CWB’s Smear of Informa Report Doesn’t Stand up to Scrutiny

[Fransisco]

*Wheatgrower press release*

CWB’s Smear of Informa Report Doesn’t Stand up to Scrutiny

Thursday, August 14, 2008

The Western Canadian Wheat Growers Association says the Canadian Wheat Board’s comments last week on Informa’s study of the CWB’s performance are not based on substantive analysis and amount to little more than a drive-by smear. It appears as if the CWB hastily crafted its press release in response to media stories that recognized the significance and credibility of Informa’s findings.“The CWB had more than a week to examine the study and conduct a comprehensive analysis,” says Mike Bast, Chair of the Wheat Growers. “Yet, instead of providing a thorough and professional review, the CWB chooses to engage in smear tactics.”

The CWB’s criticisms focus on Informa’s selling price analysis which was based on price data collected by the United Nations at various port positions. Informa adjusted the price data to account for differences in the quality of wheat sold by various exporters into each market. For spring wheat, Informa found that the CWB did not earn any price premiums in 10 of the 11 exports in which the CWB had a sizeable market share.

The Wheat Growers have prepared a detailed commentary in response to the CWB’s claims. In the commentary we explain how Informa’s selling price analysis was only one of three approaches it used to assess the CWB’s marketing performance. For example, an elevator price analysis found that U.S. farmers obtained higher returns for their spring wheat in five of the past six crop years, with the average price difference being Cdn $15.97 per tonne or 43 cents per bushel.

“Even if the CWB’s criticisms of Informa’s selling price analysis were to have some validity, it still doesn’t explain why the farmgate returns we get under the CWB are so much lower than what the U.S. farmers get under the open market,” says Rolf Penner, Manitoba Vice President of the Wheat Growers. “If the CWB is indeed earning the premiums it boasts about, where does the money go? It sure doesn’t end up in our pockets.”

The Wheat Growers are disappointed with the CWB’s unprofessional and knee-jerk response to Informa’s report.

“Instead of giving the Informa report the consideration and respect it deserves, the CWB simply lashes out at anyone who might dare suggest the monopoly is not providing a positive value to Canadian farmers,” says Bast. “The CWB’s over-the-top reaction undermines its credibility and is not in keeping with what farmers expect and deserve from their CWB.”

[Fransisco]

Apparently they also have a more detailed point by point rebuttal of the Wheat Boards Informa criticism. I'll try to get ahold of it later on in the day unless someone beats me to it.

[wilagro]

Why should the CWB "have to" answer one way or another to a study commissioned by the AB gov't which has made it well known of its opposition to the CWB as it now exists?

They should just say..."screw off"... "you troublemakers"..."we have work to do".

Having to answer to every criticism wastes time and resources.

[stubblejumper]

I didn't realize that the report was a farmers for just me report. It all makes sense now.

[Fransisco]

So in other words Willagro in your opinion the CWB should be accountable to no one.

[Fransisco]

If the board were voluntary they would have the right to say 'screw off'. But its not. As long as its a crime for farmers to sell their own wheat and they are forced to fork it over to the board questions will be asked and comparisons will be made.

[charliep]

Just curious if anyone has any questions about the
report (92 pages). Would be happy to answer to
the best of my ability as an Alberta government
employee. I am sure Informa Economics Canada
(not Texas, not Memphis, not London although the
Canadian office is part of the latter two) would
offer the same commitment.

The documentation on the $560 mln is coming
from the CWB is coming but I can likely guess the
process - they reference the public data source.

wilagro - You might want to review the CWB
producer survey from this spring. What are
western farmers in general and Alberta farmers in
particular asking (perhaps yelling) for? That's all
farmers?

[FarmRanger]

If a farmer has no choice whether to sell to the CWB, what incentive does it have to be accountable to the farmer? If you aren’t happy with their performance, what are you going to do, stop dealing with them and go to the competition? Umm, don’t think so. The competition that might have actually been able to bid up the value of your product has been legislated out of existence.

[Fransisco]

<b>1) CWB statement: “An Alberta government report has used false assumptions and selective data to undermine the value of the CWB”.</b>

Wheat Grower Response:

Unlike previous studies that have claimed to demonstrate net benefits of the CWB monopoly, most of the analysis contained in the Informa report does not rely heavily on assumptions, but rather is based on the straightforward examination of publicly available data.

The study also does not rely on a single approach to evaluate the CWB’s performance. For example, in assessing the ability of the CWB to generate price premiums, the Informa study uses United Nations price information at various port destinations to conduct a selling price analysis. This analysis finds there is very little evidence that the CWB is able to influence market prices to capture higher values for Canadian farmers.

To verify this conclusion, the Informa study then examines prices of wheat, barley and durum received by farmers at North Dakota elevators over the past six crop years and compares these to the returns received by Saskatchewan farmers under the CWB. The U.S. data series is based on the “daily average basket price” at a number of locations. The Informa study indicates that 69 locations are currently reporting data for hard red spring wheat, 28 locations for durum, 27 locations for malt barley and 50 locations for feed barley. (Page 42).

The Wheat Growers acknowledge that such an approach necessarily “assumes” that the daily average basket price is representative of what U.S. farmers actually receive. However, if anything, these averages will likely understate actual returns, because when farmers go to sell their grain, they usually seek out the best bid on any given day – they often contact several buyers in an effort to seek out the best return. They don’t accept the “average” price of all buyers.

The Informa study does not stop there. To substantiate the elevator price comparison, the study then draws on USDA weighted average price data and finds that “with the exception of 2001/02 and some crops in the current marketing year, the CWB final payments are consistently and significantly lower than the US [marketing year average] prices.” (Pages 47 and 48).

The Informa study also notes that in this comparison, the analysis uses a weighted average price for “the entire class of wheat, durum or barley, regardless of grade” to determine U.S. average prices and yet compares these to the returns for high quality grades in Canada (i.e. 1 CWRS 13.5% spring wheat, 1 CWAD 11.5% durum wheat, Standard Select 2-row and 6 row malting barley and 1 CW feed barley). Despite giving the CWB this advantage, the U.S. returns still come out ahead. (Page 48).

So when the CWB accuses the Informa study of using “sweeping assumptions” and “selective data”, this is no more than empty rhetoric. Yes, the Informa study “selects” data from a number of different sources (including United Nations, North Dakota elevators, USDA and Quorum Corporation), however this only serves to strengthen the findings, not weaken them. Also, where assumptions have been made, the benefit of the doubt has often been given to the CWB.


Weighted versus simple average prices

One of the more revealing findings of the Informa study is that the USDA data shows that there is very little difference between weighted average prices and simple average prices. For example, over the past 8 years, the price difference is only 5 cents per bushel for spring wheat, 8 cents for durum, 2 cents for malting barley and 6 cents for feed barley (page 47). What this means is that in conducting price comparisons between Canada and the U.S., it generally matters little as to whether the U.S. price data is weighted according to sales volume or not.


Net interest earnings

The Informa results are actually flattering to the CWB because the authors of the study make no adjustment for the “net interest earnings” that are embedded in CWB returns.
These interest earnings arise because of the Canadian government’s guarantee of CWB borrowings which allows it to borrow at below-market rates. Most of the CWB’s interest earnings relate to large receivables from various countries that arose more than two decades ago.

The Wheat Growers acknowledge that net interest earnings increase the final pool returns that are distributed to farmers and that this can be construed as a benefit of the financial backing the CWB receives from the Canadian government. For this reason, we can understand why Informa did not deduct these interest earnings in its comparative analysis. We note however that the existence of these interest earnings in the final pool returns has the effect of masking the CWB’s true marketing performance.

CWB pool account deficit

It should also be noted that Informa’s analysis makes no adjustment for the deficit that the CWB incurred in the wheat pool account in the 2002/03 crop year. In that year, the federal government covered the CWB’s deficit of $85 million, amounting to $9.86 per tonne. Again, the Wheat Growers acknowledge that this payment represents a “benefit” of the single desk (or rather, a benefit of the government guarantee of initial payments), although we assert that to obtain a true assessment of the CWB’s marketing performance, adjustments should be made to CWB returns to exclude the effect of net interest earnings and any pool account deficits.

[Fransisco]

<b>2) CWB statement: The Informa report calculates “that the CWB earned significant premiums (prices above market values) of up to $33 per tonne in 10 of 11 markets studied, but then uses a number of incorrect assumptions to discount them.”</b>

Wheat Grower response:

The Informa study examined 11 markets in which CWB exports represented a significant share (i.e. greater than 25%) of the country’s total wheat supplies or where the CWB exported large volumes. The analysis found that the CWB selling price was indeed higher in 10 of these 11 markets, but this was mainly due to the fact that the CWB was selling a higher grade of wheat into these markets than other exporters. When Informa adjusted for these quality differences, it found that the CWB earned a premium in only one of the eleven markets, namely Japan. The Informa study concluded that “only one market exhibits a potential price premium but it is insufficient to compensate for the lower prices [obtained] in other markets.” (Page 35).

The CWB claims the Informa study uses a “number” of incorrect assumptions to discount the apparent CWB premiums. It is not clear what assumptions the CWB believes are not correct. The Informa study carefully walks the reader through its analysis for one market (Colombia) to demonstrate how it conducted its analysis. Informa also states that it adjusted for the quality differences based on “the spreads in US cash wheat prices at the US Gulf and Pacific Northwest (PNW) regions, depending on the export market.” (Page 32). The CWB fails to demonstrate how this is not a valid basis to account for the differing qualities of wheat sold by various exporters into differing markets.

[Fransisco]

<b>3) CWB statement: “The report wrongly assumes that all wheat is the same and that overall market share is what determines the CWB’s ability to exercise market power.”</b>

Wheat Grower response:

The CWB’s claim that the report “assumes that all wheat is the same” is a baseless accusation. For example, Informa’s selling price analysis specifically adjusts the data to account for quality differences. As Informa states: “It is critical however, to recognize that the quality of wheat plays a large role in the price paid by an importing country.” (Page 30). Throughout the report, Informa takes great care to account for quality differences and, as noted in the weighted average analysis above, gives the CWB the benefit of the doubt in those cases where direct comparisons cannot be made.

The report doesn’t “assume overall market share is what determines the CWB’s ability to exercise market power”. Instead Informa states the following:

While market share is not, in itself, a sufficient measure to declare that an organization holds market power, it is certainly an important prerequisite. In order to have a significant influence on prices, a seller must have sufficient market share in order to exert market power over buyers. Generally, economists regard that 25% of a particular market is deemed to be a minimum threshold share in order to exert market power.” (Page 11).

Informa notes the CWB continues to claim that it “is the largest single seller of wheat and barley in the world, holding more than 20 per cent of the international market.” (Page 11). Informa shows that Canada’s share of global wheat exports has averaged 14.5 percent over the past decade and has not exceeded 20% since the 1994/95 crop year. In barley, Canada’s share of global barley exports has averaged 9.3 percent over the past decade and has not exceeded 20% since the 1990/91 crop year. (Pages 13 and 15).

If anyone makes erroneous and baseless claims, it’s the CWB. One would think that at least one of the 450 employees at the CWB would have noticed they haven’t enjoyed a market share over 20% in either wheat or barley in more than a dozen years.

In any event, the Informa study does identify 11 export markets in which Canada’s share of the country’s wheat imports has exceeded 25% over the past five years. It concludes that “only one [Ecuador] would potentially exhibit characteristics suggesting that Canada has sufficient market power to leverage prices.” (Page 20). Informa’s selling price analysis subsequently confirms that the CWB is not able to exert market power and obtain premium prices in any wheat markets, with the possible exception of Japan.

For durum, the Informa study identifies 13 export markets in which Canada’s share of the durum imports exceeded 25% over the past five years. Of these, Informa states that “market influence by the CWB could potentially be exercised in six.” (Page 21). Its subsequent selling price analysis confirms that Peru is the only market (for which data is available) “in which Canadian durum appears to consistently achieve a higher CIF price. In Algeria, Morocco and Venezuela, Canadian durum is not the premium-priced product with any consistency or not at all.” (Page 37).

With respect to barley, Informa states that “Canada holds more than the minimum 25% threshold of total imports in only four countries. As a share of the total supply (production plus imports) of barley in those markets however, Canada does not account for over 25% in any of the markets. Variability is relatively low in two of the four markets. These measures indicate that Canada does not hold sufficient market power in any of the 20 markets to which it has exported barley over the five year period under examination.” (Page 21).

[Fransisco]

<b>CWB statement: “Because of its flawed premise, the report selectively focuses on only 11 of the 60 to 70 actual wheat markets the CWB sells into each year – rejecting important, high-value markets like Canada, the U.S. and Europe.”</b>

Wheat Grower response:

In the case of the U.S., Informa notes that Canada held a 33.6% share of its wheat imports over the five year period examined. However, it did not select it for specific analysis as Canada’s share of total supplies in the market were less than 1%, far less than the threshold needed to exert market influence. (Page 20).

The CWB is correct in noting that Informa only examined export markets and did not consider the CWB’s domestic sales in its selling pricing analysis. However, the CWB has previously indicated that its domestic pricing policy for wheat sold to Canadian mills is based on Minneapolis milling values, with an adjustment for freight depending on the location of the mill. In effect, Canadian millers buy wheat from the CWB on a North American pricing basis so that they are not at a competitive disadvantage to U.S. or foreign millers. We are not aware of any change in this policy that would suggest the CWB extracts a price premium from Canadian millers.

With respect to Europe, Canada’s share of imports is below the 25% threshold, so it is not included in the Informa analysis with respect to wheat. It is considered in the durum analysis, although in this case Canada’s share of total supplies in Europe is 7.8%, which again is a threshold that is considered to be far below the level necessary to exert market influence. (Page 21).

Informa does however comment on why Canada’s selling prices can be higher in certain markets:

“Even though the CWB does not exhibit sufficient “market power” characteristics to extract premiums, Canadian wheat and barley may be higher priced in certain markets. The reasons for these premium prices however have little, if anything, to do with single-desk selling. The CWB states in the most recent annual report that the `single desk adds value for western Canadian farmers by enabling them to capitalize on Canada’s reputation for grain quality, consistency, food safety, customer service and reliability.’

Several of the strengths indicated in this quote are not dependent on a single-desk selling approach. In Canada, the responsibility for maintaining grain quality and consistency in export shipments rests with the Canadian Grain Commission, not the CWB. Food safety is handled by the Canadian Food Inspection Agency. Customer service and reliability are a key requirement for any successful trading organization, whether public or private.” (Page 22).

The Wheat Growers agree with the gist of Informa’s assertion here, although we maintain that Informa has not fully and properly acknowledged the role played by western Canadian farmers and grain handlers in securing Canada’s reputation for delivering a high quality, consistent and safe product to customers. We note for example that Canada has a strong reputation for delivering consistent, safe and high quality canola, oats and other crops with no intervention by the CWB and with only nominal roles played by the Canadian Grain Commission and the CFIA.

[Fransisco]

<b>CWB statement: “The report also blatantly misuses grain handling and transportation data published by the respected Quorum Corporation, which produces the quarterly Grain Monitor report under contract to the federal government. Quorum emphasizes in its reports that efficiency comparisons cannot be made between wheat and canola based on its calculations of export basis and producer netback for each crop. Yet that is precisely what Informa has done.”</b>

Wheat Grower response:

Informa does indeed draw on the Quorum report to compare the “export basis” for wheat, durum, canola and peas. The Wheat Growers have scrutinized the latest report from the Grain Monitor and while Quorum does note that the methodologies for calculating the export basis and producer netback differ for CWB crops and non-board crops, it does not (contrary to the CWB’s claim) “emphasize” that efficiency comparisons cannot be made between wheat and canola based on its calculations. It merely encourages the reader “to become familiar with this material before attempting to draw any specific conclusions from the information presented in the discussion that follows”.

If the CWB believes the Grain Monitor has erred or that Informa has wrongly taken data from the report, then the CWB should document its concerns. Furthermore, the Grain Monitor has been calculating the export basis and producer netback since 2002. If the CWB believes there are major deficiencies in the way these are calculated, why hasn’t it raised these concerns before now?

Unless the CWB can provide concrete evidence that Informa “blatantly misuses” the Quorum report data, the CWB’s accusation is nothing more than an unsubstantiated smear.

[Fransisco]

<b>CWB Statement: “Examples of other flaws include: Lack of acknowledgement that the CWB’s dominant position in the durum market supports the overall price structure”.</b>

Wheat Grower response:

The mere fact that an entity may hold a dominant position does not necessarily increase the overall price structure. If the CWB holds durum supplies off the world market, then yes, that temporarily supports the overall price structure. However, once those supplies are released onto the market, it depresses the overall price structure.

Also, if the CWB does periodically withhold supplies from the market, it means that Canadian farmers are forced to hold on to supplies that they might otherwise wish to sell. The Wheat Growers believe that each individual farmer should be free to determine the timing of their sales, including the contracting of any supplies to the CWB in a voluntary marketplace. In that way, it is the individual farmer deciding what is in his best interest (including whether to carry inventory from year-to-year), instead of the CWB presuming to know what is in the best interests of all durum growers.

[Fransisco]

<b>CWB Statement: “American wheat has an intrinsic price advantage due to factors such as the dramatically lower proportion exported from the U.S. (40 per cent compared to 80 per cent in Canada.) This means less U.S. grain is sold into diverse markets outside North America where prices tend to be lower and transportation logistics more expensive.”</b>

Wheat Grower response:

Our first reaction to this rather incredible admission is: If the U.S. market does indeed provide a higher return, then why doesn’t the CWB sell more into this market, rather than offshore markets “where prices tend to be lower and transportation logistics more expensive”? Shouldn’t the CWB be seeking out the best paying markets? That is what sellers do in an open market.

If the CWB does indeed sell less grain into the U.S. market than the market demands and instead sells more grain into distant offshore markets, then this goes a long way to explaining why Informa found that CWB returns are so much lower than the returns obtained by U.S. farmers for grain of identical quality.

The Wheat Growers also note the CWB is wrong in asserting that Canada exports 80 per cent of its wheat production. Over the past 10 years (1998/99 to 2007/08), Canada has produced an annual average of 23.4 million tonnes of which 15.7 million has been exported as wheat or wheat products. This works out to an export ratio of 67%, not 80%.

The CWB’s claim that U.S. exports are about 40 per cent of production is also wrong. Over the past 10 years, U.S. wheat production has averaged 57.2 million tonnes and its exports have averaged 28.2 million tonnes. This works out to an export ratio of 49%, not 40%.

It would appear that in its zeal to discredit the Informa study, the CWB does not feel compelled to be bound by the constraints of truth.

We also note that in its comparison, the CWB is guilty of “assuming that all wheat is the same”, an accusation it levels at Informa. We note, for example that the U.S. exports a higher percentage of its spring wheat than other types of wheat. In the past 10 years (1999 to 2008), U.S. hard red spring wheat exports averaged 7.1 million tonnes, which represents 56% of their average hard red spring wheat production of 12.6 million tonnes.

Thus, the proportion of hard red spring wheat production that is exported from the U.S. (56%) is not far below the proportion of wheat production exported from Canada (67%). Given that U.S. hard red spring wheat represents the main competing wheat for the CWB in many markets, it seems rather ridiculous for the CWB to claim that American wheat “has an intrinsic price advantage” because a “dramatically lower” proportion of it is exported. In our view, 11 percentage points does not constitute a dramatic difference.

It’s worth noting too that overall U.S. wheat exports are 80% greater than Canadian wheat exports (i.e. an average of 28.2 million tonnes compared to 15.7 million tonnes). If offshore markets truly are lower-priced, why does this not affect the U.S. to the same extent as the CWB? Are U.S. exporters really that much more aggressive, successfully capturing the best return markets, while leaving the scraps to the CWB? It would seem so.