Friday, November 26, 2010

Market Signals vs Market Power

A few years ago, CWB Chairman Ken Ritter embraced Al Capone’s approach to getting his way when, speaking to an Alberta Wild Rose Convention, he paraphrased Capone by saying: “You may get what you want with a smile, but you can get it a lot quicker with a gun and a smile.”

More recently, Maureen Fitzhenry, spokesperson for the CWB, seems to have considered a similar approach.  In an article in the Western Producer this week discussing problems with durum this year including slow farmer delivery, Ms. Fitzhenry said “...we’ve tried different programs but ultimately, we can’t put a gun to anybody’s head.”

Nor should they, even metaphorically.

The market relies on incentives to change or affect behaviour, for one very simple reason.  Incentives work.  And I’m not talking about the gun to the head type.  

The CWB fails to translate market signals to farmers.  It prefers the bureaucratic approach of trying to control everything through edict.  But it can’t control everything (nor should it).  And regardless, the CWB is still sending signals, although often they are counterproductive.

For instance, the CWB lost control of a lot of high quality durum this past summer and fall because the domestic feed market was paying $4.50/bu when the CWB wasn’t accepting any deliveries and later, when it did, the Initial Payment was only $1.70/bu.  Also, you could sell all you wanted at $4.50 whereas with the CWB you are told how much you can sell – and it ain’t much.  Although not what the CWB is trying to say, the market message received is “we don’t need your durum right now – if you need to sell and another buyer is willing to pay more, that’s a better option right now”.

The CWB can try to persuade farmers to deliver through an increased PRO or talk of increased Initial Payments, but ultimately cash is king.  The CWB came out with a Guaranteed Delivery Contract (GDC) on durum but it was a case of too little too late for some farmers.

This can get really ugly when, because of cash flow needs, farmers sell more canola or peas or oats or whatever – than the market really needs at the time.  So far this year (up to the week ending Nov 12, or put another way, a period covering 28% of the crop year), farmers have delivered 19% of the wheat crop and 40% of the canola crop.  Canola inventories in the system have been increasing and now sit in excess of 1.5 million tonnes.

Price is the dominant factor used by the market to entice more demand (through lower price) and more supply (through higher price).   At the farm level, in an open market, higher prices are used to attract deliveries (increase supply) into the system and lower prices to slow deliveries (decrease supply). 

The CWB sets a fixed price on delivery and uses a much more passive system to get deliveries – they just open up the contract calls and hope the grain will flow.  The problem is it fails to recognize that farmers still respond to price and delivery opportunities.

Compare recent FPC prices and canola prices (in Alberta). 
  • The FPC for #1CWRS 13.5 yesterday was $7.06/bu, Since the FPC appears to be the best deal right now, let’s go with that as the best option for wheat right now.
  •  On FPC’s the CWB will make an incremental payment for deliveries later in the crop year, supposedly reflecting the time value of money. According to the CWB website, if you lock in today’s FPC and don’t deliver until April, you will be paid an additional 1.8 cents/bu, for a total of $7.078/bu.

Now let’s look at canola.  Bunge in Ft. Saskatchewan posted these prices yesterday:
  • Spot delivery     $11.44/bu
  • April delivery     $12.06/bu
  • By selling today for April delivery, you'll get paid an additional $0.62/bu over today’s spot price.

The signals are clear – they’re telling farmers to deliver wheat right now as there’s no benefit to holding it, and to sell canola for deferred delivery, because there is a substantial incentive to store it.

But because of poor cash flow with CWB grains, many farmers are forced to ignore the market signals and sell canola, disrupting (distorting) the canola market.  Even at increasingly lower prices, canola deliveries continue out of necessity.

So when it comes to the CWB and its impact on Western Canadian farmers, you can run, but you can't hide.  You may think you're going around the CWB, but you're not really.

The CWB has an impact on all Western Canadian farmers.  No one's holding a gun to your head, but all Western Canadian farmers need to vote in the CWB director elections.

CGC Grain Statistics Weekly
The Western Producer
Bunge, Fort Saskatchewan
CWB FPC Price Schedule

1 comment:

  1. I am an active farmer who has started the following blog:

    I have chosen to remain anonymous as my identity could be harmful to our business as we have to market through the board to survive. Hopefully this blog will assist in the fight for freedom. Feel free to participate.