Editorial: Wheat prices – a great big mess

grain spilling out of a burlap bag

Critics of the Canadian Wheat Board used to routinely point to published price quotes for U.S. Dark Northern Spring (DNS) wheat from the Pacific Northwest (PNW) and assume that was a benchmark price for all wheat sold in the world. If the board got less, it must have screwed up, said the critics.

In fact the DNS price tends to be at a premium for several reasons, not least of which was that it was a price for Japan, which pays a premium for high-quality spring wheat. It also used to pay a premium for Canadian CWRS over DNS.

Apparently not anymore. Again, not all spring wheat trades at the PNW price. But why is Canadian CWRS being offered at almost $70 under DNS? On Oct. 24, CWRS 13.5 per cent f.o.b. Vancouver was quoted at $331.26. On the same day DNS 13.5 per cent f.o.b. Portland was quoted at $399.73.

Though the price spread is not as dramatic, the numbers from last week’s Iraq grain board tender for 50,000 tonnes of hard wheat are even more disturbing. Here are the “ciffo” (landed in Iraq) offers: (the Canadian one was for 100,000 tonnes; apparently the seller was eager).

  • Canada: $323.40;
  • Australia: $331.22;
  • Russia: $336.50;
  • U.S.: $352.70.

That’s right, Canadian wheat is being offered at $13 under Russian wheat, and almost $30 under the U.S. We already knew the system was in a mess, but these numbers emphasize that it’s not just a mess — it’s a great big mess. What’s to be done?

Let’s start by emphasizing to supporters of the old wheat board that it’s never coming back, so let’s forget about fighting that battle. By the same token, opponents of the old board need to acknowledge the problems arising from ending its monopoly. That may or may not have been a good idea, but it’s now apparent that doing it so abruptly has had major implications for co-ordination of the system. Having the biggest player in place for 77 years and then eliminating it overnight was akin to putting a stick of dynamite under the system and hoping that all the parts would fall back in the right place. They didn’t.

The theory behind ending the monopoly was that it would create competition for the farmers’ grain — that is, the companies would sharpen their pencils and lower their handling costs, therefore leading to a higher price on the driveway.

There are a couple of things wrong with that theory. One is that it’s clear that competition is working all right — the companies are now so eager to compete with each other that they’re even undercutting Russian wheat.

But even if they weren’t, there’s another problem. The companies only need to sharpen their pencils and compete on the driveway if there is unrestricted access to the marketplace, which means the railways supplying every car requested and delivering it on time. It seems the only time we have that happy situation is when there is the unhappy one of a small crop. Otherwise, competition works — the farmers compete with each other to deliver, which means the companies can lower their price.

Currently, that means a nice margin for the grain companies (although it would be even nicer if they sold at Russian prices) because the railways can only charge as much as the legislated revenue cap allows. The solution, say some, is to get rid of the revenue cap — if farmers paid more to the railways, they’d supply more cars. That would be like the U.S. system, where grain companies currently have to bid premiums of up to $6,000 a car.

So even if you really believe that the railways would supply more cars, what we’re really talking about is keeping the basis the same, but giving more to the railways and less to the grain company.

There are disturbing rumblings that the federal government thinks that’s part of the U.S. system that we should copy. Unfortunately, it hasn’t seen fit to put in place any of the other framework that makes the open-market system work. Unlike in the U.S., there is no mandatory reporting of export sales. There is no routine collection and reporting of export quotes, local cash market prices, prices received at country elevators or vessels arriving in port.

An open-market system only works properly if all the players have equal access to information. So far, the grain companies and railways hold all the cards, though if we look at export sales prices, it doesn’t look like the companies are playing them particularly well.

What’s needed now is not an argument on the merits or otherwise of the old wheat board, but concerted pressure on the federal government to establish a regulatory framework for the open market to work properly. Right now, it sure doesn’t.

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