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XLII - Export Performance: A Case Of Pervasive Institutional Denialism

Updated: Jan 16

In the last 50 years the Prairie grain-economy has experienced enormous change and progress. Driven by advances in agronomy, improvements in farming methods, and new technology applications, we achieved remarkable yield-increases and crop-diversification. With modest increases in domestic consumption, in good years we now export more than half of what we produce. But are we earning enough value in global markets commensurate with the quality of what we export, and even more importantly, are producers getting a fair share of the export-proceeds we earn?

Our answers are “no” and emphatically so to both! At the root of both ends, value-suppression and margin-squeeze, is captivity of our overseas exports to bulk-trades and a lack of competition among their custodians. Euphoric over the abolishment of the single-desk marketing system, the Canadian Wheat Board, neither politicians nor their policy-servants would dare acknowledge the structural-problems our grain trades face, let alone try to fix them. At the root of this denialism lies a staunch faith in unfettered market forces, the corollary of which is to refrain from intervention.

Ironically, what we are proposing is a market-driven approach, not bringing back a public-monopsony like CWB, or even regulatory remedies. The solution is staring us in the face, what has happened in North American markets with the opening of direct-sales channels; this half of grain-trades is functioning efficiently under market-forces. We are proposing the same solution to overseas export-markets, direct-sales that can be fulfilled in containers, rather than remaining captive to bulk-systems.

Here we make another effort to present the challenge that our grain-economy faces, captivity of overseas exports to bulk-systems, no different than under CWB, but now in private hands and not functioning competitively. The consequences are not getting sufficient value from our export-sales and squeezing producer-margins. The solution is direct-sales; to this end, we must containerize and attract overseas buyers to procure from production sources, like corporate buyers do across North America.

We then try to bring attention to the role public agencies play at the production-end of the grain-economy, through crop-research, grading-testing, quality-assurance, and regulatory-oversight. The results speak for themselves: huge yield-increases and crop-diversification over the years. The dual-value-conundrum faced at the market-end, suppressed export-proceeds and squeezed producer-margins, can be overcome for a fraction of the public-funds being spent on enhancing our production capacity.

Having abolished the CWB, and thereby liberalized grain-trades, the call for public action may be perceived contrary to the thrust of the policy efforts over the last half a century, but in fact is to complete unfinished business, to fix a structural-problem inherited from the CWB-era. What we are calling for is a modicum of support from public agencies to recast our global-image to attract overseas buyers to engage in direct-imports – trade-facilitation to make our grain-exports more market-driven.

Bulk-trap revisited: export-value conundrum

Trade liberalization had the desired competitive effects on domestic and transborder grain-trades. The key to success was direct-sales, end-users procuring what they needed from production sources by cutting out intermediaries with no value to add to grain-trades. Advocates of CWB’s single-desk system had argued that with much fewer buyers than sellers, producers would become price-takers, but competitive forces prevailed for consolidation-distribution cost savings to be shared equitably between producers and end-users – what market-forces were supposed to ensure.

The same effects, however, did not materialize in overseas export markets, where the surplus from domestic and transborder sales had to be sold, half of our grain output but growing in share. These exports remained captive to bulk-trades, even though advocates of trade-liberalization argued they would become competitive with a multitude of private grain-companies replacing the public-monopsony. The real problem was structural: highly integrated bulk-systems are not very conducive to market-competition. Replacing a public-monopsony with private companies was supposed to make trades more competitive, but the structural-problem remained.

Here we summarize the problems posed by the captivity of overseas exports to bulk-trades, not just squeezing of producer margins but also suppressing export-proceeds in the aggregate. We reiterate our conviction that, as in North America, salvation can only be found through direct-exports fulfilled in containers. Contrary to conventional wisdom, containerization will result in cost-savings by eliminating the need for consolidation at origin, and distribution at destination. Also, more competition from overseas buyers will boost producer-margins and export-proceeds, while also paving the road to further specialization in higher-value crop varieties.

The trap: captivity to bulk-systems

The bulk-system that our overseas grain exports are captive to is a relic, inherited from a bygone era when the only way to move grains was to consolidate at country-elevators and transport by rail to coastal-terminals for export in bulk-vessels. CWB bought, consolidated, and exported grains, paying producers an advance, and at year-end distributing the surplus to producers – net proceeds after handling, transport, marketing, and overhead costs. There was no competition or profit; CWB was a price-taker from global markets and paid all the net proceeds to producers.

With the abolishment of this system, in domestic and transborder trades producers gained the freedom to sell to end-users, and market competition set in to achieve cost savings and sharing of those savings between buyers and sellers, but overseas exports remained captive to bulk-systems. Advocates of trade-liberalization had assumed that the same would happen through bulk-systems with many private grain companies competing, like end-users across North America procuring directly from producer-sources. But they were overlooking the fact that the structure of bulk-systems would impede competitive forces from ever taking hold in export markets.

Grain companies exporting in bulk are price takers from global markets, bidding on bulk-trade contracts in competition with other grain-exporters, like CWB had. It was assumed that grain companies would compete in the same way in their procurement practices, but this was mere wishful thinking. There are two ports on the west-coast and two railways to get there, and to participate in grain-trades you need inland-elevators to consolidate and coastal-terminals to ship through. It was not too difficult to figure out that a handful of grain-companies would take control of the bulk-system, with little chance of new entrants to create a competitive industry.

Basically, we have an integrated bulk-system as in the CWB era, only now a handful grain-companies are in control of it. There is an appearance of competition, but buyers know that price-competition is not in their best interest. Instead, they stick to narrow price differentials to buy what producers have, the surplus from North American markets that they have nowhere else to sell. Also, respective volumes that grain companies can handle is determined by their terminal capacity; rather than engaging in price-competition for market-share, they are motivated to buy more terminals, leading to even more consolidation among what is already an oligopsony.

Consequences: margin and value squeeze

As we discussed in our last article, producers face a highly fixed cost structure; even costs generally regarded as variable (seed, fertilizer, equipment, etc.) are fixed to land size, not output, and must be committed to in advance. Producers’ wellbeing is highly dependent on crop-yields that are beyond their control; the more they produce, the more surplus they have that must be exported. They get fair market value from North American sales, but exports are captive to bulk-trades where a handful of grain-companies subject them to a margin-squeeze. There is little chance of putting profits away from good crop-years to cover the losses from poor ones.

The drawbacks of the bulk-trap do not end there. Grain companies are driven by a consolidation-imperative, procuring as much volume as they can. They end up selling to importers in bulk at global prices that tends to undervalue the quality of our grain-exports. The only way of getting value commensurate with the varieties and grades of crops we grow is marketing to end-users, but this is not how bulk-traders operate. As a result of exporting all the surplus in bulk, our total export-proceeds are suppressed; with the market power they have, traders maintain their cut, while producers get very little if any premium for higher quality crops.

The same way as they would deny that they are not paying fair market-prices in procurement, grain-companies will not acknowledge that their trading-practices leave too much on the table to importers by selling in bulk. Canada has the best classification-grading systems in the world, but our exports (wheat-barley as well as canola) are undervalued in global markets through bulk-trades. Moreover, since producers do not get a premium at their end, they are denied an incentive to switch to more valuable crops that can fetch higher prices in world markets – specialty-crops or even higher grades or varieties of staples, like durum-wheat or malt-barley.

These realities, the dual value-conundrum of our grain-exports, are felt acutely by grain producers. They know they are suffering but fail to articulate the root-cause of the problem: captivity of overseas exports to bulk-trades. Producer-associations and public-agencies are in a state of denial, hiding behind the free-market façade that they believe has been achieved with trade-liberalization and asset-privatization. We will come back to this denialism, but at the outset we must acknowledge that our country is doing next to nothing to even measure the margins we realize from different trade-channels, let alone come up with remedies to fix the trading-system.

Solution: direct-sales and containerization

Rather than regulatory remedies, we advocate a market-driven approach to get out of the bulk-trap that we are stuck in through direct-sales that can be fulfilled in containers. By attracting overseas buyers to procure the grains they need directly from production sources, like North American corporate buyers do, we will create competitive markets. Producers will get out of the margin-squeeze they are under, while as a country we will get higher value for the crops we grow and export, boosting export proceeds in the aggregate. This will also pave the way to value-driven crop-diversification by incentivizing producers to shift to higher value crops.

This shift will face resistance from vested bulk-interests invested in a highly capital-intensive infrastructure, further fueled by false fears that containerization would be too costly and impractical for such large volume trades. This was the case a few decades ago, but advances in intermodal systems have already revolutionized global trades, including grain-trades in Europe and across Eurasia all the way to the Pacific. North America at large has some catching up to do, but on the West Coast we already have enough empty containers returning to Asia to fill with 15 MT of grain, a volume that can be expanded by attracting more inbound traffic to our ports.

On the issue of costs, grains are cheaper to transport in unit-trains of hooper-cars than in container-trains, but not by as big a margin as generally assumed. The real savings that containerization will bring are in eliminating consolidation costs in inland and coastal-terminals, and even greater savings in storage and distribution costs at the receiving end. Container-loads of grain can be delivered directly to end-user facilities; buyers can receive quantities of specific varieties or grades of grains they need to meet their processing requirements. Also, containerization ensures product integrity preservation from production-sources to end-user facilities.

The real challenge we face in containerizing grain-trades is not in cost or logistics but in marketing. We are a major grain producer and exporter but primarily known for delivering grains in ship-loads; we consolidate and export in bulk, with little contact with end-users of our grains. We face a challenge in recasting our image as a premier source of grains where end-users from all around the world can procure a huge variety of crops from production sources and get them delivered to their door-steps in containers. As an online-platform we are tackling this challenge, but we need to mobilize producer-associations and public-agencies behind this cause.

Production sphere: a stellar record in public support

We are calling for more support from public-agencies on the marketing end of the grain-economy, mainly in recasting Canada’s global image to support the paradigm shift from bulk-trades to containerized direct-sales. After a decades long struggle to abolish the CWB, and the euphoria that set in its aftermath in ending government involvement in grain-trades, there is a tendency to ignore this call. We will get into the type of support that is needed later in this article, but first we want to put things in perspective in reference to the production side of the grain-economy.

Our gain economy did not take root naturally with settlers landing in Acadia or as farming spread to Quebec and Ontario. It took a century of research effort to adapt seed varieties to weather and soil conditions. Even after the Prairies became a prime grain-growing region, there were a lot of challenges ahead to fight disease and infestation. In the last half a century, the focus shifted to diversification to new crops in search of higher value – cereals, oilseeds, and pulses. These efforts continue not only for new varieties but also new grades of staple crops like wheat and barley.

Advancements in the grain economy are often taken for granted but would not have happened left in the hands of individual farmers or to market forces alone. They took concerted collective effort and public funding, in not just Canada but even the US where any progress tends to be attributed to private-initiative or free-enterprise. For the latter, you can read up on the A&M movement, but here we will try to remind you of how agricultural research advanced in our own backyard with public funding – led by government agencies, but also with public universities participating.

Our arduous journey in wheat production

Though the first wheat growth in Canada is traced back to early 17th century in Nova Scotia, its spread as a commercial-export crop to Quebec and Ontario was during the 19th century. New seed-breeds were needed for the harsh climate; early fall-freeze prevented crops from maturing while winter-growth was virtually impossible. Red Fife cultivar proved a success in Ontario and spread to the Prairies, but farmers still struggled with early winters. The real breakthrough came with Marquis, an early-maturing cultivar, introduced in 1903 but took another 10 years to commercialize.