Tuesday, November 9, 2010

More on Price Discrimination – sometimes it has more to do with the buyer than the seller

You can’t really talk about price discrimination – or differential pricing – without talking about why some buyers will pay premiums for some sources and not others. 

Often it just comes down to consistency and quality.

A good example is the Japanese feed barley market where we’ve seen different prices paid for grain from different origins – the buyers are the ones doing the price discriminating.  Over the years, Japan has paid a premium for Australian feed barley over Canadian or US feed barley.  In Japan, it’s referred to as the “Australian Premium”.  The reason for the premium is mostly quality.  

Barley from Australia comes from different regions, mainly Western Australia, New South Wales and Victoria.  Barley from each of these regions gets shipped out of regional ports, keeping the barley from these different regions separate which keeps the quality consistent and identifiable.  Growing conditions can be quite different between these regions but within each region, the conditions are much more consistent.  Japanese buyers don’t just buy Australian barley, they buy New South Wales barley, or Victoria barley, or Western Australian barley and will know upfront that the quality they get is quite consistent – and often quite different between the regions.

On the other hand, barley from Canada is originated from many regions within Western Canada and is commingled in the process of moving it from various origination points to Vancouver.  Therefore, the barley that Canada sends to Japan does not have as consistent a quality as Australia. 

Another factor plays into the quality of the feed barley we send to Japan.  Because the dominant market in Western Canada is the domestic feed market, the CWB must compete for barley for export.  And as we all know, most often the PRO is below the domestic price which makes originating feed barley problematic most years.  (The fact that the PRO doesn’t respond effectively to changes in market values also makes it difficult to attract barley.  The CWB will be the first to admit this.)

With no realistic competition from the CWB, domestic buyers will buy the best quality barley available to them first.  Feed barley is bought on the basis of bushel weight – if 52 to 56 pound barley is available, it will be snapped up by buyers, leaving the 44 to 48 lb barley.  This leaves the lesser barley looking for a home. Often farmers will have barley that technically grades a 1CW feed but is comparatively lightweight.  This is the barley that gets sold to the CWB.  And so this is the barley that gets sent to the quality conscious buyers of Japan.  It’s no wonder Australia gets a premium over Canadian barley.

A friend recently told me a story of when he had Japanese buyers visit his farm.  When his guests saw a pail of barley that my friend had kept for samples, they asked what it was.  They did not believe it was Canadian barley – it was nothing like they had ever seen in Japan from Canada. 

We could match or exceed Australian quality in export markets.  Over the years, the CWB has been approached various times to allow “selected” feed barley to be handled from the farm right through to the buyer.  So far it has failed to capitalize on these opportunities to market high quality feed barley which would provide barley producers with another outlet for their barley.

When some director candidates talk about meaningful changes to the CWB, becoming more responsive to farmers needs, this is the kind of thing that they’re talking about. 

The CWB remain mostly impotent when it comes to feed barley.  We need a CWB that is responsive to market opportunities that will benefit farmers.  We need directors that will pursue these opportunities – not be threatened by new ideas just because it doesn’t fit with the prime directive of keeping the single desk model.  If the single desk is in the way, then perhaps the single desk needs to be moved into another room.

One more thing to think about:  when the CWB says it discriminates on price, is it really?  Or is the buyer just paying for Canadian quality?


  1. Is that not what happens to my high protein number 1 and 2 durum and wheat. blended for profit.

  2. The quality problem is further exacerbated by Canadian grading standards. Elevator managers are directed to blend grades to optimize profit which means maximizing all levels of tolerance on moisture, ad mix, test weight, etc. The quality of CWB grain arriving at port position is as poor as it can possibly be, limited only by individual elevator operators capacity to source enough poor quality to blend in with anything exceeding minimum standards. The CWB has zero influence in this process unlike individual companies who own and operate these facilities. My point is that if marketing export wheat and barley was extended to private firms they would be in a position to respond to this "quality opportunity". The CWB can not.

  3. Scott

    When grain companies pay for high protein 1&2 CWADs on the CWB’s behalf they create what is referred to as a “liability” for that exact tonnage and quality. This means that if the grain company doesn’t deliver equal tonnes and equivalent quality to the CWB at port or milling facility, it will incur a financial loss based on the prevailing grade spread at the time. This of course is a dynamic process and doesn’t occur load by load; rather it is trued up at various times throughout the year through liability reporting.