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XXXII - How Producers Became Trapped In Bulk Trades

Updated: Jan 16

We are the 8th largest grain-producer and 5th largest grain-exporter in the world. For more than a century, we have been growing more grain than we consume, and thus had to export. With yields increasing faster than consumption, export volumes have been on the rise, and we now export half of what we grow. Some believe we should not worry about exports, but unless we curtail production levels, we cannot escape exporting, and thus, we should try to get as much value from exports as we can.

We embarked on our platform's mission in the belief that our nation’s export-performance was not living up to the full potential of our grain-economy, particularly from producers’ perspective. Our overseas grain-exports are too dependent on bulk-trades, and this limits “value”, especially what trickles down to primary producers:

  • A handful of grain-companies control the bulk-systems, with too much market-power, and squeeze the margins producers get from grain-trades.

  • Captivity to bulk-trades limits our diversification potential, sticking to high-volume staple-crops instead of growing higher-value specialty-crops.

  • Moreover, bulk-exports are facing increasing competition from emerging grain regions, putting in danger the already slim margins producers get.

Instead of cumbersome regulatory solutions, like imposing price-controls or breaking up grain-companies, our solution to this problem is rather simple: create new direct-sales channels. This would put competitive pressure on bulk-trades, thereby forcing their custodians to pay higher prices for the staple-crops they are already exporting and/or switch to exporting higher-value specialty-crops that yield higher-margins.

Here we will dive further into the history of grain trades with a piece on how grain-transport evolved in our own country, and how the bulk-trap came to be. The story begins with the early settlements of the Prairie region, which could not have happened without railways, while the railways would have never become viable without rapid growth in grain-traffic – the classic dilemma undeveloped regions face.

Then we turn to the regulated era, the establishment of CWB to stabilize the grain industry devastated by the Great Crash. Though most view CWB mainly as a single-desk buyer and seller of grains, in between those functions it had a critical logistics-role to perform. Leaving aside the market-side of things, we look at CWB through this lens, how it gave rise to today’s highly integrated bulk-transport system.

Finally, we turn to the unwinding of the CWB with the expectation that it would eventually be abolished to give producers the freedom to trade as they wished. Ironically, privatization started not with the abolition of CWB but the corporatization of producer-coops. Before new sales-channels could even form, export trades fell captive to bulk-systems, now in the hands of a handful of private trading companies.

Early days of growing and moving grain

Grain farming in Canada got started first in the Maritimes, then in Quebec, but took a more serious hold in Ontario, with wheat becoming the province’s principal crop in the latter half of the 19th century. Wheat was grown earlier in Manitoba, where the province’s first wheat-harvest was said to be in 1820 (Selkirk settlement). Its spread further west in Saskatchewan and Alberta came after the Dominion Act of 1872 that opened the homestead-settlement era, with an acceleration later in the century.

Wheat-farming through most of the 19th century was an oxen or horse driven affair. Depending on how many hands a farmer could mobilize and hire – a few in family-farms, many more in large-estates of Ontario – they plowed the fields, seeded, and left it to nature to grow the crops. When the time came to harvest, early in the century they were using reaping-hooks or sickles, and later switched to cradles and scythes. At this stage a farm-hand was probably harvesting an acre of land a day.

The chores did not end by collecting the crops; wheat needed to be threshed and winnowed, loosening the chaff first and then extracting the grain. Early in the 19th century, flailing was the only way to thresh, though efforts were made to draw on horsepower. Winnowing was also done with hand-tools, relying on wind when it was blowing. Even with improved methods, a farm-crew might be able to go through only 10 bushels of wheat a day. As harvesters-threshers advanced into the latter half of the 19th century, and if a tractor could be afforded to go with them, a farm-crew was probably cutting and threshing 40-50 acres of land per day.

This was not the end of the chores; whatever was not going to be consumed on the farm or in the immediate vicinity had to be bagged and carried to the nearest market in horse-wagons. In most cases, there was yet a longer horse-wagon journey to nearest waterways, at least until the railways came along. In the east, Grand Trunk Railway was finished in 1860 from Sarnia to Montreal, providing an alternative to ships in Great Lakes and Saint Lawrence. GTR was a British company but generously supported by the Canadian government. By the 1880s, GTR had become the world’s largest railway – 2000 km of track with 700 locomotives and 18,000 freight-cars.

At the time of Confederation in 1867, extending railways to the West had become imperative, not just to settle the Prairies but also to fulfill the Union-promise made to British Columbia. To this end, Canadian Pacific Railway (CPR) was incorporated in 1881 with the explicit objective of building a transcontinental railway from Eastern Canada all the way to the Pacific Ocean. CPR was a private company, but the government was there to provide whatever support was necessary, including land and generous construction subsidies. CPR’s transcontinental railway had become the national-dream and was completed in 1885 to open the West to be settled.

Originally CPR’s transcontinental route had been planned further north to serve the northern corridor that had opened much earlier with the fur-trades, but with the selection of the southern route, northern Saskatchewan needed service. This gave rise to a privately financed initiative to build a railway from Regina to Prince Albert that was finished in 1889. It was originally leased to CPR to feed its mainline but was then sold to Canadian Northern Railway in 1906. The latter had started as early as the 1880s as a collection of provincially funded northern branch-lines to feed CPR in Manitoba, but would not come into being as a railway to its own right until 1896.

In the meantime, the British-owned GTR had already extended to Winnipeg and was seeking government support to build its own transcontinental railway. Through a subsidiary set up for this purpose, Grand Trunk Pacific, the project was completed in 1914. But neither GTP nor GTR were viable entities and would not survive WW1; in 1919 the whole enterprise went bankrupt and was nationalized. In 1923 it was put under the new Crown corporation, Canadian National Railway (CNR), together with other distressed or bankrupt railways, including Canadian Northern which by then had already reached the Pacific but was on life-support with government subsidies.

This expansion of the rail-network across the country would not have happened without vast increases in grain production. In the east it was driven by Ontario’s grain sector, mainly wheat, but had slowed down with agricultural diversification. The main impetus from late 19th century onwards was coming from the Prairies, with limited population but rapidly growing grain output. Grain-exports had to get at least to Thunder Bay in the east, or to Vancouver in the west, both by rail.

Into the 20th century, homestead settlements had accelerated, and crop yields were on the rise, driven by improved farming methods, higher quality seeds, and better equipment. The region’s population increased 6-fold to 2.5 million by 1950, but local consumption would still not make a dent in what was being produced, from farm-land that had increased from little more than 1 million, to 17 million hectares until the Great Depression. Coupled with yield-increases, at least 4-5-fold, it is hard to estimate how much more grain had to move to market, mostly captive to rail.

In the early railway-days, the standard handling method was still “bags”, loaded into boxcars like they had been on to vessels. What revolutionized grain-handling was grain-elevators built to consolidate grain-deliveries from farms in their vicinity. These elevators allowed railcars (boxcars earlier, hopper-cars later) to be loaded directly. The first elevator in the Great Lakes region was built in Buffalo in 1843, first in Canada in Port Perry in 1873. The first in the west was in 1879 in Plum Coulee, Manitoba, but they spread like wildfire for the next half-a-century to all rail-lines; by the Great Depression, there were close to 6,000 grain elevators across the region.

Originally, these elevators were built to operate for profit by private-investors, including flour-milling companies. Later, companies emerged specializing in building and operating grain elevators – some wherever they could, others on CP properties. Into the early 20th century, farmer-coops got into the act to provide market-access for their members, starting with the Grain Growers’ Grain Company in 1906. There was also pressure on provincial governments to build elevators and offer favorable rates to their constituents. After WW1 wheat-pools got into grain-marketing in earnest, by starting to build new elevators as well as buying already built ones.

Getting their crops from farm-gates to the nearest elevators was still a problem for many producers; early into the 1900s horse-wagons were still widely used, perhaps slower but much cheaper. They would slowly fade away with trucks, getting larger and more affordable to buy and operate but would not become universal well into the 1920s. After that, grain-trucking would become a major force in driving elevator-consolidation trends, and in time branch-line abandonments across the region.

By the mid-1920s the rail-system stabilized with two main competitors, CP and CN. Though construction of new lines slowed down, both continued to build branch-lines into each other’s territories to expand their catchment areas. Then, railways started to shift their strategy: retreat to mainline operations, leaving branch-lines to their destiny, or others to operate (provincial governments or SLRs). They were open to options for rail-cars to be loaded off-line and brought to them to haul to final destinations. They also knew that trucks had become competitive with branch-lines to haul grains over much longer distances to elevators of their choice on main-lines.

Emergence of a regulated bulk-system

Before the Great Depression struck in 1929, it looked like the Prairie grain-economy had settled into a steady course. Grain prices had recovered from the post-WW1 crash and held their own in real terms. Farming had become more expensive with pressures to mechanize, but yields were on the rise to provide relief, at least for those who could properly manage their affairs. There was more land to cultivate, bringing in new settlers and giving those already established a chance to expand.

Most importantly, the cooperatives had given farmers a collective voice, a sense of power and security. By taking the lead in marketing, wheat-pools had greatly improved the terms of trade in favor of farmers; there was some resistance to the first abandonment of CWB, but without any worries about the return of the much-hated trading interests that had choked farmers earlier in the century. Also, wheat-pools were very helpful in helping farmers procure supplies and manage elevators.

Grain-exports were on the rise, with rail access in both directions. Much of the grain was moving east through Thunder Bay, or the longer rail-route to eastern ports. Export markets were mostly across the Atlantic but at least there was access to Vancouver to ship back east through the Panama Canal. Also, the railway-battles had been settled now with two transcontinental options, CP and CN, with no ability to negotiate competitively, but at least with the security of the regulated crow-rate.

Though the 1920s were not quite “roaring” for Prairie farmers, a sense of confidence and security had prevailed, but would prove to be short-lived. The wheat-pools were not prepared; in fact, they were over exposed going into the Great Crash of 1929 and collapsed. The federal government was quick to come to the wheat-pools’ rescue, but individual farmers suffered greatly. Most hung on, but with considerable pain, while many could not escape bankruptcy, losing everything they owned.

In 1935 the government brought back the CWB and this time permanently. Initially, CWB was voluntary, but it was at least a secure buyer for many farmers afraid of market uncertainties. Just before WW2 broke out, CWB became the sole purchaser of wheat, and in the coming years its scope was extended to barley, oats, and other crops. Basically, CWB became the sole buyer of grains, a monopsony, and a single-desk marketing authority, the sole exporter of Canadian grains to world-markets.

As the sole buyer of grains, CWB would make an initial payment to farmers for their crops, calculated as a percentage of the expected market value of the types of crops they had, back then mostly wheat. The magnitude of this initial payment varied but could be as much 75% of the expected market value. This was not repayable even if prices crashed and the CWB could not recover the upfront payment; any loss would be on the government’s account, giving farmers considerable comfort and security.