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Setting the price of wheat

Over the past few months Western Canadian farmers have had the opportunity to see their local grain companies’ versions of the price of Canada Western Red Spring (CWRS). There is a great deal of difference among different companies’ cash bids. Companies explain that these differences are due to marketing uncertainty, unique quality characteristics and lack of liquidity in the ICE Winnipeg futures contract. This variation is likely a temporary circumstance.

Standardized bids

The grain industry uses two strategies to market cash bids.

For commodities that are interchangeable, like generic canola, corn and soybeans, companies use standardized bids. Standardized bids are based on similar pricing and quality specs, allow easy comparison of different bids.

To buy crops that aren’t as easily interchangeable, companies are using differentiated cash bids. These crops include newly open market crops like spring wheat and durum, identity preserved crops and crops with unique characteristics like malting barley. Differentiated cash bids have company-specific pricing methodologies and quality specifications, making it harder to compare bids.

Current cash bids for generic canola are considered standardized because canola is a reasonably standard product. The canola grown by farmers is similar across all regions of Western Canada and even though demand for the crop is very broad, the many diverse customers demand a similar product.

Canola cash bids are typically based on one reference grade (No. 1 Canada), one futures contract (ICE Winnipeg) and one currency (the Canadian dollar). This simplifies comparisons — buyers and sellers can assume that basis bids use the same standard quality and pricing method. The factor that differs between contracts is price.

Differentiated bids are more complicated because there are more variables. Cash bids for CWRS are currently differentiated based on two types of quality specifications and a number of different pricing methods.

CWRS quality varies across Western Canada. End user demand also varies — CWRS customers require a much more specific product than canola buyers.

Some companies use up to three different reference grades (No. 1, 2 and 3 CWRS); different companies use different reference protein levels (13.0, 13.5 and 13.5-13.9 per cent). Companies’ pricing methods include straight cash bids in either Canadian dollars per metric tonne, or dollars per bushel. Futures contracts may be based on Minneapolis futures in Canadian dollars, U.S. dollars, or Minneapolis futures converted to Canadian dollars. Or, some companies may offer pooled pricing from the CWB.

These differences in bids make it more difficult to compare CWRS bids among companies on any given day.

Relationships

Standardized bids tend to result in a more uncoupled business relationship between farmers and grain companies. Farmers growing a standard crop can easily respond to changing local market conditions by changing where they sell their grain.

Differentiated bids tend to result in a more coupled relationship between farmers and grain companies. It may be more difficult for farmers to change where their grain is marketed after it’s grown, because each buyer may have a different method of calculating bids and quality specifications. In these cases, buyers typically pay a premium for that closer relationship, and expect to gain a higher premium, owing to their ability to supply a specific product.

There are trade-offs between marketing grains in coupled versus uncoupled relationships. Both systems can work side by side. The co-existence of generic canola (uncoupled) and specialty canola (coupled) is evidence that farmers want choice in business relationships.

Ultimately, Canadian growers and traders of CWRS have to compete against suppliers from other countries. Our customers are the world’s wheat millers. Some milling customers may find it advantageous to associate themselves with a specific grain company and farmer; other milling customers may want to be completely independent, buying from several grain companies and farmers.

Grain companies that trade CWRS are middlemen between farmers and milling customers. To succeed, they will need to establish the types of relationship with farmers that their end customers want.

A standardized future

It would seem reasonable to expect the industry to eventually move to standardized cash bids for CWRS. The ICE milling wheat contract in Winnipeg will be instrumental in creating a standardized market for CWRS in Canada, with deliverable grades based on No. 1 or No. 2 13.0 per cent protein wheat.

Once the grain industry adopts this contract for spring wheat bids, we will start to see standardized bids based on one reference grade (No. 1 CWRS 13.0 per cent protein), one futures contract (ICE Winnipeg), and one currency (Canadian dollars). This standardization will make it easy to compare bids among local companies.

The wheat supply chain in Canada is still trying to decide what it should be. Tools are available to standardize the industry — if the industry chooses to use them — and current systems exist if the industry chooses to remain differentiated. It will be up to farmers to choose which system they like best by delivering to companies that provide the bids they find most reasonable. †

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