An open market is still a work in progress

A truly open market requires transparency of information, but the veil is still being lifted

When the Canadian Wheat Board lost its monopoly in 2012, Blair Rutter predicted that it would take 10 years to adjust to an open market system.

“Moving from a centrally planned system to a market economy, it takes a while,” the executive director at the Western Canadian Wheat Growers Association said in an interview. “We saw that in Eastern Europe; you don’t move from a planned economy to a market economy overnight.”

For a while, it looked as if Rutter was wrong. The railways had no problem moving that first high-quality crop, sold at record prices after the poor crop in the U.S. and elsewhere that year. But prices dropped sharply as the 2013 harvest approached, and then the rail log-jam of 2013-14 finished spoiling the party.

Grain companies could take advantage of the high demand for grain handling and transportation services on the Prairies, said Murray Fulton, agricultural economics professor at the University of Saskatchewan. They rationed limited port capacity through lower on-farm prices.

“This process was aided by the fact that there is limited price transparency in the system — the size of the basis cannot easily be determined. The result is a market that is not working effectively, and that from time to time generates large rents for one segment of the system, namely the elevator companies,” Fulton said.

Still murky

Supporters of the open market concept often railed against the secrecy of the CWB and called for much greater transparency. Three years on, that’s still a work in progress.

“I think we’ve got some ways to go, but it’ll be a combination of private and public sector information. It’s not there yet, but I think we’ll get to where we need to be,” Rutter said.

Derek Brewin, an associate professor at the University of Manitoba’s department of agribusiness and agricultural economics, said farmers and the industry in general need accurate information.

“We want the real export market reflected back to the farmer. When that basis is wide, the farmer’s not seeing the real demand for their product, so they could underinvest in next year’s crop and inputs. It’s economically inefficient to not have the fair price reflected back to the farmer.”

With funding from Ottawa’s AgriRisk Initiatives, the Alberta Wheat Commission has taken steps to lift the veil. Together with Farmers Advanced Risk Management Co. (FarmCo), it undertook a price transparency project to develop a web-based concept for providing cash-based prices from most grain buyers.

FarmCo president John DePape said the site — www.pdqinfo.ca, which became available September 8, 2015 — was to initially provide regional Prairie prices for three wheat classes, as well as canola and peas, with others added thereafter. He said the data would be useful for farmers who want a real-time snapshot of the market in their area.

In the U.S., meanwhile, exporters are required to report export sale. But DePape said that Canadian farmers who want a similar system here share a common misunderstanding.

“They don’t (report prices) — it’s the commitment that they’re reporting, not the actual shipment,” DePape said. “People have also been asking for the port price, and I think that’s stepping on some commercial sensitivity.”

ICE futures struggle

Better information could benefit the domestic wheat futures set up by the Intercontinental Exchange (ICE) following the end of the CWB monopoly. They’ve been almost completely inactive.

“You need to know what the cash value is under a commodity before you’ll get people to trade that futures market,” DePape said. “I talked to people in the U.S. when [ICE] first launched that contract to see if they’d be interested, and their first question was ‘what’s the cash trading at?’ I think when we fill that gap, there’s a better chance of getting some life [in it],” says DePape.

But it will still be a challenge to convince U.S. buyers to trade ICE futures over Chicago, Minneapolis or Kansas City. Customers are reluctant to consider an alternative when they already have a working market, as the Winnipeg Commodity Exchange discovered when it revived its oat market.

“The U.S. is our No. 1 market, and when you’re selling wheat into the U.S., typically you exchange futures as part of your cash transaction. They don’t want to exchange a different futures contract. They already have a position in Chicago or Minneapolis — those are the contracts they’d want to exchange,” DePape said.

Prairie regional prices for wheat, canola and peas are now available at www.pdqinfo.ca.

Prairie regional prices for wheat, canola and peas are now available at www.pdqinfo.ca.
photo: PDQinfo.ca

More elevators and more competition?

The WCWGA’s Rutter said more competition and capacity could improve prices for farmers. He said that under the CWB, there was underbuilding of commercial facilities at the expense of overbuilding of on-farm granaries. Over time, that imbalance will right itself.

“We won’t get to the U.S., where it’s 50-50 (of farm and commercial storage), but still we’re going to see growth in commercial storage, and that will help get a more competitive market in play,” Rutter said.

Adding a deep pocket like G3 Canada (formerly CWB) to the stable of Canada’s six big players (Viterra, Cargill, Richardson, Paterson Grain, Parrish & Heimbecker and Louis Dreyfus) is good news for farmers as well.

“Any time you increase capacity, it’s going to be good for the farmer,” DePape said. “In times of low capacity availability, prices to farmers will drop. When you have more capacity, prices will improve because of competition… we know with our crop production growth, we will need to be able to handle more grain.”

Rutter said that G3’s plans to build a new West Coast terminal and elevators with greater turnaround times will better serve farmers down the road. He also said the industry needs to reduce its reliance on east-west grain movement and boost integration with the U.S.

“We have seen significant growth in wheat exports to the U.S. at the end of the monopoly — about a 70 per cent increase in wheat shipments going south,”  Rutter said. “And I think you’re going to see expanded growth in shipments going south, not just to processing facilities in the U.S., but also to ship it along the BNSF line, whether it’s to the West Coast, down to the Gulf or domestically.”

Rutter also anticipates more domestic use, which will also bolster competition for farmers’ grain.

“We’re going to see some growth in livestock industry in Western Canada when some of these trade deals start to bear fruit,” he said.

More competition, another West Coast terminal, more commercial storage, growing north-south movement — by rail and truck — and an expanded domestic livestock sector will result in a fully integrated market with good arbitrage and basis levels that should be in line with those in the U.S., even in years of extraordinary bumper crops.

“We’re not there yet at what I would a call a fully functioning marketplace; it’s going to take a few years before we see that,” Rutter said.

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