The grain market needs a dose of ‘good cholesterol’

More regulation is not the solution to improving grain transportation

Just as there is both good cholesterol and bad cholesterol, there are both good and bad regulations.

The CWB single desk was an example of a bad regulation — it clogged the arteries of western Canadian grain commerce by burdening farmers with high costs and no evidence of premium prices.

Markets are efficient and effective when they are open for participants to react freely to market signals. But “open” doesn’t mean “unregulated.” The futures markets are the most efficient and effective marketplace that we know of and yet are highly regulated, giving structure, confidence and efficiency. This kind of “good cholesterol” is what we need in western Canadian grain markets.

However, I am concerned with ideas that suggest the return of “bad cholesterol.”

The current problem in western Canadian grain markets stems from the railroads not fulfilling promises. Early in the year, they set 10,000 cars/week as their “plan” — their way of telling the grain trade what shipping capacity they should expect.

Based on data from Quorum Corp. (the grain monitor), grain companies’ rail car orders are in line with, if not below, the railroads’ original plan. However, unloads at our four export ports are much lower at 5,909 per week. Add shipments to domestic and U.S. destinations and the railroads are still well below their plan. This lower-than-expected capacity means contracts with farmers and export customers can’t be fulfilled on schedule.

Although some are saying we wouldn’t have this problem if the CWB single desk was still operating, it’s clear that the CWB could not conjure up more rail cars than the railroads have provided.

As expected, the lack of movement has pressed elevator prices lower.

Bad math

Ex-CWB director Ian McCreary told a transportation conference in Saskatoon that “(C)ompanies are making an extra $100 a tonne” handling grain this year, adding “under the former wheat board’s single desk… they (farmers) would be billions of dollars richer.” Richard Gray of the University of Saskatchewan has used similar bad math.

They assume that the grain being delivered to elevators or shipped offshore is at current prices. But it’s not. The vast majority of the grain being handled was bought and sold months ago — when the spread between country points and the port was more “normal.” Basis is an open-market signal used to slow deliveries in times like these. When that didn’t work, grain companies simply stopped buying. How can you logically use today’s prices to estimate a company’s profits (or a farmer’s costs) when they aren’t actively buying (or selling) at those prices?

More from the Manitoba Co-operator website: New insights into Canadian Wheat Board orderly marketing

There may be companies that are in a position to buy wheat from farmers at today’s prices or sell at the current port prices but the amounts are limited.

Liberal Agriculture Critic Ralph Goodale has suggested a “cap on basis.” Regulating the amount a company can pay for grain isn’t the answer. This may increase the nominal price at times like this, but it won’t stop buyers from pulling their bids and not buying at all. In other words, it won’t solve the problem.

The solution is to empower farmers to respond to the market more effectively. A great deal of wheat has been sold on forward contracts, both before and after harvest, taking advantage of prices and delivery opportunities when they present themselves. The next step is to empower farmers to avoid lousy basis levels, opting to earn “storage premiums” available through the carrying charges in the futures markets.

Better farm pricing behaviour won’t get more rail cars, but it will help improve the basis. What would basis do if farmers deferred sales (to earn “storage premiums”)? Ian McCreary suggested single-desk control of deliveries — forcing farmers to hold grain off the market — as a solution. The difference is that when farmers react to market signals, they get paid to hold grain off the market — plus the basis improves. With regulated control of deliveries, they just wait.

We need good cholesterol

The solutions to fix the market include incentives, accountability and information.

The railroads need to commit to a minimum capacity — never again should we hear that the railroads can’t ship to our demands because they released locomotives.

How about this — if the railroads don’t meet a set minimum capacity, the revenue cap is lowered? And if there is demand over the minimum capacity, and they meet it, the revenue cap is increased. Incentives work.

Farmers need to be empowered to employ marketing tools and techniques to get more from the market. With the right approach, farmers can avoid lousy basis levels and get paid to store — just one of the benefits that comes with an open market.

And last, data such as export sales commitments, rail capacity commitments and readily available price data will improve competition and marketing choices. If these market signals had been available, steps could have been taken to mitigate the evolving problems.

Collection and publication of this information will need to be regulated. Call it good cholesterol.

About the author

Comments

explore

Stories from our other publications