Wayne Easter defends the CWB with incomplete information

In a Jan 29^th letter to the editor in the Ottawa Citizen, Wayne Easter, MP and Liberal Ag Critic, takes aim at David Anderson’s position on the Canadian Wheat Board (CWB), but he’s shooting blanks.

This was in response to a letter to the editor in the Jan 22^nd Ottawa Citizen where David Anderson, MP Cypress Hills-Grasslands and Parliamentary Secretary for the Canadian Wheat Board, said that Western Canadian farmers “pay a high price to endure the limitations of the CWB's marketing attempts”.

Mr. Easter argues the CWB earns premiums for Western Canadian farmers, specifically mentioning 2008-09 where the CWB reported premiums of $6.65 per tonne for wheat, $15.37 per tonne for durum and $14.65 for malt barley.  Mr. Easter’s incomplete accounting fails to recognize or report that these alleged premiums come at a cost – paid by farmers.

The CWB reports its marketing costs to the federally appointed Grain Monitor, at least for wheat and durum (the grain monitor doesn’t report on barley).  The CWB reported that its costs in 2008-09 were $8.44 per tonne for wheat and $28.38 per tonne for durum.  This means the net result of CWB marketing activity – premiums minus the costs to earn them – is a net cost of $1.79 per tonne on wheat and a net cost of $13.01 per tonne on durum.

Applied to all the grain marketed by the CWB that year, this means CWB marketing in 2008-09 represented a net cost to farmers of $28.5 million on wheat and $55.7 million on durum. 

Mr. Easter should take note that these are the CWB’s own numbers – both the premiums achieved and the costs to achieve them.  Mr. Easter is eager to see the figures for the 2009-10 crop year when they are presented to Parliament; let’s hope he doesn’t make the same mistake of ignoring the cost of CWB marketing again.

And this is only a partial story; this does not include the non-marketing costs of the CWB, the higher system costs with the CWB, the higher farm costs due to the CWB (higher interest and storage costs) and the fact that US farmers get paid more than Western Canadian farmers through the CWB (in most years, farmers in North Dakota and Montana, growing competing crops of wheat and durum, could sell their whole crop at the lowest price of the year and still get more than Western Canadian farmers through the CWB).

Before Mr. Easter criticizes his colleagues of perpetuating misinformation, he should make sure he has complete information or else he may himself be criticized of perpetuating misleading information.

Easter's letter in The Ottawa Citizen

Anderson's letter in the Ottawa Citizen

CWB Annual Reports

Grain Monitor Annual Reports

Barley prose - farmers not getting the right signals again

The January PROs were released this week, along with the usual market commentaries on each.

I agree with the CWB’s comments about the global feed barley scenario.  There are ample market factors leading to higher global prices.  We need to be watching to see if the CWB can transmit these prices transparently to the domestic market more effectively than in the past; we shouldn’t have to rely on strong imported corn prices to underpin the domestic barley market.

On malt barley I disagree with the CWB.  They say “Maltsters who still have outstanding barley requirements will reduce quality specs to use any barley that can feasibly be made into malt, which has worked to soften the price response to the tight supplies of higher quality.”

OK – I agree with the first part – the part where maltsters are lowering their specs.  I’ve seen it first-hand.  But the second part – about the price “softening”.  Really?  Softening?

It appears that this is meant to explain why the malt PRO rose only 4 cents a bu even though the feed barley PRO (B pool) climbed 22 cents and domestic feed barley prices in SK rose about 15 cents.

Let’s look at malt pricing in terms of a premium over feed.  Back in October, the “CWB malt premium” over domestic feed barley in SK was about 93 cents. Now it sits at about 25 cents – a “softening” of 68 cents.

In southern Alberta, the malt premium – about 65 cents in Oct – has all but disappeared.  Now that’s soft.

Even over the CWB’s own feed PRO, the “CWB malt premium” is “softening” – it was 72 cents over the feed PRO in early October – now its 41 cents, for a loss of 31 cents.

In contrast, the malt premium in the US has risen from 48 cents in Oct to where it sits right now at 72 cents over feed.  While Canadian malt barley premiums have “softened” by all comparisons, in the US they have gained 24 cents per bushel.  And well they should, given the tight supply of quality barley.

If the feed barley market is hot and moving higher and the “CWB malt premium” is small already (no matter what market you compare it to), why would maltsters reducing their quality specs, effectively digging into traditional feed barley, “soften the price response to the tight supplies of higher quality”?  The way I see it, the malt price should be climbing right along with everything else – but it’s not.  At least the CWB PRO price isn’t.  Even while they say that malt barley prices are “softening” because of acceptance of lower quality, the CWB offering price for domestic brewing has moved higher from about $288/tonne in Oct to $329/tonne last week.  That works out to about 89 cents a bu higher – not softer – while the PRO dropped 13 cents. 

The PRO is “soft” because it reflects the proportion of low priced sales made early in the year (before the rally) which were proportionally larger this year due to the reduced size of the pool.

There is no doubt about it; the PRO cannot be relied upon to effectively maintain the malt premium as a price signal. 

New Crop

Next month the CWB will issue the new crop PROs.  These are critically important in terms of giving farmers price signals – and this year, competition for acres will be extreme.  The challenge for the CWB will be to provide a meaningful and competitive PRO.  And if they do, they are likely going to signal farmers to carry their 2010 malt barley (what’s left of it) into 2011, keeping it away from the maltsters when they need it.  Stuck between the old rock and a hard place.  The CWB will need to rely on CashPlus – warts and all – to give the price signals the malting industry needs. 

So why pool barley at all?

Montana grain prices 

CWB PROs 

CGC Grain Stats Weekly - look at page 15 for CWB domestic quotes 

Alberta feed grain prices 

CWB director has his facts wrong

In a recent article in the Manitoba Co-operator (January 6, 2011), Canadian Wheat Board elected director Bill Woods, takes aim at the railways for what he calls “slick accounting”.  Unfortunately, Mr. Woods has his facts wrong, which makes his whole argument meaningless.

Here’s a little background.  The annual review of regulated rail rates and charges showed that the revenue of both railways – CNR and CPR – came in under the Revenue Cap for 2010.  According to the Canadian Transportation Agency (CTA) in a Dec 21^st release, the railways combined were $5.4 million or 17 cents a tonne under the CTA Revenue Cap of almost $923.4 million or $28.93 a tonne.  According to the article in the Co-operator, the Federal Grain Monitor (Quorum Corporation) reported that farmers paid an average of around $35 per tonne in the same crop year, which works out to about $6 per tonne over the Revenue Cap rate.

Mr. Woods’ first mistake is assuming that what farmers pay is what the railways collect as revenue.

His second mistake concerns incentives for shipping in blocks of 50 and 100+ cars.  Woods asserts that the railways charge grain companies the single car rate and then pay incentives back to the grain companies to ship blocks of 50 or 100+ cars in the form of “multicar incentives” of as much as $8/tonne. 

His argument is that the total railway revenue should be based on the $35 per tonne average rate that farmers paid before any “multicar incentives”.  According to Woods, “There are about $100 million paid out annually in multicar incentives.  So that means, because the railroads are able to deduct that, their revenue can be $100 million higher. So in reality they are well above the revenue cap.”

Well, in reality, there are no “multicar incentives” paid back to grain companies.  There used to be, up to about five years ago; but now, grain companies simply pay lower rates for shipping 50 and 100+ cars at a time.

For example, let’s look at Rosetown, SK.  The freight deduction on a cash ticket for CWB wheat is $39.14 per tonne – this is what a farmer pays.  This is based on the single car rate of $3,562 per car to Vancouver and the assumption of 91 tonnes per car.  But the railways also have rates for shipping in large blocks.  The 50-car rate for Rosetown to Vancouver is $3,198 per car, or $35.14 per tonne.  The 100-car rate is $2,834 per car, or $31.14 per tonne.  So when a grain company ships a 100-car train of wheat from Rosetown to Vancouver, they don’t pay the single car rate of $3,562 per car ($39.14 per tonne) and then receive a rebate payment from the railway (as Mr. Woods seems to think) - they simply pay $2,834 per car.  This works out to $728 per car, or $8.00 per tonne lower than the single car rate that is being deducted from farmers’ cash tickets.

So, for the most part it seems that farmers, through cash ticket deductions, are paying more for freight than what the grain companies pay to actually move the grain.  BUT - a more complete review of this shows that, in 2008-09, grain companies paid farmers an average trucking premium of $6.17 per tonne – this comes right out of the lower freight rates they pay for shipping in 50 and 100 car blocks.  In addition, the Grain Monitor reported CWB “transportation savings” of $1.70 per tonne – some of which could be argued is available because of the lower rates for large blocks of cars.  When you put all of this together, farmers in general are the greatest beneficiary of the efficiencies of multicar loading.

This all leads to Mr. Woods’ third mistake – using his misunderstanding of the facts to argue that the railways’ revenues are over the Revenue Cap.

Mr. Woods, please take note - there are no incentive rebates paid by the railways to grain companies for loading 50 or 100 car trains.  Shippers simply pay a lower rate in the first place.  Check for yourself at http://www.cn.ca/en/shipping-grain-price-tariffs.htm and look up tariff CN 512538-AK.  I’m surprised that even Travacon, the CWB’s consultant of choice on this matter, didn’t seem to catch this.

Is this really “slick accounting” by the railways as Mr. Woods claims, or is it “fast and loose” analysis by a CWB director?  The facts certainly don’t support Mr. Woods’ assertion that the railways are pulling a fast one.  As a CWB director, Mr. Woods should certainly know these details.

Let’s hope that this isn’t the analysis that the CWB is using to support its call for a rail cost review.

Time to Get Involved

Here’s an idea!  Let’s go to the Western Barley Growers Association convention in February. 

Let’s face it – the barley market is practically in crisis mode.  Canadian maltsters are scrambling to find barley good enough to make malt – and it’s not easy.  The quality just isn’t out there and price signals are non-existent.  The CWB’s malt barley export program this year will be one of the smallest ever; watch for increased imports of both malt barley and malt just to cover domestic brewing needs.  Feed demand is shrinking along with animal numbers and an increased flow of DDGs.

Barley acres are going down almost every year to a point now where barley acres are expected to rebound only slightly from the sub-7 million acre level of last year – the lowest acreage since 1965. 

Looking ahead to next year, barley users are going to have to provide some good price signals to get barley seeded.  How is that going to happen under the current environment?

Why does barley matter?  Barley is the second most important cereal grown in Canada – important in terms of rotation and self sufficiency in feed and food requirements.  That means competitiveness; as barley production goes down, production of other crops increase which is certainly not going to push prices of those crops higher. 

How the CWB operates in this market is fundamental to the issues that are impacting barley as well as all other crops.  This situation needs attention – along with many other CWB issues such as how CWB is unable to provide meaningful price signals, poor movement, high costs and a drag on just about everything. 

The Barley Growers Convention is a great place to talk to like-minded farmers from across Western Canada as well as many industry people.  This year, the convention is a jointly-hosted affair along with the Master Brewers Association of the Americas – so you can find out everything you ever wanted to know about barley, malt and brewing and how they all interact.  (I’m sure there will be samples of the final product available as well!)

Topics of discussion will include areas of interest to both farmers and end-users – such as how farming practices affect malt quality (and ultimately beer quality), how grain handling affects quality and what barley qualities brewers are looking for.  Making sense of world trade and its implications to Canada will also be discussed.

Note that if you want to hear more specifically about the CWB, or press a point or two, Ian White, CEO of the CWB will be there speaking on CWB programs.  It would be a great opportunity to discuss with him your concerns about the CWB (not just barley!) and participate or listen in on discussions about the CWB, the Single Desk and barley.  Some CWB directors will also be there to discuss your issues. 

I’ll be there too and I’m eager to hear your stories about the CWB and the Single Desk - what’s working and what’s not.  There will no doubt be many discussions about where the industry needs to go and how to get there.

The convention is on Feb 16-18 in Calgary.  More detail can be found on the WBGA website, including registration information.   http://www.wbga.org/  Or you can call Dianne at 403-912-3998.

One thing that has become apparent is that we have significant problems in agriculture generally and barley specifically; we need to find solutions.  Come to the WBGA / MBAA joint convention and get involved. 

I hope to see you there.

The CWB misses the point on price comparisons - again

Recently the Western Canadian Wheat Growers Association released a price comparison that showed US farmers enjoyed better spring wheat prices last year than Western Canadian farmers.  CWB Media Relations Manager, Maureen Fitzhenry responded to the Wheat Grower analysis in a radio interview and unfortunately, continued much of the diversion from the points being made that we are accustomed to hearing from the CWB.

The Comparison

The Wheat Growers showed that the final pool return for #1 CWRS 13.5 protein in Manitoba was about $185.87 per tonne.  Part of this price is a result of the CWB’s Wheat Pool Pricing Pace Model which establishes the pricing pace for the wheat pool.  Pricing is a combination of actual priced cash grain sales and sales of futures (if cash sales are not sufficient to meet the pace).  The Wheat Growers decided to see what a US farmer’s average price would be if he priced his wheat on the same basis as the CWB.

The results are not insignificant.  If a US farmer priced his crop the same as the CWB priced Western Canadian wheat, the US farmer would achieve an average price of about $209 per tonne – about $23 per tonne more than his Canadian counterpart received through the CWB.  By matching US farmer sales to the CWB’s Pricing Pace, the futures component of the prices are equated and therefore, taken out of the equation leaving only basis related factors.  This is a powerful counter argument to the notion that the CWB gets premium prices when making sales.

The CWB’s Counter Argument

Ms. Fitzhenry’s argument on behalf of the CWB was classic CWB misdirection; either she doesn’t understand the Wheat Growers’ argument or she intentionally argued past it to divert attention from the results and to appear to have a sound argument against it.

In her argument, Ms. Fitzhenry conjures up CWB rhetoric about basic economic principles – but then stretches them or misinterprets them.  For example, she suggests “The CWB single desk is a kind of a price supporting structure within the North American marketplace, and that’s a major point that’s always ignored in these kind of things.”

We’ve heard this argument before; it is meant to say, don’t look to the US markets, thinking that you would get those prices if there was no single desk, because without the single desk, those prices would be lower and therefore, less attractive.

The Reality

Ms. Fitzhenry is missing a number of points.  By equalizing the pricing pace so both the US price and the CWB price use roughly the same futures levels, the comparison by the Wheat Growers takes the futures component out of the comparison.  This leaves just basis considerations and shows the CWB system provides lower prices than the in the US; under the circumstances, it’s tough to argue that the CWB gets premiums.  If it did, it would show up in this comparison by showing the Canadian farmer getting a higher price when both the Canadian and US farmer are pricing at the same pace.

Ms. Fitzhenry is trying to say the US price would be lower in the absence of the Single Desk.  What she fails to mention is that, according to CWB theory, the Canadian price would be lower too.  And if both Canada and US prices were lower, then the US farmer would still be getting a higher price.  That is of course, unless Fitzhenry wants to argue that the Single Desk supports the price in the US more than in Canada, but I doubt she would want to.

Ms. Fitzhenry is disingenuously skewing an incomplete analysis to support the CWB’s argument. 

The point she is missing is this – the CWB is supposed to bring value to Western Canadian farmers but when we look at the US market that value is not apparent.  The Wheat Growers analysis is not saying “without the CWB we would get US prices”; rather, it’s saying “looking at the US market we don’t see the benefit of the CWB”.

Another related argument by Fitzhenry is the common CWB argument that multiple sellers in a market push prices lower.  In the radio interview, she states, “...in a pure open market, the law of economics is that there becomes a single price – things tend to arbitrage down to the lowest, sort of, possible value.”

Really?  Does the CWB really believe this?  Or is just Fitzhenry not understanding basic economics? 

First, she uses the term “arbitrage” improperly.  Markets don’t “arbitrage down to the lowest possible value”.  Arbitrage is actually the market force that keeps markets from going too far in one direction or another.  In an open market there are many buyers as well as many sellers.  The CWB would like you to believe that in an open market, because there are many farmers selling, that the price would get driven in only one direction – down.  What Ms. Fitzhenry and the CWB fail to present is that there are many buyers as well, whose market activity would stop the drive of prices lower and would even drive prices higher when warranted.

In an open market, many buyers and many sellers interact to find a point of equilibrium – a price where they transact.  Nowhere in any economics textbook or journal does it say that prices in an open market are driven to their “lowest possible value”.

The Wheat Grower comparison is very much relevant and reasonable.  It shows, as other comparisons have shown before, that the Western Canadian farmer gets paid less for his spring wheat under the CWB system than US farmers do in a more open market.

In her role at the CWB, Maureen Fitzhenry has been thrust into a position of discrediting other views and promoting the image of the Single Desk, using the flawed logic and rhetoric of the CWB.  I’m sure it must be awkward position to be in.

It’s like bringing a knife to a gun fight.