In the August 16 edition of the Manitoba Co-operator, Allan Dawson’s article contains quotes from the Canadian Grain Commission (CGC) about why a fee reduction wasn’t part of its decision for the surplus. The CGC does not believe a reduction would be passed through grain handlers to farmers, and this is positioned as a major factor as to why the CGC opted to keep the money.
It is alarming that the CGC does not understand how any fee reduction — not just likely, but absolutely — will be passed through to farmers. Where a futures price exists, basis is the difference between the local cash price for a commodity and the futures market price for that commodity. That is: cash price minus futures price equals basis. Basis may include freight, elevation, cleaning, storage, interest, inspection fees, administration costs and profit for the buyer.
For our purposes, let’s put these components into three broad categories: (1) overhead and company costs, (2) flow-through costs, and (3) a margin component. The calculation is done understanding that if the company does not sell the grain at a competitive price, the buyer will source product elsewhere. Likewise, if the grain company does not offer a competitive price to the farmer, then a competing company will take the business away. Overhead costs are within the grain companies’ control and they strive to reduce overhead so they can more effectively compete. The margin component will grow or narrow depending on the market circumstances, which includes supply and demand, at a specific point in time. Flow-through costs such as property tax, rail freight, and CGC costs are outside the control of the company and are the same or similar for each company.
Grain buyers use basis levels to attract grain when they need it or discourage delivery when they don’t. Buyers bid only as much as necessary to attract enough deliveries to meet their sales commitments. The amount of margin the company can earn is confined to the natural rules of competition. The grain company isn’t only considering margin on a single transaction basis (like when one buys a new vehicle) but is offering its price with a view to retaining that producer customer on a long-term basis.
However, this process has nothing to do with what CGC fees used to be in the past. A CGC fee reduction would reduce that cost item in each company’s basis calculation. If the company sees an opportunity to earn more, it will try to increase the margin component. Likewise, if receipts are threatened they will reduce the margin component to retain market share, however, this is completely separate from CGC fees and can be (and is being) done today. To believe otherwise is to believe that there isn’t competition among grain handlers. If they are serious, those who believe this should take the matter up with the Competition Bureau.
So if the grain companies wouldn’t keep the fee reduction anyway, why do they really care if the CGC keeps it instead?
The WGEA’s objections are rooted in the costs for the CGC in comparison with competing jurisdictions. Grain sales are subject to global market conditions and prices, which are outside the control of any company, government or country for that matter. One-third of the costs in the U.S. and approximately 40 per cent of costs in Australia are covered by their governments for similar services. Not only does the CGC operate in a near 100 per cent cost-recovery model, but now it has overcharged by $130 million and has no plan to return it. To make matters worse, it is with certainty these new expenditures will cause a further fee increase in the following five-year budget cycle due to what will become an ongoing commitment to maintain these new and expanded programs. This makes Canada less competitive, reduces the amount of value that exporters can earn on sales and therefore reduces how many dollars can be returned through the supply chain to farmers.
We are disappointed in the apparent lack of understanding of the basic tenets of the cash basis from our leading regulator, and further that the CGC apparently made its decisions regarding the surplus without first taking responsibility to ensure it understands these principles. The CGC was either unwilling or unable to acknowledge that both costs and benefits are ultimately passed through the system to farmers. It works both ways.
So what is the solution? Earlier in 2018 the government created six Economic Strategy Tables to drive innovation and growth in Canada’s priority sectors including agri-food. As an outcome, the grain sector requires a complete and independent review of the Canadian Grain Commission and the Canada Grain Act with a view to keeping its role as a regulator, while removing its presence as a duplicative and costly service provider.
CGC costs need to go down, not up. We need the attention of the federal government for a complete overhaul of our primary regulatory agency.
Wade Sobkowich is executive director of the Western Grain Elevator Association, which is based in Winnipeg.