Thursday, December 23, 2010

The "benefits" of pooling and the Single Desk are wasted on feed barley

Did you know....
When the 2009-10 CWB final payments were announced, feed barley wasn’t mentioned in the official release by the CWB.  You had to look at the full payment document and go right to the end of the 12 pages to find this statement:

NOTE: Feed Barley Pool A and Pool B received no deliveries so are not shown above.

This is historic.  This is the first year ever that the CWB received absolutely no deliveries to the feed barley pools.  Zero.  Zip. Zilch. Nada. Nuttin’. 

And yet, in its “end of year” presentation, the CWB reported feed barley sales of 99,000 tonnes to Saudi Arabia and 133,000 tonnes to Japan in 09-10.  A review of all CWB Bulletins from 09-10 shows no reference at all to any feed barley programs such as a Guaranteed Delivery Contract (GDC) or Guaranteed Price Contract (GPC).  It’ll be interesting to read in the Annual Report how the CWB secured these supplies – and from whom (could have been bought directly from the trade).  I wonder if they made any money for the Contingency Fund.

It’s no wonder no one sold into the pools with the Initial Payment for Pool B at $92 instore ($33/tonne in SK, or $0.72/bu).  (I can’t find any reference on the CWB website to the Initial Payment for Pool A; it’s as if it never happened, which I guess is true.  I will assume it was similar to the Initial for Pool B.)

If farmers aren’t taking advantage of pooling, I guess the other pillars – the government guarantee and the single desk – are pretty much of little value to them as well.

Now look at this year.

The CWB is reporting a Feed Barley PRO, so there must be a pool available.  But the only way to sell into it is through a GDC or GPC, depending on the CWB’s choice of the day. 

On December 15th, Sask Ag reported the domestic feed barley price was $144.04/tonne ($3.14/bu) basis instore Saskatoon.  At the same time, the CWB Pool A PRO was $161.68/tonne ($3.52/bu) and the Pool B PRO was $154.68/tonne ($3.37/bu).  Also, there are GDCs reported on the CWB website for a “Net Expected Value” of $212 instore Vancouver; this works back to SK at about $153/tonne ($3.33/bu).

So if you can find them, there are some CWB contracts out there for feed barley at better prices than domestic.  And, although it’s not saying it now, the CWB had said all profits from these sales would go to farmers.  Now that they are going through the pool, I guess the “profits” will show up there.

The critical question is, what value is the single desk in all this?

When the CWB sells offshore, it must be competitive.  The big market – Saudi Arabia – won’t pay a premium for Canadian origin simply because someone said they had to.  If its price is as little as $0.50 over a competing offer from Australia, Saudi camels will be munching on Aussie barley.

The domestic price is moving higher due to various factors – higher competing commodities such as imported corn and DDGs, tight barley balance sheets and the prospect of the potential of export movement at better prices.  However, the export market is muted by the way the CWB is contracting out each sale to selected companies and not making it public or liquid.

I maintain that an open market would provide timely market responsive price signals that everyone would respond to – exporters, domestic buyers and farmers alike.  And it would encourage competition, which would drive costs out of the system.  The current CWB system does not allow that to happen, and it comes with its own inherent costs – all at a huge expense to barley farmers.

Those that think multiple sellers in an open market will push the price lower - think about why the CWB is so cautious when it sells feed barley – it buys the barley first (at large discounts to the potential sale value) because it’s concerned that it may not be able to buy in what it sold.  Why would a grain company sell below a publicly reported market price when they would know they couldn’t buy it in cheaper?  Why doesn’t it happen now in domestic barley?  Multiple buyer and multiple sellers – it’s called competition, and it’s a good thing.

And to those that think grain companies will sell at the premium offshore prices and just buy at the much lower domestic prices (keeping the higher prices hidden), think about this.  The only reason there is a large gap between domestic and export prices right now is because of the CWB system.  Get it out of the way and multiple sellers and multiple buyers will arbitrage the markets together.

Get the single desk out of the way and let the market work for the benefit of barley farmers. 

Wednesday, December 22, 2010

The Single Desk is Impotent in Barley

The latest PROs came out last week and in my view, the barley PROs tell an unfortunate and discouraging story.

The 2 Row malt PRO was lowered by $1.00 while the feed barley pool B was raised by $3.00.  This goes counter to everything we’re reading about the global malt barley markets.  With the poor quality crop in Canada as well as around the world, the malt premium (over feed price) everywhere else is getting larger – not smaller.  For example, I read recently that in Australia, the malt premium is now sitting at $100 over feed, double its traditional level.  Here in Canada, the spread between the CWB malt PRO and the CWB feed PRO is now at $27 after starting the year at $58.  The malt pool return is going the wrong way.

Here’s the problem. 

The CWB has already sold a fair amount of malt barley for this year.  And, if you’ve been following the market at all, you will know that the CWB would have sold this tonnage at prices considerably lower than what could be sold today.

Add to that the problem of the crop quality; with the lousy crop this year I’ve heard that there is little more than 700,000 tonnes selected for malt this year, and the CWB does not expect more.  Compare that to a typical year of around 2 million tonnes.

So the CWB has sold early and there’s little if anything left to sell at higher prices.  In fact, prospects look so bad that there will likely be imports of malt barley into Canada.

The malt PRO is dropping because in earlier PROs the CWB would have factored in expected higher prices to be sold later in the year; now that it’s apparent that they won’t get the barley for these higher priced sales, the PRO needs to be adjusted downward.  I expect it to drop even more by the end of the year.

Now complicate this with rising domestic feed barley prices.  The current malt premium will erode further if the feed prices continue to rise making it even more difficult to find additional malt barley.

Let’s look at a little history.

In 08-09, the CWB closed the malt pool to any new selections in Jan 2009 – the market price was dropping and the CWB wanted to keep new sales from eroding the pool return.  All selections after that point were only offered through Cash Plus contracts, at much lower prices than the pool.  Even though it provided lower prices to farmers, CashPlus became the only game in town.

Now, in 10-11, the CWB reported in December: “Going forward, there will be a limited volume of 2010-11 malting barley left to market”.  The CWB is sold out and the pool is practically done.  Unlike 08-09, the market price is soaring.   A CWB official confirmed that there are no CashPlus contracts being offered right now – but if they were, the price would be substantially above both the feed barley price and the malt PRO.

This time, the only game in town is the lower-priced pool.   But with bullish feed barley prices and outlooks, and the knowledge that malt prices should be higher, many farmers are likely to opt to sell their barley as domestic feed, effectively starving the pool.

The fact that the CWB is not offering CashPlus contracts tells us a lot about what drivers the CWB is following.  CashPlus would not only provide farmers with good prices and signals, it would also make the PRO look lousy.  And, if the CWB is short (committed more malt barley than what they’ve been able to select) they will want to make sure any more malt barley that is found covers the CWB’s commitments through the pool – even if it is at a lower price.  

If there was ever a year that farmers need good price signals, it’s this year.  There is a shortage of good malt barley and providing market prices would be instrumental in finding any additional stocks that are out on the farm.  From the farmer’s perspective, it would be valuable to know what his barley is truly worth before dumping it in the feed bin.  Unfortunately, from the CWB’s perspective, the best thing is to mute real prices.

Let’s face it – pooling barley in Western Canada simply does not work. 

Every year, the CWB struggles to compete with the domestic feed market on feed barley.  Some years – like this one – the CWB’s malt pool price struggles to compete with a rising feed barley market.  In fact, the way the CWB executed its feed barley export program kept domestic feed barley prices down, and, whether intentional or not, kept feed barley prices from threatening the malt pool.

And now, it’s clear that the CWB can’t afford to offer CashPlus because it needs to protect the failing pool.

The CWB can no longer assume it will obtain the barley it has sold.  Because of this and other challenges such as opposing market forces, the CWB is forced to act to protect itself and manage its risk in the malt barley pool account at a considerable expense to producers.  The barley producer loses in both price and opportunity.   We saw it earlier this year in feed barley, now we’re getting it in spades in malt barley.

It’s time for the new CWB board of directors to face the reality that pooling and the single desk don’t work for barley.  The board needs to go to the Federal Government to demand a change in the CWB Act to free barley from the single desk.  If that means to have barley farmers vote in a plebiscite, then do it.

Tuesday, December 7, 2010

Why does the CWB treat its customers better than farmers?

Did you know ... that the CWB will defer (delay) shipping on a contract to a customer, at the customer’s request, at no additional cost? (I've heard they will defer shipment by as much as a year at no cost to the buyer.)

Yet farmers have to pay for the privilege.  To roll a basis contract (BPC) from one futures month to the next, the farmer pays the spread in the futures; to buy out of a contract, a farmer is assessed a buyout cost plus an administration fee.  Also, if a farmer is in default, he is fined.

Did you know ... that the CWB will ship higher grades than what the customer’s contract specifies with no increase in price?

Yet the CWB will often not accept lower grades from farmers, even with a lower price. And if a farmer delivers a lower grade than what was contracted, he is often penalized harshly.

Did you know ... that the CWB will sell to customers on a true market-based unpriced basis, for deferred delivery at the buyers call?

Yet the CWB does not buy from farmers on a true basis.  The basis in the BPC is not market based; it is a derivative of the market PLUS the impact of the sales previously made by the CWB (including both basis and futures) PLUS arbitrary adjustments by the CWB to reflect its view of risk.

Did you know ... the CWB borrows at government rates (call it 0.5% for argument’s sake) and offers credit to customers at “commercial” rates (call it 4%)?

Yet the CWB does not offer credit to farmers. (The Cash Advance Program is a federal government program administered by the CWB).

It can be argued that EPOs are a form of credit since the CWB is advancing you money that, under normal circumstances, you wouldn’t get until much later.  If you think about the EPO payment above the Initial as credit, the discount charged by the CWB can be considered as the cost of that credit – or interest.  So the additional payment on delivery on a 100% EPO on feed wheat, for example, costs an estimated 11.0%.  (The irony is it's your money in the first place.)

On FPCs, the CWB pays “incremental payments” for deliveries called later in the year.  According to the CWB these are reflective of the time value of money.  They work out to about 0.3% - a far cry from the true “time value of money” for farmers. 

Bottom line - it's better to be a CWB customer than a CWB “supplier”.

Wednesday, December 1, 2010

Decisions, decisions. Knowledge is power.

Laura Rance is the editor of the Manitoba Co-operator and also writes a weekly article in the Winnipeg Free Press.  Her Free Press article last Saturday, called “CWB candidates silent on big issue”, was along the same lines as Allan Dawson wrote in the Co-operator, so I felt it was overkill to include them both in my earlier article.

But upon second review, another issue emerged.

Rance’s article was an editorial so, unlike Dawson’s piece in the Co-operator that was presented as a news article and shouldn’t feature Dawson’s opinion, to read Laura’s opinion was expected.  It’s her opinion so she’s free to share it.  But she should present it as her opinion, not as an irrefutable fact.

What I have a problem with is how Rance and others speak with supposed authority on a subject that they really have none.

For example, Rance wrote “It could be they’ve .... realized the logic of analysis that concludes a dual market scenario would simply be a slow death for the CWB.  Without capital and without its own grain handling facilities, the board would be unable to compete for farmers’ grain against the multinational grain companies.”

There are actually two schools of thought on this topic – that’s why this issue is so polarized.  Rance demonstrates an affinity for the position pushed by the CWB and its single desk supporters, but seems to ignore the other one that states that the CWB could indeed survive, and if managed properly, flourish, even without facilities.

Since she's stating this as fact, I would like to know upon what evidence she’s basing this "fact".  (And I do mean evidence – not just someone else’s opinion.) 

And why does she dismiss contrary evidence as if it doesn’t exist?

Farmers need good information to make good decisions

When someone who has a deep and detailed understanding of these issues – on either side of the argument – presents sound analysis and conclusions, I take note.  But when someone like Laura Rance writes about the CWB and its single desk with apparent authority on the subject but without the commensurate knowledge, I find the whole article lacks credibility.

Unfortunately, Rance’s article is indicative of the tripe many of the CWB defenders have felt is good enough for farmers.  Whether its Laura Rance, the CWB Alliance, or individual pro-single desk candidates, none of them actually refer to any real data, real analysis, real examples or real experience.  None of them even acknowledge there are serious problems facing farmers right now.  Are they not paying attention or are they diverting attention on purpose?

Farmers are facing real tough challenges right now on CWB grains – poor cash flow, higher than necessary costs, poor movement – the list goes on and on.  They need good, sound information upon which to base decisions on a daily basis; the CWB election process is no different.  They don’t need the additional risk of a board of directors that can’t even acknowledge the problems.

Rance’s blind faith as a CWB defender doesn’t help.

All eligible farmers should vote

Laura Rance wrote “The board plays a pivotal and unique role co-ordinating the entire grain-industry value chain, from policy through to logistics.”  I don’t see it quite the same way as she does, I’m sure.  However, the CWB’s impact on the industry is indeed unique – it touches every farmer who grows a crop in Western Canada - any crop.  Those that think the CWB is not “their issue” because they don't deal with the CWB are mistaken.

To those that are afraid of candidates who support change (because they might get rid of the single desk), think about this.  The most the board of directors can do is ask Ottawa for a plebiscite on the issue.  And most farmers I know – on both sides of the argument – would welcome that.

Right now it’s up to all eligible farmers to vote for directors that will make a difference – because a difference is exactly what is needed.  

Better get 'er done - the deadline is this Friday.