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XXX - The Mystery of Overseas Direct-Sales

Updated: Jan 16



Our mission is to open direct-sales channels to overseas export markets. These channels can not only provide higher-margins for producers, but also create further diversification opportunities to higher-value crops. Direct-sales channels are prevalent in domestic and transborder trades, but do not exist in overseas trades, which remain just as captive to the bulk-system just as they were in the CWB-era.


Plenty of explanations have been offered as to why direct-sales through corporate purchases are common in North America but unheard of in our exports to overseas. However, they often boil down to “myths” and “fallacies”, and when half of our grain output ends up overseas, we see this as a topic in need of further consideration. The prevailing view in this regard is that direct-sales to overseas markets entail too many trade-risks, thus our producers are urged stay away from them in self-interest.


If true, this would undermine the essence of our mission, that the path to producer prosperity is through direct-sales. When we began our platform, we were aware of these widely held views, and believed them to be at best misguided, and at worst, self-serving misinformation propagated by today’s grain industry and its vested interests in bulk-trades, not producers. Here we try to debunk many of the myths and fallacies being used to explain away the obvious gap in our overseas exports.


We start with a discussion on the nature of our producers, cautious but not averse to change in self-interest. If they can see better prospects in direct-sales to overseas and figure out a way of dealing with the trade-risks, they will jump on them. What holds them back is that there are no buyers in sight to be trading with. This takes us to a major part of our mission, closing the information-gap, which lies at the heart of the problem – overseas buyers know very little about our producers or their virtues.


Then we turn to another problem that we must confront, all the misinformation that is propagated by vested interests -- claims that direct-sales to overseas are too risky for producers to even contemplate, let alone engage in them. We then turn to the trade-risks that direct-sales pose, which we believe can be managed and mitigated by selecting reputable and trustworthy buyers, and pursuing a diligent approach to contract negotiations to secure term-and-conditions to protect seller-interests.


Finally, we turn the guns on bulk-trades, where we see the real risks for the future of our grain economy. The industry has been oblivious to the increasing competition we face from emerging grain producers that are continuing to improve not only their yields but also quality standards from a much lower cost-base than ours. As a region, we are in denial, but our bulk exports are coming under increasing pressure, making diversification to higher value crops even more urgent. The shift to direct-sales channels may not be just a quest for higher margins but a necessity to survive.



Myth of producer resistance to change


Looking forward, we are calling for a paradigm-shift in the way we export grains to overseas markets. This is of great significance to the Prairie grain-economy, as about half of what we grow ends up in overseas markets. This share is likely to grow even larger into the future as we are still achieving yield-increases, thus output growth, while domestic grain consumption, even across North America, is relatively stable.


The shift we are calling for, away from bulk-trades to directs-sales, is value-driven – higher producer-margins from what we already export, and diversification prospects to higher-value crops. What we are calling for is by no means radical, not even new, as such direct-sales are prevalent in domestic and transborder trades, where the other half of what we produce goes. Then, why don’t the same practices extend to overseas – are these trades inherently riskier, or are producers too risk-averse?


Before even getting into the overseas end, let us first look back on our own farm heritage to understand producers’ attitudes to change; after all, they are the ones to decide whether to make a shift to direct-sales, or remain captive to bulk-trades. Historically, we cannot ignore the legacy of the CWB-era when producers were not exposed to market-risks. The public-monopsony shouldered all the marketing and sales responsibilities, while producers got an equalized share of the proceeds.


With the memories of two world-wars and the Great Depression, and the pains they had inflicted on the grain economy, CWB’s legitimacy was hardly questioned, in fact its scope expanded in the post-WW2 era to the entire grain spectrum. As of the early 1970s, however, cracks started to form, as feed-grains and specialty crops were gradually dropped from the monopsony’s net. But our single largest crop, wheat, together with non-feed barley, remained in the net until CWB’s dissolution in 2012.


Over this 50-year unwinding period, producers’ market exposure increased greatly as they diversified to so called non-board crops, while also taking on more trade-risks as they started to engage in direct-sales, be it to crushing-plants, food-processors, feed-lot, or others. They did not have these direct-sales options with wheat, which maintained its status as the largest volume crop in terms of both output and exports.


Over this period overseas exports more than doubled in volume but one thing did not change, the captivity to bulk-trades. Perhaps this is understandable for wheat, as it has only been a decade since its trades have been liberalized, but canola exports have been growing for decades, now as much as half of wheat exports, and still all in bulk. Together these crops account for 75% of our grain exports; with other crops in the mix, bulk-trades account for roughly 85% of our grain-exports. Most of the residual are pulses and specialty-crops that are exported in containers but again mostly through grain-companies, not direct-sales that we are trying to introduce.


This stark revelation raises fundamental questions about the feasibility of our core mission, with skeptics dismissing it as utopic, given that they have not taken hold in any serious way in the past. This reality has not escaped us, but there are no mysteries as to why this is the case and how to change the status quo. We will come back to the main obstacle next, but first let’s try to understand producers’ attitudes to change by reflecting on what they have gone through in the last half a century.


Producers are not all cut from the same cloth, but they all know what is in their best interest and can be extremely cautious. But we are intentionally not using the word conservative, not just to avoid political connotation but even its dictionary definition does not apply – averse to change or innovation. The track record of the last 50 years reveals the opposite: producers embracing scientific and technological change, diversifying to new crops, and even adapting to events like CWB’s dissolution.


The producer community was sharply divided over the future of CWB towards the end, and to a lesser extent still is. Half, perhaps even more, wanted to retain the monopsony, but not because they were all die-hard collectivists; they believed CWB had served their interests well over their principal crop, wheat. But over the previous 3-4 decades, only a handful of them had opposed dropping feed-grains and specialty-crops (even canola being a niche crop back then) from CWB’s monopsony.


The embrace of canola was not instant; it took time to accept the suitability of this oilseed to Prairie soil and growth conditions. The next wave with pulses, a true bonanza in terms value per acre, did not come instantly either. The last 50 years of crop diversification, often taken for granted or underestimated, is a clear testament to the producer community’s willingness to adapt, but in a careful and cautious way, as any deviation from tradition may bring risks and/or unintended consequences.


Another shift to note was to direct-sales channels across North America. Producers embraced feed-grains being dropped from CWB’s net, as they saw the prospects of selling them to feed-lots down the road, or to feed-companies that could distribute them more widely. Producers also saw that cereal companies could reach out to farms to buy oats or other cereal crops. They knew canola could be sold to nearby crushing-plants but exporting the same to overseas was a different matter.


When volumes ramped up with export potential, producers felt more comfortable selling canola to local grain-companies as there were neither any buyers knocking on their doors, nor any grade-differentiation potential not to consolidate in bulk. When wheat was freed, like canola, they turned to direct-sales in North American markets. They also saw the grade and quality differentiation potential to be selling direct to overseas markets, but there were no buyers around. And there lies the challenge, attracting credible buyers of wheat, as well as other crops, that producers would be comfortable doing business with on their own turf, not somebody else’s overseas.



Main challenge: attracting buyers


The essence of the above story is simple: producers are not resistant to change, but they are wise and cautious, be it in switching to different crops or shifting to new sales-channels. With regards to crop diversification, the Prairie’s record speaks for itself: there was always hesitation, or fear of new crops, but once that was overcome, producers jumped on canola, pulses, or other specialty-crops when they saw the market potential. With respect to sales-channels, the minute certain crops were freed from CWB’s monopsony, producers started selling direct to end-users if the margins were better than what they got from grain traders or consolidators.


Many industry observers contend that producers are staying away from direct-sales to overseas markets because they find them inherently risky. Naturally, vested interests in grade-trades would like to perpetuate this assessment, and even some producers go along with it though they have no experience in this domain. The part we cannot relate to is how can anybody pass judgement on something that does not even exist – how can trades be deemed risky when there are no buyers in sight, let alone purchase offers on the table to be able to objectively assess their risks?


We can relate to some of the producer-perceptions as they are based on dealing with opportunistic traders looking for one-off deals, and often do not follow through with their purchase-offers. But we do not see any corporate buyers visiting the region to scout for serious procurement opportunities from primary-sources. Even if they pass by, all they can find are grain-companies that are focused on consolidating on their own account to export in bulk, with no desire to deal with corporate-buyers.


We have also observed this scene from the other end, living in Asia Pacific for more than a decade. Trade delegations come and go but mainly to extol the virtues of our staple crops, and how they are consolidated and shipped in bulk-vessels across the ocean. If the topic was pulses, you may see reference to containers, but still with no evidence of primary production sources, farms, where buyers could procure a huge variety of quality crops and get them shipped to their doorsteps in containers.


Given the bulk domination of our grain exports perhaps these promotional practices are not surprising, but what is surprising is how little effort we make to change the agenda to bring more visibility into our grain-economy. Most overseas end-users of our grains – millers, processors, or others – buy them through distributors, who in turn buy them from grain-companies at the receiving end of our bulk-trades. End buyers may not even know that the grains they process are grown-in-Canada, let alone know anything about their producers. Our farms are regarded as mere collection-points of bulk-systems, not actual primary production sources where end-users can reach out to buy the grains they need, even get them grown-to-order.


Let us contrast this warped view of our grain economy as seen from overseas, to what buyers and sellers at the end of our domestic or transborder trades did as those trades were freed from CWB’s monopsony. Producers knew where the buyers were, and the buyers knew where the grains they needed were grown. It did not take long for trading relations between buyers and sellers to form, to negotiate and execute contracts; deliveries could be arranged by truck or rail as appropriate. Also, there were no barriers for the same direct-sales channels to form across the border.


How can these trade-linkages be formed between buyers and sellers that are an ocean apart? Intermodal systems are there to facilitate containerized trades, to replace shipments by truck or rail, but buyers need visibility into our grain economy and what it has to offer to the world. Only through a promotional “window” can interest be generated from corporate-buyers from all around the world to look at the Prairies as procurement grounds, not just the origin of grain-trades in bulk.


This is what our virtual Grain Mall platform is intended for. Prospective buyers can see what we have to offer right from primary production sources, our farms – among the most advanced in the world, offering a huge variety of crops for buyers to procure and get them to wherever they want in containers, with crop integrity intact, and as necessary identity-preserved. They can post purchase-requests that interested producers can respond to, all online, and if there is sufficient interest on the part of both buyers and sellers, they can proceed with contract negotiations.


This is how we intend to bridge the information-gap that currently holds back direct-sales channels from forming to overseas markets, like channels that formed with ease earlier in domestic and transborder markets where buyers and sellers were familiar with each other. Online acquaintances or interactions are not going to lead to instant sales, but at least parties will get to know what each other wants to form the basis for further discussions or negotiations. This open platform will also allow buyers to see what the options are, and the sellers to test the market for their crops.


The fact that certain market-channels do not exist is not a logical basis to conclude that there is no demand or supply for those channels. Markets do not form without “information”, not a novel discovery on our part but a well-known fact. Historically trades used to get started through expeditions, how traders met, negotiated, and made fortunes. Now we have the Internet to connect people and pave the way for many new trades to emerge and flourish; all we need to do is look around us.


However, we refrain from characterizing our initiative as a trading-platform, as in essence it is a trade-facilitation platform. Unlike merchandise, stocks, or crypto-currencies, grain-trades do not easily lend themselves to one-click-sales. All we hope to do is provide the online channels for buyers and sellers to connect, exchange information, and negotiate towards developing a contractual framework to trade.