Who grabbed more than $3.5 billion in revenue from the Prairie grain trade over two recent crop years?
Many have asked that question and now a University of Manitoba agriculture economist has weighed into the debate.
Derek Brewin says it was likely captured by the various grain companies that pocketed the difference in the 2013-14 and 2014-15 shipping seasons.
“Despite a fall in the export price of just $1 a tonne (in 2013-14) the farmer average return fell by $80 (due to a wider export basis),” Brewin said in a lecture Oct. 19. “We are suggesting the grain companies pocketed most of that difference.”
But he can’t prove it because most grain companies operating in Canada don’t make their financial reports public. Brewin knows the railways didn’t scoop the money, because while the maximum revenue entitlement allows the railways a fair return hauling grain, it blocks them from charging what the market will bear.
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The $3.5-billion loss is based on farmers exporting 22.3 million and 22.15 million tonnes of wheat in 2013-14 and 2014-15, respectively, multiplied by the extra $80 in basis.
Brewin isn’t the first agricultural economist to conclude farmers lost billions of dollars because of a wider export basis, defined as the difference between the price received by the farmer for his or her grain and the price of that grain loaded in a ship at port.
University of Saskatchewan agricultural economist Richard Gray estimates the loss at between $5 billion and $6.5 billion, depending on the assumptions used.
Brewin is confident with his data, which includes Quorum Corporations’ (Canada’s government-appointed grain monitor) calculation of the wheat basis based on average spot wheat prices, and company handling and railway costs. He says it’s possible, although unlikely, that what wheat farmers were paid was significantly different than the spot price.
Even after assuming the grain companies faced higher costs in 2013-14 for demurrage due to delays loading ships and for grade losses, the extra cost only totalled $15 a tonne.
Historically the wheat export basis is around $70 a tonne, but in 2012-13 — the first year the Canadian Wheat Board’s wheat-selling monopoly ended — the basis dropped to its lowest in modern times: $53.49. But in 2013-14 it jumped to a record $132.41, up $78.92 or by 148 per cent.
“Most years in the past the export basis was $70 a tonne and it goes as low as $54 in 2012-13, so why do they (grain companies) need $140 (basis) that next year?” Brewin said in an interview later.
The initial drop in the basis might have reflected a more efficient market post wheat board, or increased grain company competition, or perhaps predatory pricing by one or more firms in an effort to gain market share during the first year of the new open market.
Then something changed.
“In the context of a large crop (a record 76 million tonnes) with real costs and changing capacity, uncompetitive firm behaviour likely helped trigger the wide 2013-14 basis,” Brewin said.
“The basis of 2013-14 was nearly as wide as forecasted (by a model) if the grain handlers were behaving as a long-run cartel in the wheat market.”
Six grain companies in Western Canada do 81 per cent of the business; the top three control 60 per cent.
Brewin agrees the wider basis was meant to discourage farmers from delivering grain because the system was plugged following a record crop and a backlog in grain trains due to a cold winter. Grain companies also accused the railways of not being prepared to move a record crop.
But he also points out near-record, and record grain shipments, occurred in 2013-14 and 2014-15, respectively totalling around 80 million tonnes, including 44.5 million tonnes of wheat. That means farmers delivered huge volumes despite the wider basis set by the grain companies. While farmers were willing sellers, despite a basis that was almost double the norm, Brewin said farmers’ options were limited. They only have so much storage and they need revenue.
So if the grain companies did capture windfall revenues does that make them bad guys?
“I don’t know if they were the bad guys,” Brewin said. “They are capturing an opportunity that anybody would capture to make profits with.
“A lot of people would say it is not immoral to make profits if they are there. But there is a long-term loss to Canada if we don’t reflect the export value to the farmer — especially the export value less the real cost.”
It’s also a cost to farmers who earn less as a result, which affects how much they can invest in their business and that could undermine their long-term competitiveness.
It also underscores the importance of price transparency in a well-functioning market. Economic theory holds that in an unconstrained market, competition will prevent companies from extracting more than a fair return.
One major grain company declined an interview to discuss Brewin’s findings, but an official said the firm might respond after the story was published.
In a 2014 interview Western Grain Elevator Association executive director Wade Sobkowich said it was wrong to assume grain companies were capturing windfall returns.
“The grain we’re taking in now was contracted months and months ago (at higher prices),” Sobkowich said.
He added grain companies were facing higher costs for demurrage — an estimated record $55 million at that time — and paying contract extension penalties and losing sales.
The wider basis in 2013-14 was a signal for wheat farmers to deliver less, but they still delivered millions of tonnes. And the grain companies didn’t have to reduce the basis to get the grain.
If the grain companies did earn windfall profits as Brewin suspects perhaps some of that money will be invested to make the grain-handling system more efficient. But will those efficiencies be shared with farmers boosting their earnings? Brewin’s research suggests they won’t in the absence of an unconstrained and competitive marketplace.