Six Months In

“Out on the road today, I saw a wheat board sticker on a pickup truck

A little voice inside my head said, "Don't look back. You can never look back"

You thought you knew what was needed

What did you know?

Those days are gone forever

We should just let them go but -”

Taken from “The Boys of Summer”, with apologies to Don Henley

We have now had a full six months of grain markets without the CWB Single Desk.  As much as I like to look forward – we should always be looking forward – a quick glance back is in order.  You may remember, Ralph Goodale suggested that an audit be performed on the impact of the change to the Wheat Board.  It's too early yet but not too early to look at some of the factors that should drive any assessment.

Price:  The factor to consider here is not the absolute prices being paid to farmers; for the most part, “price” is determined by global market factors.  Basis is more relevant. The problem is that we have no history of true basis under the wheat board system.  In the absence of history, we can compare current open market prices and CWB prices.  A recent comparison at a Sask elevator showed the CWB spot cash price for #1 CWRS 13.5 was $7.63/bu when the open market price was $7.86/bu., a difference of 23 cents/bu favouring the open market.  And this is not an anomaly; it’s quite common to see spreads like this.  In addition, when competition heats up or a buyer is in need of stocks to fill a train, the elevator has the freedom and flexibility to increase his price (with a smaller basis).  Farmers are now seeing the true value of wheat at any given time.

Canada / US price comparisons:   We used to argue that Wheat Board prices were low by comparing the price differences between US spot prices and Wheat Board Fixed Price Contract (FPC) prices, and consistently found the US prices were anywhere from $1.00 to $2.00/bu better.  I just compared Cargill’s posted bid for CWRS wheat in Elva (south west Manitoba) to the posted bid at the Berthold Farmers Elevator in Berthold, ND (almost directly south of Elva).  Cargill’s price is $7.85/bu once converted to US dollars.  At the same time, Berthold is at $7.92/bu in US dollars, better than the Cargill price by only 7 cents.

Wheat Board supporters often would argue that without the Single Desk holding back sales and shipments to the US, Canadian farmers would be hell-bent to drive down to the US to sell their wheat.  They argued that this tidal wave of deliveries would create long lines of trucks with Canadian license plates at North Dakota elevators, infuriating local farmers, causing a trade challenge by the US and resulting in a closed border.

Those arguing for the removal of the single desk argued that arbitrage would lead to prices in Canada moving higher in relation to US prices.  With Canadian prices moving from $1.00-$2.00 under US prices to 7 cents under would be enough for some to say “I told you so” – but I won’t do that.  (To drive home the point even further, I could show that Cargill’s bid in Morris Manitoba is equal to $8.04/bu in US dollars, about 2 cents better than Gavilon’s bid of $8.02 in Grand Forks, ND.  I could say it to make the point stronger, but I won’t bother.)

It’s no wonder that there aren’t any complaints about Canadian grain trucks at elevators in North Dakota.

Grain movement and the use of the grain handling system:  Single Desk supporters argued that without the central control of the Single Desk, the grain handling system would plug up with grain that isn’t moving as grain companies scramble for market share and refuse to cooperate with each other.  Open market supporters, on the other hand, said grain companies are the best judges of how to use their own assets.

There are many ways to measure this and the Federally Appointed Grain Monitor will present all sorts of data as we go along.  But here are just a few things that I’ve looked at.  As of week 26 (halfway through the year):

Non-durum wheat: 

• Visible stocks in the system as a % of production – 15%, lowest since 2003 (23% below average)
• Visible stocks as a % of exports – 40%, lowest since 2003 (25% below average)

Durum:

• Visible stocks as a % of production – 18%, 2^nd lowest since 2003 (13% below average)
• Visible stocks as a % of exports – 21%, lowest since 2003 (20% below average)
• At 2.3 mmt, year to date (YTD) durum exports are the second highest since 2002-03; 27% above average

Canola:

• Visible stocks as a % of production – 7%, lowest since 2003 (28% below average)
• Visible stocks as a % of exports – 13%, 2^nd lowest since 2003 (24% below average)
• Visible stocks as a % of exports and crush – 7%, lowest since 2003 (25% below average)

These inventory numbers indicate the system is capable of working very well without the Single Desk.  (I say they are lowest since 2003 – but it could be even longer.  I only have data back to 2003)

Cash flow:  I know a few farmers who have sold all their wheat and moved all of it off the farm.  As one put it (at harvest) “I’ve sold and shipped all my wheat.  I don’t know if it was the right idea, but I did it – because I can.”  Being able to sell as much as you want does wonders for cash flow.  Also, it means you don’t have to sell canola to pay for wheat bills.

Voluntary pooling:  Single Desk supporters argued that voluntary pooling can’t work.  However, CWB is currently offering a multitude of pools – Early Delivery, Harvest, Winter and Futures Choice.  I can’t say whether they are proving to be successful; I’m sure they would say it’s too early to tell.

I’ve argued that voluntary pools can work – if you design the pool to reflect the current market as much as possible.  In fact, I started a pool-like pricing model for wheat.  We call it Advanced Grain Pricing and it works very much like a mutual fund for wheat farmers.  To date, we have an average futures hedge level of just under $9.50/bu., about 90 cents above current futures.  And when you combine our “pooled” hedge level with current basis levels, it works out to about $1.00/bu above the CWB PROs.  We’re making some improvements to how it’s delivered for next crop year – drop me a line to john@depape.ca and I will let you know all the details as soon as they’re ready.

There are many other factors that are being addressed; like payment assurances (changes to the CGC), the need for more market information, farm and industry advocacy, competition (including CWB), market development, producer cars, delivered grain quality, and risk management (ICE futures), to name a few.

Things aren’t perfect yet, but with everyone in the industry working together, pushing in the same direction, the potential is great.  In fact, much greater than when we were pushing in different directions.