Canada- Land of the Free (Grain)?

February 17, 2015

Nicole Rogers
Principal, Agriprocity
nrogers@agriprocity.com

Nicole is a member of the GAI Middle East 2015 Advisory Board

The Canadian market has undergone two and a half years of enormous change. In August 2012, for the first time in over 70 years, the country welcomed a free market for wheat trading. Previously, the Canadian Wheat Board, a "Crown Corporation" under government control, was legally mandated to be the sole international trader of western Canadian wheat and other grains. The Wheat Board’s role was largely focused on building and maintaining international contracts with buyers on behalf of farmers. The logistics associated with moving the wheat and grains was handled by various large grain marketing companies, who developed assets such as inland and port terminals, to allow the Wheat Board and the Canadian farmers they represented, to execute the supply contracts they built overseas.

The Wheat Board was dissolved in August 2012 thanks in large part to the voices of Canadian farmers. Though not all were in favour of adopting a free market, many farmers believed that this historical shift would allow them to harness greater opportunities by directly participating in the international wheat and grain marketplace.

The Wheat Board still exists today, but with a new name ("CWB"), and a softer image. No longer are farmers mandated to sell to CWB, rather they are one member of a larger club of grain marketing outlets in Canada. Unlike most of their competition, the CWB does not own or operate any grain-handling infrastructure within Canada.

Primarily, agricultural production for hard wheat, canola seed, pulses and barley is concentrated in the three Prairie Provinces of Alberta, Saskatchewan and Manitoba. Inconveniently, these fertile provinces are located in the middle of the country and the wheat and grains grown here must travel through Canada’s rail infrastructure to find their way to port, in order to carry onwards to their global buyers.

Canada's rail industry is duopolistic in nature. Canadian Pacific and Canadian National rail lines are each tasked with moving goods across a vast landscape. Canadian agricultural commodities must compete for rail access with containerized goods, as well as oil extracted from Alberta's oil sands. To compound the problem, the fees rail companies are able to charge for the transportation of wheat and grains are capped by the Canadian federal government. Rail lines make better returns moving oil, containers, and pretty much everything outside of grain. As a result, agricultural producers tend to find themselves at the back of the queue. Furthermore, the two rail lines have a tendency to favour the largest grain marketers and provide them with the best agricultural sector access to the rail infrastructure, while the smaller players in Canada battle for the scraps.

Containerized movement of grains is a new concept within Canada. Previously, CWB fulfilled only contracts that allowed them to utilize a streamlined bulk shipping model. Container movement within the agricultural sector has traditionally been dominated by special crops such as peas, pulses and other smaller volume agri-commodities. International buyers who could not meet the minimums required to do direct business with the CWB relied on intermediaries and traders in their home markets to deliver the Canadian wheat and other grains they required.

The new era of choice means farmers can be creative and utilize any logistics avenue available to move their product into the hands of a buyer. Should they identify a buyer who wishes to move wheat in containers, they are now free to do so. That said, the free market has not immediately altered the current logistics system’s strong preference for bulk shipping. The world widely regards container shipping of agricultural products from Canada as inefficient and expensive.

The free market ushered in by the loss of the Wheat Board’s monopoly has also translated into fewer farms contracting their crops to the CWB. This lack of supply has focused the CWB on fulfilling the needs of their largest global customers (China, Mexico, the EU) first. Middle Eastern based buyers are considered to be small in comparison to the mammoths mentioned above. Ultimately this has led to Canadian wheat being in short of supply. Using the example of the United Arab Emirates (UAE), consistently the largest export destination for Canada in the region, trade in agri-food commodities has dropped by over C$ 200 million since 2012¹. The CWB is simply not able to continue to supply the quantities needed to ensure the competitive bulk pricing to which the UAE has become accustomed. Today, Canadian wheat has stopped being traded entirely to smaller markets such as Bahrain.

Conversely, competing grain marketing outlets have gladly picked up the CWB's share of grain supply. They are currently offering incredibly compelling pricing in the international market in order to secure market share. These low prices, have often positioned Canadian hard wheat bids below Russia, the USA, and Australia². The advantages created by the temporary chaos of the free market are ultimately building an unsustainable position for Canada within the global grains market.

It was the expectation of many, both globally, and domestically, that the creation of a free market for wheat would foster growth in the Canadian market. This may be true for those already deeply established within the existing infrastructure system. For anyone without access to the investment intensive assets needed to move grains across the Canadian landscape, or with the ability to store and hedge massive amount of product, this has not been the case to date. In many ways this has left a number of Canadian farmers feeling less freedom than in the previous regulated system.

¹ http://www.ats.agr.gc.ca/stats/5219-eng.htm
²http://www.agcanada.com/daily/canadian-wheat-lowest-in-iraq-tender-trade