Canada is Taking Aim at Its Wheat Monopoly


The following article is from the Wall Street Journal:

by Mark Peters and Paul Vieira


For 70 years, a lone trading desk in Canada’s prairie region quietly has held sway over the price of wheat and, in effect, how much consumers pay for everything from a loaf of bread to a bowl of pasta.

But those days are numbered.

The Canadian Wheat Board is poised to lose its monopoly grip on the country’s wheat sales. Canada’s Conservative Party captured a parliamentary majority this past spring, and newly elected government officials took that as a mandate to end the wheat board’s reign.

The ripple effects from eliminating—or even weakening—the board’s power would be widespread. Wheat prices, which already have experienced extreme highs and lows over the past three years, could become more volatile, some analysts say.

The move could be a boon for consumers, say analysts. Prices for Canadian wheat could fall more than usual at harvest time next summer if the board is eliminated. Wheat prices are a big input cost for food manufacturers, which recently have raised their own prices in response to higher commodity costs.

Among Western countries, the board, which is backed by laws that essentially make it the only seller of Canadian farmers’ wheat and barley, is one of the last bastions of direct state control. If eliminated, for the first time in three generations, thousands of farmers, mostly in the western provinces of Alberta, Saskatchewan and Manitoba, would be selling wheat and barley on their own.

Canadian farmers’ appetite to take on the risks that come with navigating global grain markets is set to become more apparent on Friday, when the results of their vote on whether to maintain the board are scheduled to be released.

The vote, however, is nonbinding, and Canadian officials say they will push ahead with plans to eliminate the wheat board regardless of the outcome.

Canadian Agriculture Minister Gerry Ritz said in an interview that such legislation could be introduced this fall and could win passage by the end of this year. The Conservative Party has enough votes in the legislature to pass laws as it sees fit.

“The bottom line for us is the freedom for western Canadian farmers to make the choice as to who, when and how much they sell their product. That should never be trumped by any other entity,” Mr. Ritz said.

Based in Winnipeg, the Canadian Wheat Board plays a particularly important role in the global wheat trade. For now, it is the sole representative of Canada, which consistently ranks among the world’s top four exporters.

The single desk controls around 14{e7e4ba4d9a3c939171d79cae1e3a0df1d41e5a91c3c4158fbb92284b490bc9d3} of global wheat exports, including about half the world’s exports of durum wheat, which is used to make pasta.

While the end of the board isn’t expected to alter significantly Canada’s wheat output, it is likely to force Canadian farmers to catch up with their U.S. counterparts, who have been navigating volatile markets for decades.

“The Canadian farmer has been used to a ‘single desk’ for so long,” said Dan Basse, president of AgResource Co., an agricultural consultancy in Chicago. “He’ll have to learn marketing very fast.”

Whether the arrangement is best for farmers has been long debated in Canada’s western grain belt stretching from Manitoba into parts of British Columbia.

“For years, the Canadian Wheat Board has been the most divisive issue in western Canadian agriculture,” said Kevin Bender, a farmer and president of Western Canadian Wheat Growers, which advocates for an open market.

The third-generation grower on the eastern edge of the Canadian Rockies wants the freedom to sell his grain to whomever he wants. Mr. Bender said farmers can capture better returns on their own by having open markets they can time. U.S. elevators just over the border often offer prices higher than those paid through the board, he added.

Yet, farmers who favor the board, including its current chairman Allen Oberg, contend the benefits far outweigh the cross-border price differences that can emerge. By controlling the whole crop, the board has considerable power in global commodity markets to ensure Canadian farmers get the best price. Farmers also get an up-front payment that is backed by the government, and the board doesn’t aim for a profit, so more money goes back to farmers than under an open-market system.

Without their own facilities, farmers may have to sell the bulk of the grain as new supplies are coming in from the fields, pressuring prices, said Mr. Basse of AgResource.

Exchanges anticipate that Canadian farmers will turn to futures markets in full force once the wheat board goes away, and they and grain handlers already are jockeying for the expected new opportunities.

IntercontinentalExchange Inc. said it will look to launch new futures contracts for Canadian spring wheat and durum wheat and a revised barley futures contract.

Grain handlers such as Cargill Inc., Viterra Inc. and Bunge Ltd. could see their roles—and returns—in Canadian grain markets grow.

Viterra Chief Executive Mayo Schmidt hinted at possible new business opportunities during a conference call with analysts Wednesday.

“The changes to the monopoly will have a number of important and lasting benefits,” he said, noting that multinational grain merchants like Viterra should be able to profit by gaining access to different parts of the supply chain that were previously off limits.

Cargill and Bunge declined to comment.

The board basically sells the grains and then divides the returns among the wheat and barley growers in western Canada.

So farmers get the average price over the course of a year, never capturing the top of the market, but also never selling at annual lows.

The board has added other pricing options over the years, including allowing farmers to sell their crop up-front for a fixed price.

The estimated return for a Canadian farmer in the board’s traditional sales program is estimated at $7.19 to $7.48 a bushel for the spring wheat coming out of the fields now. That compares with Wednesday’s U.S. cash price of $8.85 a bushel, according to MGEX.

The wheat board cautions against trying to compare the price Canadian farmers are expected to receive against current market prices in the U.S., saying the timing, location and system of sales are all different.

Source:  Wall Street Journal

Posted by Haylie Shipp


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