Market shift

FARGO, N.D. -- As Jan. 1, 2012 turns, American grain analysts will be looking to the north to see the effects of the planned end to the Canadian Wheat Board's "single desk" monopoly trading system for wheat and barley exports.

William Wilson, a North Dakota State University agricultural economist, has been watching the changes and recently has spoken about his analysis with the North Dakota Wheat Commission and at the University of Saskatchewan and elsewhere about what it will mean for U.S. producers.

For sure, he says, it will mean a shift in market power from the Wheat Board, which is sanctioned by the government, to an industry dominated by two players -- Viterra and Richardson International.

For decades, the Wheat Board has been Canada's legal monopoly buyer/seller of milling wheat and malting barley from the Canadian prairies.

Significantly, it operated a pool pricing system, including an initial price scheme, designed to provide farmers with equal prices, Wilson says. The Wheat Board's ancillary functions include allocating rail cars to elevators, conducting a tendering system for elevator services, as well as exerting heavy influence on grain quality regulations, variety release and export promotion. Critics have alleged the Wheat Board also is price-discriminated.

Current Canadian Prime Minister Stephen Harper, who has long helped launch campaigns against the Wheat Board, moved forward with promised reforms when his Conservative Party formed a majority government. Some nonboard trading started in mid-December. The August 2012 futures markets will begin trading Jan. 23, Wilson says.

International grain companies had been buying their wheat and barley only from the Canadian Wheat Board, or bought it as accredited exporters of the Wheat Board.

Immediate changes

Wheat Board functions will change immediately, Wilson says, and there will be a transition where the ancillary functions will be "under pressure" for potential change. "If anything, that pressure will be sooner than later," Wilson says. Benchmarks for the change probably will be the evolution of prices between now and planting for new crop, Wilson says, and how growers in both countries will respond. For example, durum prices have fallen compared with competing crops in both countries.

"I don't think we're going to see radical changes in supply and demand," Wilson says. "Maybe, in the case of durum, we may see an increase in supply up there and reduced production here."

One theory is that there is a faction of U.S. growers that will grow durum, regardless of momentary price changes.

"We'll see," Wilson says.

Canola is profitable in both countries. The proposed legislative language for the transition allows the reformulated Wheat Board to handle other crops, including canola. In recent years, the Wheat Board only handled wheat and barley.

Wilson thinks that while the Canadians will perhaps receive higher prices, they'll also be exposed to more risk.

"What the Wheat Board (historically) does is mitigate those risks," he says.

Wilson doesn't see changes in the overall volume coming across the border, but probably more will come across the border in interior elevators, instead of through Chicago.

"How much that will be? My guess is 20 percent more," Wilson says.

Traditionally, the Canadian exports to the U.S. have gone through Minneapolis, Chicago or Duluth, Minn., Wilson says. More may come through cross-border flows at interior elevators. In the case of Manitoba and Saskatchewan, it's likelier that more grain would come across the border from Saskatchewan, Wilson says.

Saskatchewan surge

"I think it's going to be driven by rail rates, by handling margins and costs, and by rail service."

He notes that handling fees in Canada are greater than the U.S., and this will encourage bypassing the Canada handling, at current fee levels. He says the U.S. has greater efficiency and assurance of car supplies, and thinks Canada's railroads might discourage shipments onto U.S. carriers, unless they have agreements.

One difference is that Canada has had regulated rail rates for exports (other than to the U.S.) from Canadian prairie provinces and through Vancouver, British Columbia and Thunder Bay, Ontario. The U.S. system makes no distinction between domestic and export rates. In some markets it's cheaper to go through the U.S. and in some markets it's cheaper to go through Canada.

Durum has many issues connected to it -- primarily related to risk and competing crops, Wilson says.

"That's true in (North Dakota), and it's true in Canada. My guess is that in Canada the growers would be more prone to produce more durum, whereas here growers are going to fiddle with competing crops. There's going to be a more competitive battle (for acres) within durum."

At the Saskatchewan conference where Wilson recently spoke, speakers discussed the viability of a voluntary Wheat Board, the factors for a viable futures market, the profitability for Saskatchewan's Churchill and Prince Rupert ports, and how grain-related trade disputes will be resolved, as well as resolving Canadian and U.S. grain quality differences, and rail rates.

Times have changed, Wilson says. "They are going to charge forth with doing what they said they were going to do. It doesn't matter so much what the social factions may or may not say," Wilson says. Compared with previous times when the issue of ending the Wheat Board monopoly was heavily debated, grain prices now are much higher.

Wheat Board's uphill battle

"Price differentials are kind of mixed up a little bit, and growers in Canada are probably a little more amenable to trying to seek the best alternatives for them, despite the social aspects they might affix to this. If prices were $2 and they had a guaranteed minimum price of $3 (from the Wheat Board) the Wheat Board would look pretty attractive."

Long term, Wilson thinks the Wheat Board will have a hard time surviving or making inroads into markets. "The grain industry is a very, very competitive business," Wilson says. "Within days and months the competitive sector will begin filling in the spots where the Wheat Board will be displaced."

Already, Cargill announced publicly it will begin offering new crop pool prices in Canada, Wilson notes.

"The Wheat Board is going to have an increasing difficult time competing in this world of assets when they don't own any assets," he says.

The government has allowed them $200 million in borrowing capacity, but the Wheat Board doesn't have assets to borrow against.

"That's not a lot of money in this business. You can use that to borrow something, but you're not going to be able to buy much of the Canadian crop at that level. It's easy to sell wheat when you're the only seller under a monopoly situation. But all of a sudden you're going to be selling wheat in competition with five or six companies; they're going to have more difficulty selling wheat without assets."

Unlike in the past, almost all companies buying grain in the U.S. today own assets -- export elevators, rail cars, country elevators.

"Now all of a sudden you have to go to your competitors to ask them to be a physical handler for you. That's a pretty good challenge."

Wilson says the competitiveness of the grain handling business will likely end up serving the Canadian farmer very well -- "and the U.S. famers." With no big change in supply and demand, he thinks there will be some "messing around" in the markets in the first year that might have an impact.

Good for US farms

"I conclude that it's ultimately good for American farmers. They've been fighting against the Wheat Board for 50 years. There were certain things about the Wheat Board that were critical -- notably the guarantees they were provided which gave them an advantage in selling in distant deferred markets, and the ability to discriminate across markets. All of those will be gone now. That's a pretty big deal."

In the immediate term in the new crop, there will be an adjustment period between the two policies, and uncertainty. Wilson says he read that the price differential between old crop under the Wheat Board and new crop that people are offered to buy grain for are such that it may influence Canadians to hold old crop into the new crop period to sell it under a freer market regimen.

"If that occurs you could have a situation where you've got a large volume of 2011 crop sold at the same time as 2012 crop. That'll have a market impact," he says,

Wilson thinks it'll take Canadian transportation companies some time to replicate some rail system technology "adoptions" which have been made in the U.S. over the past 25 years. Primarily, the U.S. has embraced shuttle train systems.

"They have high through-put elevators, but that's not the same as a shuttle train operation," Wilson says.

High through-put elevators simply load a large number of cars in a short period, while a shuttle operation does that, but it also sends them from one origin to one destination elevator, not just a destination city, and returns it.

"That's a big deal, and (the Canadians) have not fully embraced that idea and concept as we have," Wilson says. "They've not been forced, either legislatively or competitively, to adapt to that."

Also, the Canadian system's "cars late" results are "quite a bit worse" than in the U.S. "We're not perfect, but some of our railroads are pretty good. Some are not so good. We're all better than the general performance of the Canadian system."