Moving Forward: CWB-related financing

The Conservative majority is now slightly more than 72 hours old (as I write this) and I venture to say some pro-choice farmers out there are already getting upset that they don’t have marketing freedom yet.  I suspect they – and others – will get increasingly agitated as the process of moving to a voluntary CWB environment is revealed.  No need to hang onto your hats; it won’t be a quick fix – nor should it be. 

This is the first a number of articles about some of the issues we will be facing and some ideas on how to move forward.  These are not meant to be comprehensive, nor I am trying to say that these are the only solutions that should be considered; I simply want to get a dialogue going.

CWB-related financing

Some feel that you can just flip a switch to make the CWB voluntary and away we go; all will be great.  However, there’s much more to it than that.  One thing to consider is that every company in the industry is set up to work within the structure we have now.  I don’t subscribe to a quick change without considering whether the industry is ready; it would be irresponsible to an extreme to execute a quick change.  There are many issues that will need to be addressed.  We don’t want to throw anybody or anything under the bus, we want to slow the bus down, stop, and let people on or off before we go again.  We need to ensure the industry is able to adjust to the changes and continue to provide appropriate services to farmers.

When we talk about CWB reform, we often talk about what it means to farmers and the CWB itself.  We often miss talking about the rest of the industry.  Undoubtedly the biggest issue going forward is the fact that the structure of the whole grain handling industry is based on financing via the CWB.  First, the CWB finances over $4 billion (and as much as $7 billion) in annual wheat and barley sales (therefore, grain handlers and exporters don’t have to). Second, many grain handlers are reliant on CWB revenues – either paid directly by the CWB at the terminal, or paid by farmers at the country elevator.  With a voluntary CWB environment, these companies will still earn revenues from handling wheat - CWB and/or non-CWB - but lower per-tonne revenues should be expected. (This is covered in the next article.)

Financing the CWB and how that impacts its relationships with grain handlers will be key to the future structure of the industry.  Moreover, financing will be an important consideration to all grain companies, impacting whether they aggressively trade wheat on their own, or partner with the CWB (assuming the CWB will have the appropriate financing available), or make some other arrangements.  It will also influence who enters the market, who remains (who survives) and who is successful. This, in my view, is undoubtedly one of the largest issues facing responsible CWB reform.  

The CWB currently enjoys a Federal Government Guarantee which allows the CWB to finance inventory – in country elevators and terminals – at better than commercial rates.  It also provides a back-stop to the Initial Payments.  (The future availability of this back-stop of Initials will be a discussion for another time.)

The government guarantee

Over the past few years, the CWB has paid out between $4 billion and $7 billion annually to farmers.  It raises the money to do this through various forms of borrowing, exploiting its government guarantee to assure it has access to the money needed and at preferential rates.  In the event the CWB lost the government guarantee, it would not be able finance its purchases because it would not be able to borrow, let alone at government rates, since it doesn’t have enough assets on its balance sheet.  In other words, without the government guarantee, or a capital base of some description, the CWB could not operate.  This is an issue the CWB itself has mentioned time and time again – and they are absolutely right.

However, without the CWB and the government guarantee, many small grain companies will not be able to fill the gap – they too may not be able to raise the required finances. 

In a voluntary market, the CWB’s financial needs will drop as it will undoubtedly lose grain volumes to grain companies and/or farmers dealing direct to end-users.  That means the financing needs of those grain companies will go up.  Although undoubtedly some companies will be able to handle this new burden, it remains to be seen if all companies will be able to; the amount of business some companies will be able to handle will be limited by their ability to get financing.  It would be irresponsible to ignore this reality going forward; any transition plan will need to ensure that we don’t lose grain handling competition because the structure didn’t support some companies through a period of transition, acclimatizing to their new reality.

Possible solutions

If the CWB kept its government guarantees, opening up the market to any company will exclude companies that cannot get adequate financing; they would remain reliant on the CWB.  Ultimately, though, the guarantees are likely to be withdrawn at some point.

The CWB has indicated that, without the guarantees, it would need a capital base to be able to operate.  The questions would be from whom (the government or producers?), and how much?  Although this would allow the CWB to continue to operate as a marketer, it would be competing only with the larger grain companies that can self-finance their operations. The smaller grain companies that could not get the required financing would again be relegated to handling grain for the CWB on a toll basis (as it is now).  

Another option would be to keep the Government Guarantees in place but make them available to all exporters of wheat and barley.  This would help foster the inclusion of all potential exporters, big and small.  A “transition period” could be established during which the guarantees are made available to all companies handling export wheat or barley.  Over time, they could be tapered off, replaced by conventional lending or some other mechanism that may be designed between now and then.

What we want is a vibrant and robust marketplace.  It serves no purpose to make a quick change if the industry isn’t ready.   If it’s ready, great – but we need to have confidence that all players can operate and compete adequately – otherwise we are adding risk and ultimately playing favourites.

Next: Grain company revenues from the CWB.