Western Canadian grain farmers saw the gap between the export price and their price narrow in 2015-16, reaping the benefits of an efficient and competitive grain-handling and transportation system (GHTS).
Despite 2015’s near-record 64.7-million-tonne crop, there was no repeat of a grain shipping backlog that followed record production in 2013, Derek Brewin, a University of Manitoba agricultural economist said.
“It looks like the planning worked better this time and they (grain buyers) were able to give the farmer a better return all through 2015 and 2016,” Brewin said in an interview May 23.
“It looks like competition is back in our grain supply chain. It’s good news for farmers.”
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In 2013-14 Canada’s grain monitor reported the average wheat basis — the difference between the export price in Vancouver and what farmers were paid at the elevator — hit a record $132.41 a tonne. Economists say the wider-than-normal basis is a signal to farmers not to deliver grain. However, some grain was delivered and shipped, and according to Brewin, farmers collectively were shorted, on average, $80 a tonne or $3.5 billion.
“We are suggesting the grain companies pocketed most of that difference,” he said during a lecture Oct. 19, 2016.
The Western Grain Elevator Association disputed Brewin’s claim then and still does, executive director Wade Sobkowich said in an interview May 25.
Brewin now believes the companies are investing those profits into expanding their export capacity at Vancouver, benefiting the whole grain sector. The data shows it.
“More grain moved through the GHTS in the 2015-16 crop year than at any other point in the history of the GMP (grain monitoring program),” the grain monitor’s 2015-16 annual reports says.
The average wheat basis fell 34 per cent in 2015-16 to $81.53 a tonne, Brewin said. The canola basis is down to $65.24 a tonne. Both are close to the long-term trend, if you ignore the very tight basis for wheat in 2012-13 — the first year of the open market for wheat following the repeal of the Canadian Board’s single-desk selling authority.
The current spot difference for prices in Winnipeg, according to Manitoba Agriculture and Agriculture and Agri-Food Canada, are about $77.50 and $41.51 a tonne for wheat and canola, respectively, Brewin said.
“That’s pretty good news given how bad it had got the two previous years,” he said.
“And farmers are getting really pretty good prices. The spot prices in Winnipeg right now are as good as we’ve seen compared to the export price. The export price is down from two years ago and we’re still seeing pretty good returns.”
The railways partly blamed a record grain crop in 2013 for contributing to the grain shipping backlog that crop year. They also blamed the coldest winter in 100 years.
“The thing about those really high margins (in 2013-14), is it encouraged grain handlers to expand their investment in capacity,” Brewin said. “It’s very hard to build another railway, although there is some capacity (expansion) they would do, especially in the Port of Vancouver and maybe in rolling stock. But it’s a lot harder to build the next railway than it is the next terminal.”
That’s why Brewin recommends caution when tinkering with the grain transportation system, which is what’s planned in C-49, the Transportation Modernization Act (see sidebar).
“I think it would be worthwhile to say that the rail supply chain is actually working pretty well,” he said. “It’s not very broken. Don’t change it very much.”
Wade Sobkowich, executive director of the Western Grain Elevators Association, agrees the grain pipeline performed well last crop year and grain is moving well now too, but adds the grain sector must not be complacent.
“Nothing has changed in the competitive environment and nothing has changed in the policy environment since 2013 when it comes to the railways,” Sobkowich said. “What has changed is the railways have been put under the microscope and they have been moving less from other industry sectors so the grain industry has benefited from that. We have seen more capacity come to us because they are hauling less oil and gas, minerals, et cetera. So when those industries recover and we don’t have the proper backstops in place, nothing will have changed to stop us from reverting from the same set of the circumstances that we saw in 2013-14.”
That’s why passing C-49 is important for grain farmers and shippers, he said.
Harvey Brooks, general manager of the Saskatchewan Wheat Development Commission, shares that view.
“The suggestion that all the problems have gone away is wrong,” he said in an interview May 26.
Sobkowich also disputes Brewin’s claim that the wide basis earned grain companies excessive profits at farmers’ expense.
“He’s just wrong,” Sobkowich said.
“The basis number offered by grain companies does not necessarily reflect the price that’s paid for deliveries to be made to elevators because some grain is delivered and sold under terms of an advanced contract. The contracted prices are almost always different from the price offered because they are based on futures prices that existed when the contract was undertaken.”
Grain companies, like farmers, are price-takers, Sobkowich said. Companies must meet the prices offered by competitors when buying from farmers and selling to end-users.
“Grain companies are investing because they are trying to increase their market share and their returns,” he said. “They aren’t doing it because they have a bunch of money sitting around from 2013-14 and they are wondering what to do with it.”