and transportation costs. The CWB would also offer cash delivery prices for future months at designated positions following the same procedure.
Access to the grain handling and transportation facilities for cash and pooled wheat would continue to be controlled through the system of quantity contracts and contract calls.
The CWB may need to place a limit on the total amount of wheat which is available for pricing outside the pool, but this limit should not be less than 25 percent of total farmer deliveries. The integrity of the price pool can be maintained by having each permit book applicant declare the percentage of wheat to be price pooled and the percentage to be cash priced. The declared percentage would apply to all contracts offered for a particular price pool.

Farmers would have the discretion to take the cash or pooled price on each call but at no time could their individual tonnage exceed the tonnages committed to a particular price option.

The cash option for CWRS wheat should be operational by August 1, 1997. Similar arrangements for other licensed wheats, excluding durum, should be implemented as soon as possible. Because there is no futures market for durum, the Panel has not included durum within its present recommendations for cash prices. It expects that the problems in treating durum on a similar basis will be overcome.
In outlining the broad approach to making the cash price option operational, the Panel has referred to the Minneapolis Grain Exchange.

This reference reflects the present availability of futures markets, but does not in any way preclude the substitution of the Winnipeg Commodity Exchange at such time as it will have implemented its plans to develop futures markets for wheat and barley.

The Panel has developed this cash-option approach in an attempt to reconcile the demands of a large number of farmers for pricing options and individual risk management, while preserving the single-desk and continuing the present supply of Canadian wheat available to the CWB to allocate to the various markets.

The CWB is currently offering sales in both domestic and export markets based on the futures plus cash premiums of the Minneapolis Grain Exchange.

To some extent, cash options for farmers can be accommodated as an offset to these present transactions.

Implementation of this option poses policy and administrative challenges and will require close co-operation and commitment among the CWB, the trade and farmers. Careful design and implementation of this option will be essential for it to become a viable and successful alternative for farmers.

Barley

With respect to the proposals for changes to the system of marketing barley, the Panel recommend the following guidelines for implementation:

The change to the open marketing system for feed barley should become effective as soon as possible but in any event, no later than the beginning of the crop year commencing on August 1, 1997. This schedule will provide the necessary time for the industry to make the required adjustments in advance of the starting date for the new system.

The CWB will need to assess the demand for establishing a voluntary pool for feed barley and, if the demand is there, then to design the details of how such a pool would operate. The board will also need to examine the implications of operating a single-desk for malt barley under conditions of an open Canada-U.S. border for feed barley.

In order to facilitate price arbitrage and until such time as the new barley policy is implemented, the CWB should institute a buy-back procedure for farmers at the initial price plus an administration fee, and with no participation in the final payment from the pool. Any off-Board barley purchased by the trade should be eligible for export, subject to obtaining an export permit.

With respect to the contracting of malt barley it is urgent that a meeting be convened to include the CWB, the Malting Industry Association of Canada, the Western Grain Elevator Association and farmer representatives to develop a new contract which will reduce the undue risk faced by the individual farmers under the present contracting system.
The CWB, accredited exporters dealing in malt barley and grain handling companies need to combine in a concentrated effort to improve on the quality of malt barley that is exported from Canada. …