The grain industry would have been better off if Saskatchewan Wheat Pool had gone out of business.
That’s the conclusion of a report on the grain industry by Dominion Bond Rating Service, an independent Toronto-based credit rating and analysis agency.
DBRS analysts David Schroeder and Ben Chim say that following the 2002 drought, it appeared that Sask Pool would be split up and its assets redistributed.
While that would obviously have been bad news for the pool, it would have been good news for the grain industry as a whole, they say.
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“This could have been positive for the other players in the industry, given the second largest and potentially most efficient competitor would have been eliminated and its assets could likely have been acquired by the existing players at a discount to cost,” they said.
In an interview, Schroeder said if the pool had been bought by a company not already present in Canada, that wouldn’t have addressed the problem of too many grain companies chasing too little grain.
“But if an existing player had acquired the business, very simply it would have reached the goal of fewer competitors, which is one of the main problems facing the industry,” he said.
While the notion of reduced competition for their grain probably doesn’t sound like a good idea to farmers, Schroeder said producers aren’t well served if grain companies are in a perpetual state of financial disarray.
“Farmers want the best deal they can get but if the industry isn’t profitable long term, it won’t survive,” he said. “It’s basically not sustainable at current levels of profitability.”
Heightened competition
The report said that if the pool’s restructuring enables it to regain its financial health and remain a strong competitor with sizable market share, that could be problematic for other grain handlers.
In the short term, the pool will likely be constrained by its banking arrangements from being as aggressive as it might like in offering discounts to gain market share.
But over the longer term, a revitalized pool could be a threat to other players, notably Agricore United, Canada’s largest grain handler.
The report said AU has an older, potentially less efficient elevator network than Sask Pool and, while it has improved recently, is still financially weak.
It said that in the race to gain market share in the last few years, the grain industry has become overbuilt, constructing expensive high throughput elevators in overlapping market areas and offering huge discounts to get business.
While some consolidation and closure of small inefficient facilities has been taking place, it has been far too slow, the report said.
Excess elevator capacity remains a problem.
“In the long term, it is expected that the industry will only be able to sustain a maximum of three large players, but it is unclear how or when this will occur,” said the report.
Schroeder said in any other industry, the required changes would have been done long before now.
At one time, the reluctance to change was due to recalcitrant management, especially at the three prairie wheat pools, which each wanted to protect turf and stay in business as independent entities.
Lately the prospect of mergers or joint ventures has been hurt more by the grain companies’ shaky balance sheets and uncertainty over regulatory changes and future earnings potential.
The 46-page report provides a detailed analysis of the grain industry, looking at issues such as elevator rationalization, producer delivery patterns, grain handling and transportation costs, terminal operations and regulatory trends and the financial status of individual grain companies.
