New Voluntary Wheat Board May Struggle

Agriculture, Commentary, Marketing Boards, Milton Boyd (historic), Rural, Uncategorized

In Bill C-18, the federal government plans a new voluntary wheat board to replace the current Canadian Wheat Board (CWB) monopoly in Western Canada. This new board would compete with the private grain companies, and farmers would be free to sell their wheat as they wish. The voluntary board, beginning in August 2012, would receive government financial assistance including guaranteed borrowing and annual guarantees for initial grain price payments to farmers, for a period of about five years.

However, the voluntary board may struggle and face many challenges, especially after the financial assistance ends, as there would be few advantages for a farmer to sell wheat to a voluntary board rather than to a private grain company. While a number of farmers prefer a CWB monopoly, others believe they can market their wheat better without either a monopoly or voluntary board, just as they do for canola and other crops, as long as regulators ensure sufficient competition and regulation in the grain industry and grain transportation system.

A first challenge facing a voluntary board is that it might struggle to maintain enough farmer customers, resulting in high costs and considerable downsizing over time. A voluntary board may not receive strong support from farmers who prefer the CWB monopoly or even from those who oppose it, as many farmers may prefer dealing with private grain firms.

Second, the current CWB monopoly is reluctant to evolve into a voluntary board, and some of its directors are considering legal actions to maintain the monopoly. CWB argues that a voluntary board is inferior to a monopoly and that the government is unwilling to provide enough preferential treatment needed for a voluntary board to succeed. The government counters that providing preferential treatment would be unfair to the private grain companies.

A third challenge is that a voluntary board may struggle to function as an average price pool like the Board monopoly price pool. This is because farmers could easily spread their wheat sales throughout the year as they do for canola and other crops, and a voluntary pool could not claim monopoly pricing power. Also, wheat farmers would be able to use futures contracts and forward contracts to stabilize price, just as they do for canola, further eliminating the need for a pool.  

Fourth, the voluntary board as proposed by the government would have few assets and would lack elevators to collect the grain and port facilities to export it. Further, it would no longer have preferential and desired access to private grain elevators, port facilities, and rail transportation as under the Board monopoly.

Fifth, a voluntary board may face shortages of capital, especially if government financial assistance stops in five years and farmers are given board ownership. It may have difficulty either issuing shares or borrowing private funds, due to perceived risk. For example, farmers saw their Saskatchewan Wheat Pool brush against bankruptcy when shares dropped from over $20 in 1998 to less than 50 cents by 2003, and so farmers may be reluctant to finance a voluntary wheat board should it face future losses and too few farmer customers.

Earlier in the 1990s and early 2000s, many of the four big grain cooperatives in Western Canada faced efficiency challenges in competing with the private sector and were insufficiently capitalized. They ended up consolidating into one large private company, Viterra. A voluntary board may face similar challenges with strong competition and lack of capital.

Sixth, a voluntary board may lack the competitive private sector culture and management necessary for a low enough cost structure to compete with private firms. The Australian Wheat Board was privatized in 1999 and faced many challenges, including private sector culture adjustments. Large losses caused the share price to fall by over 80 percent between 2006 and 2010, and it was later taken over by other firms.

Overall, a voluntary wheat board may struggle. However, farmers can likely successfully market their wheat without a monopoly or voluntary board as they have done for canola and other crops, as long as there is sufficient competition and regulation in the grain industry and grain transportation system. Farmers from many countries have successfully marketed their wheat without grain boards in recent years, and farmers in Western Canada are likely to have similar experiences, regardless or whether or not a voluntary board succeeds.