Sunday, January 29, 2012


Just about everything being reported or stated recently by single desk supporters seems to be aimed at eroding confidence in the new market.  Current court cases notwithstanding – the reality is the reign of the single desk is over.  We are entering a new world; focusing on all that they see as negative (even when they’re wrong) while giving no solutions, serves no productive purpose.  If there are challenges – and yes, there will be – then they need to be addressed productively – with solutions.  


In a recent release, the National Farmers Union (NFU) painted a bleak picture of the market without the single desk.  Among other things, it was critical of the suggestion farmers should use futures contracts and other “costly services”.  (It’s as if the NFU would like you to ignore the fact that the CWB itself uses futures.)  They are either ignorant of the well-documented fact that the futures market is a highly efficient, low cost risk management tool that enables the best possible prices, or they are being disingenuous.  Take your pick.

The NFU also says grain companies anticipate making more money, adding this is “money that will come out of farmers’ pockets”.  This is classic “shrinking pie” mentality – there’s only so much to go around and if you make more, I make less.  The idea that being more efficient will actually make the pie bigger (where everyone gains) is beyond their comprehension.  This mindset will only succeed at failing.

Stewart Wells

Deposed CWB director Stewart Wells is single-handedly trying to erode confidence in the new market by stoking the fires of uncertainty.  In a recent interview he said “All this confusion has meant that nobody really knows what role the wheat board might be playing this coming fall.”  This is classic verbal sleight of hand.  He is correct that the CWB has yet to provide details of new offerings, but he fails to explain that it was he and his colleagues of rogue CWB directors that caused this uncertainty by keeping the CWB staff from preparing for its new role.

Even so, the lack of details of new-CWB programs does not detract from the market.  The open market has already started showing more useful price information than the single desk ever did. 

Wells also expressed concern over new contracts that don’t provide grade discounts.  After all, with the CWB system you knew what the grade spreads would be.  For instance, in 2009-10, the spread between Initial Payments for #1 CWRS 13.5 and 14.5 (1 percentage point of protein) was $0.22/bu.  On the total pool return, the spread ended up at $0.43/bu.

However, according to NDSU, the similar spread in the US started the year around $0.60/bu and spent most of the year between $1.20 and $1.40/bu.  In Canada, protein spreads have been muted by the CWB pooling system, meaning unclear market signals and those with high protein have been sharing the premiums with others with lower protein. 
You can’t lock in protein spreads in most forward contracts (US farmers can’t either), but in the open market you will get paid for high protein according to the market and not be forced to share those premiums with others that produced lower protein.  

Laura Rance

In a recent Winnipeg Free Press editorial, “Difficult decisions for farmers in a post-CWB environment”, Laura Rance spun an image of confusion and challenge for farmers.  According to Rance: “farmers were taken aback by how many decisions they need to make”; “consultants are warning farmers to read the fine print...”, and; “grain companies are planning to make a lot of money in the post-CWB environment”.

Read this article.  I defy you to find even one productive comment.  Rance would have provided much more value if she provided some ideas of how to address these issues – if they need addressing at all.  As it is, she’s being nothing more than a “Debbie Downer”.

Murray Fulton

Murray Fulton, professor at the University of Saskatchewan suggests that in the new world, there really won't be much difference.  He says some farmers will make a little more and some will make a little less.  And grain companies will be the greatest beneficiaries.  He, like many other analysts miss the point of greater efficiency, lower cost, better cash flow, and positive impacts (for farmers) on other commodity prices such as canola.  And he provides no ideas on how to capitalize on the new reality.


Whether you believe in the open market or not, you do farmers a profound disservice by doing nothing but sow seeds of discontent, uncertainty and confusion.  Markets – especially new markets – need confidence, not doubt.

  • Some people still insist that a voluntary CWB won't work.  I’m in a different camp; my view is that given the right focus and strategy, the CWB will flourish.  In fact, I believe that the future is very bright for the new CWB.  The new CWB can position itself as an industry leader in providing value to farmers through risk management tools and financial tools.  It can offer products to farmers through currently established farm-coaches that are well positioned to offer competitive products and services to farmers; not only would this be cost effective for the new-CWB, it would allow it to focus its resources on developing the products that will add value to farmers. 
  • As I talk to more and more people in the industry - farmers, grain traders and others – it’s becoming increasingly clear that there will be a great deal of grain looking for value from the CWB.  Until they get a real good feel for the new world, many farmers will opt to pool at least a portion of their grain.  The potential is there.  And the potential is huge.  To use a sports metaphor, it's the CWB's game to lose.
  • Contrary to what the NFU believes, futures enable the price to the end user to be lower and the price to the producer to be higher than otherwise without futures.  In addition, grain companies have limits to the amount of risk they can accept and futures enable these companies to accept more business at one time by reducing risk – this increases the capacity of the industry to market grain.  And that’s good for everyone, including farmers.
  • I am confident that the ICE futures will evolve into meaningful and effective tools.  The conventional wisdom of those involved in the design of those contracts (including yours truly) is that each one of them has the potential to provide great value to the western Canadian industry – and that includes farmers.  It will take some effort but it will be well worth it in the long haul.  The government removed the single desk to improve the market and economic prospects for farmers.  It makes perfect sense that it would continue the exercise by whole-heartedly supporting the instruments that replace the single desk.  I can't think of a better way than using the government guarantee to backstop the CWB as a market maker in the new ICE futures contracts.

As an industry we need to work at ways to strengthen farmers’ hands.  Removing the single desk was the first step.  Farmers will now benefit greatly by an approach to marketing their own grain that exploits market signals and market awareness.  Cash flow has been an impediment to sound marketing, with farmers being forced to sell for cash and not for market reasons; this will be fixed by having more cash crops (like wheat and durum) and with a more market responsive cash advance program.  Farmers will benefit from increased market knowledge and expertise; it’s not as daunting as some make it out to be and there are many ways to strengthen your knowledge and expertise.  In addition, farmers can be protected through new financial tools such as credit insurance and transaction insurance schemes.

Agriculture in Western Canada is poised to enter a new world – with great challenges and even greater opportunities for wealth creation and economic development.  To only focus on possible negatives and say that farmers will be challenged is an insult.  Pessimism is an impediment.  If you don’t focus on solutions you are letting the farm community down; if you aren’t part of the solution, you’re part of the problem.

Here I am extolling the virtues of addressing problems with ideas and solutions – and yet I scold single desk supporters for their negative comments while giving no solutions.  So here’s the solution: anytime someone is negative, challenge them to come up with solutions.  If they don’t have any, tell them to come back when they do.

Nothing was ever accomplished by someone who thought it wasn't possible. 

Confidence is contagious. So is lack of confidence.
--  Vince Lombardi

Sunday, January 1, 2012

To stay or not to stay

The last bump in the road to marketing freedom – or entrepreneurial freedom – is the pending court challenge by the eight farmer-elected directors of the CWB.  

In the original filing, the CWB and its farmer-elected directors took the position that the Act (resulting from Bill C-18) was invalid because the Minister failed to comply with Section 47.1 of the CWB Act and on this basis they were seeking a declaration by the court that the new Act is invalid.  Further, they wanted to immediately stop the implementation of the new open market (via a “stay” or injunction) until the judge rules on the validity of the Act. The judge refused to grant an immediate stay referring to the request as “draconian”, but the case is going forward and is set to be heard on Jan 17-18, 2012 in Winnipeg.  

Since Bill C-18 has been passed and implemented, the remaining eight farmer-elected directors (the Eight, we’ll call them) have been released.  The remaining five directors decided the CWB would drop its case, leaving the Eight – who were named individually on the original filing – to proceed on their own.

Now, instead of an immediate stay, the Eight are asking for a stay that will take effect while the judge is hearing and deliberating on the case.  The reason for the stay, according to court documents, is that the Eight believe that moving to an open market will cause disruptions to the market and “cause irreparable harm”.  

But we’ve already moved to an open market.  The Eight have it quite wrong - going back to the Single Desk while the case is being heard will create disruptions and cause harm.  What if the judge rules the Act is valid?  If a stay is granted, we would then have gone from the Single Desk to the open market (Dec 18th), then back to the Single Desk (Jan 17th), then – once again – to an open market.

Even so, in his affidavit, Bill Toews argues for the stay.  He argues that, much of the trade for wheat, durum and barley occurs on the basis of forward contracting as much as 6 months in advance of the shipment – or up to 12 months ahead in the case of malting barley.  Mr. Toews argues that opening the market now – for transactions for delivery after Aug 1 – will have a depressing effect on the current 2011-12 pool that ends July 31st.  This is not an argument to hold off these changes at this time; it’s an argument to never make changes, since, if correct, this would happen any time the Single Desk is removed.  

But it’s not correct.

Prices in the current 2011-12 crop year represent the supply-demand balance for this crop year.  Once the new crop is harvested, there is additional supply available to the market, creating a new supply-demand balance and hence, different prices.  But buyers still buying for the last half of the 2011-12 crop year (Jan-July 2012) will be subject to prices based on the current supply-demand balance – not the new crop balance.  

Toews argues that with farmers freely selling into the new crop position, prices there will drop.  (The CWB has always argued that farmers selling on their own will push prices lower than if the CWB was selling for them.)  He then suggests that buyers in the old crop position will expect lower prices as well.  

There are two problems with this.  First, an efficient market will feel the effect of all trades, so we should expect the market to “feel” the effect of forward selling. But the amount of forward contracting by farmers in January for new crop deliveries would be insignificant; certainly not enough to push the market lower.

Second, even if the new crop price is more attractive than the nearby price, if you need wheat now, you have to pay the higher nearby price.  A buyer can “expect” lower prices all he likes, but the market is the market and there is little a buyer can do to get around that.

If Toews is concerned that farmers will opt to hold the grain currently in their bins until after Aug 1st (which it seems some may be doing), this will not have the depressing effect he argues; rather it will reduce available supply from the current market which, if anything, will support prices in the current crop year.

Although his argument is a “mighty stretch”, Toews advises in his affidavit that this will have the impact of dropping the pool by only $2 to $5 per tonne.

It would make sense to compare that small downside (if you believe it) to gains made by selling in an open market.  Farmers contracting into the new crop year will be paid full value for their wheat upon delivery, far better than the CWB Initial Payment of about 65% of the crop value.  It’s very tough to argue that farmers are suffering harm when they are getting better prices through forward contracting and they are getting paid in full upon delivery.

Arguing against the use of forward contracts in the open market – with the court ruling pending – Toews states: “... in the event that the Bill is subsequently declared to be invalid, those contracts will also be invalid with the result that both buyer and seller will be forced to “unwind” the hedge positions that they had taken at the then prevailing market prices.  The costs of doing so could be significant.”

In the Continental Barley market from June to Sept 1993, market participants including farmers were free to sell to any buyer in the US without going through the CWB – until that market was shut down by a court ruling.  Those sellers incurred significant losses – not due to the unwinding of hedge positions as the CWB posits; rather it was due to the intransigence of the CWB in how it dealt with those sellers with outstanding contracts.  Whereas the CWB could have facilitated the smooth transition back to the Single Desk environment, it chose to heavily penalize those that were involved in any Continental Barley trades by not allowing those trades to be executed.  The cost was indeed significant, but it didn’t need to be.

When the barley market was open temporarily again – in 2007 – close to a million tonnes of export barley was sold by grain companies.  But since they remembered the pain of Continental Barley, they negotiated with the CWB ahead of time; in the event that the Single Desk was returned (which, of course, it was), the CWB agreed to allow outstanding forward contracts to be executed as if the market was open.  Toews argues that “costs were incurred” but he fails to indicate that the only related cost was the payment of a fee to the CWB – what some called the CWB’s “export tax” – of $4.00/tonne.  This was paid to the CWB by exporters to simply maintain the right to execute their contracts unimpeded by the CWB.  Although it collected this fee, the CWB took no part in executing the transactions.

The CWB can’t argue that going from the Single Desk to an open market (and back again) would cause disruptions and irreparable harm when it would only be disruptive and harmful if the CWB chooses to create disruptions and harm.

The best thing to do is to just allow things to continue as they are as we wait for the court ruling.

Make no mistake: the Eight are the ones causing market uncertainty with the court case.  A stay would just add to the disruption and uncertainty.  If they were really concerned with disruptions, uncertainty and associated costs, they wouldn’t be asking for a stay.  And they would be indicating that regardless of what happens, they will do whatever they can to enable a smooth transition.