| | 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 1993 dual market in barley
On August 1, 1993 the Minister of Agriculture, the Honorable Charles Mayer, removed from control of the CWB the sole authority over barley sold into the United States. As a consequence of a court challenge, a legal judgement that reversed the Order in Council, and a change in the Federal Government, the experience with the continental barley market (CBM) was very short lived-only forty days. However, it was an extremely active period for north-south barley trade. Fallout from the CBM has become legend. Proponents of the CWB and the Board itself have said that the CBM caused prices to fall and restoration of CWB control raised prices. Proponents of free trade point to expanded trade that has followed, with overall growth in sales to the U.S., albeit with continued arbitrage problems in barley after restoration of CWB control. This section reviews available evidence on this snapshot of deregulation, including the economic debate that preceded the decision, the period itself, and events following the return of barley to the CWB.
Economic debate before the change in barley marketing
This particular regulatory change was rare in that it was preceeded by an unusual amount of serious economic analysis of performance problems in the prairie barley market. In fact there were studies back as far as the early 1970s preceding the changes, which lead to the CWB losing most of its control in the domestic feed market. In the early 1980s, Carter and Kraft (1981) and Storey, Coffin and Rosaasen (1984) reported on aspects of pricing in the barley market. These studies dealt with the inability of producers (barley and livestock) to anticipate levels and direction of barley prices, and with the poor price arbitrage in the barley market.
A study by Ulrich, Furtan and Schmitz in 1991 documented the poor arbitrage, this time in relation to the U.S. market. They also documented that Saskatchwan barley prices tended to be well below prices available south of the border. During this period and since, frequent price irregularities with feed barley have been pointed out by others. For example, a report by Alberta Agriculture (1992) provided evidence showing lower net barley prices in southern Alberta than in Montana.
The malting barley market has also received attention by agricultural economists. Ulrich, Furtan and Schmitz (1986) reported that there were some problems in the malting barley market. They found that research and varietal development were heavily influenced by the domestic malting industry and affected the types of varieties that were developed. Canadian malting varieties were traditionally six row, white aleurone, while the U.S. used blue aleurone and two row varieties. These varietal differences contributed to lower barley yields and the inability to export to the U.S. Carter (1993) investigated this export constraint in detail and confirmed the Furtan, Ulrich, Schmitz results.
Finally, there were three pieces of economic research conducted in early 1993 just prior to removal of barley from the CWB. The CWB published an evaluation of its operation in the North American Barley Market in December 1992. Carter undertook a study for Agriculture Canada, in conjunction with an industry panel, on the likely effects of a continental barley market. That report was published in March, 1993.
Schmitz, Gray, and Ulrich reported shortly after Carter on a study commissioned by the Prairie Pools, the organization that brought the legal challenge that terminated the CBM.
These studies all centered on the following issues:
- is there a profitable market for Canadian barley in the U.S.?
- does the CWB have market power in the U.S.?
- are producers better off with or without CWB control in this market?
There was not much agreement on results among the CWB and the Prairie Pool consultants on the one hand, and Carter on the other. The CWB argued that the Pacific North West (PNW) of the U.S. was a barley surplus area. Carter showed that it was deficit. During the CBM period, the PNW and California opened up as major importers of Canadian barley.
The CWB and the Pool Consultants both argued that the CWB had market power, prices would fall with additional sales into the U.S., and farmers were better off serviced by the CWB in this market. Carter argued that as a small supplier in a large U.S. feed grain (and malting) market, Canada, with or without the CWB, is a price taker. He produced evidence that demand elasticity (the critical determinant of market power) was in the order of -19.0 (very highly price elastic) and malting barley was even more price elastic. These results are consistent with the proposition that there would be no market power for any Canadian seller of barley in the U.S. The CWB and Pool Consultants ended up where they started-proposing to maintain the CWB because it increases returns to producers. The CWB study downplayed the importance of the U.S. market to Canada. Carter concluded that opening up the border to the private trade would produce greater benefits for farmers. For a forty day period beginning August 1,1993, the market itself tested these arguments.
Evidence on the CBM
The change in market structure in barley that occurred on August 1,1993 and was reversed only a few weeks later, provides almost an experimental design in deregulation. Unfortunately economists that had so much to say about the market beforehand have not done much to analyze the results of the experiment. One study was done and is reported at the end of this section. This discussion of results experienced during the CWB period considers the before, during and after points in time.
Figure 4.1 shows daily movements in barley prices throughout 1993. A measure of prices of U.S. barley and U.S. corn are provided in order to track feed grain price movements through this period. Prices did fall in the CBM period, shown between the two solid vertical lines. After the CBM was terminated prices did show a short lived increase. But, so did U.S. barley prices. Graphically, there is no discernible difference in U.S. and prairie barley prices. Moreover, given the turmoil in the U.S. feed grain market during 1993 (Mississippi flooding through July and August), the pattern of Canadian and U.S. barley prices and export corn are remarkably similar, as they should be in a well functioning open market.
More sophisticated price analysis could be used to examine this issue but we think that is unnecessary. The point is that, unless one is inclined to argue that the Canadian barley market before, during and after the CBM drove the U.S. export prices on barley and corn, the CBM had no significant impact on Canadian barley prices. It may be worth noting that the three months following termination of the CBM, the Canadian price did not follow the U.S. prices upwards. It may also be worth noting that over the ten year period, there were five abrupt movements in Canadian barley prices just before the beginning of the new CWB crop year; three of these were down and two were up. The downward move into the CBM market in 1993 is one of these declines. It was the smallest among the lot. These results cast serious doubt on the proposition that the CBM caused a reduction in price, as well as the proposition that prices rose because of its termination.
The second price consideration is with regard to how prices move together, but this time in the context of arbitrage. Markets work well in economic terms when they are arbitraged, i.e., differences in prices just reflect the cost of moving product from one location to another. This requires that movements in one market be associated with comparable moves in another market. When arbitrage is effective, markets are efficient. Apparently the CBM did improve pricing efficiency for a time. That is in the long term interests of barley growers and livestock producers in Canada and, given some of the arguments presented around the grains disputes, it may help promote a degree of trade harmony with grain producers in the U.S.
The volume of barley exports to the U.S. increased dramatically during the period of the CBM. It was estimated that between 500,000 and 1,000,000 tonnes of barley were sold to the U.S during the CBM (Milling and Baking News, Sept 28, 1993). Prior to this 40 day record level of sales, the most feed barley the CWB ever previously sold in one entire year was 240,821 tonnes and average annual sales were close to 98,000 tonnes. This seriously questions the CWB (1992) argument that the potential role for Canadian barley in the U.S. market is small. Official feed barley exports to the U.S. reached 1,242,483 mt in 1993/94, and malting barley sales were 547,780 mt (see Figure 4.2).
Not all the growth can be attributed to the structural change. It must be recognized that the feed grain market was going through severe flood stress at this time. But some of the volume was the result of the changed marketing conditions. Several considerations of the increased sales stand out. First, a significant entree was made into a market which had been ignored. Second, the CWB made a significant entree into a market which it had ignored. The CWB was a major seller into the U.S. during the CBM. Third, malting barley sales had been developing since about 1989 but they reached new levels during this period. Competition seemed to work; malting barley exports have continued to increase; the U.S. market, including California, was established as a significant outlet for Canadian barley. It took the CBM to demonstrate that the U.S. could be an important market for prairie barley.
The issue of demand elasticity, so essential to the market power argument, deserves comment here. During the CBM, sales exceeded four times year-earlier volumes. These sales occurred at prices only slightly lower than those which had existed throughout much of 1993. The CWB argument of market power in the U.S. implies a small number on the price elasticity of demand (around -1.0; the smaller the number, the more market power). Carter and also Vercammen and Barichello argued for a very large number on demand elasticity (-19.0) and little market power.
The significance of this short lecture on intro economics ought not to be lost in this important issue. Any first year economics student should know that to quadruple sales with a highly inelastic demand curve (the CWB argument) would require either a massive drop in price or an exponential increase in demand. Carter’s high demand elasticity requires only a small drop in price or a small increase in demand. Both cases could involve a combination of price change and demand increase but this only changes the wording from "massive" and "exponential" to "large".
Undoubtedly there was an increase in demand for Canadian barley from the U.S. in 1993 because of the weather. But these volume and price results are almost certainly not consistent with highly inelastic demand. Additional detailed price analysis could be more definitive but it does not appear necessary. The proposition of no, or limited, CWB market power on barley sales to the U.S. stands.
The recent CWB proposal to move to cash purchasing of barley probably surprised strong Board supporters more than Board critics. It is yet another example of the Board following instead of leading and an attempt to hold onto its single desk status, which is jeopardized with the recent CWB mistakes in barley marketing. The CWB now argues that Board cash purchases will benefit farmers because it will raise barley prices on the prairies due to buying competition. This is totally inconsistent with CWB arguments a few years ago (during the CBM debate) that growers were better not knowing world cash barley prices and that the CWB could finesse the world barley market to raise the pool return.
However, buying competition on the prairies will not be completed until the Board’s single desk status is removed.
Three recent economic studies
Since the experience with the CBM there have been three additional economic reports which also produce information on these issues. Wilson and Johnson (1995a) analysed production, distribution and utilization of barley under several different assumptions about the organization of the North American barley market. They found no evidence of market power on Canadian barley, and indicated Canadian barley could become a much bigger player in the U.S. Their results showed demand potential in the Pacific North West and in California.
Clark (1995) studied barley pricing before and after the CBM. He concluded that the CWB argument suggesting that the single desk approach improves revenue from the U.S., needs to be subjected to greater public scrutiny.
Wilson and Johnson (1995b) documented the effects of variety constraints in Canadian malting barley. The found:
relaxed variety release requirements to allow greater production of 6RW, would allow increased penetration of the U.S. market and increased grower's prices. The results confirm that restrictions on the distribution of malting barley varieties in Canada have limited Canadian penetration of the U.S. market (p.351)
Deregulation of the oats market, 1989
Oats were added to the mandate of the CWB in 1949, along with barley. At the beginning of the crop year, 1989, the Honorable Charles Mayer, withdrew oats from CWB control, thus creating a market structure comparable to canola, flax and rye. Initially, there were CWB quotas on oats as in the other non board crops, but these were removed in 1993.
The decision to remove oats was made on the grounds that oats were a small crop, and a very small part of CWB activity; that CWB intervention was holding back development of oats production and processing; and that oats commerce had evolved to specification merchandising for which the CWB was not well suited. There also existed considerable trade support, and some producer group support for this form of deregulation.
It is now seven years since this change was made. That allows for analysis comparing conditions before and after the change in structure. The change has affected two aspects of business activity. At the farm level, a producer can now manage the delivery of a high volume crop with high on farm storage costs. Producers in high productivity areas can move oats early and in large volume; this represents a cash crop alternative and reduces storage costs. Prior to 1989, the farmer could not control these variables.
Second, the period since 1989 has produced oats traders and dealers in the Canadian system that did not exist when the Board was in control. A set of marketing alternatives has been developed for farmers, and there has been significant specialized oat marketing capability developed within most grain companies. The production of oats, although contributing only a small fraction to total grain production, has taken on an increased commercial importance. Following is a summary of some of the evidence associated with the change in oats marketing.
- There are now eight oats processors of various kinds on the prairies. Five of these processors have set up business since the change in marketing in 1989. Four of the new processors are in areas that have registered increases in production; three are in Alberta, one in Saskatchewan, and one in Manitoba.
- Alberta remains the largest producing province. It has not shown any overall increase in oats production since 1989. Saskatchewan has shown the largest increase in production (about 39%); the increase has occurred in the central, south and south eastern areas where, among other considerations, the U.S. market is most accessible. Manitoba has increased production about 9% in the same time period, concentrated in the region most accessible to the U.S.
- Manitoba and Saskatchewan both showed significant increases in production in 1989 which was sustained in 1990. Production fell substantially in 1991 in response to unrealistically low Gross Revenue Insurance Program (GRIP) coverage for oats. Production has taken off in both provinces since 1992.
- Oats exports have increased very rapidly from 43,000 tonnes in 1985/86 to 934,000 tonnes in 1993/94. All of the growth in exports has been to the U.S.
- Price performance has generally improved in the prairie oat market. The ratio of WCE to CBOT oats futures prices have i) increased, ii) stabilized, and iii) moved in a band around a value close to one (equality in Cdn $) measured five years before and after the change. These data suggest a relative increase in Canadian oats futures prices and improved arbitrage associated with deregulation. Virtually identical results were found for Canadian WCE Cash and U.S. Cash oats prices.
- Interviews of grain dealers conducted over the past three years indicate that handling charges on oats have decreased significantly over the period since 1989. The consensus estimate is in the order of a 30% reduction subject, of course, to more variation than when the CWB handled the product and when CGC filed tariffs were charged.
Conclusions
Barley
- The Continental Barley Market (CBM) was preceded by an unusual amount of market analysis projecting favourable and unfavourable consequences.
- Claims based on the existence of significant CWB market power in this market have not been substantiated.
- There is no evidence that the CBM adversely influenced Canadian barley prices.
- There is evidence that arbitrage improved and volume increased during the period of the CBM.
- The volume increases on malting barley appear to be sustaining over time.
- The reason given by the CWB for its recent proposal to purchase barley on a cash basis from growers is that this change will raise farm prices. This Board proposal is totally inconsistent with CWB arguments during the CBM debate a few years ago.
Oats
- Several measures applied to oats indicate that market performance has improved since the 1989 deregulation.
- Oats prices have increased and stabilized relative to U.S. prices since 1989; that means arbitrage has improved.
- Exports to the U.S. have increased significantly.
- There has been some concentration of production closer to U.S. markets.
- All of these results are consistent with what basic economics would predict about deregulating an over regulated market.
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