Thursday, October 7, 2010

The US Market, Part 1

We often look to the US to see what the world would be like without the CWB single desk, for better or for worse, depending on your point of view.  Many arguments have no apparent resolution.

Defenders of the CWB argue that if we lost the single desk, wheat would begin to flow in great quantities to the US and the US would slam the border shut to Canadian wheat.  (Although the argument is often made about the loss of the CWB, really the issue is the single desk – the control of the CWB over the marketplace.)  There is a great irony in this argument.  Defenders of the CWB believe that the control of the CWB is needed to ensure a mutually agreeable wheat-trading relationship with the US – with no trade actions.  Yet, every trade action by the US involving the CWB was about the CWB itself – specifically CWB control and market power – and not about wheat imports per se.

Beyond that, there’s something more mundane at play here (or at least should be).  Specifically, the reason wheat would want to flow south in the first place is the attraction of higher prices.  Think about it.  Today’s street price for spring wheat  in Berthold, ND is $6.39/bu, (in Canadian dollars).  At the same time the CWB’s Fixed Price Contract (FPC) – which is as close as the CWB gets to a spot price – is roughly $6.14/bu in SK and $6.29/bu in MB.

Also, the FPC price includes an “adjustment factor” of $2.78/t (7½ cents/bu) which adjusts the FPC price to reflect earlier sales made prior to sign up.  Since this adjustment factor is positive, it means the earlier sales were made at a higher price.  Disregard the adjustment factor and you get closer to what the CWB figures the spot market to be for Canadian wheat.  In this case, it’s $6.06½/bu in SK – about $0.32½/bu below the spot North Dakota price.  (The difference is often much greater.  If you want, I can show you the data.) 

Is that enough to start trucking south?  Perhaps.  Perhaps not.  But I’m not terribly interested in whether wheat will flow south or not in an open market.  As in other open (less-regulated) markets, grain will move as little as possible in order to satisfy the demand.  If it doesn’t need to move south, it won’t; if there is a need, it will.  

I look at prices south of the border – not so much as a possible destination for wheat, but rather as a proxy for what our market values could be.  Look at it this way.  Both Canada and the US are large producers of wheat and typically the two largest exporters of wheat, often going head-to-head in offshore markets.  When we see consistently higher prices south of the border, it’s not so much a question of wanting to sell into the US, it’s more a question of being competitive with the US in offshore markets and wanting to find a way to get the same kind of farm gate returns as they do.

Here’s another irony.  We compete with the US in many offshore markets.  Sometimes they win, sometimes we win.  When we win, the CWB insists it earns “premiums”.   And yet, the average US farmgate price is higher than ours.  If you can figure out how that can happen, please let me know.  We need to fix it.

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