BY JONATHAN TREMBLAY
From family farms and town halls to Question Period and federal court, the issue of The Canadian Wheat Board (CWB) has been on everyone’s mind for the past few months. Whether removing the marketing monopoly of CWB was legally “right” or “wrong” is not the issue; what is important is that, as it stands, Western wheat and barley growers will have to adapt their business to a significant marketing transition as of August 1, 2012.
Recent Conservative governments had made a promise to remove the monopoly of The Canadian Wheat Board, but it was only in 2011, when the Conservatives won a majority in Parliament that it was able to deliver on that promise. Minister of Agriculture Gerry Ritz proposed the law to allow Western cereal farmers the freedom to sell their harvest to anyone. CWB’s Board of Directors quickly announced its disapproval of the motion, resulting in a series of press releases, hastily executed plebiscites and legal action against the Minister. Among the Board’s 15 directors, the five nominated by government sided with Minister Ritz. Furthermore, two of the farmer-elected directors quit their position in protest of the actions taken by the other eight.
The presiding judge found that Minister Ritz had not respected the stipulations of the Canadian Wheat Board Act, in that he did not consult with CWB directors and did not hold a farmer plebiscite as prescribed in the Act. However, the judge also recognized that Parliament, consisting of elected representatives, has the responsibility and purview to introduce, amend and retire any law or act. That is how Bill C-18, commonly called the Marketing Freedom for Grain Farmers Act, was passed and received royal assent on December 15, 2011. This Act effectively ended the 69-year monopoly held by The Canadian Wheat Board.
WHAT IS CWB?
CWB has been an important Western Canadian economic institution for decades, and achieves between $4 and $8 billion in wheat and barley transactions with 70 countries annually. It operated on the following basic principles:
First, wheat and barley growers in Manitoba, Saskatchewan, Alberta and part of British Columbia must sell their crops to CWB. This single-desk system was a way for Western producers to enhance their bargaining position. Unfortunately, over the past 30 years, the influence of CWB in the international grain trade has become progressively smaller, to the point where it has little impact on overall prices and policy. While Canada’s wheat exports reached an average of over 22 per cent of all world transactions in the early sixties, it dropped steadily, sometimes to as low as 15 per cent. The same numbers have been seen with barley.
The second operational principle of CWB is price pooling. Farmers must sell to CWB and then usually enter one of four pricing pools – one each for wheat, durum wheat, malting barley and feed barley. These pools allow farmers to limit their risk in a volatile market or a bad crop year, as the returns they receive are based on the average price over the course of the year that CWB achieves on the international market. This aspect of the system has not always been the most profitable for farmers. When comparing CWB returns and returns for North Dakota’s wheat, durum, malting barley and feed barley growers during the first decade of this century, American farmers have consistently achieved higher prices for their crops, sometimes achieving returns of up to 10 per cent higher than their Canadian counterparts.
The third and final principle of CWB is to provide a consistent price for crops, even before fields are seeded, based on an annual forecast rate and guaranteed by government. After expenses, if the revenue achieved by CWB for the grain it bought and sold on the market is less than what was promised to farmers, the government guarantees to make up the difference. The government also guarantees CWB’s loans, currently $6 billion. Though rarely necessary, CWB’s losses have occasionally been covered by taxpayers, such as in the disastrous growing season of 1990-91, in which taxpayers made up a $670-million deficit. This fallback on the taxpayers has allowed CWB to function without much opposition for decades, but became a point of contention with international organizations and governments claiming that Canada unfairly subsidizes grain exports, in contravention of the spirit and regulations of free trade.
Whether farmers do or do not support CWB, the data are not clear. CWB assures us that a majority of farmers – 62 per cent – want to keep the single-desk system, while the Canadian Federation of Independent Businesses (CFIB) has an opinion pool showing that 83 per cent of Western farmers want the freedom to market their wheat and barley outside of CWB. Regardless, Bill C-18 comes into effect in August and both farmers and CWB must prepare.
In an increasingly competitive international market for agricultural products, CWB’s monopoly was certainly unusual, but could be explained in its historical context.
A CWB TO AVOID FAMINE
During the First World War, Canadian food production was quickly being challenged by high demand, lack of workers, and especially by unchecked market speculation in 1917. The Canadian government thus set up a first wheat board similar to what CWB was until 2011. During its brief three-year existence, it prevented hoarding of harvests and food shortages following a devastating war.
Provincial Prairie governments found the idea interesting and repeated the experiment in the 1920s, setting up voluntary pricing pools in which grain producers could participate to lessen their financial risk (much like the proposed functioning of CWB after August 1, 2012). Over 50 per cent of Western wheat farmers were participating in the pools by 1929, when a worldwide financial crisis prevented the experiment from going any further. The Great Depression and the Dust Bowl brought the price of wheat to record lows and the pools could no longer guarantee any sort of return on crops. Farmers turned away from the pools and tried other means of selling their crops to increase their revenues.
With the Prairie economy ruined, Prime Minister Richard Bennett introduced the Canadian Wheat Board Act in 1935, providing government-guaranteed price pools. Since that time, the Act was modified and amended by Parliament several times, most notably during the Second World War.
During the Second World War, worries of food shortages and famine returned to Canada. In 1943, facing the need to feed not only this country but also Canada’s Allies, Prime Minister Mackenzie King made participation in The Canadian Wheat Board mandatory, a stipulation that remained in place until very recently.
Another major change to the Board’s structure came much later, in 1998. Having been a Crown Corporation with government-appointed governance for over half a century, Parliament decided to further democratize the institution, and installed a system of shared governance with a board of 15 directors, 10 of whom were elected farmers.
After August 1, 2012, Western Canadian grain farmers will still have the option to contract with CWB. In fact, farmers have already been encouraged to do so, as CWB slowly announces restructuring, new services and a business plan that reflects the new business realities.
Virginia Labbie, Senior Policy Analyst at CFIB says that the Western part of its 7,200 farm members “are optimistic about a voluntary CWB. They indicated that they would have access to better market signals, greater opportunities to niche market their products, greater control over the profitability of their farm business, and growth in the value-added industry.”
Indeed, farmers will now be able to sell their grain to anyone, locally, nationally and internationally, encouraging greater supply-chain cooperation from farm to elevator, train and port. This means that while farmers will get the benefit of potentially selling their harvests for higher prices, they will also be responsible for promoting and marketing their grains on an international market where millions of tonnes of wheat, durum, malting barley and feed barley are bought and sold every day. Understandably, farmers are both excited and apprehensive about such an unprecedented transition.
Here in Canada, the province of Ontario went through a similar change. From 1973 to 2003, Ontario grain farmers sold their wheat through a single-desk marketing system much like CWB. Erin Fletcher, Manager of Public Affairs and Communications at Grain Farmers of Ontario, says that Ontario’s transition towards an open market took a short three years and was initiated by farmers. However, she warns against comparing their situation with that of the West by pointing out three key differences.
First, simply by volume, Ontario’s grain production (10 per cent of Canadian wheat in 2010) cannot compare to the logistics and challenges of Western production (80 per cent).
A second marked difference between the two situations concerns transportation. “Ontario’s wheat farmers have access to multiple delivery locations, transportation options and opportunities to price,” says Fletcher. The great wheat and barley fields of the Prairies have no proximity to ports and must often cover great distances to reach grain elevators and rail stations serviced by CN and CP, before reaching ports and American markets.
Finally, Ontario exports very little of its harvest. Close to 90 per cent of Ontario wheat is being sold to markets in Canada or the northern U.S., whereas Prairie wheat is principally sold internationally. All in all, it is not clear whether or not Ontario farmers have benefited significantly from an open-market system. No studies have been made to evaluate the question, and it just may be too early to tell.
Despite differences in marketing challenges, Fletcher tells us that Ontario grain farmers now look forward to an increased dialogue with Western grain farmers, especially on subjects of advocacy and research across Canada. She speculates that an open Western grain market may mean increased demand for rail service and lower freight costs in the long run.
Ontario’s production may be too small for comparison. Perhaps a better example is Australia:
Canada is the sixth-largest producer of wheat worldwide, followed closely by Australia in ninth place. However, in terms of wheat exports, Australia and Canada rank number two and three respectively.
The Australian Wheat Board (AWB) faced internal pressure from open-competition advocates, and at the same time faced international pressure from free trade regulations under the World Trade Organization.
Geoff Honey of Grain Trade Australia recently commented on the matter at the Western Canadian Crop Production Show in Saskatoon. Mr. Honey said that a combination of political scandals (oil-for-food program), public opinion and pressures of international competition provoked a change in 1999 after a decade of debate. From a mandatory marketing board, AWB was turned into a private entity, trading publicly on the stock market. Informal surveys suggest that farmers are generally better off now than they were 10 years ago, but no comprehensive studies have been conducted.
The examples explored above will tell us only that similar transitions have been carried out successfully elsewhere, and that Canada’s Western grain growers will undoubtedly learn to adjust to the new realities after August 2, 2012. They may even find that, whereas wheat has been a generally unprofitable crop to grow in the past two decades, it may just be on the verge of a rebound, much like we saw with wheat and barley’s de-regulated cousin: oats. Cherilyn Nagel of the Western Canadian Wheat Growers Association says, “For the past 20 years, Prairie farmers have shifted out of wheat in droves … [meanwhile], we’ve seen tremendous wealth creation in oats processing in Western Canada, and we are convinced it can happen in wheat and barley.”
Oats used to be a managed commodity under the Canadian Wheat Board Act, but was removed from the mandatory marketing board in 1989. Exports of the crop to the U.S. consequently increased rapidly from very little in the early 1980s to one million tonnes per year a decade later. Acreage continued to grow, as returns became more promising for farmers. Today, oat acreage is 40 per cent higher than it was under CWB, while wheat has remained relatively unchanged in some areas and dropped significantly in other parts of Western Canada. Other factors certainly affected the good fortunes of oat farmers, such as a reduction in American production, but at the heart of the issue is hard work by Canadian farmers promoting their product nationally and internationally.
During the next five years, CWB will continue to receive government backstopping on grain prices as well as guarantees in the pricing pools and guarantees on its debt. Western Canadian cereal growers will have CWB as a marketing option, not an imposition. CWB will continue to be financed during this transition as it finds a way to continue operations without government guarantees beyond 2017.
CWB continues to reveal more details of its plans, and recently announced a full range of grain-marketing programs for the 2012-13 crop year, including futures contracts, cash contracts and harvest pools. A sustainable dual marketing system is already emerging. It is a system that will include the price pools of the voluntary CWB (including multi-year locked-in contracts), much like systems already in place around the world. For the time being, one can only speculate as to its future, and how it will fare in 2017 once the Canadian Wheat Board Act is repealed and CWB is privatized. One thing that we can expect, however, is that CWB will have a competitive advantage, considering it has 75 years of experience and contacts in the field.
NEW OPPORTUNITIES, UNFORTUNATE CASUALTIES
As Minister Ritz and the federal government promote Bill C-18, “marketing freedom” and a determination to maintain the transition date as August 1, 2012, some announcements have already been made that indicate good things for the Canadian economy.
In October of last year, Regina, Saskatchewan-based Alliance Grain Traders (AGT), announced it is branching out into the highly lucrative, value-added processing of pulse crops (lentils, peas, beans and chickpeas). Now that wheat farmers have the liberty to sell to anyone for the 2012-13 harvest, AGT saw the opportunity to buy local Prairie product in order to convert it into pasta and sell it worldwide. The AGT announcement included $50 million towards the construction of a processing facility in Saskatchewan, involving the creation of dozens of jobs.
Further West in Alberta, Rahr Malting also announced expansion of its facilities and operations, purchasing barley locally, now that it can transact directly with Prairie growers.
We have also seen promising signs from the South. Canada’s main trading partner initiated more than a dozen challenges to the World Trade Organization during the past few decades because it considered Canadian wheat exports through CWB to be subsidized. This past January, following CWB’s announced transition, U.S Wheat Associates and the National Association of Wheat Growers both passed a motion calling for “an open border with Canada that provides reciprocal bilateral wheat trade.” This addresses one of the principal challenges facing Canadian grain farmers: transportation of their grain to distant markets. Under the previous system, CWB took care of all the logistics and marketing. The upcoming changes will allow farmers to take control of those activities, and may soon see Americans buying their crops straight from Prairie elevators.
Along with new opportunities comes a marked casualty of the transition to a voluntary CWB. Port of Churchill in northern Manitoba may well lose its grain shipments, as a voluntary CWB does not intend to use the port regularly. Although it is responsible for only 2 per cent of Canadian international wheat shipments, grain accounts for 95 per cent of the port’s business. Accordingly, Port of Churchill may well be closed, to the detriment of the local economy.
Grain will continue to be shipped by rail to Vancouver and Prince Rupert, for shipment overseas, and to Thunder Bay for shipment East through the Seaway. Railways will continue to be the main transportation mode for grain exports to the United States.
DIFFERENT TIMES, DIFFERENT MEASURES
“CWB’s mandate is different, but there is a new mandate in a market that makes sense and creates some opportunities for us,” says Gord Flaten, CWB’s Vice-President of Marketing. Flaten and other senior officials of CWB have shown an enthusiastic approach to the transition.
For the past 20 years, Western Canadian cereal farmers have realized smaller profits than their American counterparts; value-added processing and acreage of barley and wheat have declined; and the “power” of Canadian wheat has fallen in the world. A 2002 audit by the Auditor General identified “significant deficiencies in governance, strategic planning processes, performance measurement and reporting, and information technology” within CWB. The Board began addressing these potential areas of improvement but it is with this transition to a voluntary Board that it has an opportunity to change its organizational structure and culture for the better.
CWB has indicated that its Board of Directors will no longer include elected farmers, returning to the pre-1997 model of governance. Furthermore, this organization, which includes 430 employees and a yearly administrative cost of $75 million, will have a chance to not only streamline its business, but also find new opportunities for Canadian wheat. With privatization in 2017, CWB may venture out and look to expand its business opportunities, including, for example, the marketing of grain grown outside of Canada, to diversify income and reduce financial risk. This, along with an improved transportation infrastructure being developed as a result of the federal rail service review, is one of the many ways in which CWB can take the opportunity to adapt and to become not only a viable option for Western cereal growers, but perhaps the best option in an open market.
Farmers may also learn of many advantages that could disappear with CWB’s transition, such as advocacy, quality assurance, weather monitoring and research dollars, but these are sectors that can also see innovation and emerge as more efficient in a collaborative cereal-growing industry. “The federal government and grain companies will push the quality and consistency of our supply. It is not hard to sell the Canadian brand,” says Minister Ritz.
In conclusion, as we approach August 1, 2012, farmers, governments and their agencies, and grain companies can look towards exciting challenges and opportunities for Canadian wheat and barley. An all-encompassing open agricultural crop market for grains, pulses and oilseeds is emerging that will be beneficial to Canadian producers, taxpayers, value-added industries and the economy. As the Prairie provinces will become host to an increasing number of value-added processors such as millers, malters and others, and as cereal acreage is expanded to feed an increasing world population, Canada may yet see the reversal of its previously declining status as a leading agricultural exporter.