Cash advance program needs to fit with the new market

First – to dispel a misunderstanding.  The Advance Payment Program (APP) is not a CWB program; it is a federal program offered under the Agricultural Marketing Programs Act.  The CWB is simply the administrator of the program for wheat, durum and barley.  Unfortunately, some producers think that they will lose cash advances on wheat once the single desk is gone.  That just isn’t true.

However, with the removal of the single desk, the economics of wheat, durum and barley marketing will change and it makes sense to take a hard look at the Advance Payments Program with the objective to ensure it fits well with the new market realities.

Features of the Advance Payment Program

The following points paraphrase the description of the program on its website. (Some editorial liberties were taken.)

• The cash advance “rate” paid to producers is based on the average market price of the grain estimated by Agriculture Canada that will be payable to producers over the crop year.  The rate is limited to no more than 50% of the estimated value.
• The maximum cash advance available to each producer is $400,000. The first $100,000 is interest free.
• The “production period” for APP is 18 months and generally runs from April to September of the following year.  This means producers have a maximum of 18 months to repay their cash advance.
• Producers repay cash advances as their grain is sold.  The advance program is repaid in full before the producer receives any payments for grain sold.

These features represent limitations to the program that should be looked into, to make the program work more effectively in a market environment in which producers can readily respond to true market signals.

In an unregulated market like canola (and as we expect to see in wheat), inter-month futures spreads and deferred pricing options are important and valuable market signals and tools for producers.  For example, at harvest time, canola producers are presented with spot prices (for immediate or nearby delivery) as well as prices for later delivery that are, at times, significantly higher than the spot price.   

These higher prices are the market’s way of telling producers that if they commit to a deferred sale, they will be paid to store their grain instead of delivering it right now.  But the need for cash flow at harvest has often kept farmers from taking advantage of deferred premiums as they are forced to sell on a spot basis.  Producers selling more canola than the system really wants leads to weaker harvest basis levels than would otherwise happen.

Many producers taking out an advance still need cash flow from spot sales at harvest.  Therefore, there are still more spot sales of cash crops made than the market really needs at that time.  We know this because of the large price differences between spot and deferred prices; these price differences are seen as very weak cash basis levels and wide inter-month futures spreads.

With the CWB single desk system, this is not an issue.  With the CWB, producers do not react to market signals to decide when to sell and deliver; it doesn’t matter when the producer actually delivers the grain, his net price is the same – the Initial Payment plus any Interim Payments and Final Payment.  In the new market, this will change.

Possible Solutions

Cash advances could be designed to enhance farmers’ ability to respond to market signals.  Often, deferred sales provide better returns than spot sales (carrying charges in the market); in this way, they pay producers to store grain.  If the cash advance was “tied” to the deferred sale, the value of the sale would be known and therefore, more of the value could be advanced to the producer; perhaps as much as 90% of the value (as opposed to 50% of the estimated crop value, as it is now).  Not only would this help with cash flow, it would encourage strategies that provide better returns for producers.

In addition, there are a number of financial tools emerging that could be used to insure the transaction, further supporting these types of strategies.

In the event that cash advances were tied to a deferred sale, when a spot sale is subsequently made, the producer would receive the total payment of that sale, as the advance would not need to be repaid until the deferred contract is delivered.  This too would lead to less grain being sold in the spot position to generate cash flow; unless, of course, the market signals indicated to sell more.

Going forward, as a general concept, cash advances should support the proper use of market signals.  Better yet, they should work hand-in-glove with the market and the signals it sends.

 

Advance Payment Program

Wheat exports to China triple in deregulated market

Interesting article.  The CWB seems to have missed this one.  (I've put the most interesting comments in bold)


Wheat exports to China triple in deregulated market

AUSTRALIAN wheat exports to China have already tripled this year, and demand from the world's most populous nation is expected to lift. 
 
One major exporter said that demand from China, the world’s biggest grain producer, could be sustained.
Australian wheat exports to the world’s most populous nation in the nine months ended June 30 totalled 740,000 tonnes, of which 80 per cent was in bulk and 20 per cent in containers, or about 7 per cent of total wheat shipments, official data showed.

That compared with 238,000 tonnes in the full marketing year ended September 2009.

Exporters cited several factors underpinning a trade that has generated about $230 million in export income already this year, including difficult internal Chinese logistics, the qualities of Australia's white wheat that allow it to be favourably blended with sometimes variable local grades and the positive effects of deregulation of bulk wheat exports from Australia in 2008.

Previously, flour mills in China didn't have direct access to Australian wheat, as the former export monopoly operator, AWB, only sold wheat to Cofco, the Chinese government's grain importer.

Said Tom Puddy, wheat manager for the Grain Pool marketing unit of Co-operative Bulk Handling: “Now with deregulation, this is a clear example of customers in certain markets having access to buy Australian wheat, unlike before.”

CBH accounts for about 35 per cent of the export trade to China so far this year, or about 250,000 tonnes, with AWB shipping a little more than 300,000 tonnes. Other companies involved include GrainCorp in both the bulk and container trade, the Elders Toepfer Grain joint venture and Glencore Australia.

The increase in Chinese buying this year chiefly reflects their wish to replenish inventories, which have been sold down in recent monthly domestic tenders.

Moreover, private buyers have been issued with import quotas allowing them to buy direct from Australian suppliers without going through Cofco, Mr Puddy told Dow Jones Newswires.

AWB general manager for commodities, Mitch Morison, said Australia cargoes, mostly of wheat that has about 10 per cent protein levels, are being shipped chiefly into Guangdong province in the south and, to a lesser degree, Shandong province in the north.

It's cheaper for the Chinese to import wheat sometimes than to haul internally, particularly in the south, where there's consistent demand, he said.

There are also internal quality issues, given the sometimes highly variable milling yield and mixed qualities of some domestic wheat grades, which are blended with imported Australian wheat, he said.

“We would expect to see over time a continual increase in Chinese demand for imported grain,” Mr Morison said.

Some of Australia's biggest customers in Asia, particularly in Malaysia, have interests elsewhere in the region, including in China. These regional clients now want to import in their own right and want licences from Cofco, he said.

“There will be growth of the private sector demand for quality wheat” in China, he said.

AWB sells to Cofco, which co-ordinates all imports and issues licences to import, he said.

Beginning at the time of its former life as the Australian Wheat Board, today’s AWB has had a long trading relationship with Cofco, he said.

Indonesia remains the biggest buyer of Australian wheat, taking 2.2 million tonnes in the nine months ended June 30, or 21 per cent of total exports, compared with 2.6m tonnes, or 18 per cent of total exports that totalled 14.57 million tonnes in the last marketing year ended September 30, 2009.

Mr Morison said demand is rising from Indonesia as new mills come on line, and from Sudan and Yemen.

-- 30 --

Why don't CWB supporters want voluntary pooling?

All this talk of how voluntary pools won't work has got me thinking.  Allan Oberg, CWB chairman, has said it at all the CWB producer rallies and in the media.  Others repeat the same mantra.  Even the media itself, through editors like John Morriss of the Manitoba Co-operator, has tried to define the voluntary pool as impossible.

Thanks to a media that, for some reason, has failed to show both sides of this issue, all we hear is how it can't work because it's never worked before.  They say voluntary pools in Australia and Ontario don’t work.  They don’t even talk about the ones in Alberta and PEI.  But they haven’t even talked to the people involved in these pools to get their views and to find out what is working.  With a little research, they would find that although they’re not on the scale that the current CWB operates, these voluntary pools are providing value to those that use them.

The voluntary pool is the basis of the dual market.  The dual market is an open market with the added option of pooling offered by an organization like the CWB.  The CWB website refers to the dual market (the voluntary pool) as a myth.  For example, the CWB reports that in the dual market of 1936-37, open market prices were higher than the initial payment of the pool, so the CWB received no deliveries from the 1936 crop.  And, in 38-39, open-market prices were lower than the initial payment and so the CWB got all the wheat deliveries and ran a deficit of $61.5 million.

So, obviously, if we go back to voluntary pooling, the same thing will happen again, right? 

I don't think so; before you can reasonably come to that conclusion, you must make the assumption that the pool and the market it is operating in, would be structured the same as before.  This has a familiar ring to it; do the same thing over and over again and you should expect the same results.  It would be insanity to think otherwise.

Doing it differently is something that hasn’t been considered.  We haven’t heard how it might work – or what we need to make it work.  It makes me wonder if CWB supporters even want it to work. 

So, do it differently: think outside the bin.

Considering what hasn’t worked and the benefits and options producers would want, I have designed a voluntary pool; I call it the Voluntary Independent Producer Pool (VIP Pool).  And, yes, it’s structured and designed quite differently than the voluntary pools the CWB offered before 1943.  Here’s what I believe the VIP Pool would offer:

·         It will provide better than average returns over the crop year.

·         It will provide cash flow when needed.

·         Delivery into the system will be a function of dynamic system needs (not passively through a programmed schedule like contract calls).  However, it will allow producers to have input into the timing of deliveries in conjunction with the needs and commitments of the pool.

·         It will serve all farmers – big and small.

·         It will work for producer car loaders.

·         Producers will benefit from storing grain when appropriate and will deliver when appropriate.

·         It will compete effectively with the spot market.  (It will not be starved of deliveries in a rising open market like in 36-37, nor will it be overwhelmed with costly deliveries like in 38-39)

·         It will encourage grain buyers to compete for deliveries through price incentives such as protein bumps, trucking premiums, better basis levels and grade promotions.

·         It will allow individuals to reap the benefit of strong local basis levels relative to other regions.  (For example, in canola we see stronger basis levels around Yorkton.  Pooling canola deliveries in Yorkton with deliveries in, say, Calgary, adjusted only by freight (as with the current CWB pool) is not a fair or appropriate allocation of price.)

·         It is a price risk mitigation tool and will not speculate; individual producers that want to take a position on the market (speculate), can do that independently outside the pool.

In a recent editorial, John Morriss said that you can run a voluntary pool without a wheat board, but you’d give up all the other things the CWB does.  CWB supporters say that without the single desk, the CWB would not be able to develop markets and build customer relations, would not have a voice in grain industry policy, would not have an influence over grain transportation, nor act as producer advocate. 

But let’s face it; you don’t need a wheat board with a single desk to do all these things either.  What you need is an industry willing to work together toward common goals – and yet the greatest impact the single desk has had over the years is to divide and polarize the industry.  Whether it’s because of the single desk itself or the culture of the community that embraces it, it doesn’t really matter.  The industry will be well served by facing up to this fact when considering its future.

Everyone in the wheat industry can see how the canola industry has shown that working together is possible, through the work of the Canola Council of Canada, canola commissions and canola grower associations.  If we can do it with canola, there is every reason to believe that we can do it with wheat, durum and barley. 

If you’re sincere in wanting the benefit of pooling, you need to look at what needs to be done differently to make it work.  I urge all involved – CWB supporters and open market supporters – to think what is needed to make voluntary pooling work.

Will it work?

When we were designing futures contracts at the Winnipeg Commodity Exchange, we knew that even if we designed a technically superior contract, if nobody used it, it would fail.  And the flipside of that is, if people used a fundamentally poorly designed contract, it would succeed.  It is completely up to the users.  Similarly, a well thought-out voluntary pool will work if people use it.

If you're a producer and would like to know more about the VIP Pool, would consider participating in it (or something like it) and would like to see one offered, please send an email to vip@depape.ca.  Let me know who you are, where you farm, and what you want to see in a voluntary pool.  When you think about it, what individual producers want is the best place to start.

And, as always, forward this on to all those you know that may find this interesting.

Any means to an end

The “save the single desk” campaign by the CWB is all about changing minds.  Not just producers’ minds – but the minds of the general public.  CWB directors in favour of retaining the single desk would undoubtedly like to get as many people from all walks of life to believe that the producer isn’t the only one with something to lose.  I’ve already heard calls to write to your MP and tell him/her how you support the CWB - and not the government - on this issue.  The hope is that if Conservative MPs get enough grief from their electorate, they will pressure Prime Minister Harper to slow down, or better yet, stop altogether.

So it was no surprise to hear Allen Oberg, representing the board of directors of the CWB, on a call-in show in Regina (620 CKRM) answering questions from both producers and city-folk.  But the following exchange blew me away.

Kate (caller):     I’m wondering if the wheat board goes, is there any guarantee all that good quality Canadian grain is going to be available for me when I’m buying flour, and pasta and all that sort of stuff, or is it just going to be grain sourced from anywhere that’s maybe not that great a quality?

Allen Oberg:    Well, that’s certainly a concern that has been raised.  ...  I think that in an open system, companies will be looking to source grain from ... any source and put that to any destination.  So that is a concern, that our quality system and that reputation that’s taken years to build up and maintain, whether that will be preserved.

.... There’s no doubt that the US produces far more wheat than we do here in Canada, but when we’re talking a high quality production – number one and two CWRS that market is a lot smaller and we have customers that specifically request that quality and are willing to pay top dollar for it.

Jim Smalley (host):   Kate, you’re the key part because you’re the consumer and you want that high quality wheat which is what Canada, and particularly Western Canada, produces.  It provides a beautiful loaf of bread, unsurpassed in the world.  So I hope, Kate, you’ll continue to buy prairie grain.

Kate:   Oh, I will.  Thanks.

Allen:   And I hope it’s still available.

Oberg's call in show on 620 CKRM

Does Mr. Oberg really believe that high quality wheat won’t be available in Canada without the single desk?  Or does he just want the likes of Kate to think that?

I chatted with my contact at a major baker in Canada and asked him what he thought about Oberg’s comments.  He said they get the quality they order from the millers they buy flour from regardless of whether they are buying flour from US wheat for their US operations, or flour from Canadian wheat for their Canadian operations.  (And yes, sometimes they buy flour for their Canadian production that is made with US wheat.)  In other words, the CWB is not a factor when it comes to quality.

But I think most people knew that already.

Mr. Oberg, representing the CWB board, has started down a dangerous path, saying just about anything to sell people on the virtues of the CWB – or to vilify the open market.

In his recent blog (Aug 15^th), Allen Oberg wrote about what he calls a “Rural Myth”:

The dual market is a western Canadian rural myth.  It doesn’t exist anywhere in the world and it won’t exist here.  A single desk is an all or nothing deal, and I feel like is very important that we are honest about that.

Yes, let’s be honest.  I agree that “a single desk is an all or nothing deal”.  But what we’re talking about is a “new generation” CWB without the single desk, a marketing agency offering unique value and services; most likely pooling.  A while back I wrote about how voluntary pools work and gave the Viterra bean pool in southern Alberta as an example.  Since then, I have been reminded that there are others in Canada successfully offering voluntary pools: Ontario Wheat Producers’ Marketing Board, Ontario Bean Producers’ Marketing Board, and PEI Elevators Corp.  It would sure make sense for the CWB to contact these groups to see how they do it before Mr. Oberg says they can’t exist.

The indiscretions don’t stop there.  The CWB paints grain companies with a particularly harsh brush.  Time and again the grain companies – particularly the larger ones – are vilified as the enemy, just waiting to take advantage of the poor hapless farmer. 

The CWB tries to get away with portraying big grain companies as nameless, faceless companies that will drive the price down so they can make more and farmers make less.  The people that work at the local elevator are friendly, honest, hard working stiffs just like the rest of us.  Their kids go to school with customers’ kids and they play hockey or ball together.  Most employees grew up in the community.  They don’t get up every morning and go to work with the intention of screwing farmers.  (The CWB Alliance produced a video where these companies are described as “thieving bastards”.  Mr. Oberg stated on his blog that he thought the video was “excellent”.) 

It’s amazing to me just how far they will go.  I guess the gloves are off and anything goes; unfortunately that means saying whatever they think they need to, whether it’s true or not.  And when the plebiscite results are announced on Sept 9^th and they show a majority in favour of the single desk, you can be sure the rhetoric will be ramped up even further.

Spending other people's money

It seems that two factors involved with the removal of the CWB single desk are on a collision course.

I'm hearing more and more from producers who are saying they plan on storing this year's wheat crop until they can sell it without going through the CWB.  One said he plans on contracting his 2011 crop as soon as he can for delivery in August 2012.  Others are saying they will only sell wheat for feed or ethanol (around the CWB). Clearly most producers can't store grain for a year - they need the cash flow - but I know that some can, and likely will.

Also, the board of directors of the CWB has made it clear that they will use all resources at their disposal to fight to keep the single desk.  Basically, that means money in the pool accounts or the Contingency Fund, and they don’t seem to be shy about spending it on the plebiscite, the conference call with producers, the advertising campaign, and the seven producer rallies (so far).

On his blog, about the plebiscite, Allen Oberg has said:

“We would ask the federal government to also respect the plebiscite results - if they do, there really isn't a question of spending any additional funds.”

I think what he’s saying is if the plebiscite results show support for the single desk (which it is skewed to do) and the federal government ignores the results (which they have said they will), then the CWB will continue to spend producers’ money fighting it. (Probably best to count on it.)

Now put these two issues together; if the pools are smaller due to some producers boycotting them, those remaining in the pool will each be burdened with an even greater share of the growing cost of this campaign.

This could be considered by some to be appropriate since CWB supporters will remain in the pool and pay for their portion of the campaign based on their deliveries to the pool.  But, many who don’t support the CWB, the single desk, or the campaign, will have no choice but to deliver to the CWB and will have no choice but to pay for a share of the campaign that is completely contrary to their interests.  The smaller the pool and the longer the campaign, the more each producer in the pool will pay.

The CWB is using money from all producers delivering to the CWB whether they support the single desk or not; whether they support the “save the single desk” campaign or not.  This is true whether producers hold back this year’s crop or not.  How can the CWB logically – or morally – take money from producers for a campaign to undermine their interests, knowing full well that they would never agree to it if they were asked?

It reminds me of that old Bill Cosby stand-up routine where he told the story of when he would get into trouble and his father would say, “Go get me your belt so I can beat you.”  That was funny; this isn’t.

Allen Oberg has said on his blog (aimed at Minister Ritz):

“Maybe it is time to move beyond the sound bites and start listening to farmers – all farmers, including those who have different views...”

This is hypocrisy at its finest.  Mr. Oberg, as representative of the CWB board of directors should take his own advice.  The CWB needs to stop playing politics with the bottom lines of producers that have “a different view” than eight of the board of directors and don’t support its efforts, whether marketing efforts or quasi -political “save the single desk” efforts. 

A good start would be to allow producers to decide whether they want to pay for the campaign.

It would be a very easy task for the CWB to allow farmers to indicate that they either approve of the campaign and wish to contribute to it, or that the campaign is fighting against their interests and therefore they don’t want to contribute to it.  At the end of the year, the CWB will know the damage to the pool accounts from the campaign and, those that chose to support it could have their fair share of the cost apportioned to their final payment.  Those that didn’t support it would have their final payment left intact without the extra deduction for the campaign.

Alternatively, the CWB could leave the pool accounts alone and use only money in the Contingency Fund (which they say isn't producers' money.  I disagree.)  That would be a tough one though, since they seem to see the Contingency Fund as the nest egg for the “New Generation CWB”, the organization they are fighting to avoid.

Either way - allowing producers to opt out of paying for the campaign, or using Contingency Fund money - seems fair to me.  If the CWB forces all producers to finance the campaign, not only is it hypocritical, it is a blatant abuse of power.

Allen Oberg's blog