Confidence

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.  

NFU

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.

Confidence

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

NFU news release

Stewart Wells interview

NDSU protein spreads study

Laura Rance Free Press article

Murray Fulton article

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 18^th), then back to the Single Desk (Jan 17^th), 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 31^st.  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 1^st (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.

Getting on with business

With the passage of events this week, we can now focus with confidence on the markets as we transition to a full and complete open market.  Bill C-18 is now law.  Although the new CWB dropped its case, the deposed farmer-elected directors continued unassisted by the CWB; however, their request for an injunction to stop the implementation of the bill was denied by the judge.  All that remains on the legal front is a Jan 17^th court date, set by Judge Shane Perlmutter, to decide whether to suspend the law while he decides on the broader question of whether to strike the law down. There’s not much he can do though as he is a Manitoba provincial court judge (not Federal); apparently he has already indicated that the most he could do is stop the bill from taking effect in Manitoba.  Most opinions I am hearing now is that this doesn’t have much of a chance for success.

As it stands right now, everyone is able to trade whatever they want – to whoever they want – for delivery after Aug 1, 2012.  However, any wheat, durum or malt barley sold for delivery before Aug 1^st still must go through the CWB – and that creates a dynamic that the new CWB needs to address.

First let’s look at wheat 

Although Aug 1, 2012 has often been seen as some sort of discreet “starting line” as the beginning of a new era in grain marketing, there is no getting around the fact that new crop market mechanisms will reach into the old crop as well.  This creates a problem for the new CWB; that’s probably why they have yet to offer Series B and C contracts.  

The Pool Return Outlook (PRO) for #1CWRS 13.5 is $6.63/bu in SK.  The CWB’s Fixed Price Contract (FPC) is $6.19/bu as of Friday.  But on Friday, the first business day following Royal Assent, I’m told that Viterra was bidding $7.40/bu for new crop delivery in SK.  I didn’t hear of any other bids, by other grain companies or by the new CWB.

Farmers now have a choice – even for old crop.  Any wheat they don’t have contracted to the CWB can either be sold to the CWB using whatever mechanism is available (Series contract, FPC, or GDC, etc) or sold to whomever they like for delivery after Aug 1^st.  On Friday, Dec 16^th, the price that Viterra offered gives a large incentive to sell old crop wheat into a new crop position; instead of selling into the 2011-12 pool, farmers can pick up an estimated $0.77/bu by selling for delivery in the new crop.  (I say “estimated” because the PRO is just an estimate and the final pool return could end up higher or lower than where the PRO is right now.)  Comparing the 2011-12 FPC and the 2012 new crop bid, it’s a “no-brainer” – sell your 2011 crop on an FPC and you’ll give up an additional $1.21/bu that you’d get by selling it for delivery in fall of 2012.  Now that’s what I call a carrying charge!  

With many farmers angry about the legal costs piled up in the 2011-12 pool, you can be certain that they’ll be looking at selling what’s not yet committed of their 2011 crop into the 2012 crop year.  If enough of them do, this could create difficulty meeting the demand in the latter part of this crop year as well as creating a burdensome demand on the grain handling system early in the next crop year.  Both these will have an impact on price as well and the new CWB would do well to prepare for this by being as effective as it possibly can.

The new CWB needs to start acting like a voluntary organization – and the sooner the better.  It can start by doing a number of things:

1. Open up the feed barley market immediately.  According to the CWB, “Weaker values in the export market will make further international feed barley sales unlikely”.  And since the CWB has been selling feed barley only on the basis of GDCs, it can be assumed it has no open sales and no inventory of feed barley.  Therefore, there is no risk to the CWB to open up feed barley completely and immediately.  It can do this via a number of different mechanisms – all of them simple. 
2. Open up the malt barley market immediately.  The CWB could ensure it has coverage for all its malt barley sales and then open the market.  But in its most recent PRO release, the CWB said; “Prices will remain under pressure as Australia and Argentina ramp up their export programs and the world moves towards a larger world barley crop in 2012-13.”  If the CWB is short (i.e. it has sold malt barley but haven’t ensured 100% coverage), it will be able to remain very competitive in an open market for the balance of the crop year.  Also, with new crop 2-row prices rumoured to be around $7.00/bu, the old crop PRO at $5.28/bu in SK will not be able to compete, creating the same scenario in malt barley as described for wheat above.  The CWB will be forced to use CashPlus and there will be limited value seen in that. 
3. Close the wheat and durum pools early.  Once the pools are closed, the CWB can either offer a short second pool until the end of the year or offer cash prices.  Either way, its prices would be more relevant to the current market and therefore more competitive.  They don’t necessarily need to open the market completely (although that would help too) but they will need to be showing the true value of the wheat and durum crops in the second half of 2011-12. 

Not only do farmers now have a choice – even on old crop – so does the new CWB.  It can choose to operate for the balance of this crop year on the basis of the status quo, which will almost certainly creates problems for itself and perpetuate market distortions that will affect everyone, or it can choose to start immediately to reflect open market dynamics, which will likely create more marketing opportunities for itself and those that choose to support it, as well as make the transition to the real open market much smoother than would occur otherwise.

Let’s hope they make the right choice.

“Every man has the power to choose, but no power to escape the necessity of choice.”

Ayn Rand

The courts aren't always right

By now we all know the results of the CWB court challenges and that Judge Douglas Campbell ruled in favour of the Friends of the CWB and the CWB.  Some of the comments in the ruling demand attention:

"...when advancing a significant change to an established management scheme, the failure to provide a meaningful opportunity for dissenting voices to be heard and accommodated, forces resort to legal means to have them heard.  Had a meaningful consultative process been engaged to find a solution which meets the concerns of the majority, the present legal action might not have been necessary."

To use the judge's own terminology, this is an absurdity.   He clearly has not been paying attention to the "CWB file" for the last 30 years or more.  That’s not a criticism, just a fact.  Those who have been paying attention know that there has been ample opportunity for dissenting voices to be heard on both sides of this issue.  And that they have exploited that opportunity at every turn.

Before you can "find a solution which meets the concerns of the majority", you have to determine who the majority is and what their concerns are.  The CWB's plebiscite results have been presented as a clear indication of the majority's wishes.  It is no such thing.  Neither the question asked nor the voters’ list fulfills the requirement of determining the interests of all stakeholders.  If Judge Campbell had been following the CWB issue, he would know like the rest of us that the idea of a plebiscite is nothing more than a red herring; you could never design a reasonable plebiscite that the CWB and its most fervent supporters would accept, let alone its results. 

 

When a list of CWB permit book holders is presented with the choice of a voluntary CWB (the dreaded dual market), only a clear minority supports the single desk.  Arguing that a voluntary CWB will fail or that farmers don’t understand the question doesn't cut it.  But, really, none of that matters anymore, because we’re no longer talking about farmers or grain marketing.

Do Precedents Matter?

All the discussion is around parliamentary process.  Even when we talk about plebiscites, it’s not about farmers anymore – it’s about political processes.  So, in that vein, we should take a look at another case, very similar to this CWB cases.  Here are some relevant facts of a case heard by the Ontario Supreme Court, between The Canadian Taxpayers Federation (CTF) and the government of Ontario:

In 1999, the Taxpayer Protection Act (TPA) was passed by the Ontario legislature, in which Section 2(1) reads:

o   A member of the Executive Council shall not include in a bill a provision that increases, or permits the increase of, a tax rate under a designated tax statute or that establishes a new tax unless,

a)       A referendum concerning the increase or the new tax is held under this Act before the bill is introduced in the Assembly; and

b)      The referendum authorizes the increase or the new tax.

(Sound familiar?)

In June 2004, the Ontario Minister of Finance introduced Bill 106 to amend the Income Tax Act.  Even though Sec. 2(1) of the TPA of 1999 required it, no referendum was called.  The CTF took it to court, seeking the courts to declare the Health Tax to be invalid because the government didn’t call for a referendum.  Paragraphs 47-49 of the ruling are relevant to the CWB case (paraphrased, emphasis is mine):

[47]       Nothing in the Act suggests that a referendum is required before the Act can be amended even if this amendment creates an exception to Section 2(1).

 

[48]       ... even if the TPA had contained a provision that no exception to the referendum requirement contained in Section 2(1) could be enacted without the holding of a referendum, this type of limit on a legislature’s sovereignty would not be binding.

[49]       The courts will give effect to limits imposed on the legislature’s ability to amend its own statutes only where they constitute “manner and form” requirements.  The Supreme Court of Canada in the reference Re Canada Assistance Plan set out what was necessary in order to impose an effective manner and form requirement.  Applied to the present case the following would be required:

a)       A clear statement of intent by the legislature that ... the legislature intended to bind itself or restrict the legislative powers of its members;

b)      It would be contained in a statute that is constitutional or quasi-constitutional; and

c)       The statute would specify the manner and form to be followed by the legislature itself to effect the amendments.  It would not remit the decision to an entity not forming part of the legislative structure.  

On “manner and form” requirements, it says the government would not give authority to change the Act to “an entity not forming part of the legislative structure” – in other words, not to farmers voting in a plebiscite.

But there’s more.  Section 13 of the Federal Interpretation Act sums it up quite nicely:

Every Act shall be construed as reserving to the Legislature the power of repealing or amending it, and of, revoking, restricting, or modifying any power, privilege or advantage thereby vested in or granted to any person or party, whenever the repeal, amendment, revocation, restriction or modification is considered by the Legislature to be required for the public good.

In other words, parliament has the ultimate power and authority to amend Acts.  And can revoke the power given to anyone else (like farmers through a plebiscite) when amending.

The last thing the grain markets need right now is more uncertainty.  Judge Campbell’s ruling, when viewed side by side with the CTF vs Ontario government ruling, and Section 13 of the Federal Interpretations Act, is ambiguous at best, or even worse, just plain wrong.  And the self-righteous chiding by the CWB supporting groups does nothing to make it more correct or decisive.  

Although the government is moving ahead as planned, all this legal wrangling is taking the focus away from what is right for the Western Canadian economy.  Instead of debating about court proceedings and parliamentary procedures, we should be spending our time on new opportunities in the grain markets. 

As suggested by Minister Ritz, we should assume the Marketing Freedom for Grain Farmers Act will be enacted as planned.  Let’s face it, if the appeal courts disagree with the government on this issue, we’ll have a much larger problem – an impotent Parliament.

Only in Canada, you say?  Pity.

Canadian Taxpayers Federation vs Ontario