Tuesday, July 26, 2011

Pooling can work if you want it

Allen Oberg, chairman of the CWB, stated recently that a voluntary CWB would not likely offer pooling because “farmers aren’t likely to be interested”.  He added: “...you’re never sure of how much grain is going to be contracted to that voluntary pool and that makes it difficult to make sales.”

I think Mr. Oberg is wrong on both accounts.  The CWB’s producer survey showed 45% of wheat producers favoured the “dual market” (a voluntary CWB) and 41% preferred the single desk.  The CWB has stated many times that pooling is fundamental to the value proposition of the CWB as it is a fundamental risk management tool for farmers.  If that’s true, it stands that many producers would expect to see the CWB offer some form of risk management in the form of a pool (or pools) once it loses its single desk and becomes voluntary.

Also, Mr. Oberg is repeating the old CWB position that a voluntary pool won’t work, based on the assumption that it will have a fixed price or value (like an Initial Payment or PRO).  They say farmers will opt out when the “open market” price moves higher and, in a falling market, farmers will want in or those farmers that are in the pool will suddenly find that they had astounding yields and want to deliver more than the CWB anticipated.  So in a rising market, the pool gets starved and in a falling market, the pool gets overwhelmed with high priced grain.  The thing is, none of this needs to happen.

A successful voluntary pool – right in our backyard

Although Mr. Oberg suggests that there are many reasons why there are not pools in other crops like canola, oats, peas or lentils, he is mistaken to believe that there are none.  A very successful pool is operated by Viterra out of Bow Island, AB.  This pool has been successfully managing risk for, I’m told, about 100 edible bean producers in the area since it was run by Alberta Wheat Pool.  I’m also told that even though there are times when the open market price climbs above the pool price, the pool is very successful at retaining members.  They see it as a long term prospect, and over the years, they’ve done very well.  They also know that if they were to opt out, there are five more waiting to take their spot.  Once out, it would take a long time to get back in – so guess what?  They don’t leave.

Pools don’t have to be “one size fits all”

Pools could be developed with different focuses:
·         A specific class or variety of wheat
·         Grain from a specific region or with specific quality parameters
·         Grain going to a singular buyer (a good example would be something like the Warburtons program). 
·         A few years ago, a colleague suggested a separate pool for high quality wheat destined for Japan.
·         A select group – producer car loaders on a short line share a common goal to reduce costs and make their investment work.  They could easily market their grain together and pool all the returns; a voluntary CWB could provide marketing and pooling administration.
·         Unpriced pools – there is nothing magic about the CWB when it comes to timing of pricings (selling futures).  A pool could be offered that gives its members a fixed basis as its only price guarantee.  Pricing would be at the option of the producer, or he could choose the option of having his portion of the pool professionally managed (priced).  Pools could compete on the strengths of the pool managers’ track record, much like a mutual fund.

When I acted as a consultant to Prairie Pasta Producers (PPP), the CWB rejected the idea of PPP, a co-op of about 600 farmers, processing their own durum without going through the CWB and its pool.  To the CWB, it would mean PPP members were “cherry picking” the high valued domestic market.  I suggested that every durum farmer in Western Canada should be encouraged to join and support the coop; that way, every durum farmer would benefit from selling directly to their own processing plant.  Further, I suggested that the CWB could also enable and support it by offering a separate “pasta pool” for those involved; this way every participating durum farmer would get the same return from their sale to their processing plant.  All other deliveries would go through the conventional durum pool.  Obviously the idea never went anywhere.

There are also some developments in electronic trading that enables the development of averaging indexes that represent the average pricing of a commodity over a selected period.  The index would be based on a specific cash market; the electronic trading system would be set up to generate the index based on trades going through the system.  Although used extensively in energy markets, it could be applied to agriculture quite easily.  Grain companies (and the new CWB) could offer pools on the basis of these indexes, which could average the price over any predetermined period –from weekly to annually.  So to get the average price over a pool period is easier than ever.

When it comes to pooling, why just the CWB

 All this talk of different pools begs the question: once the CWB no longer has the single desk, government guarantees or enabling legislation, what is it?  CWB supporters have said, perhaps rightly, “the CWB will not be anything more than a broker or another grain company.”  This is especially true if the new CWB doesn’t offer pooling, as Mr. Oberg is suggesting.

The federal government is committed to enabling a voluntary CWB.  If the CWB becomes just another grain company, and anyone can pool, perhaps the federal government should look at new legislation that would provide the new CWB – or any other entity – with the appropriate tools to compete in the pooling and risk management arena.

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