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XXVIII - Breaking Loose From Bulk-Trades In The Post-CWB Era

Updated: Jan 16

We concluded our last article with a couple of pages on our three-pronged strategy: direct-sales, specialization, and containerization. Here we will take up direct-sales again, a fundamental pillar of our mission – what they are and how to pave the way for them in overseas export markets like in domestic and cross-border trades. They impose the necessary competitive market discipline where they exist, but in our overseas grain-exports bulk-trades still dominate even in the post-CWB era.

At the outset, let us make it abundantly clear that we have not invented the idea of producers selling direct – they already do it all the time. Most if not all are already engaged in it one way or another in what is sold to domestic markets and across the border to the US. Examples are widespread: wheat to flour mills, canola to crushing plants, oats to cereal companies, and the list goes on to include a significant share of what is already grown and sold through what we consider direct-sales. These sales channels benefit not only producers, but also buyers by cutting out intermediaries.

The next obvious question is, if these channels are mutually beneficial to both buyers and sellers, why they do not exist for overseas exports. Part of the reason is what we said in our last paper: while buyers and sellers are familiar with each other across North America, there is an information-gap between producers and overseas buyers. Also, producers are often conditioned to think that dealing with foreigners carries too much risk. The other part is that producers are accustomed to relying on bulk-trades since that is what they have always done, whether during or after the CWB.

Perhaps they do not need any convincing as they engage in these practices in their own backyard, but still, we keep coming back to the obvious, that there are huge benefits in shifting away from bulk-trades to direct-sales. These channels will not only yield higher margins but also allow diversification to specialty crops or grades that will fetch higher prices with even larger margins, thus better returns on land.

Like anything else in life, change brings challenges and risks, but they can all be managed through due-diligence and risk-mitigation. Even if perceived risks persist, there are export-insurance options, or insistence on irrevocable letters-of-credits, as well as deposits for grow-to-order contracts, not to mention advanced payments in full before anything is shipped. Thus, there are plenty options to cover trade-risks.

The real challenge is attracting overseas buyers to our region and exposing them to its virtues: the most advanced grain-growing region where they can procure a huge variety of quality crops to meet their needs directly from production sources. They can get those crops shipped to their doorsteps in containers with crop integrity intact, and as necessary identity-preserved. Once buyers step forward with serious intent to purchase, producers can judge whether it is worth considering what is in the offering and decide whether to walk away or enter further contract-negotiations.

Model we are striving for

Venturing into this portal, we had no delusions of having invented anything new or revolutionary; all we are trying to do is introduce a model that has been tried and tested in other domains, including domestic grain-trades, and thus should also work for overseas exports. This is a basic model built on direct-sales that tends to force markets to function more competitively, in the interests of buyers and sellers alike.

Basic Model: The grain industry is made up of numerous producers, farmers, and fewer but still a multitude of buyers – crushers, mills, processors, and others alike. Producers grow certain crops if market-prices are high enough to cover costs with reasonable returns on capital. Buyers pay those prices if they think they can make a profit in the next stage of production; if not, they look for other sources for those crops or switch to other crops. Perhaps a simplistic view, but direct transactions between producers and end-users facilitate markets to function more competitively.

It is natural to ask where the grain-companies fit into this model. The answer is simple: not all grains are ready to enter the supply-chain at farm-gates; they need cleaning, grading, and even processing, and this is where grain-companies can step in. When farming and transport-systems were primitive, grain-companies emerged to play consolidation, distribution, and trading functions, and as farms advanced and buyers developed their own capacities to procure and handle grains, the role of grain-companies changed but did not vanish. They extended their reach into various consolidation and processing functions, even into corporate or contract farming.

In the abstract this is how the grain-economy functions. Where possible, direct sales from farms to corporate-buyers set price benchmarks with no intermediaries, and where grain-companies are needed, they take their share for the value they add, but they do so in the knowledge that they can be cut out by buyers internalizing more functions, or producers doing more at their end. Where markets are effective, all players along the supply-chain get a fair share for the value they add. But markets do not always function effectively, as we saw in the past and observe even now.

Progress Made: In our last article we looked back on history to observe how WW1 had necessitated government intervention to protect producer interests. With the government pulling back prematurely, markets collapsed again forcing producers to take the matter into their own hands with the establishment of wheat-pools. When the Great Depression did the wheat-pools in, the government had to step back in to set up the Canadian Wheat Board (CWB), which became a permanent feature of our grain-economy in 1935 as a monopsony, a single-desk purchaser and marketer.

Membership was compulsory and the model was designed for producers to deliver their crops to country elevators where they were paid an advance, and during the year would receive the rest of what they were owed – their share of sales-proceeds less CWB’s costs. The system held together well for decades, but as in any collective-model, in time cracks started forming along different fault-lines: between producing and purchasing regions, across different crop segments, among producers of different persuasions, collectivists and individualist, with many shades in between.

With political pressure mounting from Eastern Canada as well as from advocates of commercial freedoms within Western Canada, the government relented and in 1972 clawed back CWB’s monopsony to only non-feed wheat and barley, in both domestic and export trades. Feed and specialty crop producers felt liberated, but discontent prevailed among many wheat-barley producers, demanding their rights to opt out. Voluntary participation was an option but was likely to be blocked by a majority of producers. Thus, CWB’s monopsony prevailed over wheat-barley for 40 more years.

These were only two crops but represented a huge share of our exports, as well as a significant share of our domestic trades. The only way to escape CWB’s monopsony was diversifying to other crops, initially canola being the principal one. Wheat exports did not decline in volume but shrunk in share to 50%, while canola increased to half that volume with 25% share, with other crops taking up the remaining 25% – mainly peas, lentils, and soybean. Thus, considerable diversification was already taking place, even under CWB’s monopsony, but not to the region’s full potential.

Challenge Ahead: The efforts to disband the CWB had failed in 2006 but succeeded in 2011, with its monopsony coming to an end in 2012 but allowed to operate as a grain-company for 3 years. In 2015 it vanished as a separate entity with its assets taken over by a consortium of Saudi interests and a US grain-company. In the meantime, as we discussed in our last article, a tsunami of consolidation had already gotten underway with all the wheat-pools being corporatized and merging under Viterra, which soon after was taken over by Glencore, a global commodities giant.

Since 1972 domestic and cross-border grain-trades of non-board crops had evolved and expanded, along the lines of the competitive-model we described above. Direct corporate purchases set price-benchmarks for grain-companies to follow with the value-added services they provide, be it through consolidation, handling, or processing. With wheat and barley also freed from CWB’s monopsony, market competition now rules over all our grain-trades domestically and across the border to the US. But this is little more than half of the grains produced across the Prairies.

Close to half our crop-output is destined to overseas, where a very different model prevails. CWB’s abolishment was expected to give rise to a competitive model like in domestic and cross-border trades. But unlike these markets accessible directly by truck or rail, overseas exports were highly captive to bulk-systems that had now fallen into the control of a handful of private grain-companies, basically a private-oligopsony replacing CWB’s public-monopsony. Instead of higher margins expected from private traders, producers came under an even tighter margin-squeeze.

Barriers in the way

In this new industry structure that has emerged in the post-CWB era, at least in the overseas export domain, producer interests are not served well. The captivity to bulk-systems, gateways to which are controlled by too few trading-interests, hinder crop-diversification, and squeeze producer-margins. But these conditions are not an outcome of open price-collusion among grain companies; they stem from the nature of bulk-systems that were privatized with no regard to competitive implications.

There is no point trying to break up the custodians of bulk-systems or to regulate the pricing of the bulk-systems themselves. Grain-trades can be made much more competitive by opening alternative channels to bulk-trading so that producers are not captive to bulk-systems. In our case, we are trying to do this through direct-sales, a practice that we know from experience can facilitate grain-markets to work more competitively, as we observe from our domestic and cross-border grain-trades.

Prevailing opinions: Decades long struggle to get rid of CWB was highly polarized. Opponents would not tolerate any government involvement in what crops they grew or how they sold them, and regardless of the outcome, they were not prepared to budge from their staunch stance on commercial freedom. Proponents, on the other hand, never wavered from the all-or-nothing position even when CWB’s existence was threatened, not even willing to consider voluntary-membership options; we did not see any movement on this collectivist-tendency even after CWB was abolished.

Politicians, the ultimate arbitrators of what happens, are too scared to go anywhere near the topic because of this unwavering polarization in producer opinions. There was no middle-ground to be found 10-20 years ago, and they do not believe there is one today. The topic is too hot for any civil servant, federal or provincial, to touch in view of the prevailing political sensitivity. Even elected officials of grain-commissions or producer-associations are reluctant to talk about industry-models, preferring to hide behind price or yield trends, or much safer topics like agronomy or technology.

Neither our approach nor the path we are pursuing touches this debate, not by any design on our part to shun controversy but because we firmly believe direct-sales is the most practical path to value-driven-diversification, thus higher-margin exports. We are often asked by our social-media followers where we stand on CWB, but the truth of the matter is we are over that. Our model would not have worked before 1972 and even after that, only for non-board grains; but from where we stand, what we are pursuing is the most practical and effective path to prosperity for the Prairies.

Vested Interests: Most grain-companies have done well since 1972, first with the liberation of canola and its move to bulk-trades with rapidly growing volumes, and even better since 2012 with being able to trade in board-crops, particularly overseas exports of wheat that constitutes half our export volumes. Naturally, if successful, we will be diverting trades away from bulk-systems, thus threatening their interests. But we would be happy to divert just the proceeds of yield increases in the coming years to containerized direct-sales channels, leaving bulk-volumes where they are.

Even if the success of our mission goes beyond that to significantly reduce bulk-trade volumes, we will not be issuing any apology-statements to grain-companies, as any shift in favor of direct-sales channels will be in the interests of producers. We would also note that the new trade domains we open present new business opportunities for the same grain-companies that today are primarily vested in bulk-systems. It will be up to them to cultivate new export opportunities to engage in containerized overseas trades, by adding value through consolidation, handling, or logistics.

We should note that there are already containerized crop domains, like the most lucrative segment of our grain-economy, pulses. However, you would note that the type of direct producer-to-buyer exports we talk about are not prevalent in this domain and not likely to change with our efforts. The grain-companies tend to dominate these trades as there are many processing needs at the export-end, and companies at the import-end are established distributors serving highly fragmented end markets – scope for direct-sales from producers to end-buyers are limited.

Information Gap: We are not deterred by any of the above prevailing attitudes or vested interests in pursuing our mission. We firmly believe that if we are there to serve producer interests, and producers believe in our cause, none of this could stand in our way, as producers are not only our platform’s constituents but also the primary stakeholders of the grain-economy at large. Political or vested-interest resistance will only be a distraction, not a material barrier to our mission’s success.

Neither the government nor the grain-companies can prevent producers from selling through direct-channels to domestic or export markets, as they do now not just within Canada but across the border to the US. But there is reluctance to engage in direct-sales to overseas markets due to perceived trade-risks and lack of adequate container-logistics services. Before even getting into these challenges, which we firmly believe can be overcome, there is the information or familiarity gap between the buyers and sellers that prevents even sales-contacts from getting established.

This latter problem is what needs to be addressed first. Unlike corporate buyers across North America, overseas importers know little about the production side of our grain economy, that there is a huge variety of crops that can be procured from farms – our grain-economy is known primarily if not exclusively for its bulk-exports. Also, our producers know too little about overseas export opportunities to even consider sales prospects, let alone target buyers. In our trade-facilitation mission, this information-gap is the first challenge we must tackle with our core-strategy.