Two pillars of Canada’s $26-billion grain industry are again under review — a process reviving long-standing divisions between some farmers and grain companies over grain industry regulations.
The Canada Grain Act and Canadian Grain Commission which administers it, deal with grain buyer licensing, grade standards, grading disputes, quality control and producer payment protection.
Some submissions are likely to also address the CGC’s mandate, its operating surplus and how it’s funded and governed.
“The CGC’s core responsibility is to establish and maintain science-based standards for Canadian grain and regulate grain handling in Canada to help ensure the integrity of grain transactions and that Canadian grain is dependable and safe,” Agriculture and Agri-Food Canada (AAFC), which is leading the review, says in its consultation discussion document.
Why it matters: Grain industry regulations affect not only grain farmers and the grain sector, but Canada’s economic well-being.
“Our government is inviting Canadian producers, grain handlers, processors, and exporters to share their views on possible changes to the Canada Grain Act,” Agriculture Minister Marie-Claude Bibeau announced via video link during CropSphere in Saskatoon Jan. 12. “Together, we will help shape an innovative and modern regulatory system that safeguards grain farmers, grows Canada’s reputation for grain quality and helps our grain industry compete with the world.”
The review had begun in 2019, but was sidelined. The deadline for comment is April 30, 2021.
The grain act states the CGC was established “in the interests of the grain producers, to establish and maintain standards of quality for Canadian grain and regulate grain handling in Canada, to ensure a dependable commodity for domestic and export markets.”
The CGC’s mandate “in the interest of producers,” must remain, says the National Farmers Union (NFU).
The CGC, created in 1912 in response to years of farmer allegations of unfair dealings by grain buyers, is an almost sacred institution to the NFU. It fears the grain trade wants to weaken the CGC to boost earnings at farmers’ expense.
Keystone Agricultural Producers (KAP), Manitoba’s general farm organization, also supports the CGC’s continuing role in ensuring grain quality and farmer protection.
It passed a resolution April 2, 2019 to participate in the review and to lobby the federal government “to ensure the Canadian Grain Commission continues to provide the vital roles of adding value and protection to Canadian farmers.”
“The Canada Grain Act was developed in 1912 for a reason — to protect producers,” KAP president Bill Campbell said in an interview in 2019. “Do we still need that protection? Maybe we do now more so than then.”
The Western Grain Elevator Association (WGEA), representing most of the major grain companies, wants the CGC to focus on being a regulator rather than a mandated, costly service provider — a position shared by the Alberta Wheat and Barley Commissions led by general manager Tom Steve.
Currently, by law, all Canadian grain exported bulk in ships requires outward weighing and inspection by the CGC at a cost of $1.48 a tonne. But about 70 per cent of that grain is also inspected by private, third-party grain inspectors, hired by grain companies, WGEA executive director Wade Sobkowich said in an interview Jan. 13.
“Bottom line is, it’s (CGC inspection) just an unnecessary cost,” he said. “We’re paying for an inspection document (Certificate Final) the majority of times that gets filed and doesn’t serve any purpose from a trade or quality perspective. That, in and of itself, is reason enough to take a look at how we do things.”
But the NFU says the Certificate Final, the Canadian government’s guarantee to buyers they are getting the grade and volume they paid for, is critical to maintaining Canada’s reputation for delivering high-quality grain.
“The grain companies have never wanted the CGC,” NFU second vice-president Stewart Wells said in an email Jan. 13. “They would much prefer a situation wherein they can make all the rules themselves — the so-called ‘industry self-regulation.’ Industry self-regulation was the reason that the grain act and the CGC were invented over 100 years ago. Farmers were being cheated by the grain companies.”
Wells added that removing the elements of fairness, balance of market power and information that the CGC has provided for farmers would diminish the knowledge base of farmers and increase the power of grain companies and handlers.
The solution, according to Sobkowich, is to have the CGC oversee third-party inspectors, ensuring quality control, but at less cost.
The private inspectors could also inspect grain shipped domestically through the St. Lawrence Seaway and by truck and train to the U.S. and Mexico, that the CGC is not currently inspecting, he added.
Several companies offer grain inspection services so competition will keep costs down, Sobkowich said.
When possible grain companies pass those costs back to farmers, Steve said in an interview Jan. 13.
“The core issue for us is the role of the CGC as a regulator, versus a service provider, because there are more economical solutions out there through third-party companies,” he said.
But outward weighing and inspection fees account for 93 per cent of the CGC’s annual revenues. The CGC is required to cover its operating costs.
But Sobkowich and Steve say the federal government should cover the CGC’s funding shortfall in the absence of fees because of the public good it performs.
“It would mean some significant rationalization on the size of the CGC, if it is an oversight agency versus a service providing agency,” Steve said. “Maybe that’s the natural evolution of the industry. We have to be one of the lowest-cost service providers because as you know our farmers are the farthest from tidewater of any exporting country. So we need to take costs out of the system.”
Industry views vary on the grain-grading system, which the CGC oversees in consultation with the industry. The NFU supports it. So does the WGEA, but Sobkowich said it needs the occasional tweak.
“The Canadian grading system, under the Canadian Grain Commission, is a good way to buy grain because it allows us to basket those quality parameters together in a way that we can sell it to the customer,” he said, adding it doesn’t interfere with companies meeting customer specifications. “It (grading) needs to be responsive to the marketplace… but it should remain in place.”
The Alberta Wheat and Barley Commissions are conflicted. While directors tend to favour “a more specifications-based grading system… (they) are cautious about adding more discounting factors, Steve said.
“Be careful what you ask for, right?”
AAFC also wants to hear from the industry about producer payment protection options.
Under the current system licensed primary and process elevators and grain dealers are obliged to post security to cover money owed to farmers for delivered grain. If farmers don’t get paid within a specified period, and they have the proper receipts, they can access the security.
AAFC’s document says the program has been successful.
“Between 1990 and 2019, 21 companies covered by the producer protection program defaulted on payment obligations to producers,” it says. “Eligible producer claims to the CGC totalled over $26 million. Payout to eligible producers was approximately $23.5 million representing approximately 90 per cent of eligible claims.”
However, the paper says the program is expensive for licensees and the CGC to administer.
A number of other options have been explored, including an insurance program. It wasn’t implemented after the CGC determined costs would increase for a number of licensees, while others would be ineligible for coverage.
Another option is a compensation fund that would pool licensees’ risk.
Licensees would contribute based on their expected risk of failure and volume of grain purchases, while administration costs would be financed with licensing fees.
The fund would be backed by a reinsurance policy.
The current program has been a waste of money for WGEA members, Sobkowich said.
“There has never been in the history of the WGEA any member that has gone out of business to the point the producer security had to be enacted on them,” he said. “But we are paying for it and that gets factored into the costs that ultimately result in the final price to the farmer. If farmers are comfortable paying that then I guess it remains in place.”
Farmers are sophisticated enough that such programs are unnecessary, Sobkowich said. But if there is a program its costs need to be tied to the risk of non-payment. The chances of a long-established major grain company going out of business and not paying a farmer is a lot less than a new startup, he said.
KAP is on record as supporting some type of producer payment program.
The document also asks the industry to consider whether the CGC’s binding arbitration between grain buyers and farmers on grades and dockage be expanded to other grade characteristics and made more flexible. Currently ‘subject to inspector’s grade and dockage only applies when farmers deliver to a licensed primary elevator. The farmer must engage in person at the elevator. A trucker delivering the grain can’t do it.
KAP has said it wants this CGC service made more flexible.
Surplus, governance, wheat classes
While the discussion document doesn’t refer to them, Steve said his commissions also want to comment on the CGC’s operating surplus role in establishing western Canadian wheat classes and governance.
“Is the commissioner (who oversees the) system still valid? The commissioners are still appointed by the government. Is there a better model? I think that will be part of the debate,” he said.
The Harper government had talked about dropping commissioners in favour of a board of directors, but changed its mind.
The CGC had a $137.3-million surplus as of March 31, 2020 and is expecting an additional $9 million more by March 31, 2021.
It’s due to a combination of higher user fees and increased grain production.
The CGC, with annual expenditures of around $65 million, says it needs at least $40 million in reserve to cover potential revenue shortfalls caused by a drop in Canadian grain production and/or exports.
The Alberta Wheat and Barley Commissions have called on the CGC to drop its fees to reduce the surplus.
Starting in 2018 the CGC said it would spend $4 million of the surplus over five years to provide free falling number and DON (deoxynivalenol) results in wheat samples submitted to the CGC’s annual harvest sample program.
Alberta farmers also want more transparency around how the CGC decides what wheat classes to create and which wheats go into them, Steve said. In 2018 the CGC created a new milling wheat class and revamped the standards for wheats going into the Canada Western Red Spring and Canada Prairie Spring classes to address customers’ complaints that Canadian milling wheats had insufficient gluten strength.
The changes resulted in a number of popular CWRS and CPS wheats being moved to classes that return less money to farmers.
The grain act and CGC haven’t had a “comprehensive” review since 1971, says the discussion document. But it also notes there have been some “targeted changes.”
Several more ambitious attempts to amend the act never became law, in some cases because of an election. That’s a possibility this time too, with pundits prophesying a federal election this spring or fall.