Washington, DC, USA
May 26, 2011
Source: U.S. Wheat Associates newsletter
After winning a solid majority in recent parliamentary elections, Canada’s Conservative government announced last week plans to introduce legislation later this year to end the wheat and barley export state trading enterprise controlled by the Canadian Wheat Board (CWB) for 76 years. Agriculture Minister Gerry Ritz said the legislation would take effect in August 2012.
Many challenges lie ahead before such a change can be implemented. As its own leaders suggest, the CWB’s competitive position would be tenuous if it loses the single desk because it does not own grain elevators or port terminals. The CWB will fight hard to retain its monopoly.
U.S. Wheat Associates (USW) recognizes that change is never easy and some western Canadian wheat producers remain very concerned about a shift to market competition and the challenge of selling wheat and managing price risk on their own. Yet, Canadian producers already market many other crops on an open, non-monopoly basis. Like the growing number of Canadian farmers who also want marketing choice for wheat and barley, USW has long advocated for an open wheat market in western Canada.
“We are confident the entire global wheat supply chain would benefit from this significant change,” said USW President Alan Tracy. “In that environment, the market would respond more rationally to economic signals rather than react to trade-distorting monopoly pricing decisions.”
In an open market, western Canadian wheat producers would see more choices and better prices as buyers compete for their wheat. International wheat buyers would also benefit as multiple sellers compete for import business. More competition would, in turn, spur more innovation and market transparency.
Ending the CWB monopoly would likely have a stabilizing effect in the world market because:
- There would be little or no impact on total exportable supplies from North America. The major grain companies that serve the supply chain in the United States and across many parts of the world are established in western Canada. Their names are familiar, with Cargill, Viterra, Richardson and ADM among them. They own the interior and export elevators in Canada and will compete to buy and sell grain.
- There would be greater transparency as exportable supplies compete at prices determined by the open market. A monopoly's ability to fix their prices inevitably disrupts the trade that would otherwise take place, a simple truth the CWB vehemently tries to deny.
- All buyers would be able to compete for supplies based on market factors and not administrative decisions. The primary difference between the CWB monopoly and an open market is their tight control of the supply, which allows them to price and offer their product differently from market to market. That is why some importers have found themselves shut out of the Canadian market at the monopoly's whim.
- Some buyers, who have enjoyed price incentives from CWB compared to comparable wheat classes from other sources, may have to pay more for Canadian wheat. On the other hand, some who currently pay top dollar may see lower prices.
We must acknowledge that an open market could initially mean more Canadian wheat moving to parts of the United States as Canadian farmers seek higher returns. However, the huge price incentive that currently drives that desire would dissipate very quickly. With an open U.S. and Canadian spring wheat market, cash prices on both sides of the border should equalize quickly after the monopoly distortion is removed.
A U.S. spring wheat producer can often sell his new crop in excess of $1 per bushel more than CWB is offering his Canadian cousin under monopoly control. That U.S. premium currently approaches almost $2 per bushel more than CWB's current new crop pool price estimate. Once the CWB stops administratively under-pricing wheat at the farmer level, existing Canadian elevators will bid competitively for wheat. Canadian farm gate prices would likely rise to approach U.S. levels, depending on location, and much of the incentive to truck wheat to U.S. facilities would disappear. We may still see more Canadian wheat come into and through the United States, but probably in trains rather than trucks, with much of it moving to export positions.
While both the United States and Canada are major export suppliers, neither can supply anywhere near the world’s current or future wheat import demand. Both countries would each win and lose some business during the marketing year. Therefore, the more successful Canadian wheat producers become in actually achieving their goal of attaining the best possible return from the marketplace, the better chance U.S. producers have for success.
“We believe that if the market is allowed to work, wheat producers in Canada and the United States and their overseas customers would benefit,” Tracy said. “U.S. wheat producers look forward to competing openly on the basis of quality, value and reliability.”
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