Wednesday, March 30, 2011

Is the CWB competing with itself?

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.


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.


Saturday, March 5, 2011

CWB Farm Forums

CWB Farm Forum meetings hosted by farmer-elected directors are coming up.  I urge all farmers to get out and go to these meetings.  Press the directors on important issues – make them accountable.  Get the directors to answer your questions; you have every right to know more about the CWB than they are sharing. 

Here are some issues to bring up with your CWB directors (in no specific order); I’ve included questions I would want to ask – use them or add them to your own questions.  Maybe if the directors read this, they’ll come prepared to answer them:

About The Lakers
The CWB’s mandate in the CWB Act is “orderly marketing”.  Directors such as Allan Oberg have said the CWB’s mandate is to maximize farmers’ returns, but that is not stated in any CWB publication, including the Annual Report.
QUESTION:         What is the CWB’s mandate?
QUESTION:         How does purchasing vessels come under the CWB’s Mandate?
QUESTION:         The possibility of making investments like this using farmers’ money is not mentioned in the Annual Reports.  Why?
QUESTION:         Will the CWB consult with farmers to see if farmers are interested in financing this purchase?  Will the CWB ask farmers’ permission to use their money?
QUESTION:         If so, will the CWB listen to farmers and abide by their wishes?
QUESTION:         If you don’t ask permission, how can you reasonably say that you represent farmers and their interests?
QUESTION:         Can you explain – if this deal is so great – why is Upper Lakes (the CWB’s supposed partner in this) selling its stake in all of its vessels, including the ones just ordered?

About Feed Barley
The CWB is handling less and less feed barley.  In fact, there were no deliveries in the feed barley pools in 09-10 at all.  Yet the CWB engaged in cash trading of feed barley (no pooling).  In early 10-11, the CWB sold large amounts of feed barley at as much as $50/tonne over what farmers were being paid.  Offshore values were not allowed to fully impact domestic prices, effectively keeping prices low.
QUESTION:         The CWB uses sales price comparisons to assess its marketing performance by grain.  But it doesn’t report anything for feed barley sales; why?  (Annual Report, page 45)
QUESTION:         Why is the CWB involved in feed barley at all?  What value to farmers does it provide?  How can you say the CWB provides value in feed barley when the single desk keeps domestic market prices lower than offshore?
The Annual Report (page 60) says this about the feed barley pools: “Some activity in the barley pools was related to net interest earnings of $212,000 and to differences between estimates and actual results of $119,000. Because this was unrelated to farmer deliveries during 2009-10 and consistent with the treatment of these credits and charges in previous pool years, a total of $331,000 was transferred to the contingency fund.
QUESTION:         What does this mean?  Why is there a difference between “estimates and actual results” when there was no barley delivered into the pools?  To what “actual results” is the report referring?  Where did the $119,000 come from when there was no activity in the pools?
In the EPO accounts (Annual Report, page 65), feed barley is listed with no activity (no barley delivered on EPOs) but with a loss of $13,000. 
QUESTION:         How can that happen?  (I know this is small, but what really is happening?  If this can happen in the small accounts like this, it must also happen in the larger accounts – we just don’t see it.)

About Malt Barley
The Annual Report reported that the CWB achieved premiums in malt barley of $13.71/tonne over all competitors.
The malt barley market is very competitive; China, the CWB’s largest buyer of malt barley is the most competitive market in the world for malt barley and it is well known that the Chinese are extremely price sensitive. 
QUESTION:         How can you get buyers like China to pay premiums like this?
In the Annual Report (page 46), concerning malt barley premiums it states: “The CWB achieved better-than-forecast price premiums.   There were a number of factors that contributed to the positive results, most notably a poorer-than-expected Australian barley crop.”
QUESTION:         Does this mean that the premiums the CWB got on malt barley to China are just because of better quality?  If it’s not quality, why would China pay the CWB more than they would pay Australia?

About Durum
The 09-10 Annual Report stated (page 56): “Given reduced international price levels from the previous year, 2009-10 saw lower-than-expected farmer deliveries against Series delivery contracts, and an increase in the number of farmers who chose to deliver 2009-10 durum into the 2010-11 pool.”
However, the CWB only accepted 40% of Series A and 20% of Series B durum contracts. (page 56)
QUESTION:         If farmer deliveries were lower than expected, why such low acceptance levels?
Also, the report says there was an increase in the number of farmers who chose to delivery 09-10 durum into the 2010-11 pool.  But we know that farmers were screaming for deliveries to open up.  And, based on the PROs at the time, there was no incentive to defer shipment into the next pool:
March 2010         old crop PRO = 196                          new crop PRO = 187
May 2010             old crop PRO = 197                          new crop PRO = 190
July 2010              old crop PRO = 201                          new crop PRO = 203
QUESTION:         What is the source (and logic) of the statement that farmers were deferring delivery by choice (when it was common knowledge that durum farmers were getting desperate to deliver wheat for cash flow)?
QUESTION:         What is the CWB planning to do with durum to improve cash flows?

About Premiums
The CWB says it gets premiums.  Last year, the CWB reported an average premium on non-durum wheat of $4.90/tonne.  (Annual Report, page 45).
QUESTION:         How are these premiums calculated?
QUESTION:         How do you rationalize this statement with the fact that year after year, US prices are much better?  (In many years, even the lowest US price over the crop year is better than the total pool return.)
The “net CWB costs” for 08-09 were reported by the CWB to the federally appointed grain monitor as $8.44/tonne.  Assuming the net CWB costs are similar in 09-10 (not yet reported), the net result of CWB marketing is not a premium to the competition, rather it is a discount (or loss) of $3.54/tonne.
QUESTION:         What is the true value of the CWB when it loses an average of $3.54/tonne relative to the competition?  Why does the CWB boast about getting premiums when the net result is actually a loss to farmers?

About “Contributions from other revenue sources”      
“Contributions from other revenue sources” includes commercial contracts and tendering, net interest earnings and discretionary foreign exchange trading.
Contributions from other revenue sources          $49.05 million     (page 45)
Commercial contracts and tendering:                     $40.5 million       (page 41)
Net Interest earnings:                                                   $9.6 million         (page 61)
Discretionary foreign exchange trading:                -$1.05 million     (calculated)
QUESTION:         Are these all the sources of revenue in this category?  If so, is it true that the CWB lost $1.05 million in discretionary foreign exchange trading?  Why is this not reported directly?  Why is it hidden and we have to figure it out?
The Annual Report (page 46) reported “While 2009-10 targets were exceeded for some revenue sources, others were negatively impacted by the strong Canadian dollar, increased financing costs and rising commodity markets.”
QUESTION:         How would rising commodity prices negatively impact these “other revenue sources”?

About “Other Income”
In 2009-10, the CWB reported $187 million as “other income”.  (page 79)  ($133 million in wheat; $22 million in durum; $34 million in designated barley)
QUESTION:         What is the makeup of this?

About “Other direct expenses”
In 2009-10, the CWB reported $43 million as “other direct expenses”.  ($27.8 million in wheat; $8.6 million in durum; $6.8 million in designated barley)
QUESTION:         What is the makeup of this?

About Cash Trading
The report on Cash Trading (Annual Report, page 67) includes all cash trading in one account – CashPlus malt barley, feed barley, organic program, Wheat Storage Program, and Churchill Storage Program.
QUESTION:         Can we get a breakdown by each program?
QUESTION:         What is the source of the $10.4 million listed as “other income” in the cash trading statements?

About Mission Terminals / Soumat
Mission Terminal is part of Soumat, the grain handling business owned by Upper Lakes Group, the CWB’s partner in the laker purchase.
It has been reported that Mission Terminal made CWB director-election contributions to some director-candidates, particularly those that have an interest in producer cars.
QUESTION:         Isn’t this a conflict of interest (since Mission Terminal is the largest administrator of producer cars and handles the lion’s share of the producer cars going east)?
The amount of CWB grain handled by the Soumat transfer elevator in Trois Rivieres averaged 52,300 tonnes per year in the 5-year period before ex-CWB CEO Adrian Measner was hired as CEO.  Since he was hired, the volumes have averaged 356,000 tonnes – an increase of almost 600%.  Mission Terminal, also led by Measner, has increased its CWB business so much that it expanded its capacity – even though Thunder Bay already has significant over-capacity.
QUESTION:         Can you explain why the Soumat transfer elevator in Trois Rivieres has seen its CWB business go up so dramatically since the appointment of Adrian Measner?
QUESTION:         Why is Mission Terminal expanding?  Did the CWB negotiate with other terminal operators in Thunder Bay for additional volumes (instead of sending it to Mission)?  If no, why not?  If yes, why did Mission have to expand? 
QUESTION:         Is it the view of the board that favouring one company over the others is a good long term strategy for farmers?

Details about the Farmer Forum meetings can be found on the CWB website at:

You can get a copy of the CWB Annual Report at:

Tuesday, March 1, 2011

Full steam ahead on the laker debate

It’s been almost a month since the CWB announced its purchase of two lakers.  And there’s still lots to talk about.

CWB Mandate
An argument by the CWB (and some journalists) is that it’s well within the CWB’s mandate to make these investments.  But what is the CWB’s “mandate”?  Dictionary definitions of “mandate” include two that fit here:
1.       Authoritative order:  an official command or instruction from an authority. 
2.       Support from electorate:  the authority bestowed on a government or other organization by an electoral victory, effectively authorizing it to carry out the policies for which it campaigned.
“Authoritative order”
First, I think it’s safe to say that with the CWB, the “authority” is the CWB Act.  Although the Act does not use the word “mandate” it does clearly present the purpose of the CWB:
“The Corporation is incorporated with the object of marketing in an orderly manner, in interprovincial and export trade, grain grown in Canada.”  (underline emphasis is mine)
The Act also empowers the CWB to purchase “personal property”: 
6.  (1) The Corporation possesses the following powers: ...
(d) to acquire, hold and dispose of real and personal property, but the Corporation shall not acquire or dispose of any real property without the approval of the Governor in Council
So the CWB has the “power” to buy real and personal property, but it has never been made clear that this particular purchase is consistent with the mandate (object) of the CWB.

Is the purchase of lakers by the CWB necessary to fulfill its mandate of “marketing in an orderly manner?”  Does owning these vessels contribute to orderly marketing?

“Support from electorate”
According to the second dictionary definition of mandate – that is, “support from electorate”, the CWB board is authorized to carry out policies for which its elected members campaigned.  Not one elected director campaigned on the policy of purchasing assets with farmers’ money – not in the last election, nor in the one previous.  Therefore, not one director has the “support from electorate” to buy anything using farmers’ money.  By this definition, they do not have the mandate.
I checked the platforms of all sitting farmer-elected directors.  Not one sitting farmer-elected director ran on a platform of making investments – of any kind. 

The farmer-elected board members did not receive a mandate from their electorate to buy vessels.

Apparently, farmers don’t need to be consulted
Some have taken exception to the idea that farmers should be consulted.   According to Laura Rance in the Manitoba Co-operator, “Boards of directors ... should not be expected to seek the approval of their shareholders ..., even ones requiring major investments.”
This doesn’t apply here.  Farmer-elected board members have the obligation to receive a mandate from their electorate (farmers) and they didn’t.  And Rance is kidding herself if she thinks farmers are “shareholders” of the CWB.  Shareholders choose to invest their money in the organization and choose to sell their shares if they don’t agree with the direction of the organization.  Last I checked, farmers couldn’t sell their “share” in the CWB.

Farmers should be consulted on decisions that take the organization in new directions.  Remember, farmers can’t opt out if they don’t agree.

Oberg’s Position
Allan Oberg, Chairman of the CWB board of directors, stated in an article “The CWB's mandate is to maximize the financial return to farmers from the marketing of their wheat and barley.”
There is no reference in the CWB Act to maximizing the financial return to farmers.  And a review of CWB Annual Reports comes up empty as well.  There is no way to connect the dots from “CWB mandate” to “maximize financial returns” to “owning lakers”.

No one closely observing the CWB would ever get the message that it has the mandate to buy lakers.

But it’s such a great deal
The CWB using farmers’ money to buy these lakers is like a married man using his wife’s money (without asking) to buy her a new sports car and he thinks she should be OK with it because it was such a good deal.  And then he’s surprised when she wants a divorce.

If the CWB had the mandate to spend farmers’ money on lakers (which they don’t), there would be less of an argument here.  Good deal or not.

And who’s going to own these ships anyway?
According to the CWB’s news release, “Prairie farmers will become owners of ships that move their wheat on the Great Lakes, under an agreement reached today between the Canadian Wheat Board (CWB) and shipping companies Algoma Central Corporation and Upper Lakes Group Inc.”

Wrong.  Although Prairie farmers will pay for the vessels, they will never own them.   The CWB will own the vessels but farmers do not own the CWB.

Survey results
Shortly following the announcement of the purchase, I launched an open survey by email to Prairie farmers, asking the simple question: “Do you support the CWB’s purchase of lakers as reported by the CWB on Feb 8th, 2011?”
I asked farmers to respond by return email, simply answering yes, no, or maybe (don’t know).
With well over 600 farmers responding so far, the results are:
NO         90.0%
YES         7.5%
DK          1.5%
Even self-identified single desk supporters are dead-set against the purchase of these lakers. 

The resounding concern among farmers is the use of their money without their choice.

What if participation was voluntary?
What if the CWB allowed farmers to choose to invest?  After all, that’s what the big deal is about – choice.  The CWB could offer the financing of this deal as a private placement to those farmers that support the idea and want to, and are able to, invest.  These investors would then get a return on their investment in the form of interest.  Once the purchase price is recouped through operating the vessels, all farmers would benefit in the ongoing operation of the vessels.

If the CWB asked for voluntary participation and farmers chose not to, should it go ahead with using farmers’ money to purchase the lakers anyway?