Single Desk Selling: Some Relevant CWB and Operational Issues

Events leading to establishment of the first CWB
The first Canadian Wheat Board (CWB) was formally established, under the authority of the War Measures Act, by P. C. 1589 on July 31, 1919 (Wilson, 1978). The Board concept originated in Australia where it had been implemented in 1915 in connection with wartime policy of that country. The Canadian experiment was first set up as a one-year temporary organization in 1919, in response to the British government’s cornering of the Winnipeg wheat futures market and the closing of that futures market. On July 15, 1920 trading resumed at the Winnipeg Grain Exchange, which had been closed a year earlier in conjunction with the establishment of the CWB.

Events leading to creation of the second Canadian Wheat Board(s)
In the early 1930’s the federal government, in order to support wheat futures prices, purchased and held wheat futures contracts. It found "that it could not sell the futures later in the crop year without unduly depressing the market," and, ". . . by the spring of 1935 it held futures contracts roughly equivalent to the total quantities of wheat in storage in Canada." (Wilson, 1979, p.98) The federal government realized the futility of its attempt at price support policy. "Depression, as well as war, had created abnormal conditions under which the futures market could not operate satisfactorily" (Wilson, 1979, p.97). There was continued pressure from producer organizations to reconstitute the CWB and the CWB was temporarily recreated in 1935.

In 1938, the Turgeon Commission recommended the Government, under normal conditions, should remain out of the grain trade. (Royal Grain Inquiry Commission. Report. Ottawa, 1938 quoted in Wilson 1979). The large imbalance between world wheat supplies and world demand and the possibility of war were the reason given for not immediately dissolving the CWB.

The 1935 CWB was not compulsory and it operated a voluntary wheat pool until 1943. During World War II, the demand for grain raised prices, and in 1943 the CWB was made compulsory to help control inflation. The CWB was then retained after the war because most of Canada’s wheat was exported to Britain under a bilateral agreement, and the CWB made administration of the agreement much simpler (Fowke, 1957).
Rotstein (1984) convincingly argues the rationale for CWB creation was the same as other Canadian public corporations, a response to major forces from outside the sector that are to a large extent, uncontrollable. The Liberal government in the late 1930s, and early war years, was committed to terminating the CWB in favor of the open market but external forces-the culmination of the depression effects and the "extraordinary issues of the war effort" lead to creation of the Board. "Hence the genesis of a crown corporation by a government that did not want it" (Rotstein, 1984).

The early years (1935 - 1949)
The current Canadian Wheat Board was created by legislation enacted through Parliament in 1935. It began as a voluntary government agency of the federal government and farmers could deliver to the Board or to the open market. The motivation for creating the Board was only partly producer assistance based. Wilson provides the following:

Unquestionably, the government’s basic reason for the creation of a monopoly wheat board was concern over possible inflation in one sector of the economy which threatened the tenure of its wartime price controls. Secondly, the government had been placed on the horns of a dilemma in acting as seller and also as ultimate buyer of most of the producers’ wheat. The creation of the crown account, at the expense of closing the market, and the closing out any further producer interest in the balance of the 1940, 1941 and 1942 accounts, had afforded a solution to both problems. Had no action been taken, the board would shortly have been unable to make further offers to the British. Either the latter or the Canadian government on their behalf would have had to make their purchases on the open market. Meanwhile, transportation and labor shortages had interfered with the shipment of wheat to the lakehead, resulting in abnormal spreads between street and terminal prices.
The creation of a monopoly wheat board was a consequence of, but only incidental to, the resolution of these problems. Thus it happened that the pools secured a windfall victory in the government’s decision to close the market and to replace it with a monopoly board. The reasons for the decision were unrelated to the pools’ advocacy over the years of that type of market system.

It was ironic, too, that the Liberal government had come full circle on the wheat marketing policy it had originally embarked upon to get the government out of the wheat marketing business and to terminate the wheat board. Instead of doing so, the government had now gone to the opposite extreme of creating a monopoly board. But this was not because the government had concluded that a monopoly board was the best alternative among marketing systems. Instead, it adopted this policy as a temporary, wartime expedient to resolve the extraordinary issues with which it was immediately confronted (Wilson 1978, p.782).

Also in 1943, the government via the War Measures Act, enlisted the position of the CWB to control other grain prices. It is to be noted that control in this case means "limit the level or rise in these prices". The Board had statutory maximums on wheat, oats, barley, flax, and corn between December, 1941 until expiry after the war. In April, 1943 the Board was also authourized to buy rapeseed and sunflowers.

In 1967, the Canadian Wheat Board Act, hitherto subject to expiry which required periodic amendments by Parliament to extend the Board’s duration, was amended without time limit, thereby creating a permanent Board (Wilson, 1979, p.102).

Oats and barley
In 1949 the CWB was given exclusive authority over the domestic and export marketing of oats and barley. A large proportion of oats and barley were used on farms, or sold to neighboring farms. A smaller proportion was traded among provinces, mostly between western and eastern Canada, and an even smaller proportion was exported. Since transactions within the province fall under provincial jurisdiction, each of the western provinces had to legislate compulsory marketing authority to the Wheat Board.

At the time the oats and barley legislation was being considered there were questions raised in the House of Commons on the constitutional legality and possible conflict of interest. It was brought to the attention of the House of Commons that movement of oats and barley is from farmer to farmer and at the time little was exported. A possible conflict of interest arises for a wheat board monopoly on oats and barley between farmer buyers and farmer sellers. Stuart Garson, Premier of Manitoba at the time was concerned over this possible conflict of interest. In a letter to the Minister of Trade and Commerce, C.D. Howe, Garson asks the questions:

Is the Wheat Board to be the agent of the producer of oats and barley charged with the responsibility of securing the best price possible in all available outlets? Or is the Board to be the agency of the Government, buying oats and barley at a price set by the Government for reasons not necessarily related to, and even compatible with, the securing of the best price?

These questions arose from Garson’s belief:

"that ever since P.C. 7942 of October 12, 1943, had created a monopoly board, the latter had been an agency of the crown, subject to government direction in pricing rather that the agency of producers and selling to their best advantage" (Wilson 1978, p.966).

After a year of debate and proposed resolutions to Bill 135 the federal government’s position remained unchanged. The federal government’s position under Howe was that:

"If the coarse grain farmers of western Canada are not satisfied that the wheat board, as now constituted, is a satisfactory marketing agency for their coarse grains, then an obvious alternative is for the producers of coarse grains in western Canada to establish their own marketing agency". (Wilson 1978, p.974).

The federal government was not willing to have the Wheat Board market oats and barley to the best available price in export and domestic markets and at the same time recognize the importance of the livestock industry. The two concerns were seen as contradictory. Despite these concerns, Saskatchewan passed the required legislation in March, 1949. Alberta and Manitoba followed with identical legislation within one month.

CWB control over interprovincial shipments of feed grains became a public issue during the grains crisis in 1969 to 1972. Farmer border crossings (provincial borders, not the U.S. border) lead to much publicized RCMP arrests in 1969 and 1970. Western farmer dissatisfaction with excessive controls on feed grains, and eastern feeder concerns with price and supply availability were important factors leading to Feed Grain Policy changes in the 1970’s. Some changes were made in 1974, and by 1976, the domestic feed grain market had returned to a reasonably open system with restoration of unimpeded interprovincial shipments and futures trading of oats, barley and feed wheat.

Evolution and CWB policy: 1960 - 1980s

Grading to protein
A drop in sales of wheat to the U.K., beginning in 1960, was an important signal that there was a change occuring in international grain markets. It was also a critical sign that there was an important criterion missing from Canada’s grain grading system. There were no criteria, and apparently little willingness, in the system for measuring or selling protein. The Chorleywood Bread Process (CBP), developed in the U.K. around 1960, allowed bakers to use flour with less protein without compromising on the quality of the bread. Prior to adopting this process, bakers had been using up to 75% hard red wheats in the grist. A lower cost grist could now be prepared by combining a small proportion of high protein wheat with local low protein soft white wheat. Millers needed to know the protein content of the two wheats for the grist to have the correct protein level. Canadian wheat was not available with minimum protein content guarantees. The U.K. was able to purchase U.S. Northern Springs at 14 and 15 percent protein, Russian SKS at 14 and 15 percent, and Australian Prime Hards at 14.5 percent.

Table 3.1 Protein Content (%) of CWRS
Western Canada	five year averages
	1965-70	1971-75	1976-80	1981-85	1986-90	1991-95
1CW	13.5	13.5	13.6	14.1	14.2	13.0
2CW	13.6	13.2	13.1	13.8	14.0	12.9
3CW	13.6	12.9	12.7	13.2	13.7	12.7
CW Feed	13.5	n/a	13.5	13.5	14.3	n/a
All Milling Grades	13.6	13.3	13.2	13.8	14.0	12.9

Source: Canadian Grain Commission Harvest Survey

The data in Table 3.1 show that Canada had a good supply of high protein wheat available from 1965 on. We are advised that a system had been worked out within the Grain Commission in the early 1950’s which would allow protein identification and segregation. But the CWB and CGC both resisted this small but important piece of technological and market change, and it was not until the early 1970’s that the CWB began selling by protein specification. Farmers were still not rewarded for protein content until almost a decade later. In contrast, pricing by protein has been a practice for decades in the United States.

In 1970, Dr. J. Ansell Anderson, the originator of the notion of protein segregation in Canada, pointed out that farmers in areas of the prairies which consistently produce higher protein were subsidizing areas producing lower protein. The first evidence of rewarding protein difference at the farm level appears to have been on No.1 CWRS in 1979 when the grade was split into two categories at 13.5%; No.2 CWRS received the same treatment in 1987. The system is still playing catch up on protein: Amber Durum was first protein segregated in 1993, and an announcement was made for winter wheat in the fall of 1995. The CWB in announcing these protein segregations has said they "are in response to farmer requests" (CWB Press Release, July 1994). The CWB in 1994 authorized a $0.50 per tonne credit to grain companies on No.1 CWRS and No.1 CWAD for purchase of grain protein testers. "Beginning August 1, 1995 farmers will be paid protein premiums for Nos. 1 and 2 CWRS 12.0, 12.5, 13.0, 13.5, 14.0, 14.5 and 15.0 percent. No. 3 CWRS with a protein level of 13.0 percent will also receive a premium. For Nos. 1 and 2 Canada Western Amber Durum (CWAD) farmers will be paid for 12.5, 13.0, 13.5 and 14.0 percent protein" (CWB News Release, July 4, 1995).

Transportation and equity
In the late 1950’s and 1960’s, "equity", defined as equal access to the handling and transport system, was the primary driving force in operating the quota system of the CWB1. Quotas were built around a unit delivery system which allowed farmers to decide what they would deliver into the system. Not surprisingly, in this kind of non-market signal environment, deliveries did not necessarily match demand and frequent system congestion was the result. System logistics and efficiencies were in need of repair as was, ultimately, the definition of equity.

The Block Shipping System was first tested in 1969 and by 1970 fully implemented over the Board designated area. As many as five train runs each with a series of shipping points was designated as a "Block". Elevator companies were allocated cars based on the volume of business done on each block. The elevator companies were given complete flexibility to allocate cars to the shipping points within a shipping block. Clearly the new system was a move to more closely match farmer access to the system with demand, and it altered significantly the concept of equity. "Equity" now came to mean approximate equal access to the system over the crop year as opposed to any moment in time. The economic consequences are obvious-with the pooling of returns and flat prices over the crop year, those whose deliveries were postponed, received a lower real return for their product. That definition of equity, when judged against economic reality, ran into some contradictions.

In 1979, after industry consultations, the allocation process for off-Board and non-Board cars was separated from the allocation of Board cars. In 1984 the block shipping system was supplanted by the current train run system (CWB, July 1992):

Prior to 1969, the quota system was primarily concerned with equity. That is, delivery opportunities were allocated so that no group of producers, region, or grain received less quota than another. ... The primary goal of today’s quota system is to make efficient use of the constrained transportation and handling system. Providing equitable delivery opportunity for all western grain producers is a secondary goal (CWB, July 1992).

To accomodate differences in land productivity, in 1979 the assignment of acreage for quota purposes was significantly altered. Summerfallow became penalized in available quota acres and more productive land was provided a quota advantage. After several modifications in quota policy, the CWB finally removed quotas on all nonboard grains and revised the basis for Board grains. Only wheat and barley acreage qualify for quota assignment today, and only wheat and barley are subject to quota control. The CWB claims this quota revision is production neutral and that it reduced total quota acres by about 25% (CWB Press Release. April 1993).

In 1994-95 the CWB moved toward more contracting of grains. Contracting within the CWB had been used in some market development programs as early as 1977, and guaranteed delivery contracts had been tested on some new wheat and barley varieties in the 1980s.

Contracts are basically another form of quotas which are characterized by larger volumes per call and greater lumpiness in application. However for the CWB they have the advantage of better logistical control and greater market discipline, through contractual arrangement. Consequently the CWB has greater control, and less uncertainty, in assembling supplies.

Contracts have also materially changed the Board's concept of equity. Obviously in a world where CWB contracts existed along-side conventional delivery quotas, sometimes for the same commodity, sometimes for different commodities, contracting producers will usually have an advantage in the timing and volume of deliveries. Today, contract calls provide relatively larger movement in small wheat or barley categories than in the ordinary wheat and feed barley categories. By most standards of equal access to the handling system, this characteristic of contracts would not pass the test. However, the view is now that contracts can be justified on equity grounds because "all producers have the same opportunity to sign a contract."

Designated barley and amber durum wheat pools
The designated barley pool account was implemented in the 1975/76 crop year. The durum pool account was implemented in 1977/78. These separate pool accounts were created in recognition that amber durum and designated barley are "marketed in distinctly different markets than are feed barley and wheat. ... the separate pool account is used to provide producers with a distinct price signal and market return calculation for this crop" (CWB, July 1992, chap 13, p.1).

Two-price wheat policy (1972-1988)
The Two-Price wheat policy, created in 1972, was removed on August 1, 1988. It set prices domestically for a period of time, sometimes above and sometimes below offshore prices. By the late 1980s central Canadian Hard Red Spring Wheat acreage had grown to the point that a substantial portion of domestic milling was serviced from non-CWB sources. The U.S.-Canada free trade agreement in 1989 led to the abolishment of the two-price wheat policy. Table 3.2 shows how in 1987 spring wheat production peaked in Quebec and Ontario. Total domestically ground wheat remained relatively constant over the same period.

Table 3.2. Wheat Production in Central Canada
Spring Wheat Area (Other Than Durum)				Spring Wheat Production		Quantities of Wheat Ground for Flour in Canada
Year	Que.	Ont.	Total	Que.	Ont.
	'000 hectares			'000 of tonnes		'000 of tonnes
1980	42.7	8.9	9,598.5	124.8	23.4
1981	40.9	8.9	10,394.5	119.0	24.0
1982	32.0	8.9	10,795.9	93.0	24.0	1982-83	2,322.0
1983	30.0	11.3	11,839.3	82.0	27.5	1983-84	2,459.0
1984	37.0	10.5	10,977.7	120.0	30.5	1984-85	2,412.0
1985	47.0	12.1	11,246.7	164.0	41.6	1985-86	2,466.0
1986	44.2	30.8	11,588.4	138.0	84.0	1986-87	2,469.0
1987	54.5	44.5	10,739.3	150.0	128.0	1987-88	2,442.0
1988	48.5	22.3	10,174.2	122.0	60.0	1988-89	2,487.0
1989	34.5	16.2	10,690.0	110.0	48.0	1989-90	2,383.0
1990	42.5	16.2	11,547.5	137.0	44.0	1990-91	2,405.0
1991	32.5	16.2	11,932.1	96.0	38.0	1991-92	2,367.0
1992	35.6	18.2	12,041.5	119.0	54.4	1992-93	2,400.0
1993	37.0	18.2	10,704.2	110.0	50.3	1993-94	2,635.0
1994	40.5	12.1	8,257.1	103.0	35.4	1994-95	2,683.0
1995	31.0	16.2	8,838.5	85.0	47.6

The policy (implemented by the Federal government) had little net transfer effect in the direction of prairie wheat producers. If it is judged to have had any positive impacts it would have to be in the dimension of stabilization, but because the domestic market is so small, even that effect was limited. Variability of export markets overrode the small domestic contribution to revenue. The major beneficiaries of the program were Ontario and Quebec HRS wheat producers who had a very closed, protected, high priced market for a few years. They were able to capture most of the benefits of high domestic prices as fringe suppliers. This foray into misplaced use of market power may also have hastened the demise of some prairie millers.

Market information
The operation of the CWB has long been characterized by release of very little information beyond the Annual Report which is available only well after the end of the crop year. During the grains crisis in the early 1970s this issue received considerable attention and observers began to complain about 1) the limitation on market signals, and 2) the inability to assess CWB performance. By the mid 1970s, the Minister of the CWB, the Honorable Otto Lang initiated the unprecedented move of early announcement of initial prices and quota prospects. This information was intended to provide guidance to producers before seeding. This was a major advance in information flow at the time. The process was terminated in 1979 during the U.S. embargo against the Soviets, because Minister H. Argue indicated the "market conditions were too uncertain".

Several farmers and economists, repeatedly made the case for more market information on grain markets from the CWB. The next major contribution from the CWB came as a result of directions from Minister Charles Mayer in 1993 when the CWB began providing estimates of returns that can be expected in each category of a pool, the Pool Return Outlooks (PROs). These "forecasts" provide a measure of how world prices are changing over time but do not provide a firm indication of the level of final payments. Nor do they provide any measure of current CWB selling prices. Finally the PROs do not provide much useful information for evaluating CWB operations.

This latter information deficiency has important implications. There has been no independent publicly available comprehensive economic evaluation of the operation of the CWB in its entire history. Efforts by external reviewers have been subject to criticism by the CWB and Board supporters, claiming erroneous results because of inadequate or inaccurate data, and data misuse. This represents a real and significant regulatory trap. This situation is much different in Australia, where Industry Commission reviews have resulted in meaningful changes to the AWB (see Chapter V).

CWB management and operating structure
The Canadian Wheat Board is administered by a Board of not less than three and not more than five commissioners. These commissioners are appointed by the government until age 70 and report to the Minister responsible for the Canadian Wheat Board. "On the operation side, the Commissioners are jointly and separately responsible for the work of the Board’s principal operating divisions, including Sales and Market Development, Grain Transportation, Country Services, Management Information Services, and Treasury" (Wilson, 1979, p.67). The Board is advised by an Advisory Committee made up by an eleven member, farmer-elected, body. They have no authority beyond advising the CWB on its operations and commenting on matters of interest to the Committee in the public domain. This organizational structure continues despite a 1990 review panel recommendation to reorganize the structure of the CWB to that of a "modern corporate structure" with an appointed chair and board of directors, along with a professional president and chief executive officer. (See CWB, 1990). In 1992, Deloitte and Touche conducted a comprehensive management review of the CWB. They found a serious lack of leadership, lack of strategic planning, and lack of accountability at the CWB. This report has not been made widely available (see Hansard, March 13, 1996).

The two principal responsibilities of the Commissioners are the sale and pricing of Board grains. Board commissioners are advised by the Sales and Market Development Division on price and are frequently involved in direct sales negotiations with importers. Some sales are made through accredited agents of the Board. For a period in the 1980's, the proportion of sales through agents increased but apparently it is declining today.
Over the years the CWB has had varying degrees of control over transportation. Early on it controlled board and nonboard grains. During the era of the Grain Transportation Agency (GTA), it shared responsibility for car allocation with the GTA. The CWB owns about 2,000 hopper cars which were purchased at the peak of concerns over transportation capacity in the late 1970s.

Control of transportation and rail cars has changed since the abolition of the Western Grain Transportation subsidy. A group of Senior Executive Officers met and reported on grain transportation issues including grain car allocation. Unless there are fundamental changes made to the role of the CWB, the Grain Transportation Division at the CWB will continue to have a major input into grain car allocation regardless of which group is assigned control over the government and CWB owned hopper fleet. The fact that the CWB controls all grain movement in the country reduces handling and transport efficiencies.

CWB borrowings, made up of short and medium term debt instruments and short term loans, as of July 31, 1994 amounted to $6.826 billion and a year earlier were $6.849 billion. The CWB currently has three programs that it uses to raise capital and reduce the cost of borrowing. The Euro Medium-term Note Program was launched in July 1993, the U.S. Commercial Paper Program in 1991, and the Wheat Board Note Program in 1989.

When the CWB became a compulsory board in 1943, futures contracts for milling quality wheat and non-feed barley at the Winnipeg Commodity Exchange were closed. Price pooling by the CWB took the place of hedging as a way to manage risk.

Board grain is unhedged, and one of the principal purposes served by price pooling is to distribute the price inherent in the carrying of unhedged grain equitably among all producers sharing the pool (Wilson 1979, p.278).

Indications are that futures trading for wheat and barley is now being used by the Board in the Chicago and Kansas future markets, and for financial instruments. Mention of the CWB’s activities in the commodity futures markets is first made in the 1992-93 CWB Annual Report. The following year's annual report announces the formation of a ...

Risk Management Group which is responsible for managing commodity price risk through the use of exchange traded futures and options, as well as other risk management instruments (CWB Annual Report 1993-94).

Conclusion

• The CWB was set up as a temporary government marketing agency and made mandatory due to wartime conditions and the need to keep a lid on wheat prices.
• The Commissioners have become, in essence, political appointees until age 70.
• The CWB does not have a "bottom line" in any of the performance review, profit, or political senses, and it is fully guaranteed by the government. A 1992 comprehensive management review of the CWB found a serious lack of leadership, lack of strategic planning, and lack of accountability at the Board.

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