Single Desk Selling: Appendix A - Farm Management Hidden Costs

I. Opportunity cost of CWB price pooling (1984-85 to 1993-94)
When producers deliver grain to a CWB account, they receive an initial payment which is less than the value of the delivery. Sometimes adjustment payments are made during the crop year; sometimes an interim payment is made after the crop year is finished; and if the pools are in surplus after CWB marketing charges have been deducted, a final payment is made around January 1st after the close of the crop year. This payment regime means that the payment schedule on the CWB Crop year (August 1 to July 31) stretches out over almost eighteen months. No interest payments are made to producers in relation to how long they must wait for their money. Interest payments are credited to pool accounts but they are pooled with all other receipts dependent on CWB, not producer, cash flow.

There is a time value of money. Early deliveries and payments from the Board are worth more than later deliveries. Farmers who have a loan to service experience interest costs when their CWB payments are delayed. Those farmers who do not have loans forego potential interest earnings because they must wait for payment. In other words, there is an opportunity cost associated with their delayed payment.

The CWB pricing regime guarantees that farmers must wait for payments. Tables A.l and A.2 summarize the ten year average payment schedule, by quarter, for each of the four pools up to the 1993 crop. Initial payments represented about 78% of the final return for durum and designated barley over the period, and 81% and 87% for wheat and feed barley, respectively. But averaging, like pooling, covers up useful information.

Table A.1 Average CWB Payments, By Pool Account, 1984-85 to 1993-94.
	1st Qtr.	2nd Qtr.	3rd Qtr	4th Qtr.	Total
$’s per tonne
Wheat	124.52	127.60	131.67	134.77	151.22
Durum	129.90	134.90	141.20	142.40	166.49
Barley	90.86	91.31	93.31	93.31	103.78
Designated Barley	130.35	137.60	140.80	142.30	166.70

In 1992, the durum initial payment was only 48% of the final payment. In years when there are no adjustment or final payments, the initial price is 100% of the final payment. There have been several examples of this situation over the ten year period. In fact the reason for the higher average for the initial on feed barley is the frequency of pool deficits in barley.

This analysis, which we call the "opportunity cost of interest" calculates the value of the interest foregone as a consequence of the payment schedule actually experienced within each CWB pool account. We make the calculations net of any payments for interest credited to the accounts by the CWB. The inclusion of CWB interest paid into the accounts could give results that are lower than the true opportunity cost because of the pooling effect but we did not have the information to adjust for this factor.

Table A.2. Average Proportion of Total Payment Available to Farmers, by Quarter, by Pool Account, (1984-85 to 1993-94)
	1st Qtr.	2nd Qtr.	3rd Qtr.	4th Qtr.
Wheat	81.4%	83.2%	85.9%	87.9%
Amber Durum	78.0%	81.0%	84.8%	85.5%
Barley	87.4%	87.4%	89.3%	89.3%
Designated Barley	78.2%	82.5%	84.4%	85.4%

Source: Compiled from CWB annual reports, various years.
To conduct the analysis we had to assume a point in time against which to measure interest foregone. The date is somewhat arbitrary and we chose January 1st of the crop year. This assumes full payment could have been received, which would have allowed the grower to either pay off any debt or invest the money. Producers can sell all their nonboard grains by then. The ten year period should average out trends and seasonals from the data.

To repeat, our analysis credits the pools with interest earned by the CWB, and the farm level results are net of CWB interest credited. Sometimes these credits are large. The inclusion of CWB interest earned reduces our estimates of opportunity costs by an unknown factor. On balance however there is a cost to farmers for delayed payments. Our estimates indicate the costs are significant.

Data
Monthly levels of initial payments, adjusted payments and interim payments for the ten year period were obtained from CWB Annual Reports and Manitoba Markets. Grading patterns reported in the CWB Annual Reports were used to estimate grade distribution. This data set is far too large to report here but it is available for review upon request.

The interest rate used to calculate the present values of returns was the prime rate plus 1% as reported by a major commercial bank. The CWB pays out or deducts "interest" on each Pool account. Interest is listed under "Deducted Operating Costs" in the "Statement of Operations and Surplus for Distribution to Producers..". "This amount consists of interest earnings, interest paid on borrowings, and interest paid or received from other CWB accounts" (CWB Annual Report, various years). Interest earnings have frequently exceeded interest expenses in this entry in the Board’s financial statements. A second entry in the same statements, for interest earned after the close of the pools, was included in interest calculations.

An interest cost not explicitly available from the financial statements is one included in "Carrying Charges." "For example, the carrying charges on wheat stored in country elevators, which is the largest single cost shown, covers interest on the initial payments to producers as well as the storage charges paid to the country elevator companies" (Grain Matters, June 1976). This interest factor was therefore excluded from the analysis.

The analysis
The first step was to calculate the present value (PV) of all outstanding payments at December 31, for each of the 10 years. The PV was calculated for each grade in each Pool by subtracting each full month of interest earnable from the outstanding payments. Adjustments to the initial payment were deducted interest from the month they were announced. For example, if an adjustment to the initial price was announced in March of the crop year, three months of interest was subtracted from the payment to obtain its PV at December 31. Similarly, interim payments made by November 1 were deducted eleven months of interest. Final payments accrue twelve months of negative interest.

The interest earnable by the producer on outstanding CWB payments is the difference between the nominal value of CWB payments made after December 31 and the PV of these same payments at December 31, net of total CWB interest earnings (or losses). The opportunity cost of outstanding CWB payments is interest earnable by the farmer net of assignable CWB interest. Assignable CWB interest is 7/12 of CWB interest earned (lost) during the crop year plus all interest earned after the end of the crop year.

Opportunity costs, by pool account and crop year were calculated by weighting the opportunity cost for each grade by the tonnes delivered, summing these over all grades in a pool account and dividing by the total tonnes delivered

Results
Ten years of CWB operations were covered in the analysis; and the results are reported in Table A.3. Results are shown as averages for the ten year period and by particular years, by Pool. For example, for Amber Durum in 1993/94 the interest cost of the pricing regime was estimated to be $2.77 per tonne. The highest opportunity cost incurred was for Amber Durum in 1987/88 at $3.63 per tonne. The opportunity cost for the Wheat Pool ranges from $1.89 to $0.00, for the Barley Pool, $1.04 to $0.00 and for the Designated Barley Pool, $1.50 to $0.00 per tonne.

A zero opportunity cost occurs when there are no adjustment payments after January 1st and no final payment–the worst case scenario in CWB pricing. Negative opportunity costs occurred in the Barley Pool in each of the last three years because CWB interest payment exceeded bank interest earnings. The Total column in Table A.3 indicates the opportunity cost in a particular year if a producer had an equal amount of the four pooled grains to sell.

The results in Table A.3 depend on:

• Bank interest rates.
• CWB interest earnings on the pool accounts.
• CWB interest expenses on pool accounts.
• Frequency of adjustments to the initial price.
• Size of interim and final payments.
• Size of the initial payment in relation to the final payment

Table A.3. Opportunity Costs of CWB Payments Outstanding at December 31, 1984-85 to 1993-94
Crop Year	Wheat	Amber Durum Wheat	Barley	Designated Barley	Total
	...................................$’s per tonne...................................
1984-85	$1.891	$2.580	$0.355	$0.461	$5.29
1985-86	$0.000	$0.823	$0.000	$0.608	$1.43
1986-87	$0.064	$1.086	$0.000	$0.000	$1.15
1987-88	$0.917	$3.628	$0.110	$1.100	$5.76
1988-89	$1.534	$1.966	$0.612	$1.349	$5.46
1989-90	$0.418	$1.099	$1.041	$1.495	$4.05
1990-91	$0.000	$0.000	$0.000	$0.025	$0.03
1991-92	$0.616	$1.146	($0.182)	$0.569	$2.15
1992-93	$0.531	$0.920	($0.464)	$0.446	$1.43
1993-94	$0.613	$2.770	($0.423)	$0.508	$3.47
Average	$ 0.60	$ 1.56	$ 0.12	$ 0.61	$3.02

II. Cross-subsidization and effective price variation due to delivery patterns
The following is an illustrative analysis of the cross-subsidization and cash flow inequities, that occur as a result of the CWB controlled delivery system. Timing of deliveries affects cash flow and thus the effective price received by producers. Different delivery patterns result in cross-subsidization among producers. Producers across the CWB’s designated region do not deliver their grain in the same proportions throughout the year and some categories of grain are moved earlier than others. Producers who deliver their grain early on in the crop year are subsidized by those who deliver later because of flat pricing. Producers who deliver late in the crop year get the same nominal price for their grain as those who deliver early and are not compensated for storage and opportunity costs. That results in what economists refer to as different effective prices.

Farmers who have delivered late and incurred interest costs or lost interest on late deliveries receive a lower real price for any given CWB total price paid.

In order to assess the magnitude of the inequities that occur, we consider three delivery patterns. First we specify delivery as 25 percent of the crop delivered in each quarter of the crop year. This pattern is presumably what delivery would be if the system were completely "equitable" for producers. A second delivery pattern simulates a producer delivering 33 and 1/3 percent of the crop in each of the first three quarters. This delivery pattern is called the "accelerated" pattern and is indicative of some small categories of grain, areas that have relatively low productivity, and deliver to year-round ports if grain is being directed to the Seaway and Pacific ports to minimize aggregate transportation costs. The third delivery pattern simulates delivery opportunities which are "delayed". Twenty percent of the crop is delivered in each of the first three quarters and the remaining 40 percent in the last quarter. Eastern prairie farmers sometimes face this kind of delivery pattern as they waited for the Seaway to open.

The analysis generates measures of cash flow, effective returns and prices (in economic terms) based on average CWB payments over a ten year period (1984-85 to 1993-94). The analysis allows for estimation of the delivery pattern effects on different producers.

Data
The basic data for this analysis are the same as for the first section of this appendix. We used price information from CWB Annual Reports and Manitoba Markets for the same ten year (1984-94) time period. The delivery patterns were simulations as discussed above. One interest rate was used, the weighted average annual prime rate plus 1 percent for 1994 or 7.78 percent. For consistency with the quarterly delivery patterns, the data were analyzed on a quarterly basis. Payments schedule by quarter in percentage terms are summarized in Table A.2.

The analysis
In this analysis, we assume 1,000 tonnes of production of each crop for illustrative purposes. This choice of 1,000 tonnes does not affect the qualitative findings in this section. We first illustrate how cash flow is affected by CWB regulation. Then we take the cash flow results one step further to show how equal prices in nominal terms (that is, as the CWB pays them out) are very unequal prices in economic terms.

Regulated deliveries and the CWB pricing regime impact directly on farm cash flow. Figure A.l illustrates this point with an example from the wheat pool for the three different delivery patterns, using the ten year average price data. Each farmer with 1,000 tonnes receives the same (ten year average) $151,220 total return for the crop year. Cash flow on the final payment is the same for all farmers, received over five months after the end of the crop year. But the bulk of the cash flow is significantly different. The major factor giving rise to the difference in cash flow is the delivery pattern, but a small component is due to the pricing regime. For example, the accelerated delivery generates cash flow in the fourth quarter even though there are no deliveries and all producers receive the same final payment.

Figure A.2 provides another measure of cash flow across the four pools. The difference in level for each pool simply shows average price level relationships among the four grains. The impact of delivery patterns shows up as the difference in available revenue within the pool. If we are willing to accept that these cash flow differences are relevant, then it follows that effective or real prices received by the different producers will be different even though the nominal price paid by the CWB is the same. This must be the case if there is a time value of money.

It is assumed that, on average, deliveries in a quarter are made by the middle of the quarter. Interest accrues for 1.5 months within the delivery quarter plus for each full month to the end of the crop year. The number of months of interest that accrue on each quarter are;
• 10.5 months, First Quarter
• 7.5 months, Second Quarter
• 4.5 months, Third Quarter
• 1.5 months, Fourth Quarter
Any increase in initial payment from a previous period is added to the current period calculation, in proportion to the previous period’s deliveries. For example, if the initial payment for wheat increases by $10 in the second quarter and 250 tonnes were delivered in the first quarter then $2,500 is added to second quarter revenues.

There are different ways to measure the effect of delivery patterns because the time period over which money flows in the CWB accounts is so long identification of a point in time is largely arbitrary. The first approach we chose was a comparison of the value of the revenue received from each delivery pattern at the time when the CWB total revenue is known, i.e., when the final payment is made. This is a peculiar comparison because it is well after the fact—one more crop has been grown and another is being planned—but it is how the revenue flows in this system. It is therefore a legitimate comparison. These results are summarized in Table A.4.

Table A.4. Additional Revenue as a Result of Delivery Pattern, by Pool Account
	Accelerated>Delay $/tonne	Accelerated>Uniform $/tonne	Uniform>Delayed $/tonne
Wheat	$2.58	$1.61	$0.97
Durum	$2.75	$1.72	$1.03
Barley	$1.83	$1.14	$0.69
Designated Barley	$2.76	$1.72	$1.03

Source: Compiled from CWB annual reports, various years.
The second measure of delivery pattern effects is to calculate the effective price of deliveries measured at the same point in time used for the opportunity cost of interest, January 1 of the crop year. This analysis was conducted for No. 1 CWRS 13.5%, No. 2 CWAD, and designated barley and the results are summarized in Table A.5. Figure A.3 shows the same relationships for No. l CWRS 13.5%. The results illustrate how a producer with delayed deliveries subsidizes a producer in who is able to accelerate deliveries by up to $2.76 per tonne, based on ten year average data. In a particular year, this amount could be much greater or much less depending on the price level and payout schedule. A grower with accelerated deliveries has an advantage over "equitable" deliveries by up to $1.72 per tonne on average. A producer with "delayed" delivery may be disadvantaged by as much as $1.03 per tonne relative to a producer who is able to make "equitable" deliveries in each quarter.

Table A.5. Real Price Differences as a Result of Delivery Patterns
	Accelerated>Delay $/tonne	Accelerated>Uniform $/tonne	Equitable>Delayed $/tonne
#1 CWRS 13.5%	$2.17	$1.36	$0.81
#2 CWAD	$2.13	$1.33	$0.80
Designated Barley	$2.13	$1.32	$0.80

These are significant numbers particularly when placed in the context of being ten year averages. The 1953 Saskatchewan Royal Commission Report on Agriculture and Rural Life, made this point over forty years ago and it was clearly a valid point then as it is now.

Figure A.3 shows that the ten year average No. l CWRS 13.5% payment of $164.03 tonne received after the end of the crop year was worth only $151.81 in the middle of the crop year. The accelerated delivery pattern generated an effective price equal to the nominal (and reported) price paid by the CWB. The other two effective prices are below the nominal price, but higher than the discounted CWB price measured at the middle of the crop year.

The significance of these results is illustrated by the fact that the "effective" price for an accelerated delivery pattern is larger than for the delayed and equitable pattern, by as much as $2.17 and $1.36 per tonne, respectively. A grower who is able to market a large proportion of the crop early in the year is better off. We have provided estimates of how much better off.

For estimates of effective price differences, designated barley pool account, #1 Canada Western Red Spring Wheat (CWRS) 13.5%, and #2 Canada Western amber durum wheat (CWAD) are used. Ten year average prices available at each quarter are calculated and three delivery patterns are simulated. The effective price of the designated barley pool account and two grades of wheat are calculated to January 1 at time t+1.

Time t is the crop year. January 1, t+1 coincides with when CWB final payments are made. It is assumed that the interim payment is received by November after the end of the crop year. The number of months of interest that accrue on each quarter are:

• 16.5 months, First Quarter
• 13.5 months, Second Quarter
• 10.5 months, Third Quarter
• 7.5 months, Fourth Quarter
• 1 month, Interim Payment

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