Monday, October 25, 2010

The CWB Misses the Point on Feed Barley Debate

Late last week, the CWB commented on the feed barley debate.  (  Unfortunately, they still don't get it.

The CWB explained its feed barley program back in 2007-08 by saying it sold several hundred thousand tonnes purchased directly from the trade.  This is quite different than buying from farmers using Guaranteed Delivery Contracts (GDCs), as they are doing this year – but in most respects, the result is the same.

On these trades it has been estimated that the CWB made about $50.00/tonne.  To explain why it didn’t distribute this excess profit to producers, the CWB said: “It would have been extremely difficult to determine which farmers contributed to those cash sales and at what prices, which is why the margins were directed to the CWB's contingency fund…”

I have to ask:  Why did the CWB choose to buy from the trade and not from farmers?

First, if they bought directly from farmers using GDCs, they could have distributed the excess profits to the farmers that participated in the sales. 

Second, using this program, the CWB created the same major problem in 07-08 that we’re seeing right now.  In both years, the CWB’s actions are directly responsible for keeping the export values from having a positive impact on the domestic price of feed barley.  Since The CWB made $50/tonne in excess profits on these export sales, it’s only natural that, with efficient price transparency as there would be in an open market, the domestic prices would have moved higher to compete.  At 1½ tonnes/acre, that works out to $12,000 per quarter that you could’ve had. 

And it doesn’t stop at feed barley.  If you made more from selling feed barley, you’d have less cash-flow pressure to sell canola.  Less selling pressure on the canola market means higher prices on canola.

A majority of The CWB board of directors feel farmers are better off with the CWB single desk.  They argue that grain companies “would (naturally) buy feed barley at prices just above the domestic value, sell it at the higher international values, and retain the profit margin.”

This argument is based on what would happen if you suddenly changed the rules, shut down the single desk one day and opened up the market the next.  It’s based on the assumption of the current dysfunctional market structure – ineffective price discovery, no appropriate hedging tools, few players and no active arbitrage between markets.  The CWB fails to factor in competition and arbitrage between markets.

I argue that the market would evolve very quickly from its current makeup.   We would see the rapid development of vibrant futures and options markets, active cash brokerage/trading, multiple participants (not just the big grain companies) and effective arbitrage between markets.  Competition would drive handling margins lower, just as we’ve seen in other non-CWB commodities. 

Ironically, I see the CWB playing an important role in a dual market, particularly in the early stages, in price discovery, discipline and arbitrage.

The crucial point the CWB is missing is that the rest of the barley market suffers by the way the CWB operates.  And the CWB is completely myopic when it says that if there was an open market, farmers would lose.

They don’t get it.  Doing it the CWB way, everyone loses.

1 comment:

  1. For those that want more detail.

    In 2007-08, the CWB reported a total of 1.192 million tonnes of feed barley that traded through the CWB's Cash Trading activities.

    In anticipation of an open market that year, about 900,000 tonnes of feed barley was sold in the export market by the private trade. However, prior to making the sales, the private trade negotiated terms with the CWB that would apply if the courts reverted the market back to the CWB single desk - which, of course happened. The agreement between the private trade and the CWB said that the trade would pay the CWB $4.00/tonne in return for allowing the trade to execute the sales.

    Therefore, on this 900,000 tonnes, the CWB made $4.00/tonne, or about $3.6 million.

    On the balance of the program, the CWB bought about 300,000 tonnes directly from the trade. Since the CWB reported total earnings from cash trading of feed barley of $19.938 million, on this 300,000 tonnes the CWB earned $16.338 million, or $54.46/tonne.

    None of this money was paid to farmers. It all went into the Contingency Fund.