The CWB has two systems in place to buy malt barley – conventional pooling and CashPlus.
CashPlus was first offered in 2007-08 as a response to pressure by maltsters and farmers, urging the CWB to solve the problem of the malt PRO being unresponsive in volatile markets. That year the markets were quite strong and domestic feed barley prices rose throughout the year, exceeding the malt barley, making the domestic feed market a better deal than malt. This had happened before and maltsters were again experiencing serious challenges attracting malt barley deliveries. Concerned that this was becoming a recurring problem, the malting industry asked the CWB to help solve the problem.
The CWB came up with CashPlus, meant to be “a pricing program that offers farmers an upfront, market-based cash price for their malt barley.” It was aimed at a number of specific value propositions:
- More security of supply for buyers at a price at which the business would be executed.
- Pre-seeding contracts where farmers would commit to growing malting barley and both sides would know the price and other elements of the contract.
- Flexibility for buyers and farmers to negotiate other contract terms – for example, special quality terms.
CashPlus contracts are based on actual sales; the CWB determines a guaranteed minimum price for the buyer to pay farmers. Typically, this price is about 85-90% of the sale value. The CWB holds back this portion of the sale price as a risk precaution and to cover its expenses. Once the contract has been completed and the full expenses are known (including some money at times going into the Contingency Fund), the CWB pays the farmer what’s left. As the market price moves, CashPlus pricing to farmers tracks closer to the market than pooling, providing a closer view of market prices (not perfect, but closer).
Interestingly, whereas CashPlus is more responsive to market dynamics, keeping pace with malt barley markets and domestic feed barley values when needed, the CWB now competes with itself – the malt barley pool now competes with CashPlus.
This became obvious in 2008-09, the second year of CashPlus. The malt barley market had been very strong as a hang-over from the strong markets of the previous year. But, prices started to come off; the 2-row malt barley PRO dropped $40 per tonne by December 2008. In January 2009, the CWB announced it would not accept new selections in the pool for the rest of the crop year; all new selections would be through the CashPlus program only. The reason was that any new selections or sales in the pool would be at lower prices and would drag the pool return down. This move caused an uproar at the farm lever; single desk and open market supporters were united in their concern that this was contrary to the purpose of pooling – averaging all sales so farmers share in both the highs and lows of a market. Those that didn’t have their malt barley selected were not going to benefit from the higher priced sales. Although most of the malt barley pool is nearly completely selected by this point in the crop year, closing the pool still created winners and losers – something pooling is meant to avoid. (And there really wasn’t much left to select anyway. The CWB reported on CashPlus in its Annual Report: “Effectively all of the trading activity in this account occurred in a short period prior to the start of the crop year.” It makes you wonder why the pool was shut down at all; a few more selections would have had minimal impact.)
CashPlus contracts – the few that were offered – were at much lower prices than the final pool return.
In 2010-11 the situation is reversed; this time the market has been quite strong. Poor growing and harvesting conditions meant that very little malt-quality barley was produced. The CWB malt pool is usually over 2 million tonnes; this year the pool is reportedly less than 1 million tonnes and the CWB and maltsters are searching for barley to satisfy commitments already made in the pool account. The CWB appears to be limiting the amount of barley through CashPlus because this year, market-based CashPlus prices would be much higher than the PRO; buying through CashPlus would starve the pool account at a time when more barley is needed to satisfy sales already made.
The chart above shows the CWB Final Pool Return for 2008-09 and 2009-10 and the latest PRO for 2010-11, all for Alberta farmers (straight black lines). It also shows, as a reflection of the open market, the street prices in Montana (in Canadian dollars per tonne). It clearly shows how the open market was dropping in 08-09, supporting the CWB’s view that further sales in the pool would bring its value down. It also shows how the open market prices are rallying in 2010-11; CashPlus contracts based on current market prices would be higher than the PRO. Favouring the pool accounts and not offering CashPlus is meant to drive malt barley selections into the pool. This serves two purposes. First, it is aimed at covering the CWB’s early sales of malt barley that were undoubtedly made when prices were lower. Second, once any shortfall is covered, additional sales made through the pool account (if any) will be at higher prices which will support the pool returns. This is particularly important right now since domestic feed barley prices are threatening to exceed the malt PRO.
There are a number of problems created with this approach of the CWB periodically selecting one program over another:
- It provides farmers with only the lowest priced option.
- The risk management element of pooling through sharing all high and low sales is diminished when the pool is closed early.
- Access to market prices is lost when CashPlus is not offered.
- Changing the rules midstream creates uncertainty; farmers used to have confidence that the malt barley pool would always be available – but not since 2008-09. And farmers that appreciated the market-based pricing of CashPlus are left wondering why there is none offered.
- During a year when this choice between programs is made by the CWB, less malt barley is offered to maltsters as more of it moves into feed channels. This makes things even more challenging to maltsters.
- Ultimately, this approach to malt barley pricing to farmers does not help to attract malt barley acres, particularly important as crops increasingly compete for land.
Solutions
The CWB should either go with a conventional pool OR go with CashPlus. Wait – that won’t work. We’ve seen that pooling malt barley doesn’t work because at times it can’t compete with the domestic feed market; that’s why CashPlus was invented in the first place. And CashPlus on its own? Think about this:
Because CashPlus sales are meant to reflect the market, there is the real possibility that you have two buyers on the street with different prices – set by someone else. You can say that the buyer with the lower price could simply raise his price to compete. Sure – but that’s a problem when you’ve already sold malt based on the CWB price for barley. It has been said that in this kind of situation (yes, it has happened), the CWB tries to equalize things by lowering the farmers’ guaranteed price on the higher priced sale. If that’s the case, can you really say that the CashPlus contract is market-driven?
Another option is to devise a program where the malt prices are based on a futures contract. It’s done in the US; malt barley is priced to farmers on a basis to Minneapolis spring wheat futures. It’s a neat idea since malt barley needs to compete with spring wheat; as the price of spring wheat rises, so does the price of malt barley – until its priced by the farmer.
Here’s something that’ll work. The CWB could treat malt barley like it treats organic grains. For a fee paid to the CWB, farmers could sell malt barley directly to any buyer.
Or open up barley marketing completely and totally which would allow the market to figure out the best approach.
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