THE IMPACT OF AN OPEN WHEAT MARKET IN THE PRAIRIES ON EASTERN FARMERS
as every canadian grain farmer is aware, the Government of Canada has initiated the transition plan to remove the Canadian Wheat Board’s single desk powers.
Bill C-18 is an amendment to the Canadian Wheat Board Act and it will take effect August 1, 2012. Beginning August 1, there will be a dual market in Western Canada where marketing through the CWB is voluntary; farmers may also market their wheat and barley through licensed grain elevators. In anticipation of this open market, farmers will be able to forward contract for delivery after August 1 as soon as the bill receives royal assent.
The government’s intent is to repeal the Canadian Wheat Board Act completely in 2017, at which point the CWB can operate as a private entity. Over the five years of transition for the CWB, it will operate with a new board of directors appointed by government that will develop a business plan for privatization. The government intends to provide borrowing and initial payment guarantees to the interim CWB throughout the transition period.
At the time of publication bill C-18 has passed second reading and a legislative committee has been struck to hear witnesses. The senate is also planning hearings in the near future. Expectations are for bill C-18 to pass before the end of 2011.
The impact of this bill on Prairie farmers has been discussed in great detail in Western Canada but the effect will extend to the entire supply chain including farmers in Ontario. There are four key areas where farmers in Ontario will potentially be affected by the open market – grain price, logistics, exports and government policy.
Overall, the grain trade is confident the impact on the price of spring wheat from the change to the open market will be minimal because the price of wheat is based on international supply and demand trends and the Canadian wheat crop represents a small portion of this supply.
However, according to some local grain elevators there will be some impacts that will affect Ontario’s spring wheat basis. One elevator operator explains that in the past, when feed wheat was surplus, western farmers could not sell into the US or offshore. This surplus would historically come east and depress grain prices in eastern Canada. Now that western farmers can sell into the best price market, grain should move south to the closest market first and result in higher feed wheat prices in Ontario.
A study conducted in 2008 by Informa Economics states, “when evaluating prices received by farmers in the US and in the Canadian prairies, the analysis shows that for hard red spring wheat, US elevator bids have been higher than final payments from the CWB in five of the last six crop years.” If the open market improves the price of wheat for farmers by over $12 per tonne as the analysis suggests, it may have a positive impact on the Ontario spring wheat basis.
“Farmers are considering more wheat for next year and the growing demand around the world will mean there will be more grain to move. Major railways are beefing up line capacity to move more grain at harvest,” says Federal Agricultural Minister Gerry Ritz of the open market’s impact on grain logistics.
In an interview with Reuters in September of this year, the CEO of Canadian Pacific Railway announced a $300 million expenditure to improve its northern mainline across the Prairies to handle longer, heavier trains and provide back up if bad weather shuts down the southern cross-Canada mainline. One of the reasons indicated by the CEO for the investment was the expected dismantling of the CWB and the potential for it to result in more grain being shipped south into the US. The Canadian National Railway is also upgrading two lines running from the Prairies south into the US after flooding recently disrupted both. These improvements in logistics will have a positive impact on freight rates for all farmers across Canada including farmers in Ontario.
Grain traffic through lake terminals will also be impacted. One terminal operator is hoping that an open market will result in more wheat moving through Ontario ports. The impact on Ontario farmers may be negative if terminals increase throughput of western grain and, as a result, reduce storage and grain movement options even further for local farmers at harvest.
From the perspective of wheat buyers, including Ontario’s millers and bakers, their interest over the next few months will be in the transition. Part of the legislation allows the CWB to retain some control over wheat shipments for three months following August 1 in order to move grain sold prior to the deadline. “C-18 means the Board gives up their monopoly on August 1 but the Board retains some powers for an additional 90 days. This will go a long way to smooth out the transition – a good decision by government,” says Derek Jamieson, executive vice president of the Parrish & Heimbecker Milling Group.
The first major change for all farmers and grain buyers with this legislation is the elimination of export licenses. In the past, all wheat exported by Ontario farmers or industry had to be under an export license issued by the Canadian Wheat Board. This change will eliminate a step in the export process that added paperwork and time
An area of positive change for Ontario farmers will be in the development of relationships with export buyers. In the past, Ontario wheat was marketed to export buyers in a two pronged approach – leveraging the relationships held through the Canadian Wheat Board and working through the grain trade’s international sales programs. As the Canadian grain trade increases their international grain offering to include Canadian wheat, grain sellers will be more full service by offering a full complement of Canadian grain including hard and soft wheat, canola, soybeans and specialty crops. This will broaden the exposure of Ontario’s crops as our grain traders increase their territories to include areas formerly dominated by the Canadian Wheat Board.
An area where Canada has outshone many wheat growing regions of the world is through the support offered to millers through the Canadian International Grains Institute (CIGI). CIGI delivers customized educational programs and technical expertise and ongoing specialized technical support to Canadian field crop customers around the world. This value added service will not be lost in the transition to the open market. In the past, the majority of the funding for CIGI came from the CWB but Grain Farmers of Ontario contributed a significant amount for enhancements to our research and market development programs. The federal government has provided for the future of CIGI through a Western grain voluntary check off.
Overall, according to Minister Ritz, the Canadian brand will not suffer in the transition to the open market. “The federal government and grain companies will push the quality and consistency of our supply. It is not hard to sell the Canadian brand,” he says.
Canada’s Agriculture Minister Gerry Ritz, left, arrives with grain farmer Don Kenny to make an announcement in Stitsville, Ontario in November.
This is an area where groups like the Baking Association of Canada (BAC) see some hard work ahead. “With more players in the grain handling sector, it will be a challenge to coordinate industry-wide issues like research and mycotoxins,” says Paul Heatherington, BAC president. The BAC sits on the Grain Industry Roundtable which Heatherington suggests will have to expand to ensure wheat suppliers are able to participate in industry-wide solutions.
Beyond research, transportation and rail service is another area where many associations have been advocating for a review. This issue has been addressed in the open market transition. The goal is to improve the performance of the entire rail supply chain that will include the establishment of a government organized Commodity Supply Chain Roundtable to address logistical concerns. The improvement of rail transportation in Canada will improve the competitiveness of shipping rates for all farmers.
The Grain Industry Roundtable and the Rail Service Review are two opportunities for farmer input on national issues through their representative organizations. The challenge moving forward for the grain industry will be ensuring all farmers right across the country are properly represented on issues.
“Grain Farmers of Ontario is committed to representing our grain farmers on national issues,” says Barry Senft, CEO. “I see a great opportunity ahead for national dialogue on issues that affect all grain farmers and a movement away from the eastern-western mindset of the past.”
Overall, the open market is expected to have a positive impact on the grain trade. The industry sees opportunities in the future to vertically integrate their supply chain and exporters are looking forward to increasing their product offering. Minister Ritz summed the opportunity of an open market up nicely when he said at the announcement of Bill
C-18 on GFO Chair, Don Kenny’s farm near Ottawa, “…the sky will not fall in an open market. Instead, the sky will be the limit.” •