Perfect the system: regulate grain for more profits

Opinion

Hey there, time traveller!
This article was published 29/10/2016 (2340 days ago), so information in it may no longer be current.

 

It’s been a turbulent few years in western Canadian grain marketing as farmers, grain handlers and the transportation network adjust to working with an open market.

Although the reality has fallen somewhat short of producer expectations, few would favour going back to the single-desk monopoly.

The open market may be imperfect, but as the saying goes, even imperfection has its own beauty.

However, some recent number-crunching by agricultural economists suggests the open market could use a little regulatory help to function as it should.

University of Manitoba agricultural economist Derek Brewin is part of a group of economists following how the farmers fared during their first few years in the first open market for wheat since 1942.

They’ve been tracking the “basis,” which is the difference between the export price and the price paid to the farmer.

The theory was that in an open market, competition for market share by the major grain handlers would drive those basis levels to the narrowest efficiently possible. In the first year after the Canadian Wheat Board was dismantled, that seemed to be the case.

The wheat export basis shrunk to just under $54 per tonne, its lowest level in years, presumably because the major grain companies pulled out all the stops in a bid to get farmers delivering through their terminals.

But then the crop of 2013 came in, a bin-buster by any measure. The record crop was followed by a brutally cold winter that further bogged down an already sluggish transportation network.

Basis levels soared, increasing by nearly $80 per tonne. Some argue that was a natural, market-based response rationing access to the transportation system, but as Brewin notes, there were still huge volumes of grain moving through the system — albeit slowly.

When Brewin compared the 2013-14 experience to 2008, the last time a huge crop hit the system, it gets even stranger.

In 2008, farmers harvested a crop that was 24 per cent bigger than the previous year and ending stocks increased by 68 per cent. In 2013, the crop was larger than the previous one by 34 per cent and ending stocks increased 148 per cent.

However, basis levels dropped 10 per cent in 2008. In 2013, they increased 148 per cent.

The basis has remained unnaturally wide by historical measures ever since. Tallying up the volume of grain moved in 2013 and 2014 multiplied by the wider basis, Brewin figures farmer returns were collectively down by $3.5 billion.

The question becomes, where did that money go? The railways didn’t get it. Their ability to extract extra revenue from the system is capped by the so-called Maximum Revenue Entitlement.

There were lots of extra costs associated with the delayed shipments, such as demurrage, storage charges and quality losses. But those numbers aren’t high enough to explain such a wide difference.

The only logical conclusion is that the grain companies pocketed windfall profits — because they could. After all, 81 per cent of the grain-handling business is done by six grain companies in Western Canada. The big three — Pioneer, Viterra and Cargill — control 60 per cent.

However, he can’t prove it because with the exception of Viterra’s owner, Glencore, these companies are privately traded; their books aren’t open for review.

Another caveat is that his work is based on spot prices posted at port, which may not accurately reflect the prices paid to farmers who sold under contracts.

The fact that grain handling, historically a narrow-margin business, has become more profitable isn’t necessarily a bad thing. It might attract new players and new investment to the sector.

That said, Brewin thinks farmers would benefit from measures that increase market transparency, such as mandatory price-reporting legislation similar to the United States. There, companies must report how much they sold and at what price on sales over certain volume.

“It’s a real loss to Canada if we can’t reflect the export price back to the farmer in the most efficient supply chain we can build,” he said.

Laura Rance is editorial director for Farm Business Communications. She can be reached at laura@fbcpublishing.com or 204-792-4382.