| | March, 1996
Executive Summary
I. Key Aspects of the Cereals Grain Trade and Canada's Role
II. Economic Framework for Evaluating Effects of a Single Desk Seller
III. Some Relevant CWB History and Operational Issues
IV. The Continental Barley Market and Oats Deregulation
V. The Australian Experience With a Single Desk
VI. Benefits of a Single Desk in Canadian Wheat
VII. Costs of the Single Desk Buyer and Seller
VIII. Summary
IX. Appendix A
X. Appendix B
XI. References
The views represented herein are those of the authors, Colin A. Carter and R. M. A. Loyns, and we are responsible for the full contents of the report. Alberta Agriculture, Food and Rural Development provided financial and information resources to complete this work.
The purpose of this study is to examine the benefits and costs of single desk selling (SDS) of Canadian grains. We have set out to determine whether the existing single desk marketing system is optimal from the prairie producer’s standpoint. This is an important issue for farmers because the Canadian Wheat Board (CWB) has a major impact on the grain and livestock industry-from the farmgate to the final customer. The Board is a major force in resource allocation in prairie agriculture. The CWB is not only a marketing agency, but has also become a regulator. The industry is required to continually respond to non-market rules set by the Board.
In our study we examine the economic consequences of removing the single-desk status of the CWB, not abolition of the Board. We implicitly compare the existing system to one where farmers could voluntarily sell to either private companies or to a type of cooperative (e.g., the CWB) that pools price. There are plenty of examples of this arrangement in other countries.
Any financial advantage that may be due to the current single desk selling in Canada has to be weighed against the corresponding costs. The CWB monopoly means the CWB is the primary buyer of prairie wheat and barley that is exported or used for domestic non-feed purposes. This lack of competition on the buying side introduces lack of transparency, cross-subsidization, high marketing costs, and production and arbitrage inefficiencies due to false price signals. The rationale offered as justification for the single-desk focuses on the selling power of the CWB and too little attention has been paid to the fact that there is no buying competition at the farm gate. The CWB claims the cost to farmers to run the CWB is less than five cents per bushel. We find it is much higher than that, perhaps ten times higher.
Virtually all aspects of the Canadian grain marketing environment are still highly institutionalized and highly controlled by the CWB. This has slowed productivity gains in grain handling, increased marketing costs, and has reduced farm returns. This is not to say there has been a conscious attempt by the CWB to retard economic growth in grain farming, but there are few political or economic incentives for the CWB to reduce the inefficiencies associated with the status quo. The Board does not pursue improvements in the system the same way that organizations would in response to market forces.
We studied recent developments in barley and oats and found that CWB claims of market power in barley have not been confirmed. The United States has turned out to be an important market for barley and oats, contrary to earlier CWB assertions. The outcome in the oats market is what basic economics would predict about deregulating an over-regulated market.
The CWB argues that price premiums may be achieved in some wheat markets. We doubt the ability of the CWB to extract significantly higher prices, on average. A few years ago, the Australian Wheat Board claimed it received a price premium of about $20 per mt. but more careful cost-benefit analysis has since found the premium to be only $0.12 to $0.31/mt. In our report, an examination of U.S.-Canadian farmgate returns to wheat and barley shows no evidence of any CWB price premium. This is no surprise because Canadian grain must be priced competitively in world markets, and the majority of Canadian wheat sales are into markets where price is more important than quality. Even if the CWB could draw out premiums, would they offset the additional cost to the system? We find that they do not.
Our report examines the single-desk costs associated with the following factors:
- administration of CWB;
- protein over-delivery in world markets;
- delays in varietal development;
- grade over-delivery in world markets;
- farm production inefficiency due to false market signals;
- excess domestic handling charges;
- excess cleaning;
- demurrage/dispatch/extra freight;
- overage credits;
- delays in farm cash flow and on-farm storage costs;
- grain company and processor costs, and;
- government underwriting and food aid sales.
Looking at these factors, we have found that measurable costs of the single-desk to farmers exist, they vary and could be as high as $20 per tonne in any year for wheat. Taxpayer costs could be another $5 to $6 per tonne. For barley growers, the hidden costs of the Board are larger than $20 per tonne, and the taxpayer costs are approximately $9 per tonne.
Colin A. Carter and R.M.A. Loyns |
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