Historic Policy Change Loaded With Uncertainty

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Next August 1 ushers in what is arguably the most radical policy shift in Western Canada s grain industry since the Canadian Wheat Board monopoly was created nearly 69 years ago.

Western wheat, durum and barley farmers will have marketing freedom. What then?

Farmers know how to price crops in an open market. But when rhetoric gives way to reality, will producer cars be economic? Will the railways decide which grain companies live or die? Will the voluntary, government-owned wheat board be privatized, sold or wound down? Can two spring wheat futures contracts survive?

Short-term wheat prices might be higher, says University of Manitoba agricultural economist Derek Brewin. Grain companies, anxious to get market share early and block the voluntary board, will aggressively cut margins to get farmers business.

That bodes well for the next five years while Ottawa is backstopping the board, Brewin says. But that will prove short lived. Eventually if the grain companies get down to very few numbers… the price of grain will go down.

Don t expect more wheat processing, Brewin said. If we see increased (domestic) wheat demand I d be quite surprised, he said.

Railway power

Car allocations will change. The board divvies them up based a company s grain handle. It also tries to assure farmers get equitable access. Starting Aug. 1 the railways will allocate all the cars.

The railways are going to be pretty significant players, especially if they play favourites, says University of Manitoba agricultural economist Brian Oleson.

It s more profitable to focus on the big three grain firms, therefore they ll get the best deals, says Richard Gray, an agricultural economist at the University of Saskatchewan.

Shippers can complain about poor rail service to the Canadian Transportation Agency but be broke by the time there s a ruling, says Adrian Measner, president and CEO of Upper Lakes Grains Group, and former CEO of wheat board. He says railway power needs to be watched closely.

If priority is given to (firms with) hundred-car spots I think the writing is on the wall for many companies.

The railways say they re focused on service, efficiency and customer service.

But Gray predicts the biggest companies will have an advantage with the railways and there will be less grain moving through the system overall.

Companies say they can manage their shipping better without the wheat board. Individual firms might, but the board sees the whole picture, which is important when there s a snafu, says Gray. A company only sees its own position, and for competitive reasons, won t share information.

Currently, demurrage (penalties for vessels not loaded on time) is pooled across all sales for the year. After next August, each company will bear the risk and cost.

If you re a small company and you re only filling 10 boats a year and get big demurrage on one or two, you re in big trouble, Gray said.

Voluntary board

The jury is out on a voluntary board.

Oleson says without the single desk, there is no board. Measner gives it a slim chance of survival as a niche player. I think it s better to try than not try, he said.

The board needs its own handling facilities for long-term survival. In the short term it might be able to work with smaller grain companies, including Upper Lakes Group s Mission Terminal at Thunder Bay.

Producer cars are a way for the board to procure grain. But it s unlikely to be business as usual. That has huge implications for the farmers that have collectively invested millions of dollars in loading facilities and/or shortline railways dependent on producer car traffic.

Farmers routinely load wheat and ship it to port where the board accepts delivery, bypassing the country elevator saving them $800 to $1,200 a car.

Farmers have the right to load their own car, but many predict it will be uneconomic in an open market.

I think it s unlikely, says Keith Bruch, vice-president of operations with PatersonGlobalFoods.

A group of producer car shippers might make a deal with a grain company, especially one with few elevators, to deliver grain to port it would otherwise not receive, says Gray.

Futures wars

Some see a battle brewing in the futures markets with ICE Futures Canada going head-to-head with Minneapolis for the spring wheat contract.

ICE Futures Canada is launching spring wheat, durum and barley futures contracts providing risk protection and price discovery for the new market. Some observers say Winnipeg has the edge.

I think the farmer would see a better price if it was out of Winnipeg, says veteran Winnipeg trader Bill Craddock. There will be less need to build in risk on certain factors in the basis.

ICE s spring wheat contract is modeled after its popular canola contract, including inland delivery against the futures. Easy delivery, or the threat of it, ensures futures and cash markets converge.

Bruch expects within five years only ICE s contract will survive. Minneapolis has tradition, but Canada grows more spring wheat.

There s little doubt the Minneapolis Grain Exchange (MGEX) wants Canada s business. It recently changed its contract to allow for the delivery of foreign grain, but Rita Maloney, the exchange s director of marketing and communications, won t come right out and say it.

We re focused on making our amarket the best it can be, she says.

Bruch says Canadian companies prefer trading in Canadian dollars and tonnes.

One thing I like about Winnipeg is if ever there is any trade action out of the U. S, we have a Canadian contract as opposed to a U.S. contract that we might not be able to deliver Canadian (grain) against, he says.

Trade action inevitable?

Gray says a trade action is inevitable. Canada supposedly has unfettered access to the U.S. wheat market under the North American Free Trade Agreement but that hasn t stopped U.S. farmers from successfully blocking Canadian wheat imports.

At some point in the next five years there will be times when (Canaadian) wheat will flood across the border, says Gray. American farmers won t like it.

I d be really surprised if the North Dakota farmers would now assume we re part of North Dakota just because we got rid of the wheat board.

Gray adds that the grain marketing freedom train has left the station.

It s important not to stand in front of the train, but to decide what we want to put on it.

There won t be a wheat board, but that doesn t mean there won t be grain-sector regulations. In fact, there might need to be more.

Gray would like to see establishment of a Western Grain Transportation Committee, which with government funding and farmer oversight, would research ways to improve grain handling and transportation.

Gray says that in the absence of the Pools and wheat board, What s missing is there no longer will be any producer voice in the system.

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Ifpriorityisgivento (firmswith)hundred-car spotsIthinkthewriting isonthewallformany companies.


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