Preparing for change
Feb. 14, 2012
by Arvin Donley
With the Canadian Wheat Board’s (CWB) grain marketing monopoly set to end after 76 years in August 2012, nearly 150 representatives of various sectors of the country’s grain industry gathered at the Grain Industry Symposium Nov. 22-23 at the Delta Hotel & Suites in Ottawa, Ontario to discuss the impact of this dramatic change.
The Canadian government’s passage of the Marketing Freedom for Grain Farmers Act on Dec. 16 will give Western Canadian farmers the ability to sell their wheat, durum and barley either voluntarily through the CWB or through an open Canadian grain market.
The only potential roadblock to the end of the single desk system was a federal court ruling in December that Minister of Agriculture and Agri-Food Canada Gerry Ritz acted illegally in not allowing a farmer vote on the issue. The government is appealing the ruling (see page 38).
Three weeks prior to the court ruling, Ritz, as the keynote speaker at the Grain Industry Symposium, said that the change would increase Canadian farmers’ competitiveness and profitability.
“The bottom line is that Canada has a world-class grain industry, but we need to bring the tools we use in line with the modern-day realities of today’s market,” Ritz said. “We need to modernize so producers can respond to the growth in global demand of foodstuffs. We know by experience that yesterday’s answers can never meet the challenges of today. We need new approaches for a new generation of agriculture.”
Following Ritz’s remarks, John Knubley, deputy minister of agriculture and Agri-Food Canada, outlined how the transition would take place. He said the government bill was designed to take a phased approach so that the CWB would have sufficient time to prepare a business plan for becoming a new viable entity in the grain marketing system and to give the grain industry clear and predictable milestones moving forward.
“An interim voluntary wheat board will be created with a government financial guarantee for up to five years,” he said. “We’re planning for a transition period of five years. Within four years, the Wheat Board is to submit a plan to parliament and the minister to privatize, whether it’s a public for-profit company or a cooperative, or however they want to do it.”
Most of the delegates at the meeting, which included grain producers, handlers, processors and commodity organization representatives, voiced their support for the legislation to end the monopoly, although some did express concern about the challenges they would face in making the transition to an open market system.
Among the significant changes that will occur in the new system include redrawing of transportation patterns, millers having to find new sources of wheat and all players having to hedge risk in new ways.
In an open market, one sector that will see a drastic change in how it does business is the milling industry.
Derek Jamieson, president and CEO of P&H Milling Group, the second-largest flour miller in Canada behind Archer Daniels Midland Co., said losing the monopoly means millers will no longer have assured supplies of Western Canadian spring wheat at any given time.
“Millers will need to be considerably more proactive to ensure that the supply lines to their mills remain full,” Jamieson said. “Today, under the supply assurance (from the CWB), there is essentially no competition for wheat from a millers’ perspective. Next year, millers will be competing with other domestic and foreign buyers. This is an extensive list that includes other mills in Canada and the U.S., grain companies, off-shore buyers, all of which been forced to deal exclusively with the CWB.”
Jamieson said mills will need multiple supply sources, including U.S. wheat at times. He noted that under the CWB there is no incentive to buy U.S. wheat.
He said the CWB offers wheat contracts that establish a fixed basis and fixed foreign exchange level on a daily basis that is good for 24 hours.
“I anticipate that next year the basis will be determined by each negotiated transaction between the buyer and seller,” Jamieson said. “My assumption is that the foreign exchange will be set on a live basis during trading hours, although sellers may choose to do otherwise. We’ll just have to wait and see.”
He noted that the wheat market in Ontario has been open for nearly 10 years and mills in that province have functioned well.
“We found that flour buyers as well as millers adjust quickly to the market changes that evolved from the loss of a single desk seller,” he said. “We expect the Western Canadian experience will be similar to Ontario in many aspects.”
NEW TRANSPORTATION ROUTES
One of the consequences of operating in an open market is that Canadian grain handlers are likely to push more wheat through the Port Metro Vancouver on the Pacific Ocean instead of through the Great Lakes and St. Lawrence Seaway, Keith Bruch, vice-president of operations for Paterson GlobalFoods, said during the conference.
Without its monopoly to market Western Canada’s wheat and barley for milling and export, the CWB will no longer coordinate the loading and movement of rail cars from grain-handling sites to port. Burch said grain handlers such as Viterra, Richardson International, and Cargill will prefer to move grain through their networks of country elevators and to port terminals they own, suggesting Vancouver will take priority over terminals along the Great Lakes and the Seaway.
Redrawing grain movement patterns may create subtle but significant changes in terms of which markets buy Canadian wheat and where on the western Prairies farmers grow which crops and in what quantities, Bruch said.
With farmers shopping for the best prices, Burch said more spring and wheat may be shipped into the United States on the country’s rail system, which is dominated by Canadian National Railway and Canadian Pacific, than during the CWB monopoly years.
Knubley noted that a Crop Logistics Working Group has been established to give the agriculture sector an opportunity to provide input into the Rail Freight Service Review implementation process, to address any logistics issues related to the grain supply change in the transition to marketing freedom, and to provide a forum for other transportation-related issues.
“One of the key areas of focus for the working group was access to elevators, rail and ports,” said Knubley, who is co-chair of the working group. “Proper logistics and rail service remain absolutely essential during the business of change. In this regard, the working group recommended that Transport Canada continue implementation of the Rail Freight Service Review Initiative.”
The role and objectives of the new working group will be:
•To allow agriculture stakeholders to exchange views about issues and support the Transport Canada facilitation process flowing from the Rail Freight Service Review;
•To provide a forum for stakeholders to exchange information and views about any transportation and supply chain issues that may arise from the transition to marketing freedom for wheat and barley;
•To allow stakeholders to exchange information and develop views on performance measurement along the supply chain; and
•To provide a forum for agriculture stakeholders to exchange information and views on other supply chain logistics issues.
NEW HEDGING OPTION
Grain handlers will stand to gain from the new open market system, according to Brant Randles, president of Louis Dreyfus Canada.
He said the industry is fully capable of managing risk in an open market system and will likely embrace a new hedging option when the ICE Futures Canada launches a spring wheat contract launches in January.
ICE’s contract will compete with the established U.S. hard red spring contract at the Minneapolis Grain Exchange, but it will be in Canadian dollars and will feature a Western Canada delivery point.
“We’ll see how long it takes to get traction, but I expect that especially the western red spring wheat product will be a viable contender against Minneapolis,” he said. “The wonderful thing about ICE contracts is they are based upon canola contract rules and the delivery mechanism is much the same as the canola delivery contract. These rules and delivery mechanisms are understood by buyers and consumers the world over, so I think it will have a lot of good traction.”
ICE’s plan to launch a durum futures contract looks less certain of success, Randles said, given durum’s much smaller production base compared to spring wheat and the subsequent lesser need to manage risk.
Offering a perspective of how the changes would affect grain producers was Stephen Vandervalk, president of the Grain Growers of Canada.
He said the biggest advantage to the open market system for farmers will be obtaining payment more quickly when selling their wheat and barley.
“When you talk to the banker at the beginning of the year and are saying what you need for your operations, you don’t know what price you are going to get, you don’t really how much you’re going to deliver and when you’re going to deliver it,” Vandervalk said of the single desk system. “At the end of the day, when you have delivered all the grain, it can take up to 18 months to get final payment.”
Ritz said the new open market system will offer a solution to such cash flow issues.
“The biggest change without the single desk will be when you drop your grain in the pit of the elevator, it is no longer yours,” Ritz said. “Under the current system, it yours until (the CWB) decides is not yours. That’s not the way it will be next year. You’ll drop it in the pit, take your check and go home.”
Vandervalk said the open market system will offer other advantages for producers including the ability to manage risk by utilizing futures contracts and being able to develop more niche markets for their products.
One potential drawback to the new system, at least in the short term, could be the overproduction.
“I think there’s a risk that the market will need some time to get acres matched up with demand. Currently, the pool price announced in February-March was the main signal for how many acres of each board grain was grown,” Vandervalk said. “Whatever was grown was accordingly priced afterward and then given a quota on deliveries in time and surplus. In an open market, this has to be done using price signals and will take time to sort itself out.”
The Grain Industry Symposium was hosted by the Canada Grains Council and the Grain Growers of Canada.
Canada approves act ending CWB monopoly
The Canadian government approved on Dec. 16 the Marketing Freedom for Grain Farmers Act, which ends the Canadian Wheat Board’s (CWB) monopoly over Western Canadian wheat and barley.
Farmers will have the choice starting Aug. 1, 2012, for the delivery of wheat and barley to the CWB or another buyer.
“The Marketing Freedom for Grain Farmers Act repositions the entire grain sector for the future — one that is better able to attract investment and allow farm and industry entrepreneurs to seize new markets, increase sales and drive our economy,” said Agriculture Minister Gerry Ritz.
CWB President and Chief Executive Officer Ian White said it has been preparing for the change for months, developing pool and cash programs for farmers for the upcoming crop year. White said details about new 2012-13 programs will be announced soon.
“Amid all the change, one thing remains the same: the CWB will market farmers’ grain,” White said. “We will work to achieve the best prices for farmers and superior service for customers in Canada and around the world.”
The Canadian government said it is working with the CWB, farmers, the grain value chain and provincial partners, to implement an orderly transition which includes a viable, voluntary CWB, as part of an open and competitive Canadian grain market.
Viterra said it is ready for the changes to the grain sector, and started offering bids on Dec. 16 to western Canadian wheat, durum and barley producers.
“The company is building on its positive relationships with growers by providing new markets for their wheat and barley, as it currently does for oilseeds, pulses, oats and other grains,” said Mayo Schmidt, president and chief executive officer, Viterra. “The government of Canada has fulfilled its commitment to Prairie growers, taking a major step forward for western Canadian agriculture.”
Viterra said it anticipates that the industry, farmers, customers and economy will see significant benefits as further transportation and logistical efficiencies are realized in this positive new environment.
The Canadian government said that it will continue to move forward with changes to the Canadian Wheat Board (CWB) despite a ruling by the federal court in December that the minister acted illegally in not allowing a farmer vote on the issue.
“Farmers and our government are disappointed by the court’s decision,” said Ritz. “We will appeal this decision as we are convinced that Parliament has the right to end the single desk monopoly.”
The CWB said the government should respect the federal court’s ruling.