Your three options: One in 84000?

I have been meaning to comment on the plebiscite itself for some time, so here goes. The three option ballot was the right way to go for reasons I mentioned here. But in issuing ballots to 84000 producers, the government abandoned some of the fundamental principles that ought to guide it in dealing with the CWB. The most important of these is that consultations should be conducted with farmers who have a continuing commercial stake in growing wheat and barley. Translation: You have to make your living as a farmer. There is simply no way that 84000 people in Western Canada make their living as farmers, considering that there are only approximately 8000 grain farms with revenues of more than $250000 according to Agriculture and Agri-Food Canada. In the end, it is the result of the plebiscite and not who voted that will carry the most weight, but it would be a shame to have the process marred because farmers did not have their voices heard.

Spinning dangerously out of control?

The following letter ought to win an award. You've got to hand it to the CWB; they can spin with the best of them.

February 9, 2007

Letter to the Editor

It was suggested in the February 1 issues of the Manitoba Cooperator and Farmers Independent Weekly that an Ontario farmer currently selling hard red spring wheat with 13.5 per cent protein would receive $5.50 per bushel, whereas a grower on the Prairies selling 1CWRS would receive about $4.40 per bushel as a final pool return—approximately $1.10 less. The implication is that this is because of poor performance by the CWB. That implication is incorrect, because of several errors in the comparison.

To begin with, the comparison relates a spot price (the Ontario price) to a pool value (the CWB Pool Return Outlook). This is a misleading comparison. A pool value is by definition an average of prices achieved over an entire crop year. In a rising market such as we have experienced so far this crop year, a spot price is always higher than a pooled price. Is the CWB selling wheat at those “high” Ontario values and returning those dollars to farmers? Yes. In fact, CWB values are even higher, as noted below.

The Ontario farmer spot price of $5.50 per bushel is presumably a price at or near an Ontario mill. Therefore, an appropriate comparison would be the current price of CWB wheat landed at an Ontario mill. On February 5, the CWB offered eastern mills No.1 CWRS with 13.5 per cent protein for $230.47 per tonne at Thunder Bay. Add to this freight charges of $25 from Thunder Bay to the mill, and the landed price equals $255.47 per tonne or $6.95 per bushel.

The comparison, then, is between $5.50 per bushel of hard red spring wheat to the Ontario farmer and $6.95 per bushel for CWB wheat sold in Ontario. This $6.95 per bushel would be added to the pooled payments western farmers receive for wheat sold throughout the 2006-07 crop year. Because the CWB’s Ontario sales prices are based on competitive North American values, western farmers can obtain similar cash values today under the CWB’s other pricing options such as our Daily Price Contract. It appears that Ontario farmers are receiving prices that are significantly under current market values.

The truth, therefore, is the exact opposite: CWB prices are higher.

Sincerely,

Gord Flaten,

CWB Vice-President of Marketing

The entire letter rests upon the CWB's belief in its own power, that they can tell processors, millers, and bakers what the price of wheat is anywhere and everywhere. I suppose in some fantasy world perhaps, but what buyer would pay $6.95/bu to the CWB when it can apparently buy from local growers for $5.50?

The CWB's "offered" price is not the price the farmer delivers against. The farmer delivers against the PRO or against Fixed Price and Daily Price Contracts that are based on US futures prices adjusted by basis levels and CWB deductions and "adjusting factors". But if they can claim this made up price to be "the truth", then I suppose I can claim that my farm is "offering" canola for $15/bu this year, oats for $3.50/bu, and confectionary sunflowers at $0.40/lb and make the accountant and the credit union really happy.

The single desk seems to give the CWB a monopoly on one thing: crazy. I hope no one else is buying what they are selling.

Monopoly or Bust?

Thomas Hewson, vice-president of the Western Barley Growers Associations, raises some interesting questions to farmers who do not believe a voluntary CWB to be possible.

There is going to be increased pressure on any government to end the single-desk
marketing monopoly. The past government took the first step toward that by
agreeing to allow it on the table at World Trade Organization talks. Greater
farmer participation in value-chain relationships does not bode well for the
monopoly. A voluntary marketing agency may well have more life expectancy
than a single-desk CWB.

An excellent question. Would the die-hard supporters of the monopoly rather have a voluntary CWB, or no CWB at all? A lot of the same people who are fighting to maintain the monopoly fought to keep the Crow Rate subsidy. When the subsidy was eliminated in the early 'nineties, farmers received only a fraction of earlier, more generous, buy-out offers.

I believe that a voluntary CWB has an excellent chance at success, and is the best option for farmers in the designated area. Hopefully this vision comes to fruition before the CWB simply ceases to exist.

Can anyone read French?

Last Thursday, I attended a breakfast seminar put on by the Frontier Centre for Public Policy that featured John De Pape, who spoke about the CWB and its role in marketing barley. It was a very informative and very reasoned analysis. The Frontier Centre usually puts audio or video of these things online, so as soon as it gets put up, I'll post a link and you can see it for yourselves.

At the breakfast, I sat at the same table as Gord Kurbis, Director of Corporate Policy with the CWB. He disputed the now somewhat infamous news story out of Algeria, quoting an Algerian official who said that the CWB was selling wheat to the Algerian state trading agency at a discount of tens of dollars per tonne. Mr. Kurbis said that the English translation that made its way to Canada was inaccurate. So, I dug up the Algerian article, if you are inclined to read the French. The key quote comes two-thirds of way into the first paragraph:

"Les prix de vente à l'Algérie de 400 000 à 500 000 tonnes de blé annuellement sont bien étudiés puisque ce sont des prix préférentiels. Ces derniers font gagner à l'Algérie plusieurs dizaines de dollars sur la tonne achetée."

My own French skills being what they are, I plugged the quote into an online translator. Intrigued by this, I double checked it with a friend who speaks fluent French. Translation: It is well known that the sale prices to Algeria on 400,000 to 500,000 tonnes of wheat annually are preferential prices. They save Algeria tens of dollars per purchased tonne.

I have a difficult time understanding how there could be any confusion about the meaning. I just don't know why some farmers continue to fall for the CWB party line. The CWB claims that it can price discriminate, charging different prices to different markets to maximize returns. I don't understand where undercutting our competitors by tens of dollars per tonne qualifies as maximizing returns.

UPDATE: (Feb 12, 2007) Check out this exchange between the CWB and US Wheat Associates for more info on translation-gate, or whatever we might call this misunderstanding. (Scroll down to item number three.)

Market signals, again

Maybe this should be a recurring series of posts as well. I'll say it again, the manner in which the CWB pays farmers for grain is about the most muddled signal that farmers receive. The TV signals we got on the farm in the days before satellite were stronger.

If you have your price signal antennae up (the bunny ears, if you will) you may have noticed that the board put out its initial payments for feed barley. This value represents the money farmers would receive up front for feed barley delivered into the board. The price they posted was $110.50 per tonne or $2.41 per bushel. The signal to the farmer: we really don't want your grain. If our lowball PRO price wasn't enough of a signal, the initial payment should be. In this case, we are lucky that we don't have to use the board. In the case of other grains, we are not so lucky.

There is a definite cost to the payment system used by the CWB and it means that the prices quoted in the Pool Return Outlook are higher than the farmer can expect to receive. The reason is that the farmer bears the interest cost, the cost of financing the foregone cash, for grain that he has delivered but not yet paid for. Waiting sixteen months to receive final payments from the CWB is a cost to farmers.

A picture says a thousand words...

This picture was taken from a Regina Leader-Post article. I find the things that protestors put on signs very interesting, the second one from the left especially; "Young farmers want a future, Save the CWB!" This is somewhat ironic, considering that none of the people in the photo appear to be under the age of fifty.

I can't see many young farmers staying on the farm because a government agency will market their wheat and barley for them. My own intuition suggests the opposite is true; As a young farmer, I want the expanded opportunity and greater choice in how my business is run.

The comments are open, so let us know what you think. Geoff and I are both farmers, both under 25, and we do not think that the future of young farmers requires a CWB monopoly. Does support for marketing choice run along age lines?

Some people just get it

A good summary of the latest CWB shenanigans can be found over at smalldeadanimals. It is nice to see non-farmers who understand the fundamental premises behind farmers opposition to the single desk. (And are willing to send traffic our way, thanks, Kate!)

That said, I don't think Kate is voting in the upcoming plebiscite. It is up to farmers to move marketing choice forward, so if you can vote, vote early and vote for choice.

Debunking junk economics

Just recently, the CWB released a study it had commissioned at the farmer's expense to look at its own economic impacts. PriceWaterhouseCoopers, the international consultancy, performed the analysis. Not surprisingly, it found that the CWB had major impacts, generating $1.6 billion in economic activity and "creating" over 14000 jobs. This seemed ludicrous. Then I looked at the study. I saw that they took the value of "premiums" earned by the CWB straight out of other CWB commissioned studies by Andy Schmitz, Richard Gray, and the like and treated these mythological premiums as having a direct, tangible impact on the Canadian economy. Sounds fishy. But the study also treated all CWB expenditures as having economic impacts. I always thought that farmers funded those expenditures, not the CWB. Those expenditures would exist with or without the board in place, so attributing them to the CWB seemed incredibly arbitrary.

To assure you that this idea isn't totally crazy, I refer you to Tyler Cowen, professor of economics at George Mason University and author of the popular econ weblog Marginal Revolution. This was posted under the heading, "Don't Trust Economic Impact Studies." It refers to impact of the arts but it applies to studying the economic impact of any organization and it is crucial to any critical look at the study released by the CWB. (Emphasis is mine.)

We should be skeptical of “economic impact” studies that show the importance of the arts to a community. A study of this kind might show that an arts festival or new arts arena brings millions of dollars in economic value. But these studies typically treat arts expenditures as creating value out of nothing. Implicitly it is assumed that if the money had not been spent on the arts, no other economic or social values would have been produced. Again, the relevant comparison is whether an arts arena leads to more value than some alternative. When we look at economic impact studies for one industry at a time, they all appear to show high benefits. But this means that the net benefits of any single project are low, zero, or perhaps even negative on average. By investing in one good idea we are always forsaking another good idea. In essence these studies list gross benefits rather than net benefits.

Indeed, the relevant comparison in the case of the CWB would be the impact of marketing expenditures in a competitive market. It is a comparison that can't be made.

It is the height of arrogance to think that the gross benefits of Western Canadian wheat and barley marketing are the result of the existence of the CWB. The only conclusion you can take away from the CWB's Impact Study is this: the CWB has such a lack of respect for farmers that it believes that they couldn't generate a single dollar of economic activity in its absence.