Thursday, November 18, 2010

Myths and myth-representations about the CWB

Single desk candidates and others have made a number of statements to strike fear in the hearts of voters.  Here are some of those statements along with my comments.

Without the CWB, farmers would be forced to market their grain directly to offshore buyers.
Why would farmers be forced to market their wheat directly to offshore buyers when there are companies already set up to compete for this business?  Do canola growers sell canola to, say Showa, in Japan?  Farmers would market wheat the same way they market anything else.

A voluntary CWB would be in direct competition with the grain companies that it would rely on to ship its grain.  Why would they handle the CWB grain and not their own?
Grain handling is a fixed cost business and there is over capacity. CWB tenders have shown what grain companies will do to get extra volume – they discount their fees by as much as $20/tonne.  If the CWB approached a grain company with the support of farmers representing a large amount of grain, the CWB could negotiate very attractive handling terms.  Grain companies would work hard to get and then keep a sizable customer like that.

A dual market won’t work. 
I think to most people, a dual market is one where farmers are free to choose who they sell to, including the CWB.  In a dual market the CWB would not have a monopoly, or its single desk; it would be a participant in the market providing whatever value it can for producers.  For example, I have shown in an earlier commentary that only about 17% of Western Canadian farmers deal with the CWB on barley, either malt or feed (and that includes 100% of all the malt barley).  In a dual market, if the CWB dealt with even 10% of all farmers on barley, this should be considered a success.  It would tell me that 10% of all farmers find value in the CWB offering.  The CWB doesn’t need to handle everything to be considered a success.

On its website, the CWB tries to explain how a dual market won’t work by giving examples from the 1930’s.  ( )  These examples all depict a fixed price pool; I showed earlier that a basis priced pool would allow the CWB to compete very well.

The dual market experience in Australia shows a dual market won’t work here.
Quite the contrary.  In the first year after losing the single desk, AWB acquired over 25% of the Australian 08-09 wheat crop.  It’s pooling activities attracted 2.7 million tonnes while its “Grain Marketing” business unit acquired a further 3.4 million tonnes.  I understand that some of the private companies also provide a pooling option.  Pooling successfully offered alongside the “open market”.  Go figure.

Getting rid of the single desk will be the end of the CWB.
The single desk represents forced participation.  In a dual market, with voluntary farmer support, the CWB could be very effective marketer - as long as its open to doing things a bit differently. A separate organization could be formed to address policy issues on behalf of the industry, including farmers (but voluntary), much like the Canola Council of Canada does for canola.

The CWB risk management program has a lower cost than for non-CWB crops
Truth of the matter is that the open market system, including competition and the use of futures has been proven to be a much lower cost system (not just here - anywhere in the world).  For example, in 2008-09, Western Canadian average “net-backs” (charges that cover handling, cleaning, CWB expenses, risk management, etc - excluding freight) were reported as:
CWRS = $28.91
Durum = $48.47
Canola = $5.65
The reasons canola is lower include competition and the lack of CWB costs.  (These net-backs cover all relevant costs including risk management.)

Working together, marketing through the single desk gets farmers better prices.
Although it’s nice to think this, and intuitively this makes sense, it is not supported by evidence.  Even if it was able to get premiums, we have shown that the real costs and lost opportunities are much larger, presenting farmers with a net loss position.  More streamlined models need to be considered but the majority of the CWB board of directors cling onto the status quo.

The CWB does not distort markets.
This is just wrong.  Poor farmgate cash flow forces marketing actions in other crops that would not occur if the CWB crops were more responsive to market signals.  The way the CWB has handled feed barley exports for the last four years has artificially kept the price of feed barley low in Western Canada.  Poorer net returns on wheat due to high costs and less-than-average prices contribute to increased acres of other crops, pressuring prices lower due to increased supply.  Canada also has a smaller processing industry because of the single desk.

Without the CWB, the US border will get slammed shut to Canadian wheat because there will be lines of trucks hauling south.
The truth of the matter is that all the trade challenges brought forward by the US have been against the
CWB – not import of Canadian wheat.  (One challenge actually stated it was on wheat from Western Canada, not eastern Canada.)  Canada enjoys an excellent trading relationship with the US on all sorts of other agricultural commodities; corn and soybeans coming from the US into Canada; canola, flax and oats going from Canada to the US.  In fact the US imports more oats from Canada than it grows domestically.  None of this trading activity has been hampered by trade actions – because none of these activities involve the CWB.

Feel free to write in with other myths or myth-representations that you would like to have discussed.

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