Wednesday, April 13, 2011

Shipping wheat from Thunder Bay to Vancouver

Sometime in the middle of March, trade chatter started about a shipment of wheat by the CWB – from a Thunder Bay terminal to a Vancouver terminal.  Sources indicated that the CWB loaded “about 100 cars” of high quality spring wheat in Thunder Bay and shipped them west across the prairies to Vancouver to satisfy a sale to Japan.

This isn’t the first time the CWB has shipped wheat from eastern terminals all the way across the prairies to the west coast.  In 2004-05, the CWB shipped wheat from Churchill and Montreal, both to Vancouver.  Explaining the situation then, the CWB stated:

Weisensel noted there have been significant transportation problems in the last couple of months, including mudslides, continuous rain and extreme cold weather, which have delayed grain movement and delivery. In order to ensure sales commitments were met, the CWB moved 280 cars of grain from other ports to the West Coast.
"This is the power the single-desk gives western Canadian farmers," Weisensel added, noting international customers have clearly identified the CWB's reliability as an important factor in making it a preferred wheat supplier around the world. "Prairie farmers achieve premiums based on this reputation, and in my opinion, maintaining our good standing is extremely important."

I certainly don’t dispute trying to keep your reputation, but does it really make sense to ship grain sitting in eastern ports all the way across the country to do it?  

First, it comes at a high cost.  Rail freight from Thunder Bay to Vancouver isn’t a normal “tariff item” but since grain freight rates are fundamentally determined by distance, there’s a pretty good chance the freight bill was somewhere around double the rate from Saskatchewan to Vancouver – call it $80 per tonne.  Add to that the added costs of inward elevation and outward loading into railcars in Thunder Bay – call it $13.00 per tonne.  All tolled, the added cost could be close to $100 per tonne.

Second, if you have to “pay up” to get the grain in position, it makes more sense to pay the extra cash to farmers – not CN and not grain companies for handling grain twice.  The CWB may take the position that the high protein wheat it needed is not out in the country but have they tried everything to find it?

What does this mean in the big picture?

In 2005, the CWB said that it shipped grain from eastern terminals to the west coast to protect its reputation.  But it could still protect its reputation with buyers by paying farmers a premium to get the grain.  It might even improve their status among farmers if they did.  But - through this exercise the CWB appears to prefer to manage its supply-chain challenges without upsetting the “equity cart”.  

If a grain company finds itself short against a commitment, it improves its price to farmers, taking a loss if necessary.  It may even buy from its competitors but usually that’s a last resort.  Even in the rare situation where a grain company ships out-of-position grain to satisfy a sale, the company pays for its mistake – not farmers.  

Last time that we were aware that the CWB shipped wheat cross-country (2005), members of the grain trade indicated to the CWB that high quality grain was still available on farms and that a financial incentive paid to farmers would work to find it and bring it in.  It was suggested that the CWB tender to grain companies for this grain; the grain companies would bid on the tender on the basis of what they felt they would need to pay farmers to get the high quality grain.

The onus would be on the grain companies to go out and find it.  If they misjudged and a greater premium was required, they would pay it (not the CWB, not farmers).

The pool account would still pay to solve the problem, but some farmers would get more than others.  Perhaps that’s why the CWB didn’t do it – it’s not equitable.

The CWB seems to think it’s better to have the pool account pay something pushing $1 million to the railroads and grain companies than paying premiums to farmers totaling potentially much less in order to accomplish the same thing.  

All for the sake of maintaining its reputation.

Wednesday, April 6, 2011

Who wants the CWB to market canola?

The Manitoba Canola Growers Association just launched a producer survey that takes an interesting yet biased approach to the question of the CWB marketing canola.  The questions don’t allow you to just say “no thanks”.  Here are the questions:
  • Do you presently load producer cars?
  • Would you load producer cars of canola if they were available?
  • How many tonnes of canola do you produce annually?
  • How many tonnes of canola would you be interested in having the CWB market on your behalf?
Unfortunately, this survey is badly flawed – and not because of the way the questions were asked (although there are problems there as well).  The biggest problem is that anyone can respond (not just farmers) and you can respond as often as you like.  For example, you could go through your local phone book and submit a response in each person’s name.  Because of this alone the survey results will be totally worthless. (I’ve responded twice already; you just clear your computer cookies between each submission.)

But beyond that, the questions are really structured for those that like the idea of the CWB marketing canola in the first place.  After reading the questions, those that don’t support the idea may simply assume that the questions aren’t for them and not submit anything.  Take a look at the last question; it asks how many tonnes of canola you would like the CWB to market for you.  You could say “zero” but I think many will just not respond.  The risk is in the “results”; if the MCGA announces that the vast majority of those responding support the CWB’s involvement, it will be a serious misinterpretation and miscommunication.

Producer Cars

The questions are also about producer cars; specifically about loading canola producer cars.  It almost appears that the MCGA is drawing a connection between CWB involvement in canola marketing and opportunities to load canola producer cars.

Let’s look at this a little closer.  The reason why farmers load producer cars is financial. Loading a producer car you avoid about $13.00/tonne country elevation, or about $1,200 per car or more.  This is possible only because you are going around a portion of the high cost CWB system.  There isn’t the same gain on canola; according to data from the Federal Grain Monitor and Canadian Grain Commission, it appears that grain companies make their “handle” on terminal elevation and cleaning and make very little at the country elevator, no doubt due to stiff competition from local crushers.   There just isn’t the high country elevation to avoid like you see in wheat; I don’t know what a guy needs to make loading a producer car attractive, but I’m sure you won’t get it from canola – with or without the CWB. 

The value of canola marketing by the CWB

This opens the door to a discussion concerning the CWB’s value proposition to farmers and end-users.

  • First off, the MCGA question is regarding the CWB marketing canola on a voluntary basis – not through a single desk.  So the things that the CWB suggests are the strengths of the single desk – market premiums through market clout and “strategic marketing” – don’t even come into play here, regardless of your beliefs.
  • The CWB talks about its “customer relationships” as a strength; it has none in the canola industry.
  • CWB pooling is a form of risk management.  Voluntary pools already occur in other crops; the heavy CWB structure is not needed to form a pool.
  • The CWB offers pricing options.  Pricing options on canola are already available through grain handlers and crushers and work very effectively.  In fact, studies have shown that they are more effective and efficient than the pricing options available through the CWB.  What’s more, they are simple to use and understand.  It’s hard to imagine what the CWB will bring to the table here.
  • The CWB acts as farmer advocate on various issues; marketing canola would add nothing to this activity, nor would this activity benefit the CWB’s marketing efforts in canola.
  •  The CWB says it “ensures farmers benefit from accessing the lowest-cost and highest-value port and terminal options”.  The canola sector is highly competitive and data show that canola handling costs are much lower than CWB wheat handling costs.  How will the CWB’s involvement shrink canola handling costs further?
  • The CWB engages in market development and branding on wheat.  In canola, the Canola Council of Canada has done a remarkable job at promoting canola and developing markets.  Again, it is very difficult to see how the CWB’s involvement, even at a “voluntary” level, would add to the exercise.
  •  Let’s not forget that the CWB comes at a cost; data shows that the CWB cost to market wheat comes in at around $10.00 per tonne, above and beyond the higher system costs.  

The Bottom Line

There is no benefit in having the CWB involved in canola marketing.  What’s more, it would undoubtedly come at a cost to farmers.  If you like the idea of pooling and want to try it in canola, remember you can do it without the CWB.  If you like the idea of averaging out sales over the crop year, you can do that without the CWB too; simply sell an equal amount once a week or once a month throughout the crop year.  The CWB’s Wheat Pricing Pace Model does essentially the same thing – there’s no reason why you can’t do it as well.

Come to think of it, if the canola industry can succeed so well (including farmers) without a single desk, and at a much lower system cost, with an industry-wide organization promoting and developing the market, and you can mimic much of what the CWB does, doesn’t this beg the question: why couldn’t the barley and wheat sectors do the same?

Regarding the seriously flawed MCGA survey, it is so seriously flawed, it is meaningless.  The only good thing about it is, it has allowed a good discussion about what the wheat and barley markets could be like if they were allowed to function like canola.