| | 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 and Food provided financial and information resources to complete this work.
Previous studies
The CWB has followed the lead of the Australian Wheat Board (AWB) in arguing that it provides substantial benefits to farmers, due to price discrimination in the world wheat market. In the case of the AWB, Ryan (1994) reported the results of an "internal" AWB analysis of the benefits. The AWB compared actual sales prices they received, against benchmark competitor prices, and they mainly used adjusted U.S. prices as the benchmark. In Australia, they call this the "top down" approach. On average, the AWB reported price premiums of about $14/mt ($US) over the 1987/88-1990/91 time period.
It is therefore no great surprise that the CWB (Kraft, Furtan, and Tyrchniewicz, 1996) would calculate a "price premium" figure of $13.35 using this "top down" method. The CWB study involved comparisons with relevant competitors-which means they used Australian prices, in addition to U.S., EU and Argentina. In the wheat market, Australia is a major competitor of Canada’s. So if the AWB is right and the CWB is right, the CWB gets a $13 premium on top of the $14 Australian Wheat Board premium! This is all a bit hard to accept.
Compared with Canada, Australia at least does have a potential spatial advantage because of the location of Pacific/Asian markets for the eastern states and the Middle East, for West Australia. Because Canada is located next to the U.S., this consideration does not apply and Canada has no significant freight advantage. Notwithstanding its potential (small) spatial advantage, the AWB’s claims of price premiums have not been taken too seriously in Australia, nor should be the CWB’s similar claims in the case of Canada.
Actually, the "top down" method has been found to be quite problematic. The Industry Commission (IC) in Australia was given access to the confidential price data which the AWB claimed to "prove the existence of a premium" due to the single-desk arrangement. The IC (1988) reported that they simply couldn’t deduce anything based on those data: the Commission considers that international price comparisons of these types are inherently of limited usefulness for the purposes at hand (p.117).
A few years later, Booz, Allen, and Hamilton (BAH, 1995) conducted a study on the AWB single-desk. BAH was hired by the Australian Grains Council (which is a strong supporter of the AWB) and like the IC, BAH rejected the AWB "top down" price comparison approach because:
- FOB comparisons do not really provide insight into either marketing effectiveness or the single-desk premium. Simply put, the "top down" approach is not a comparison of marketing systems;
- different quality standards and a different quality mix in the wheat market means the "top down" method does not provide a good estimate of what farmers would receive without a single-desk, and;
- the final answer obtained with the "top down" approach (i.e., the price premium) is too dependent on the subjective judgment of the analyst in selecting the appropriate benchmark.
There are, therefore, serious doubts about the usefulness of the kind of analysis used by the CWB in its recent study, and it could not possibly provide a firm conclusion one way or the other.
When discussing a single-desk, it is very important to distinguish price premiums due to wheat quality or particular services (such as favorable credit terms and technical assistance) accompanying a sale, from those due to the exercise of monopoly power by a single seller. The former is not necessarily due to a single-seller. Price premiums associated with special services built into a sale should be regarded as a return necessary to cover the costs of those services and not extra revenue due to the single-seller. Price premiums may also be due to other factors rather than the existence of market power. For example, Canadian grain quality standards and certification are usually argued to add value to Canadian grain. Such premiums also would be available to private sellers and do not require a monopoly seller in order to be realized. In reference to this issue and its sales program in Brazil, the CWB has recently stated:
the CWB is normally able to get a higher price than competitors because of the quality guarantees that are provided with Canadian grain. (Grain Matters, May-June 1994, p.8).
We agree it is possible to add value to grain through quality guarantees, but private sellers could do the same if the benefits of providing the service exceeded the cost, as they may well in a few selected markets. Alternatively, the recent CWB report (Kraft, Furtan, and Tyrchniewicz, 1996) implies offshore customers and private marketing firms are not very smart.
In the BAH (1995) Australian cost-benefit analysis, the findings were somewhat ambivalent towards single-desk selling. The net benefit of the AWB was found to lie between a minus $1.31 per mt ($US) and a plus $5.33 per mt ($US), or an average of $2.01 per mt. Gross benefits were estimated at $0.12-$7.96 ($US/mt) and were comprised of a premium price ($0.12-$0.31/mt), market mix (0-$3.25/mt), and pricing discipline (0-$4.40/mt). Estimated costs of the AWB were between $1.43-$2.63/mt, calculated through benchmarking AWB costs against the U.S. and Canadian equivalents. Overall, these results are generally inconclusive, but suggest a very slight advantage of single desk selling of Australian wheat from a net benefit perspective. However, it seems BAH were marginally supportive of the single-desk only because of export subsidies in the U.S. and EU. They reported:
the single desk does appear to be of incremental value to Australian growers under the current world situation for wheat. When producer subsidies and price distortions in international markets disappear, this is unlikely to remain the case (p.6).
As indicated above, BAH decomposed the benefits of the single-desk into three components:
• comparisons of prices for wheat sold in the same market (price premia);
• the extent to which Australia has a high share of high-priced markets and avoids poor markets (market mix), and;
• the degree of "pricing discipline" (the ability to capture any freight advantage).
The BAH study found the small net benefit associated with the single-desk was due to a combination of the market-mix and freight advantage factors, with the main gain from freight advantage. The single desk price premium averaged only $0.21/mt. The market-mix factor averaged $1.62/mt ($US) and the freight advantage factor averaged $2.20/mt, before accounting for additional costs due to the single-desk. The market-mix advantage resulted from the conclusion that the AWB has had an unexpectedly high market share in "good priced" markets, although the specific costs of obtaining these premiums through marketing activity in these countries were not calculated. The Australian freight advantage was argued to be due to Australia’s proximity to such markets as Egypt, Iran, Indonesia, Japan, and Malaysia. BAH concluded that freight differentials to these markets favored Australia over competitors and the AWB can capture these premiums associated with distance from market.
Will multiple sellers result in lower farmgate prices
The recent CWB report by Kraft, Furtan, and Tyrchniewicz (1996) predicts that farmgate prices would fall in the presence of multiple sellers. For instance the Board consultants make the following claim:
multiple sellers are extremely limited in their ability to differentiate between (sic) buyers in terms of their willingness to pay and would only capture a premium if all buyers paid more (p. 41).
We believe they are missing an important consideration-multiple sellers in world markets would mean there would also be multiple buyers on the prairies, and competition on the buying side. As explained in Sections II and VII, it is precisely the lack of farm gate buying competition that has generated inefficiencies in the grain handling and transport system in Canada. In addition, the lack of buying competition means that prairie prices are isolated from world markets and farmers are operating in the dark when it comes to meaningful price signals. A dual market would correct this situation. There are many examples in other countries where dual markets operate-where farmers voluntarily sell to either private companies or to cooperatives that pool prices. For example, this is the standard practice in the case of rice marketing in California and it also describes the domestic wheat market in Australia.
In a dual market, both private and cooperative grain companies would be competing with each other and with the CWB at the farm gate. This would raise prices to farmers because of efficiency gains, and it would bring prairie price signals in line with global markets. In addition, it would provide farmers with the freedom of choice and discretion over marketing plans and timing of sales. The CWB has plenty of competition in world markets but it is the lack of buying competition at the farm gate that is the root of the problem in western Canada.
We believe prairie farmers would be better off with a dual market in wheat because price premia due to a single seller are highly unlikely. If the CWB were stripped of its export monopoly, it would not shut down unless it proved to be less efficient than private firms.
Is Canada a price taker in wheat
There is reason to believe that Canada is essentially a price taker in the wheat market. However, the CWB regularly contradicts itself on this issue-sometimes arguing that it can price discriminate and sometimes arguing it prices competitively. For instance, as part of the 1994 U.S.
International Trade Commission (USITC) hearings on Canadian wheat exports to the United States, the CWB argued that it typically sells wheat to the United States through accredited agents and thus the CWB may not know the final landed price of a shipment. Earlier, in 1990, the USITC determined that flour millers in the United States were not paying premiums for Canadian durum wheat. The USITC sent questionnaires to U.S. importers and millers and asked for prices paid for U.S. versus Canadian wheat. The finding was that:
it is not apparent from the data collected by the Commission in this investigation that prices paid by U.S. Millers for Canadian durum are significantly different than prices paid for U.S. durum. (p.ix)
For like quantities of wheat, U.S. prices and Canadian prices fluctuate, with no consistent price difference between U.S. and Canadian durum... (p. 7-1)
In response to a recent report by Goodwin and Smith (1995), the CWB essentially argued that Canada is a price taker in wheat. The CWB stated that:
if Canadian grain is not priced competitively, Canada will not do the business (CWB Press Release, and Review and Critique of Goodwin and Smith, March, 1995).
This view is supported by two previous studies. In an analysis of the 1980 U.S. grain embargo against the USSR, the U.S. Department of Agriculture (1986) found that wheat is basically fungible and thus the embargo had little impact on the USSR and little impact world prices and trade volumes. The USDA embargo study was a very extensive research effort and it found that the world grain market is efficiently arbitraged.
Goodwin (1992) studied wheat prices in five markets and found that wheat prices in spatially separated markets are closely linked, as one would expect in a competitive market.
As explained in Section I, around 75-80 percent of the wheat is imported by developing countries, and their main consideration is price. In other words, most of the market is a "bulk" market, as opposed to a quality conscious market. The bulk market is unwilling to pay for product differentiation in wheat and in their view there is a high degree of substitutability among wheats. Using International Wheat Council data, BAH (1995) report that over 60 percent of CWB wheat sales are made into the top 10 bulk (i.e., price sensitive) markets. The BAH data are shown in Figure 6.1. Figure 6.1 represents just the top 10 markets, and in total, the CWB probably sells about 80 percent of its wheat into markets where price is more important than quality. The top wheat markets for the CWB are reported in Figure 6.2, where we see that most are developing countries. Over the past decade, China and the FSU have been Canada’s largest markets and these are not high quality, high protein markets.
For the 1983-92 ten year period, China and the FSU accounted for 48 percent of CWB wheat exports. Most of the CWB’s wheat sales to South Korea are feed. Of all the importers listed in Figure 6.2, it is really only Japan, the United Kingdom (U.K.), and the U.S. that are quality markets, willing to pay for high protein.
The CWB (1995) has recently argued that the U.S. export enhancement program (EEP) segments world markets and that a single-desk seller can take advantage of this opportunity for further price differentiation. This is a new justification for the single-desk, and it has also been used in Australia. However, there is no reason to believe that EEP changed the nature of competition within the set of subsidized markets.
If the BAH approach (described above) were applied to the CWB, the results would most likely show a negative single-desk benefit. The CWB has an unexpectedly high market share of the bulk markets, which would yield a negative market-mix advantage for Canada. Canada’s theoretical freight advantage is near zero because of Canada’s proximity to the United States. Finally, the Australian SDS price premium was found to be only $0.21/mt, and we have no reason to expect Canada’s would be any higher.
The Japanese price premium
Some industry observers agree that the CWB could earn a premium in the Japanese market for Canadian wheat, though it is probably the only market where any significant single-desk premium is earned. However, it is difficult to determine how much (if any) of the "premium" is due to the single-desk, versus other characteristics such as uniformity, cleanliness, etc. Some wheat traders believe that if the single-desk were removed, Canada would sell the same amount of wheat to Japan and for the same price. There could be a small single-desk premium-say $5 to $10 per tonne, but this would average out to $0.50 to $1 per mt across all exports as Japan accounts for less than 10 percent of the CWB’s exports.
Canadian farm gate price comparisons with U.S. prices
We argued above against the merits of the "top down" approach recently used by the CWB to calculate SDS benefits. Instead we suggest it is more useful to examine the price at the producer level, because this is the heart of the matter. We therefore compare Canadian farmgate returns (i.e., returns received through CWB wheat and barley pools) with those across the border in the United States. The results are reported in Figure 6.3 and 6.4 for the 1988/89-1994/95 time period. The Canadian-U.S. barley price comparison is shown in Figure 6.3, and the wheat comparison in Figure 6.4. In each figure the vertical bar displays the CWB price and the solid line is the weekly price in the United States during that same time period. We attempted to compare prices for north-south locations that are relatively close to one another. We chose DNS 14% prices at Minot, and compared them with the pooled price of No.1 CWRS 13.5% in Winnipeg. For feed barley, we compared the Great Falls price with the Lethbridge price, for No.1 CW feed barley. Both the Winnipeg wheat price and the Lethbridge barley price were pooled CWB prices, adjusted for freight, cleaning, and elevation charges. Total adjustments to Winnipeg wheat ranged from $14.98/mt in 1988/89 to $21.68/mt in 1994/95. For Lethbridge barley the freight, cleaning and elevation totalled $18.07 in 1988/89 and this increased to $39.76 by 1994/95.
Summary statistics for the data displayed in Figures 6.3 and 6.4 are also reported in Table 6.1. For barley, the average price over the entire period is $84 in Canada, compared to $114 in the US. This is a rather large difference of $30/mt. For wheat the average is $157 in Canada, and $158 in the United States. These figures are all in $Cdn. The results are quite revealing because the Canadian pooled price ends up being no higher than the corresponding U.S. price. This suggests that if the CWB does somehow earn a large premium in world markets it does not show up in the farm gate price.
In examining Figures 6.3 and 6.4 and Table 6.1, keep in mind that:
· prairie grain freight subsidies should have served to raise the Canadian prices;
· the U.S. EEP could have served to push up the U.S. prices, and;
· the large CWB wheat pool deficit increased the Canadian price in 1990/91 (Figure 6.4).
Over this time period (1988/89 - 1994/95), Canadian freight rate subsidies averaged approximately $13/mt, which should bias the U.S.-Canadian price comparison in favor of Canada. In other words, you might expect the Canadian price to be above the U.S. price because of the Canadian freight subsidies. Any CWB pool deficits would also tend to bias the results in favor of Canada. In the case of wheat, there was a rather large loss of $30 per mt in the 1990/91 pool, but we did not adjust the Canadian price downwards in Figure 6.4. Adjusting for the deficit lowers the seven year average Canadian price from $157 to $153 in Table 6.1. The spike in the 1990/91 vertical bar was what growers received, but a large share of this was a straight transfer from taxpayers.
| Table 6.1 Comparative U.S.-Canada Farmgate Prices for Wheat and Barley: 1989/90 - 1994/95 |  | | | |
| Wheat | Barley |
| Minot: U.S.
DNS 14%
($Cdn/mt) | Winnipeg:No. 1
CWRS 13%
($Cdn/mt) | Great Falls
Feed Barley
($Cdn/mt) | Lethbridge No 1
CW Feed
($Cdn/mt) |
Year | | | | |
| 88/89 | $170 | $195 | $121 | $106 |
| 89/90 | $141 | $160 | $107 | $104 |
| 90/91 | $101 | $119 | $106 | $ 67 |
| 91/92 | $141 | $119 | $107 | $ 84 |
| 92/93 | $155 | $147 | $108 | $ 78 |
| 93/94 | $211 | $173 | $115 | $ 73 |
| 94/95 | $185 | $189 | $131 | $ 75 |
| all years | $158 | $157 | $114 | $ 84 |
Source: Canadiana prices obtained from CWB Annual Reports and then adjusted for freight and handling. U.S. data obtained from Agweek.
The impact of EEP on the wheat price comparison is not expected to be too large, given that 29% of Canada’s wheat exports are sold into non-EEP markets (Kraft, Furtan, and Tyrchniewicz, 1996). We purposefully chose to compare No.1 CWRS 13.5% protein with DNS 14% for the reason that a relatively small share of No. 1 CWRS 13.5% was sold into EEP markets. The impact that EEP had on U.S. domestic wheat prices over this period, depends on the extent to which EEP created "additional" exports and the market impact of grain stocks that were released as past of EEP. It was argued by ABARE (1989), and by Brooks, Devadoss and Meyers (1990), that EEP may have actually lowered U.S. domestic prices during the period when stocks were given away as EEP bonuses. However, the basic point of this comparison is unaltered by EEP-there is no evidence that the CWB fetched a higher price.
In barley, a study by S. Haley (1989) estimated that EEP could have raised barley prices by $6 to $11 per tonne. Carter (1993) found these numbers over-inflated the importance of EEP, and suggested a more reasonable estimate might be a $1 to $3 price increase. Haley’s estimate of the "additionality" (i.e., net increase in exports compared to commercial sales without EEP) was found to be unrealistic. He failed to take into account the fact there was no EEP on corn, and barley competes with corn in most feed rations. In any case, the impact of EEP in terms of inflating U.S. prices is much smaller than the impact of the Canadian freight subsidy in terms of inflating Canadian prices.
We see from Figure 6.3 for barley, that the CWB price was well below the U.S. price for every year considered and this basic result has been confirmed in other studies (Ulrich, Furtan and Schmitz, 1986; and Carter, 1993). The 1994/95 CWB price of barley was surprising low given that the U.S. market was rising most of the year. The CWB price in 1994/95 was only $2/mt over the previous year even though world prices were rising rapidly and averaged $16 more than the previous year (see Table 6.1). This rather large price gap seems very inconsistent with the argument that the CWB earns price premiums on barley.
In the case of wheat (Figure 6.3) the price gap is not as large as for barley. CWB pool prices at the farm gate are comparable to prices in the U.S. (below if we net out the 1990/91 pool deficit), when in fact they should be above them given the transportation subsidies that existed in Canada.
Conclusion
- The benefits of SDS in Australia, although claimed by the AWB to be large, have been shown to be small (around $2/mt).
- The opportunities for the CWB to beat the AWB, in terms of price benefits, are very limited.
- It is doubtful that the CWB can charge meaningful price premiums due to the single-desk factor. In fact, most of the evidence is to the contrary.
- Studies that purport to show substantial SDS benefits must be viewed with healthy skepticism.
- Studies that purport to show substantial SDS benefits, based on fob price comparisons must address at-farm net benefits and detailed distribution of benefits.
- A comparison of farmgate returns in Canada and the U.S. fails to show any evidence of CWB price premiums.
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