Aug 1 is here and we’re finally clear of
the debate and acrimony; we can focus on new business. Or can we?
The other day I was out looking at crops
just outside of town. Standing alongside
a wheat field I took a deep breath and said to my friend, “Smell that.”
“Smell what?”
“Take a deep breath; notice that? No more BS.”
Taking another focused breath, I added,
“No wait, it’s still there – almost so imperceptible you don’t even notice it
right away. But it’s there – it hasn’t
gone away completely.”
On the eve of The New Marketing Era in
Western Canada, there are still those that are grasping at the shadows of the mandatory
CWB – or as a friend called it yesterday, CWB - the “Compulsory Wet
Blanket”. The Canadian Wheat Board
Alliance and The Friends of the Canadian Wheat Board (let’s simplify things and
call them The Alliance & Friends) continue to try to convince us of that
the end of the CWB will create marketing anarchy and poverty in Western Canada. Fortunately, they couldn’t be further from
reality.
At the risk of giving them more
attention than they deserve, I want to remind people how off base detractors of
the new market are in their arguments.
Here are the Top Ten Myths of the New Market:
10.
The grain industry will become more
concentrated and powerful
Time will tell of course, but as many of
us had suggested, there are new players – Gavilon Inc., Lansing Olam Canada and
CHS, to name just three – becoming increasingly active in Western Canada. Something tells me there is more to come as
things evolve. Competition is a good
thing.
9.
Producer cars will no longer be a viable
option
On this one, they may be partly correct,
but for the wrong reason. The Alliance
& Friends have argued that without the single desk there will be no one
there to support producer cars. Here
they’re missing two points:
a) The new CWB has access to terminals and intends
to continue to promote producer cars and work with farmers that want to load
them.
b)
Farmers
who load producer cars have argued that they are worth about $1200 per car by
avoiding primary elevator handling fees.
But, in a competitive market without the CWB single desk, those handling
fees will come under pressure, thereby reducing the financial attraction of
producer cars. Will producer car loaders
still load producer cars if the perceived advantage is only $200?
8. Trucks
of Canadian wheat will overwhelm US elevators; US farmers will demand trade
sanctions
The Alliance & Friends have suggested
that Canadian farmers will fall over each other to sell into the US, driving
the US price lower. And this will lead
to US farmers demanding trade sanctions against Canada.
Yet higher US prices have migrated north,
taking away the incentive to drive south.
Almost immediately, new crop wheat prices in Canada were very
competitive with US prices and continue to be.
Arbitrage is working – just not in the direction the Alliance &
Friends would have wanted it.
As for US farmers’ outrage – according
to a Reuters news story, Jim Peterson, marketing director of the farmer-run
North Dakota Wheat Commission expects US farmers will benefit on the global
stage from an end to the CWB's "price-distortion".
Keep in mind, the 14 or so US trade
actions were against the CWB – not Canadian wheat.
7. The
quality of Canadian grain products will go down
Bill Gehl, president of the CWB
Alliance, said that the quality of Canadian food products will go down without
the single desk because the buyers will be free to buy the cheapest grain on
the planet – and grain used in Canada will be the radio-active variety from
around Chernobyl. There are two problems
with this argument:
a) Food manufacturers were always free to
buy from whomever and from wherever they wanted. The CWB never had control over
Canadian millers or bakers.
b)
Since
Canadian food manufacturers could always buy from wherever they wanted, and
since – as Mr. Gehl will tell you – they are profit maximizing enterprises,
they already buy the cheapest grain they can, which, as it happens, comes from
Canada.
6. ICE
Futures Canada’s new futures contracts have failed
Although I haven’t heard this from the
Alliance & Friends, they are critical of all futures markets.
Yes, the new contracts were launched
over six months ago and, yes, there is still only light trade. But those saying they have failed should be
reminded of Mark Twain’s comment “the report of my death was exaggerated”.
The CME’s new Black Sea wheat futures
started trading in early June and so far in the two months to July 30th
have a grand total of 9 open contracts – and in only one month. By comparison, after its first two months of
trading, ICE milling wheat had close to 100 open contracts – and in three different
months. Although you may hear the CME
speak disparagingly about ICE wheat futures, you’ll never hear them talk that
way about their own Black Sea contract.
They know better than to talk a contract down (unless it’s your
competitor’s).
The new ICE futures contracts for milling
wheat, durum and barley are tools needed in Western Canada, particularly after
the end of the single desk. But these
things take time and take effort.
Futures contracts are exceedingly difficult to kick start; everyone says
they will trade them when they get liquidity – but how do they get liquidity
unless people start in?
Rather than pessimistically talking these
contracts down, we need to optimistically talk them up. Hedgers need to place orders, farmers and end
users need to ask for basis contracts based on the new contracts, traders need
to spread ICE futures against other contracts like Minneapolis. Wouldn’t it be great if the new CWB offered
basis contracts off ICE futures?
In the long haul, these contracts have
the potential to provide better price discovery, more stable basis and better
transfer of risk than anything else.
It’s undoubtedly worth a little effort.
And it’s definitely an exaggeration to say they failed.
5.
The new CWB will fail
Apparently, according to the Alliance
& Friends, voluntary pooling won’t work.
It seems that those within the new CWB didn’t get that memo because
they’re charging ahead with them regardless. Like anything else, CWB will succeed only if
it's supported. My guess is that if it
succeeds with voluntary pools, it will be in spite of core CWB supporters
turning their back on it.
Embarrassingly, in true “dog in the
manger” fashion, there is nothing the Alliance & Friends would like more
than the demise of the new voluntary CWB.
4.
There will be no one to focus the industry
or act on behalf of farmers
As many of us have stated previously,
there are many models of trade organizations that can be used to design one for
wheat in Western Canada. The Canola
Council of Canada is a great example with participation from all corners of the
canola world, working toward a common goal – a thriving industry. It’s no wonder that the canola industry is
not only thriving, it is flourishing.
Luckily no one is listening to the
Alliance & Friends and they’re just getting on with things, first with a
planned Barley Council and also a potential Cereals Council.
3.
Prices will go down as farmers will drive
them lower
Canadian farmers selling into a market
will not drive the global price of a commodity lower. If anything, they could drive the basis wider
(lower), but total handling (and marketing) costs paid by farmers under the CWB
system were the highest in the world.
Ok, I don’t know that for a fact, but I
do know that the handling costs were remarkably high compared to every other
market I am aware of, making the theoretical basis extremely weak to begin with. Add to that the high “marketing costs” borne
by farmers because of the way the CWB worked: shipping 1’s against a sale of 3’s;
demurrage to the farmers’ account; thinking despatch is a source of revenue
(when it is a cost); shipping wheat from southern Alberta through Churchill
(because it is the cheapest routing for grain from North East Sask (yes, I
know, it doesn’t make any sense to me either); delaying shipment to a customer
(for up to a year) at the customer’s request and getting nothing for it;
shipping wheat from Montreal to Vancouver; selling only half a crop (durum);
etc, etc. Ka-ching, ka-ching.
I’ll stick my neck out a bit here and
say the cost of handling and “marketing” that farmers will pay will go down
with the end of the single desk. (There
really is only one way to go here.) And,
ignoring global price movements, that means higher prices for farmers.
2.
Small farms will suffer without the
single desk
The trend over the past three decades
has been toward larger and larger farms, mostly due to decreasing
profitability. And that’s WITH the CWB
single desk. I’m not about to say that
the trend toward larger farms will stop with the end of the single desk, but
with increased competition, lower marketing costs, increased marketing options
and a more functional marketplace, profit per acre should go up making smaller
farms more viable.
1.
The CWB is the only one offering price
averaging or pooling.
Well, that’s not entirely correct. A new, independent company called Farmers
Advanced Risk Management Company (FARMCo) is launching a price averaging tool
for farmers.
Quite frankly, I got fed up listening to
the Alliance & Friends (and a few academics) about how voluntary pooling
wouldn’t work (because it didn’t work in the 20’s and 30’s). So I developed a
program to show how it could work; the result is FARMCo and the Advanced Grain
Pricing Program (AGPP).
FARMCo’s mission statement explains its
position:
“FARMCo
will play a leading role in changing the grain marketing culture in Western
Canada, particularly with farmers, by advancing and broadening sound grain
marketing concepts and providing meaningful tools and techniques for both
farmers and other grain merchandisers.”
A fixed price Initial Payment – like
they used in the 20’s and 30’s – will always struggle in a voluntary
situation. Fundamental to the design of
the AGPP is that the price paid to farmers is variable, moving and keeping pace
with the market.
Cash flow suffers under conventional
pools, with restricted delivery and relatively small Initial Payments. Waiting for over a year for a Final Payment
doesn’t help. The AGPP does not
restrict deliveries, rather it pays a premium for deferring deliveries, giving
an incentive to store. It has an Initial
Payment of about 85-90% of the current market and the final payment is made
within two to three months of the sale, making it cash flow friendly.
In the AGPP, we use futures and options
to provide “better than average” pricing, exploiting carrying charges to the
farmer’s benefit. In addition to getting
paid to store, basis is not pooled, so participants get everything their local
market has to offer.
FARMCo is focused on providing value to the
benefit of farmers – hence the name. Not
only will farmers be among its shareholders, all profits (beyond a fixed
management fee) go directly to its farmer clients. No one else – not even the new CWB – can say
that.
The new market is here. Even Anders Bruun, lawyer for the Friends of
the CWB recently stated, “Things may have changed so much that the monopoly
couldn’t possibly be restored”. We have
crossed the Rubicon – there is no going back.
Let's not forget that there's a lot more
to this change than unplugging the CWB. Anyone who expected this industry to
just slip into the future without a scratch – whether you thought it would be
good or bad - would have been misled. And
although there are challenges ahead, I’ll take them over the Compulsory Wet
Blanket any day of the week.
Take a deep breath. It sure smells good.
