The Canadian Wheat Board

The CWB

The CWB can trace its roots to the First World War, when the federal government established the Board of Grain Supervisors to pool, ship, and market wheat from Western Canada to assist in the war effort. Once the war was over the board was disbanded and prices for wheat quickly plummeted. This drop in prices bolstered the belief among producers that they had been exploited by private traders and shipping companies before the war.

In order to fight the bargaining power of traders, Canadian farmers began to re-establish wheat pool marketing companies across the prairies. These companies grew until the Great Depression hit in 1929 and the price of wheat plummeted, at which point almost all of the pooling companies descended into bankruptcy. In an effort to raise prices and production levels, while also answering the pleas of farmers, the federal government established the CWB in 1935.

In 1943, the CWB was given the legal authority to be the only buyer of wheat from Western Canada, and ensured all farmers received a minimum price for their crop. The CWB, however, did not own all of the grain elevators and wheat pools (grain-buying cooperatives) in the region—rather, these businesses were contracted to accept grain on behalf of the CWB.

Through these field agents, the CWB had a standard method for purchasing and distributing grain. At the beginning of every crop year, the CWB determined the price it would pay for wheat, durum wheat, and barley, with prices dependent on the quality of grain delivered. While farmers were guaranteed minimum prices for their grain throughout the crop year, the board was not obligated to purchase all grain produced by farmers. Rather, market conditions would determine how much the board would buy. This meant that the CWB could refuse to buy a farmer’s crop, and if the organization did so, farmers would either have to store their wheat until the next round of contracts, or transfer their wheat to another producer for a small fee.

When farmers delivered their grain, they would receive an initial guaranteed payment that amounted to roughly 75 percent of the projected market price for wheat that year. The board would then sell the grain, and any extra profit from these sales – minus CWB marketing and operational expenses – would be distributed to farmers. If the board was unable to turn a profit, or made a loss, the farmers would still have their initial payments and the government would absorb the losses.

The Free Market Move

Eliminating the CWB’s single buyer control – also known as a “single desk” system – had long been a goal of Canada’s Conservative Party. Before the current Conservative Prime Minister Stephen Harper was elected into office in 2006, he led the National Citizens’ Coalition lobby group which supported legal challenges against the CWB’s control over wheat sales. Harper became President of the coalition in 1998 and stated that his desire to see the board dismantled was “about the right of citizens to own private property.”

The Conservatives ruled with a minority government when they were first elected into power in 2006, and were unable to garner the legislative power necessary to dismantle the CWB. In 2007, the Agriculture Minister tried to remove barley from the control of the CWB by cabinet order. The Federal Court ultimately deemed the move illegal, claiming that the government could not dissolve CWB powers in this manner. Meanwhile a non-binding, mail-in vote conducted by the federal government showed that 62 percent of Western Canadian respondents voted in favor of removing the CWB’s monopsonistic control over barley.

Shortly after winning a majority government in the May 2011 election, the Conservative Party laid out a plan for dismantling the Board, and by December of that year a bill was passed to end the single desk system.

Opposition

Opposition to the dismantling of the board was strong. Groups of farmers and CWB supporters, such as the Friends of the Canadian Wheat Board (FCWB) and the Canadian Wheat Board Alliance, maintained that the board provided invaluable advantages to farmers in regards to price-pooling, the negotiation of transportation contracts, and overseas sales. These groups continue to challenge the actions of the federal government.

In 2011, when Conservatives achieved a majority government, CWB supporters continued to fight to keep the board. In the summer of that year, the CWB held a referendum with its farmers over whether to dissolve the Board’s monopsony. Roughly 60 percent of wheat farmers and 51 percent of barley farmers voted to keep the monopsony, with 55 percent and 47 percent turnout, respectively. The vote was criticized as not being truly representative, and while it was conducted by the government-owned CWB, the vote was not considered an official government referendum and therefore lacked legal implications. The Agriculture Minister referred to it as a “non-binding survey,” adding that the vote would not have an effect on the passage of the bill. The government also pointed out that in the 2011 election, 52 of the 57 parliamentary districts (ridings) within the CWB’s Western Canadian jurisdiction elected Conservative representatives, and that this vote indicated support for their proposals.

Regardless, the FCWB launched a legal challenge against the government, claiming that the proposed legislation which would dismantle the board was illegal. A federal judge agreed, stating that the government was required by law to hold an official vote with farmers whenever changes to the board were proposed. The bill to dissolve the CWB passed unscathed, and for the first time since World War II, Western Canadian wheat and barley farmers could sell their product to whomever they chose. The CWB could continue to operate, but was stripped of its single desk control and was slated for privatization by 2017. A 2012 appeal submitted by board supporters ultimately decided in favor of the government, with the court maintaining that there was no evidence that consent from the CWB or from farmers was required for dismantling it.

Legislation against the government’s decision is ongoing. In April of this year, the Supreme Court declined to hear an appeal from a farmer group that sought out CA $17 billion in damages related to the dismantling of the CWB. Meanwhile, a class-action suit led by the FCWB claiming that the federal government mismanaged CA $720 million in funds that should have been paid to farmers in 2011-12, is set to be heard in Federal Court in the coming months.

Given that the CWB has now been privatized, crushing any lingering hopes of the potential restoration of the single desk system, farmers’ only possible recourse is compensation through legal action.

Sale

On April 15, 2015, the Federal Government announced that Bunge Ltd. and SALIC’s bid to purchase the CWB had been accepted. The joint venture, which will be known as the Global Grain Group (G3), completed the deal on July 31, 2015 with a CA $250 million payment for a 50.1 percent stake in the CWB. The remaining 49.9 percent will be available to farmers who sell their grain to the new company. Farmers will receive $5 in equity for every tonne of grain they deliver to G3. However, once the total equity set aside for farmers reaches CA $250 million or seven years has passed, G3 has the right purchase the shares from the farmers, who have no right of refusal. That effectively means in seven years, G3 has the right to purchase the remaining shares for 100 percent ownership of the CWB.

Ian White, the chief executive officer of CWB who oversaw the deal, said that the CWB received offers from more than 50 potential investors and concluded that G3 was the best option.

Single desk supporters, however, claim that the price and terms of the deal were wholly inadequate. And although yearly sales by the CWB regularly topped CA $6 billion, the board had very few physical assets. Since the CWB contracted with other companies for storage and shipping, they had no grain elevators of their own. The company’s only physical assets were several thousand grain-carrying railcars, two recently purchased grain ships in the Great Lakes, and an office building in Winnipeg.

The arguably most valuable component of the board, its monopsony, no longer existed. Without this control, the CWB was instantly demoted from an all-powerful force to a mid-range player where any potential buyer of the company would have to compete with other players in the space.

Regarding the terms of the deal, the FCWB argued that the sale of the board was shortsighted and would hurt local producers while benefiting Saudi Arabia. A lawyer for the FCWB warns that “the objective of the Saudis will be to get grain as cheaply as they can from Prairie farmers.”

Conflict of Interests and the Threat to Producer Prices

Much of the discussion about the sale has been focused around the identities of the buyers, and of Saudi-owned SALIC in particular. SALIC was established in 2011 to invest in international agricultural projects that would enhance Saudi Arabian food security. Previous agricultural programs in the Kingdom focused on achieving self-sufficiency in the production of certain products such as wheat, but this severely depleted the country’s already scarce water supplies.

As Saudi Arabia shifted towards embracing the need for grain imports, Canada became a natural target for investment. Saudi Arabia now imports 100 percent of the country’s wheat needs, and in recent years Canada has been one of its top suppliers. However, G3’s, or Saudi Arabia’s, ability to undermine the prices offered to Canadian farmers will be limited.

Already, the CWB has become a minor player in the market. Winnipeg-based Richardson International, Canada’s largest agribusiness firm, is currently the largest grain handler in the country. The most significant buyers include Switzerland-based Glencore, and American-owned Cargill.

Australia underwent a similar process of wheat deregulation in 2008 when the country dismantled its single-desk Australian Wheat Board. Some Canadians have been looking to draw potential parallels and glean what some of the consequences of the policy shift might be. Within three years of the policy shift, Australian farmers had 26 different exporting companies to choose from—a figure that supporters of the policy shift were quick to point to as a sign of positive change. Critics, however, maintained that only a handful of those companies actually played a significant role in the market, and that farmers had some, but not much more choice than they used to have.

Given the fact that global wheat prices have remained relatively strong since the 2008 commodities spike, and that the success and pricing of the Australian wheat crop very much depends on weather, it is difficult to discern the impact that dismantling of the Australian wheat board has had on farmer revenues. But evidence suggests that the export-oriented wheat farmers of Western Australia may have fared better than their Eastern counterparts, given their comparative proximity to major Asian importers of Australian wheat. Also, the shift in policy may prove to be harder on smaller farmers, given that larger farms tend to have a greater ability to negotiate with multiple buyers. Overall, the Australian experience unfortunately does not offer very many concrete lessons for Canada to be guided by.

Benefits

A major expected benefit of the CWB privatization is an increased flow of investment into the Western Canadian grain space. Before, investment had been limited, and the CWB was using debt to finance the company’s infrastructure investments. A new grain terminal had not been built in Vancouver since 1968, which is Canada’s largest port and the most essential to Western Canadian farmers given its location.

In fact, one of the major reasons that the G3 offer was accepted – as opposed to an offer from a coalition of Canadian farmers – was that Bunge and SALIC together have vast economic resources for investing in the Board’s infrastructure, and have extensive international networks which can provide new markets for Canadian grain.

G3 has already announced a CA $500 million investment in building a new high-efficiency grain terminal in Port Vancouver, the first in almost 50 years. The new terminal will have a loop track design allowing for the unloading of multiple railcars without needing to break the train apart, as is currently necessary.

Since the opening of the market, other grain handlers and shippers have also increased their infrastructure investments. Several players have increased storage capacity and the number of grain-handling railcars. Viterra, like G3, also plans on improving Canada’s aged port capacity with a CA $100 million upgrade to Vancouver’s port which will allow for increased capacity and permit the loading of large “post-panamax” ships.

Investment in infrastructure will be essential as transportation has always been a top concern for Canadian farmers. A wheat farmer is almost entirely dependent on the railway network for shipping his or her product. If wheat farmers near Regina, Saskatchewan want to reach the international market, they need to ship their product roughly 1,700 kilometers to Vancouver or 1,200 kilometers to Thunder Bay. Some farmers near the United States (US) border could truck their wheat to the US for sale, but for everyone else, trucking their product several hundred kilometers can result in a loss.

The railways are controlled by two companies—Canadian National (CN) and Canadian Pacific (CP) – both of which are often criticized for not offering enough capacity to farmers. In 2013, the year following the end of the single desk system, Canada achieved its largest ever wheat crop. This caused capacity issues and traders had difficulty selling all of their grain. This was despite CN posting a record performance, moving 25 percent more Western Canadian grain than usual.

With the dissolution of the CWB, farmers may have lost the bargaining power of a single buyer-seller controlling the wheat supply, but the investment in extra capacity and railcars may alleviate some of the reliance on CN and CP.

The renewed opportunity for investment into Western Canadian wheat infrastructure is likely to have a broad positive impact. Increased storage capacity and improved transportation networks will make it easier for Canadian wheat to reach Asian markets. Canadian barley, canola, and to a lesser extent pulses and corn, will also benefit from infrastructure upgrades.

A Competitive Future

A world without the CWB will not necessarily be a safer one for Western Canadian farmers. They will no longer be guaranteed a minimum price for their crop, and will be more exposed to price fluctuations as market conditions change both from year to year and within a particular market year. Farmers may also find they have more work to do, as they will have to determine who to sell their grain to – a choice they did not have before.

However, the dissolution of the CWB has led to greater price transparency for global buyers of Canadian grain and encouraged increased investment in storage facilities and grain-handling assets.

The purchase of CWB by the Bunge-SALIC joint venture is likely to create greater competition for the export of American spring wheat and durum wheat to Asian markets. But this is more likely to be a long-term consequence, given that it can only happen once G3 has successfully pieced together a strong agribusiness network and the infrastructure necessary to support it.

While the policy shift may spell uncertainty for Canadian wheat, it may also lead to a vast array of opportunities for improvements in the efficiency of processes for the grain.