A new analysis from a Toronto think tank blasting the Canadian Wheat Board for three years of “poor financial returns for farmers,” quickly drew return fire from the CWB over the report’s “false assumptions and oversimplified numbers.”
The C.D. Howe Institute on Thursday released what it calls an “e-brief” titled “A Bushel Half Full,” urging “more transparency” in reporting financial returns to farmers, as well as “greater accountability” on the part of CWB management to its farmer-elected board.
In the brief, University of Regina business administration professor Sylvain Charlebois and Richard Pedde, an Indian Head, Sask., farmer and former derivatives trader, benchmarked the performance of the CWB’s Daily Price Contract (DPC) program, which they said “serves as a window on the CWB’s overall performance,” and said they found that it “does not deliver on its mandate.”
But CWB CEO Ian White retorted Thursday that the C.D. Howe brief compares daily posted Montana elevator prices for wheat to returns from the “now-obsolete” DPC. The institute’s methodology, he said, “represents a fundamental misunderstanding of the program and the CWB’s task in marketing Prairie farmers’ grain.”
Charlebois and Pedde said they based their methodology on the “Gray Benchmarking scheme” developed by the CWB to compare prices received by Canadian Prairie, North Dakota and Montana producers averaged over a year. Gray Benchmarking, they said, is a “comparative approach that was used briefly by the CWB in 2001.”
The CWB replied that the C.D. Howe authors’ methodology “does not mirror” the benchmarking calculation developed by University of Saskatchewan ag economist Richard Gray, and the C.D. Howe report “does not account for the CWB’s effect on the U.S. prices against which it is measured, nor the capacity of the U.S. market to absorb additional Canadian grain without downward price pressure.”
But Charlebois and Pedde contend that early in the life of the DPC, the CWB price was lower than Montana prices by an average of $9.23 per tonne, they said, and the price differential later “widened dramatically” to over $12 per tonne in the first half of 2006-07 and then to an average of almost $40 per tonne “at a time when the CWB had told producers that it expected only a $5-per-tonne price differential relative to U.S. prices.”
Furthermore, they wrote, the DPC incurred hedging losses in 2005-06 of $12.58 per tonne and in 2006-07, $14.36 per tonne.
“Questionable at best”
The authors go on to criticize the CWB’s recent record of providing information to Prairie farmers as “questionable at best and tactically mismanaged.”
Rather than extrapolate results from one program to estimate the losses in the CWB as whole, there should be a “more transparent” way for Prairie farmers to know how much better off they would be if they could sell on a daily basis at comparable U.S. prices. One such improvement, Charlebois and Pedde said, would be to “re-enact” the Gray Benchmarking system.
“Greater transparency would also enable trading functions to be conducted by outside marketing experts, if they show that they earn better returns for farmers than current CWB traders,” the authors said.
The CWB’s White critiqued the C.D. Howe brief as “another report based on false assumptions and oversimplified numbers.” For one thing, he said, the brief assumes the entire western Canadian wheat crop could be sold into the U.S. at posted U.S. elevator values. “This is not possible, nor do posted values consistently reflect actual pricing opportunities available to farmers,” the CWB said Thursday.
The CWB retorted that its pooled returns to farmers in 2007-08 were over $1 a bushel higher than what most U.S. spring wheat and durum growers earned. Citing weighted average receipts published by the U.S. Department of Agriculture, the CWB said it estimates Prairie wheat farmers earned “at least $560 million more than their U.S. counterparts.”
The CWB said its DPC prices were calculated to take into account differences in the western Canadian and U.S. systems. Factors such as typical western Canadian trucking premiums and U.S. quality discounts were deducted from the posted elevator prices, the board said, thus a difference between DPC prices and Montana spot prices “reveals nothing about CWB performance.”
Furthermore, the CWB said, U.S. spot elevator prices are “not representative of actual farmer returns” but rather an “indicated opportunity” that does not account for actual farmer pricing behaviour, “or even actual pricing opportunities available.”
Comparing returns is problematic, White said, as Canadian farmers must market grain to a “far more diverse” global customer base and the U.S. market accounts for only 10 per cent of Prairie milling wheat sales, with 80 per cent exported overseas.
U.S. protectionism also made access challenging for Canadian agricultural products, the CWB said, citing hard red spring wheat, shut out of the U.S. market by a high tariff wall from 2003 to 2006. As well, the CWB said the C.D. Howe authors “ignored the fact that Canadian farmers can only access the U.S. premium market after incurring transportation costs that disadvantage them relative to U.S. farmers.”
U.S. elevators “might be located in close proximity to many Canadian farms, but our wheat economics are fundamentally different,” White said. “This would be true no matter what marketing system were in place for Western Canada.”
Charlebois and Pedde’s report, the CWB said, implies the C.D. Howe authors “view timing of sales as the predominant way that CWB sales should be evaluated, ignoring other strengths of the single-desk system.”