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Opinion: Putting a price tag on the grain backlog

There’s demurrage and contract defaults, but the biggest cost is to Canada’s reputation

We’ll never know exactly how much this year’s grain backlog cost Western Canada’s grain industry, including farmers, but it will be in the millions of dollars.

A bigger backlog in 2013-14 cost members of the Western Grain Elevator Association — Canada’s major grain companies — $90 million just in demurrage, contract extensions and defaults. That doesn’t include intangible costs.

University of Saskatchewan agricultural economist Richard Gray estimated 2013-14 cost western grain farmers up to $6.5 billion in lost revenue over the 2013-14 and 2014-15 crop years due to a wider basis — the difference between the cash price paid to farmers at the elevator and the price of grain loaded on a boat at Vancouver.

Some suspect grain companies captured some of that value.

Not everyone, including grain companies, agrees with Gray’s estimate because some farmers forward sold and were shielded from the wider basis.

A wider basis translates into less net dollars in the farmer’s pocket. Typically it’s used to discourage grain deliveries to plugged elevators.

Still, there’s no denying farmers took a big financial hit in 2013-14.

But the biggest potential cost to farmers from the current backlog probably won’t be demurrage or the basis, but rather lower export prices for crops such as wheat.

It looks as if you can put a price on reliability, or the lack of it. In March Canadian wheat loaded in a ship at Vancouver, B.C., was selling for around $1 a bushel less than equivalent-quality American wheat shipped out of Portland, Oregon, according to Canadian and American price data.

Given Canada’s reputation for high-quality wheat and Vancouver being closer to Asian markets, Canadian wheat should be selling for a premium not a discount. But some industry observers suspect it reflects offshore buyers’ concerns about Canada’s unreliability.

AAFC forecasts Canada will export 17.2 million tonnes (632 million bushels) this crop year. A buck a bushel discount could rob farmers of $632 million over the crop year. Even if the discount narrows it could be a big hit to farmers and the entire supply chain, affecting everyone’s piece of the pie.

The lost revenue could dwarf demurrage costs, which have been running $11,500 to $13,000 a day per waiting ship.

Demurrage charges exceeded $50 million in 2013-14. This year’s bill could hit $40 million.

The Agricultural Producers Association of Saskatchewan (APAS) says since the railways’ failure to deliver grain in a timely way caused the demurrage, it follows the railways should reimburse farmers.

But it’s the ‘charter party’ — the company that owns the grain, and has agreed to load it on a boat within an agreed-to time period, that pays the bill.

However, it’s widely assumed grain companies pass demurrage and other costs back to farmers by widening the basis. But grain companies’ ability to do that is affected by competition, and there are signs it’s stiff.

Most grain companies have added handling capacity in the country and at export and need more handle to make it pay.

G3, the joint venture firm majority owned by Bunge and the state-owned Saudi Agricultural Livestock Investment Company (SALIC), which bought the wheat board in 2015, is a self-described ‘industry disruptor.’ It’s building a country network of efficient elevators and state-of-the-art export terminal at Vancouver.

According to one of its rivals, G3 has added competition. Part of the company’s mandate is sourcing grain for Saudi Arabia. That, and being vertically integrated, means G3’s board of directors doesn’t necessarily need a profit handling grain.

Another sign of competition is the basis now, unlike in 2013-14, hasn’t widened much.

There could be another reason too: grain companies don’t want to be accused again of exploiting farmers because of a backlog.

Lower prices are one signal not to deliver grain, but being told by the elevator manager a facility is plugged works too.

A relatively stable basis also refutes the National Farmers Union proposition that grain companies are using the current backlog “as an excuse to pay farmers less for their grain,” implying the companies are doing it intentionally to make more money.

Alberta farmer and NFU member Ken Larsen made that argument in an op-ed published in the Manitoba Co-operator March 22.

His op-ed claims grain buyers are “local monopolies” and therefore can “maximize their own profits while blaming the railways and charging farmers basis for any extra costs they might incur.”

As mentioned, the basis hasn’t been abnormal. And notwithstanding some exceptions, most Prairie farmers are not captive to one grain company. Nowadays there are fewer elevators, farther apart, but most farmers have large trucks, which once loaded, can economically reach more than one grain company.

There’s also a plethora of commercial truckers competing to haul grain.

It’s the grain companies that are, in all but a few cases, captive to one railway.

Despite the NFU’s historical antipathy towards the railways, the op-ed comes to their defence, questioning complaints of poor grain movement.

“(T)he more grain the railways haul, the more money they make, so this claim (of poor service) does not meet the smell test,” the op-ed says.

Railways do make more, hauling more, but there’s more to it. The railways usually move most of the West’s grain, but sometimes, including this year, not when grain companies want it moved.

The op-ed correctly says the railways moved almost as much grain this year as last. What it doesn’t say is the railways failed to deliver what they agreed to. Grain companies made export sales and bought grain from farmers based on rail commitments. When the railways didn’t deliver a backlog was created.

The entire pipeline has suffered financially, but the biggest cost is to Canada’s reputation. And it’s a cost the industry could be paying for long after the backlog is cleaned up.

About the author

Reporter

Allan Dawson is a reporter with the Manitoba Co-operator based near Miami, Man. Covering agriculture since 1980, Dawson has spent most of his career with the Co-operator except for several years with Farmers’ Independent Weekly and before that a Morden-Winkler area radio station.

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