We are calling for a shift away from bulk-trades to direct-sales. We acknowledge that any change in trading practices brings certain risks and challenges that our producers have to face and deal with. We will come back to those associated with direct-sales in our next article but here we want to focus on bulk-trades, their drawbacks and more importantly the risks our bulk-exports face in global markets.
At the outset let’s take a stock of where the grain-economy is at. We have achieved significant yield-increases and export growth. Also, our export-mix diversified, first with the addition of canola and later pulses -- the latter small in volume but significant in value. But our two major crops, wheat and canola, still account for 75% of what we export, and 85% of our exports through the West Coast are in bulk.
Producers have choices with regards to what they grow and how they export, but at the end of the day they are highly dependent on bulk-trades. There is always talk if not disgruntlement about their captivity to a hand-full of grain companies and the low margins they end up getting. Given the industry structure they face, there is no immediate relief in this regard, but even worse, we fear that the situation may further deteriorate in the years to come under increasing global competition.
We start with a reminder that bulk-systems came with our regulated heritage but did not vanish into the privatized and liberalized era. They bring certain advantages to producers, mainly steady purchases with secure and reliable payments. But on the downside, they yield narrow margins and limit diversification to higher-value crops.
Then we move on to a much greater danger our bulk-exports face in global markets. The next 20-30 years may not bring as much growth in demand for grains on the world stage as the last 20-30 years. Moreover, supply is on the rise with rapid yield increases in emerging grain-growing regions, low cost production-sources we would have difficulty competing with, intensifying the margin-squeeze on our producers.
On the bright side, we do not have to remain so dependent to bulk-trades. We have shown our capacity to diversify in the past, first to canola and later to pulses. There are many other opportunities, not just wheat and barley but also other oil-seeds and coarse-grains, only if we could turn our attention to containerized-trade prospects.
We raised these concerns in past articles but before our virtual town-hall meetings we thought we would restate our case, the need to wean off our dependence on bulk-trades. Prior to these meetings, we will also post another article to look at the alternatives we are advocating, direct-sales, the risks and challenges they bring, so that you can relate to both sides, bulk and direct, to asses risk-reward trade-offs.
Bulk-systems and their shortcomings
Bulk-systems came with the regulated heritage of the grain-industry, the Canadian Wheat Board era, but despite all the market-liberalization efforts, we could not shake off our dependence on these trade-channels. Guided by our firm belief in unfettered market-forces, we rushed to privatize grain-industry assets (CWB and also wheat-pools) without giving much consideration to competitive consequences.
Bulk-systems are capital-intensive, with investment required in terminals both in the interior to consolidate and on the coast to ship. Even post-privatization, the industry was going to further consolidate, leaving the system in the control of a handful of companies with little incentive to compete. Thus, it should not come as a surprise that producers are now complaining about slim margins and unfair contracts.
Also, within bulk-systems scale-economies come with more-of-the-same types of grains, thus their custodians favouring volume rather than crop-attributes, limiting crop-differentiation to fetch higher-prices in world markets. Thus, grain-companies have a vested interest to stick to staple-crops, not specialty types or grades, with the unintended consequence of limiting value-driven diversification across the region.
Proponents of bulk-systems may take exception to our claim that the grain-industry is overly concentrated with too much power over their suppliers, producers. They would be right that grain-companies are price-takers from global markets, but with too much power over domestic suppliers that are largely captive to them -- not a monopoly but with oligopolistic tendencies that shape the Prairie grain-economy.
Defenders of the status quo may also claim that if alternative channels were needed to achieve the full potential of our grain-economy, market-forces would rise to the challenge. But it is a well known fact that emerging or transitional markets may be in need of “facilitation”, if for no other reason than providing information for markets to function effectively, to connect buyers and suppliers to facilitate trade. And this is precisely our mission, to facilitate the formation of more competitive market-channels. We are trying to serve producer-interests, but not by imposing rules, regulations or restrictions on grain-companies to limit their market-power.
Risks bulk-trades face in global markets
Aside from these drawbacks inherent in bulk-systems, our staple-exports face much graver threats on the global stage: demand growth slowing and supply from new sources increasing. We had been achieving steady yield increases, and with fairly stagnant domestic demand, we had to export the surplus. Global demand was there to absorb our production growth, but we made little effort to understand the underlying demand-drivers, instead assumed that these trends would prevail.
China-factor: China’s grain-imports have grown dramatically to represent as much as 20% of global grain trades, while accounting for two-thirds of our export growth in the last three decades. China’s unprecedented growth spurt was bound to slow, together with its insatiable appetite for grain imports, as it had already risen from the poorest to middle-income country ranks. To make matters worse, we let our trading relations with China to deteriorate to such an extent that now one-fifth of our total grain exports are in jeopardy, at least through traditional bulk-channels.
New-sources: Too self-absorbed in our own yield-increases and export growth, we ignored the fact that the same might be happening in other parts of the world, not just China where significant yield-increases were evident, but also what we call the New Grain Belt, stretching from Caucasia to Central Asia, a landmass as large as Canada or US. China was highly instrumental in reviving the agricultural potential of this vast region with its Road and Belt Initiatives, and now is turning to it as a source of grain-imports, thereby putting our bulk-exports to China in jeopardy.
The whole Asia Pacific region, including China will be turning to the New Grain Belt for their basic grain-needs to substitute for what we (together with all of Americas) export in bulk. This is the dark side of the story, but luckily there is also a bright side, only if we could wake up to the global market realities. We in the Prairies have the capacity to shift to higher value crops, which China and other Asia Pacific countries will continue to have a need for -- not just new varieties but also higher grades of our staples like wheat and barley. And this underlies the specialization imperative we are calling for, together with a shift from bulk to containerized grain-exports.
Our past diversification record
For evidence of our farm-economy’s capacity to diversify, we only have to look back on our past achievements, most notably first with canola and later pulses. In both, these shifts were initiated by producers in response to new market opportunities, not mandated or induced by policy initiatives, public subsidies or other incentives.
Canola: The shift to canola was an escape from CWB’s monopoly over wheat and barley exports. Once it got underway, however, it was fueled by the higher prices the new crop fetched in both North American and overseas markets. Our production reached EU levels, but with modest domestic demand, we became by far its largest exporter in the world, leaving behind higher margins to producers, as well as more value-add for the local economy through canola-oil -- crushed-canola became an animal-feed ingredient, as in China, by far our largest importer of the raw-crop.
In the course of two decades our canola exports reached above 25 MT (half our wheat-durum exports) but mainly captive to bulk channels, with the exception of truck or rail shipments to the US. Despite the better value-proposition, however, we found ourselves in a vulnerable position, source of two-thirds of total global trades, with almost half of our exports going to China. Thus, now we are planning to crush more domestically, and with limited market for canola-oil, use it as a bio-fuel source.
Pulses: Our subsequent diversification wave to pulses came later, strictly market driven, nothing to do with regulatory matters like the canola-wave. Producers were keen to explore and government agencies supportive of adapting these ancient and lucrative crops to local soil and growth conditions. There were start-up pains with handling and shipping but in time they were overcome. Now peas and lentils still represent only 10-15% of our grain-exports, but a much higher share in value.
There was flirtation with the idea of exporting pulses in bulk, but containerization prevailed as the value-proposition was in crop differentiation and quality. A very successful local company emerged, with an overseas partner, to package and export market-ready pulses. Another local enterprise formed after rounds of mergers but ran into trouble, with its assets taken over by one of the oldest US grain-companies. Now the stage is set for growth in containerized pulse exports to global markets.
Many more opportunities remaining
Now we face multitude of new diversification opportunities to higher value export crops that can be sold through direct-channels and shipped door-to-door in containers with crop integrity intact. These include higher-grade varieties of wheat for flour-milling and food-processing, barley for brewing-distilling, high-value oil-seeds, variety of coarse-grains, many niche or exotic grains, and organic-crops.
Wheat: Our largest crop-export, wheat (including durum) hovered around 20 MT/yr over the last 25 years, though global trade volume was increasing. We seemed to be content with our traditional markets, failing to take advantage of new ones with the excellent quality of our grades, especially durum. There is huge potential to increase the value of our wheat-exports only if we could shift to containerized deliveries.
Barley: Our barley exports are modest (once 2 MT/yr and even lower now) mainly because what we have in the offering is in bulk, mainly suitable for feed. We missed out on different grades of barley that fetch higher value for brewing or distilling. These trades involve smaller containerized deliveries to specific locations -- huge market potential in this segment across Asia Pacific, especially the China-market.
Oil-seeds: Content with canola, we had ignored other oil-seed varieties. Recently we discovered the potential for high-quality soybeans, now with our export volume reaching 4 MT. There is potential for growth in this domain across Asia as long as we stay away from cheap, low-grade soybean that China buys mainly from US and Brazil, almost 100 MT/yr for animal-feed, while using domestic varieties for food or sauce.
Coarse-grains: Unlike the US, we do not grow much corn or sorghum, but in smaller quantities we do grow enough of other coarse-grains to export, like oats and rye (largest exporter in both), and also have the potential to grow other varieties. There is export potential in this domain if we turned our attention to containerized-exports -- breakfast-cereal exports to China alone is one huge market worthy of attention.
Other specialty crops: Our soil-and-growth conditions are conducive to much further diversification to more exotic or niche crops, including organic-of-anything that we have the potential to grow for export. However, the key to all these small market opportunities is containerization, as orders are small and require direct deliveries to customer locations -- all high-value and lucrative, as long as trade-risks are managed.