Wednesday, January 12, 2011

The CWB misses the point on price comparisons - again

Recently the Western Canadian Wheat Growers Association released a price comparison that showed US farmers enjoyed better spring wheat prices last year than Western Canadian farmers.  CWB Media Relations Manager, Maureen Fitzhenry responded to the Wheat Grower analysis in a radio interview and unfortunately, continued much of the diversion from the points being made that we are accustomed to hearing from the CWB.

The Comparison

The Wheat Growers showed that the final pool return for #1 CWRS 13.5 protein in Manitoba was about $185.87 per tonne.  Part of this price is a result of the CWB’s Wheat Pool Pricing Pace Model which establishes the pricing pace for the wheat pool.  Pricing is a combination of actual priced cash grain sales and sales of futures (if cash sales are not sufficient to meet the pace).  The Wheat Growers decided to see what a US farmer’s average price would be if he priced his wheat on the same basis as the CWB.

The results are not insignificant.  If a US farmer priced his crop the same as the CWB priced Western Canadian wheat, the US farmer would achieve an average price of about $209 per tonne – about $23 per tonne more than his Canadian counterpart received through the CWB.  By matching US farmer sales to the CWB’s Pricing Pace, the futures component of the prices are equated and therefore, taken out of the equation leaving only basis related factors.  This is a powerful counter argument to the notion that the CWB gets premium prices when making sales.

The CWB’s Counter Argument

Ms. Fitzhenry’s argument on behalf of the CWB was classic CWB misdirection; either she doesn’t understand the Wheat Growers’ argument or she intentionally argued past it to divert attention from the results and to appear to have a sound argument against it.

In her argument, Ms. Fitzhenry conjures up CWB rhetoric about basic economic principles – but then stretches them or misinterprets them.  For example, she suggests “The CWB single desk is a kind of a price supporting structure within the North American marketplace, and that’s a major point that’s always ignored in these kind of things.”
We’ve heard this argument before; it is meant to say, don’t look to the US markets, thinking that you would get those prices if there was no single desk, because without the single desk, those prices would be lower and therefore, less attractive.

The Reality

Ms. Fitzhenry is missing a number of points.  By equalizing the pricing pace so both the US price and the CWB price use roughly the same futures levels, the comparison by the Wheat Growers takes the futures component out of the comparison.  This leaves just basis considerations and shows the CWB system provides lower prices than the in the US; under the circumstances, it’s tough to argue that the CWB gets premiums.  If it did, it would show up in this comparison by showing the Canadian farmer getting a higher price when both the Canadian and US farmer are pricing at the same pace.

Ms. Fitzhenry is trying to say the US price would be lower in the absence of the Single Desk.  What she fails to mention is that, according to CWB theory, the Canadian price would be lower too.  And if both Canada and US prices were lower, then the US farmer would still be getting a higher price.  That is of course, unless Fitzhenry wants to argue that the Single Desk supports the price in the US more than in Canada, but I doubt she would want to.

Ms. Fitzhenry is disingenuously skewing an incomplete analysis to support the CWB’s argument. 

The point she is missing is this – the CWB is supposed to bring value to Western Canadian farmers but when we look at the US market that value is not apparent.  The Wheat Growers analysis is not saying “without the CWB we would get US prices”; rather, it’s saying “looking at the US market we don’t see the benefit of the CWB”.

Another related argument by Fitzhenry is the common CWB argument that multiple sellers in a market push prices lower.  In the radio interview, she states, “ a pure open market, the law of economics is that there becomes a single price – things tend to arbitrage down to the lowest, sort of, possible value.”

Really?  Does the CWB really believe this?  Or is just Fitzhenry not understanding basic economics? 

First, she uses the term “arbitrage” improperly.  Markets don’t “arbitrage down to the lowest possible value”.  Arbitrage is actually the market force that keeps markets from going too far in one direction or another.  In an open market there are many buyers as well as many sellers.  The CWB would like you to believe that in an open market, because there are many farmers selling, that the price would get driven in only one direction – down.  What Ms. Fitzhenry and the CWB fail to present is that there are many buyers as well, whose market activity would stop the drive of prices lower and would even drive prices higher when warranted.

In an open market, many buyers and many sellers interact to find a point of equilibrium – a price where they transact.  Nowhere in any economics textbook or journal does it say that prices in an open market are driven to their “lowest possible value”.

The Wheat Grower comparison is very much relevant and reasonable.  It shows, as other comparisons have shown before, that the Western Canadian farmer gets paid less for his spring wheat under the CWB system than US farmers do in a more open market.

In her role at the CWB, Maureen Fitzhenry has been thrust into a position of discrediting other views and promoting the image of the Single Desk, using the flawed logic and rhetoric of the CWB.  I’m sure it must be awkward position to be in.

It’s like bringing a knife to a gun fight.

No comments:

Post a Comment