What happens when the Canadian Wheat Board monopsony goes away?

October 17, 2011 4:49 PM

The Canadian Wheat Board's monopsony is being abolished. If I were a wheat farmer in Saskatchewan, what could I expect to see over the next five years?

Currently, wheat farmers must sell their wheat to the CWB. Once that's no longer the case, companies like Cargill will be moving into the new market. I don't know anything about agriculture or commodities, so I'm wondering what that will look like for farmers. For example:

• How will selling work? Presumably farmers aren't going to just drive down to the nearest grain elevator and sell their crop at whatever the price is that day. So will they sign contracts with Cargill (or whoever) at the beginning of the year to sell at a set price at harvest time? How will the buyers structure those contracts in order to maximize their profits, get an edge on the competition, and protect themselves from fluctuations in wheat prices?
• How long is the CWB likely to survive? It had two-thirds support from farmers in a recent referendum, so I can see people sticking with it in the short term if it's remotely viable. But it doesn't own any grain-handling infrastructure, so I guess it would need to strike deals with its infrastructure-owning competitors. Can it compete in an open market?
• My understanding is that the CWB protects small farmers by offering price stability. So are we going to see increased concentration of farm ownership in the medium term, as large agricorps buy up small farms that have gone under after a drop in prices?
• What's going to happen that I'm not even thinking about because I'm an uninformed urbanite?

This is a big question with a lot of unknowns. But people have been talking about it for longer than I've been alive, so I figure there's some accepted wisdom out there.

posted by twirlip to Society & Culture (9 answers total)

I don't know much about the CWB, but a couple of angles spring to mind. I'm in the UK, so different conditions will apply elsewhere.

(I have farming family and watch the industry, but am not directly involved, so experts may be able to correct me on some points of the following.)

Here, some farmers sell forward to the processors or middlemen and some sell spot at harvest or even some time after if they have storage. Grain is a major actively traded commodity on the futures markets, so the price they sell is related to that. Hence, you have little certainty on prices except what you lock in yourself. You don't get that much room to negotiate on contracts - you sell a certain amount of a certain quality at a certain price.

I don't know to what extent the CWB ignored market trends, but it seems likely they are going to see more price volatility. That doesn't necessarily mean more farms going out of business and bigger groups taking over - farm profits vary from year to year and in many places the banks are understanding(ish), extending credit to get them through to the next year.

However …

In the UK, we had a near-monopsony milk buyer, the Milk Marketing Board, which was deregulated in 1993. Immediately after the MMB lost its monopoly, farm gate milk prices rose as the independent dairies competed for supply. That didn't last too long. Several dairies went bust and prices quickly began to fall again - and indeed, now thousands of smaller dairy farms have gone out of business because they can no longer make a living.

Now, the milk picture is complicated because you also have imports (milk from Europe, dairy products from New Zealand, which has a much lower cost of product), the effect of subsidies, the common agricultural policy, the market structure is different (dairy farms produce all year round, they have a supply contract with the dairy which agrees to take the milk but essentially tells the farmer what price they're getting - not much scope for negotiation or shopping around), the pricing power of the supermarkets (who are perhaps an oligopsony for much agricultural produce in the UK, but certainly have no intention of increasing the prices farmers get).

Still you could perhaps consider MMB as an example that led to concentration in farming.

MMB's processing operations actually still survive as Dairy Crest, which is one of the big dairy groups in the UK market, but it had its own collection and processing infrastructure, so it sounds like it's different to the CWB
posted by Temagami at 5:24 PM on October 17, 2011 [1 favorite]

You might look into what happened when the Australian equivalent, the Australian Wheat Board, was privatised, followed by the later deregulation of the wheat trading market.

I'm somewhat across this, albeit with only limited knowledge of the market-side of things. But as I understand it, in Australia :

• Farmers, either directly or as a co-op, deal with a marketing/trading company (e.g. AWB). The co-op itself may also be a marketing/trading company, dealing directly with domestic & overseas purchasers.
• AWB is still going 3 years after deregulation (although, as I mentioned, it was privatised beforehand). It's still the largest marketing/trading organisation locally. I won't comment on the whole "class of shares" issue mentioned in the wikipedia link, except to say that progression of ownership/control structure is extremely common when similar organisations and groups are privatised into a deregulated market.
• It actually does add some flexibility for producers - they can pick-and-choose where & who they sell their grain to, which allows them the option of targetting their production to suit those markets. That has its downsides, of course, but it also adds the potential for creating new domestic & international markets (e.g. the market for "organic" non-pesticide treated wheat is expanding here).
• Dunno. I too am an uninformed urbanite, albeit one working on grain-related issues ;-)

Overall, I'd say it probably does have a tendency to increase concentration of ownership into the same old agribusinesses (boo! hiss!), but other already-existing factors that do the same (e.g. access to capital, economies of scale, etc) outweigh it. My personal feeling - and, again, I'll reiterate that I'm not and have never been a farmer - is that it opens other opportunities that farmers may or may not be ready to take advantage of.
posted by Pinback at 5:31 PM on October 17, 2011

The MMB is the case study referred to in my comment in that thread. Thanks for the memory refresh!

The Wheat Board will survive in some fashion for a while but you'll see the more successful farms either go it alone full stop or try some way to privatize the profits and socialize the losses by only selling to the Wheat Board when they can't get a better price elsewhere. Long term either the more marginal farms will be shut down/sold off or a new Wheat Board will be made, only this one actually will require constant government money as it will be made up of only the more marginal farms.

In any event, don't expect flour* to be any cheaper for Canadian consumers. Not that cheaper flour would matter, it already is cheap, I couldn't imagine even a 20% increase in the cost of flour causing much trouble to any Canadian. Bakeries may complain, but even then what is the cost of the flour in a cheap loaf of bread? It must be a low percent.

*I'm using flour here because for consumers I think wheat = flour.
posted by any portmanteau in a storm at 6:09 PM on October 17, 2011

Changes in the cost of flour actually have a serious impact on the price of bread, as seen in Canada in 2007 and 2008. The cause of the price jump wasn't the dismantling of the wheat board (obviously), but the effect was substantial. It was a big story for a short while.
posted by looli at 6:45 PM on October 17, 2011

From the 2008 article. Flour went from $12.50 for a 20kg bag to $19.00 over a year. If you need 0.5kg of flour for your loaf the cost of flour went from 31.25 to 47.5 cents. The bakery owner was expecting it to rise to $27.00. Making the cost for such a loaf 67.5 cents.

So the increase from his baseline of a year previous to an expected future increase was 36.25 cents. The increase from the then current price to the increased would be 20 cents. But the baker in question thought consumers should expect the price of a loaf to increase by $1.00 or more.

The cupcake person is looking for an increase of 25 cents. If a cupcake had 50 grams of flour in it this would result in an increase of 6.75 cents. These cupcakes have 15.625 g of flour in them, so the increase in flour cost would add 2.11 cents per cupcake.

In both cases, these producers were expecting to charge their consumers much more than the cost of the increase in flour. They're is taking advantage of a "crisis" to improve their bottom line.
posted by any portmanteau in a storm at 7:12 PM on October 17, 2011 [1 favorite]

How will selling work?

Here is a primer on how it works for canola, a "non-board" commodity. Seems staggeringly complex to a simple urbanite like myself. (Canola, by the way, has far surpassed wheat in terms of farm cash receipts, and is the most important single crop in Canada.)
posted by Urban Hermit at 8:31 PM on October 17, 2011 [1 favorite]

Best answer: I am a wheat farmer in Saskatchewan.
Farmers out here are absolutely nuts about the CWB issue. I'm relatively new to farming so I don't have the whole "my father, grandfather, and great-grandfather grew rich by the CWB, and gol'durnit if I don't support them too" thing going on. Nor the soul-consuming hatred of the Board. Contrary to popular belief, it's not entirely the Board's fault that we get mediocre wheat prices. Blame the global wheat market -- Russia, Ukraine, and Kazakhstan produce massive amounts of wheat sold at deep discounts; we're desperately far away from our major markets; world wheat consumption is not growing exponentially; speculation in the commodity markets causes rapid price swings that an organization like the Board can't always profit from (the Board tries to crop-average by selling similar quantities of wheat each quarter).

There are farmers who drive down to the local elevator or crushing plant and sell their canola at whatever the price is that day. These guys aren't going to act differently with open-market wheat. They already deliver the wheat to a local elevator (who acts as an agent of the CWB), but there will be one less middleman.

Issues that farmers don't foresee, that I think will happen:
- Logistics will become a complete clusterf**k for a few years. It's happening in Australia right now.
- Farmers will lose a lot of freedom in shipping. Right now we have two choices: we can make a deal with a local elevator and sell our wheat to them. We may negotiate a small trucking premium ($6 per metric tonne), but we have to pay the rest of the trucking ($4 per tonne over and above the premium), elevation, weighing, and cleaning fees of $20 per tonne. The elevator company cleans the wheat, blends it with everyone else's, loads it on rail cars and sends it off to the west coast. Or we can order our own rail cars (producer cars), which the CWB administer, load them ourselves, and pay a total of $3 per tonne in elevation and weighing fees. The elevators hate it!
When the CWB goes away, do you really think that my local Cargill elevator is going to let me load a rail car myself and save my $21 per tonne? No, they're going to tell me that if I want to sell my wheat, I can bloody well truck it to the elevator and pay the fees like everyone else. I produce 1000 tonnes of wheat every year, and I'd rather that $21,000 was in my pocket, not Cargill's.
- Everyone close to the U.S. border thinks they're going to be trucking down to the U.S. and making piles of cash. They see the wheat bids in North Dakota (a good $75-100 per tonne higher than CWB prices) and have dollar signs in their eyes. Do you really think the Americans are going to put up with a flood of Canadian wheat? That border will slam shut about 48 hours after it opens.
- Price of flour is not affected by the price of wheat. Middlemen? I don't know.
- All of our flour in the stores is Canadian wheat. When the Board goes away, that will change. Do consumers care?
posted by bluebelle at 11:22 PM on October 17, 2011 [6 favorites]

I should also say that the pro- and anti-Board factions are strongly divided.
The CWB had to do a lot of fudging of the voters' list to get that two-thirds support in the recent plebiscite.
They really haven't been doing much other than frenetic self-promotion lately. It's painful to watch them go down like this.
posted by bluebelle at 11:29 PM on October 17, 2011

Response by poster: These answers are fantastic. Thank you!

bluebelle, the point about shipping and fees is exactly the sort of thing I was wondering about with that first question, so thank you especially for that (and welcome to Metafilter!).
posted by twirlip at 3:26 PM on October 18, 2011