17 Jan/07 National Post
by MORRIS W. DOROSH
Free our wheat farmers: Will the Harper government succeed in stripping the Wheat Board of its obsolete monopoly powers?
People who aren't acquainted with prairie agricultural politics may be baffled by recent events surrounding the Canadian Wheat Board. Why is the Harper government, overwhelmingly supported in rural western constituencies, bent on destroying an institution that many farmers seem to support and value? Why is the government ignoring the will of grain farmers, as apparently expressed in recent Wheat Board elections?
In fact, the real disagreement is not so much between a united front of farmers and the Harper government, but rather between two broad groups of farmers separated by an ideological fault line. On one side are those prairie farmers who view the Wheat Board system as a source of emotional and economic security. On the other are those who doubt that the system delivers any economic benefit, and chafe at the restrictions imposed on them in the management of their businesses, not to mention the Board's arbitrary and autocratic practices. This split is of long standing and emotionally superheated. In many farming families, brother is pitted against brother, and father against son.
The Canadian Wheat Board is a state trading enterprise. It has the exclusive, government-granted authority to buy wheat and barley grown in western Canada (but not elsewhere) for export and domestic human consumption. It is illegal for a prairie farmer to sell such grain to any other buyer; and it is illegal for a grain user to buy from any other source, including directly from growers. Western farmers do not even have the right to build grain processing facilities and supply them with their own grain without the Board's involvement.
The price that growers receive is equal to the Board's proceeds from sales minus its expenses, pooled on an annual basis so that each farmer receives an identical return for the same product. The Board insists that it obtains premium prices. But in the absence of competition, comparisons are inexact. It is a fact, however, that better prices than the Board's are routinely offered by grain buyers just south of the Canada-U.S. border. But of course, Canadian farmers are prohibited from selling to them.
In reality, the Board can sell at any price offered, no matter how low
-- because its cost of goods sold (i.e., what it pays farmers) is adjusted automatically according to the formula described in the previous paragraph. In grain-trade circles, many believe that this ability to undercut any competitor at any time inevitably reduces prices for everybody and results in an unnecessary transfer of wealth from grain producers to grain consumers. And so the expressions of support the Wheat Board says it has received from customers can be construed as being motivated by a selfish desire to keep prices low.
Moreover, it is impossible to argue in favour of the monopoly system without ignoring all the lessons of recent economic history. Unlike the Board, private grain companies would have to compete for farmers' grain by offering the highest buying prices. Then they would compete for buyers for their own grain-based products by offering the lowest selling prices. They would have to control their costs effectively and maximize their productivity. This is the way successful companies, and economies, work.
Where do farmers line up on the issue? Upwards of 75% of Canadian grain is produced by a quarter of growers. These larger growers tend to be progressive, younger, better educated and more competent managers. Among this group, support for the Board's monopoly power is low. Rather, support for the Board is high among smaller, older operators, who are also the most vocal in expressing their point of view.
In a nearly hysterical campaign to preserve the monopoly system, the Board has begun to contend that it is not a government agency and therefore not subject to government oversight. In fact, the Board recently launched a legal action in an attempt to establish that it is not bound to follow instructions from the responsible minister.
The Canadian Wheat Board Act indeed exempts it from the provisions of the Financial Administration Act, a clause which has not been constitutionally tested. In every other imaginable respect, however, the Board is a government creation. The federal government owns its assets and is responsible for its liabilities. (In the past, the federal treasury has covered $1.5-billion in shortfalls arising from miscalculation and mismanagement.) The treasury also guarantees the Board's financial obligations, currently on the order of $6-billion. These guarantees secure repayment and allow the Board to borrow at the same rock-bottom interest rates as prime government securities carry.
The Board's governance structure is based on a 15-member board of directors, five of whom are appointed by the federal cabinet, and 10 of whom are farmers elected by other farmers. This "farmer democracy" is a nice idea, but it isn't a particularly appropriate way to run the Board: Even highly successful farmers don't find their experiences particularly useful in guiding multi-billion-dollar commercial activity in the extremely specialized field of international commodity trading.
A further problem is that election procedures are incoherent. Voting eligibility is conferred by a delivery permit, which is required in order to sell grain to the Board. But many farmers and farm units have multiple permits, and therefore multiple votes. There are no more than 20,000 commercial grain growers in western Canada, but the voter list runs to 85,000 names.
The situation most closely resembles what would happen if every owner of a General Motors vehicle were entitled to vote in the election of General Motors directors, with shareholders obliged to accept the consequences and General Motors being the only legal manufacturer of vehicles. It least resembles conventional corporate governance, in which each share, not each holder, represents a vote.
The Harper government understands the need for reform. Its intention is to remove the Board's monopoly authority, privatize the Board, and maintain it as a voluntary marketing agency. Those farmers who wish to patronize it could continue to do so, but they would be under no obligation.
The Board, naturally, opposes this: No one likes to see their monopoly powers taken away. The Board's main argument is that it cannot compete with private actors in a voluntary environment -- and so it will sink without the monopoly. This must be the first case in history that pleading incompetence has been used to retain a privilege.
In practice, the Board has (or should have) knowledge and expertise sufficient to give it a secure place in the value chain. Physical handling, storage and transportation of grain is not the only way to add value. The best interests of Western grain farmers would be served by new and creative ways of thinking in a global economy that responds well to innovation.
It is interesting to note that, inasmuch as there is vocal support from some quarters for the Board's western wheat and barley monopoly, there has never been any movement to extend these monopoly principles to other spheres. There is no clamour, for instance, for extending the Board's authority to the rest of Canada. No one has proposed the creation of similar monopoly entities to market, say, iron ore, oil or natural gas. (There are similarities between the Wheat Board system and the marketing boards that control milk, egg and chicken production and marketing, but there are also major differences. And in any event, the existence of one obsolete monopoly does not justify another.)
The Harper government, at some risk to itself, has sided with the class of farmers who want the same economic freedom that everyone else enjoys. Even the least skilled worker has the opportunity to locate the employer who offers the best wages and terms of employment, and to change employers at will. The corollary of the Wheat Board system in employment terms would be slavery.
After openly and emphatically promising reform in the 2006 election, the government is now proceeding to take on the Board's monopoly. Unfortunately, making big changes will require legislation amending or repealing the Canadian Wheat Board Act. This is a politically inopportune time for such an action. The collectivist, central-planning philosophy that underlies the Board system is well-aligned with that of the NDP; and the other two opposition parties may also see an advantage in protecting the status quo.
However things unfold, the abolition of the Wheat Board monopoly is a necessity. The western grain industry faces competitive challenges, including the rise of eastern Europe as a low-cost cereal producer. Free-market competition can do for the prairie grain economy what it has done in every instance in which it has been allowed to operate. The Harper government should stick to its plan.
mwdorosh@allstream.net
- Morris Dorosh is publisher of Agriweek, a Winnipeg-based newsletter for the agribusiness community.
by MORRIS W. DOROSH
Free our wheat farmers: Will the Harper government succeed in stripping the Wheat Board of its obsolete monopoly powers?
People who aren't acquainted with prairie agricultural politics may be baffled by recent events surrounding the Canadian Wheat Board. Why is the Harper government, overwhelmingly supported in rural western constituencies, bent on destroying an institution that many farmers seem to support and value? Why is the government ignoring the will of grain farmers, as apparently expressed in recent Wheat Board elections?
In fact, the real disagreement is not so much between a united front of farmers and the Harper government, but rather between two broad groups of farmers separated by an ideological fault line. On one side are those prairie farmers who view the Wheat Board system as a source of emotional and economic security. On the other are those who doubt that the system delivers any economic benefit, and chafe at the restrictions imposed on them in the management of their businesses, not to mention the Board's arbitrary and autocratic practices. This split is of long standing and emotionally superheated. In many farming families, brother is pitted against brother, and father against son.
The Canadian Wheat Board is a state trading enterprise. It has the exclusive, government-granted authority to buy wheat and barley grown in western Canada (but not elsewhere) for export and domestic human consumption. It is illegal for a prairie farmer to sell such grain to any other buyer; and it is illegal for a grain user to buy from any other source, including directly from growers. Western farmers do not even have the right to build grain processing facilities and supply them with their own grain without the Board's involvement.
The price that growers receive is equal to the Board's proceeds from sales minus its expenses, pooled on an annual basis so that each farmer receives an identical return for the same product. The Board insists that it obtains premium prices. But in the absence of competition, comparisons are inexact. It is a fact, however, that better prices than the Board's are routinely offered by grain buyers just south of the Canada-U.S. border. But of course, Canadian farmers are prohibited from selling to them.
In reality, the Board can sell at any price offered, no matter how low
-- because its cost of goods sold (i.e., what it pays farmers) is adjusted automatically according to the formula described in the previous paragraph. In grain-trade circles, many believe that this ability to undercut any competitor at any time inevitably reduces prices for everybody and results in an unnecessary transfer of wealth from grain producers to grain consumers. And so the expressions of support the Wheat Board says it has received from customers can be construed as being motivated by a selfish desire to keep prices low.
Moreover, it is impossible to argue in favour of the monopoly system without ignoring all the lessons of recent economic history. Unlike the Board, private grain companies would have to compete for farmers' grain by offering the highest buying prices. Then they would compete for buyers for their own grain-based products by offering the lowest selling prices. They would have to control their costs effectively and maximize their productivity. This is the way successful companies, and economies, work.
Where do farmers line up on the issue? Upwards of 75% of Canadian grain is produced by a quarter of growers. These larger growers tend to be progressive, younger, better educated and more competent managers. Among this group, support for the Board's monopoly power is low. Rather, support for the Board is high among smaller, older operators, who are also the most vocal in expressing their point of view.
In a nearly hysterical campaign to preserve the monopoly system, the Board has begun to contend that it is not a government agency and therefore not subject to government oversight. In fact, the Board recently launched a legal action in an attempt to establish that it is not bound to follow instructions from the responsible minister.
The Canadian Wheat Board Act indeed exempts it from the provisions of the Financial Administration Act, a clause which has not been constitutionally tested. In every other imaginable respect, however, the Board is a government creation. The federal government owns its assets and is responsible for its liabilities. (In the past, the federal treasury has covered $1.5-billion in shortfalls arising from miscalculation and mismanagement.) The treasury also guarantees the Board's financial obligations, currently on the order of $6-billion. These guarantees secure repayment and allow the Board to borrow at the same rock-bottom interest rates as prime government securities carry.
The Board's governance structure is based on a 15-member board of directors, five of whom are appointed by the federal cabinet, and 10 of whom are farmers elected by other farmers. This "farmer democracy" is a nice idea, but it isn't a particularly appropriate way to run the Board: Even highly successful farmers don't find their experiences particularly useful in guiding multi-billion-dollar commercial activity in the extremely specialized field of international commodity trading.
A further problem is that election procedures are incoherent. Voting eligibility is conferred by a delivery permit, which is required in order to sell grain to the Board. But many farmers and farm units have multiple permits, and therefore multiple votes. There are no more than 20,000 commercial grain growers in western Canada, but the voter list runs to 85,000 names.
The situation most closely resembles what would happen if every owner of a General Motors vehicle were entitled to vote in the election of General Motors directors, with shareholders obliged to accept the consequences and General Motors being the only legal manufacturer of vehicles. It least resembles conventional corporate governance, in which each share, not each holder, represents a vote.
The Harper government understands the need for reform. Its intention is to remove the Board's monopoly authority, privatize the Board, and maintain it as a voluntary marketing agency. Those farmers who wish to patronize it could continue to do so, but they would be under no obligation.
The Board, naturally, opposes this: No one likes to see their monopoly powers taken away. The Board's main argument is that it cannot compete with private actors in a voluntary environment -- and so it will sink without the monopoly. This must be the first case in history that pleading incompetence has been used to retain a privilege.
In practice, the Board has (or should have) knowledge and expertise sufficient to give it a secure place in the value chain. Physical handling, storage and transportation of grain is not the only way to add value. The best interests of Western grain farmers would be served by new and creative ways of thinking in a global economy that responds well to innovation.
It is interesting to note that, inasmuch as there is vocal support from some quarters for the Board's western wheat and barley monopoly, there has never been any movement to extend these monopoly principles to other spheres. There is no clamour, for instance, for extending the Board's authority to the rest of Canada. No one has proposed the creation of similar monopoly entities to market, say, iron ore, oil or natural gas. (There are similarities between the Wheat Board system and the marketing boards that control milk, egg and chicken production and marketing, but there are also major differences. And in any event, the existence of one obsolete monopoly does not justify another.)
The Harper government, at some risk to itself, has sided with the class of farmers who want the same economic freedom that everyone else enjoys. Even the least skilled worker has the opportunity to locate the employer who offers the best wages and terms of employment, and to change employers at will. The corollary of the Wheat Board system in employment terms would be slavery.
After openly and emphatically promising reform in the 2006 election, the government is now proceeding to take on the Board's monopoly. Unfortunately, making big changes will require legislation amending or repealing the Canadian Wheat Board Act. This is a politically inopportune time for such an action. The collectivist, central-planning philosophy that underlies the Board system is well-aligned with that of the NDP; and the other two opposition parties may also see an advantage in protecting the status quo.
However things unfold, the abolition of the Wheat Board monopoly is a necessity. The western grain industry faces competitive challenges, including the rise of eastern Europe as a low-cost cereal producer. Free-market competition can do for the prairie grain economy what it has done in every instance in which it has been allowed to operate. The Harper government should stick to its plan.
mwdorosh@allstream.net
- Morris Dorosh is publisher of Agriweek, a Winnipeg-based newsletter for the agribusiness community.
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