Monday, October 10, 2011

Wishful thinking

When I heard the news of the Alliance Grain Traders proposed $50 million durum and pulse processing facility, my first thought was “This is such positive news - what could CWB supporters possibly find as downside?"  Well, they think they found it and it didn't take long before they were out in public spinning their version of the truth.

·         Bill Gehl, Canadian Wheat Board Alliance chairman said:  "If this company has a viable business plan, the single desk should not be an impediment to their project."

·         Stewart Wells, CWB director said: "There's no reason why anyone with a good business plan wouldn't be able to build their operation and still have a strong Wheat Board that's getting a fair price to farmers for their grain."

·         Terry Boehm, NFU president said: "It's perfectly possible to have a pasta plant whether the CWB is there or not.  Unless, of course, you're building a plant with the assumption that when the CWB is gone that you'll be able to access durum cheaper than you could have through the Canadian Wheat Board, which means less money for farmers."

·         Allen Oberg, CWB chairman said:  "Distance from domestic and export markets – not the single desk – is the biggest impediment to value-added processing plants in Western Canada."

Although none have ever had anything to do with an agricultural processing enterprise, these “spokesmen” somehow feel equipped to explain why they think the single desk is not an issue and why locating on the prairies doesn't work.  (And in the process, they insult Alliance Grain Traders CEO Murad Al-Katib by implying he doesn’t know what he’s doing.)

Gehl goes so far as to say transportation costs limit canola processing on the prairies: “Whether it is wheat flour, pasta, oil sands bitumen or canola, transportation costs have always limited what can be done with value adding on the prairies."  Perhaps he’s had his head elsewhere for so long that he hasn't noticed that there are now ten canola crushing plants on the prairies, processing close to half the crop - and many are expanding as we speak.  Domestic crush is clearly a dominant canola market influence.  I would love to be a fly on the wall listening to Gehl explain to Cargill, Bunge, Viterra, Richardson and Louis Dreyfus that they’ve got it all wrong and shouldn’t have built their crush plants on the prairies.

I’d also like to hear any one of them explain why oat processing is so successful on the prairies and why durum is being processed in North Dakota – both in the heart of production regions, miles away from the major consumptive areas.  (And both without the CWB single desk in their way.)

Boeme suggested that the only reason a processor would locate in the prairies is to get cheap grain for his plant.  Perhaps he should get together with Oberg and Gehl and decide which is the best argument for them - either it's good to locate in the prairies to get cheap grain or it's bad because of the distance to markets.  If Oberg is right, Boeme is wrong.  If Boeme is right, Oberg is wrong.  Ironically, they’re both wrong.  Check out the price of canola around Yorkton where the two new crushing plants have certainly supported prices.

Actually, there are many factors that go into the decision of where to locate; reliable supply of feedstocks, greater control of quality and logistics are among the most important.  Locating near a consumptive market means that you are out of position for other possible markets; locating near the supply of raw materials (like in the prairies) provides ready access to the materials you need while allowing you to serve more and varied markets.

More processing on the prairies is an effective counter to concerns over grain handling issues like terminal access, car allocations, and primary elevator congestion.  Since the CWB and its allies have always seen these as big issues with an open market, you’d think they would recognize that a new processor on the prairies actually helps alleviate these potential problems.

And yes, the single desk is a deterrent to new investment.  As any processor will tell you, they are running a factory, producing a product someone else is relying on.  One of the most important factors in establishing a processing business is to be a reliable supplier; and what that means is control.  One misstep and you could lose a major customer.  An environment where your single supplier is also a regulator is not attractive to prospective investments.  Open markets facilitate business by allowing you to respond the way you see fit; regulated markets frustrate business by being unresponsive or by changing the playing field without warning.

Western Canada lost three potential malt business investments due to the single desk.  Under the circumstances, they all did the right thing.  Because they were uncomfortable with the prospect of dealing with only one supplier (the CWB) they built in Montana and Idaho where they could access both local barley as well as imported barley from the CWB.  The Canadian malting industry has even told both the CWB that as long as the single desk is in effect, they will not invest in any expansions in Canada.

The CWB and its allies wish the single desk was not a deterrent to new value-added enterprise in Canada, but it is.  Their arguments lack substance or factual support and even go against conventional wisdom.

Through its actions, the processing industry has demonstrated the realities of dealing with both the single desk and the open market for years, showing its preference for the open market. Now, as we are beginning to see the response to an open market in wheat and barley, the CWB and its allies still fail to respect reality.

Actions speak louder than words.  Saying something over and over hoping it to be true is just wishful thinking.  And gentlemen, you don't build a prosperous industry on wishful thinking.


  1. This is exactly why the CWB system has been so damaging to agriculture on the prairies; the lost opportunity costs associated with the CWB have been staggering.

  2. these guys shouldn't go away mad, just go away!!

  3. It always baffled me that the CWB would insist that it wasn't cost effective to ship finished product from the prairies.
    CWB way - Harvest - Terminal - Port - Processing Plant - Port - Distribution Centre - User.
    Non CWB - Harvest - Processing Plant - Port - Distribution Centre - User. And the value added jobs stay in Western Canada.

  4. John,

    Is there no way for a processing plant to source their product directly through local producers with the current system?
    I am just trying to understand what the CWB does exactly to impede local processing. Do they have to sign off somewhere allowing a
    processing plant be built?



  5. Chris M.:
    A processing plant cannot source directly from local producers without the CWB's involvement. The CWB sets the price the mill pays for the wheat (pays the CWB) - the mill pays the farmer the initial payment (of the pool) on delivery (and is reimbursed by the CWB). This way, the farmer remains in the pool and gets any final payments directly from the CWB.
    This system dulls any price transparency as the miller can't give any meaningful price signals to the farmer.
    The CWB doesn't "sign off" on any new investment but investors have needed to keep the CWB informed and involved as the CWB has been the only supplier.
    If given the choice between a market where they have autonomy with who they deal with among multiple suppliers and a market with one supplier, most investors will go with the autonomy.

  6. On October 6 I called the CWB about the Producer Direct Sale (PDS) program. This is exactly what Chris asked about, although I was talking about exporting to the US. That day, the CWB was selling durum (#1, 12% protein) at port for $14.88/bu. The FPC (also in port) was $9.23 or so. The pasta plant would have to pay the $14.88 to the CWB in order to get the product. The farmer would get the $9.23 from the CWB (or sell in the pool and get whatever is left over from plebiscites, advertising and lawyers...oh yeah, and marketing costs!).

    If the farmer chose the PDS route, he first would have to pay the difference between the 14.88 and intitial price that the CWB is paying. Then the farmer could sell his product to the mill. However, at the same time the price in NE MT was about $12.30 for durum. So the farmer gets less and the mill must pay more under the CWB system.

    The final kicker is this -the CWB will only allow the farmer to sell whatever percentage of his contract that is accepted. So, as of October 6 the acceptance level was 25%. If the farmer had 100 T of durum contracted, and was able to sell it all to the mill, he still would only be able to sell 25T to the mill because that is all the CWB would allow for a PDS.

  7. I heard during the debates that 61000 ballots were sent out and there are only 51,000 permit book holders
    how accurate are these numbers and if true it invalidates the CWB plebiscite results