Wheat and Western Canada

1. Wheat and Western Canada Econ 4300 2008

2. Monopolies in western Canada • 1670-1870 – the Hudson’s Bay Co. • Monopoly seller • Monopsonist buyer • Red River colonists could not deal in furs

3. Monopolies in western Canada • Canadian Pacific Railway • No competition allowed • 1888 the monopoly clause cancelled • The CPR was compensated • East ↔ West battle • Monopolies were not a national concern • Many industries were not competitive

4. Market Power Impacts

5. Agriculture in the early West • Continual protests over low prices • Target – mostly Eastern interests • Proposals: state owned grain trade, cooperative organizations • Actions to help raise selling price and lower cost of goods purchased (today, FNA)

6. Wheat Pricing, early 1900’s • World price → Liverpool price • Winnipeg price was the spot price • Spot price = Liverpool less transport, handling, insurance, profit, etc. • Canadian producers – no impact on Liverpool price • The Liverpool-Winnipeg price spread could maybe be altered, and farmers viewed the spread as excessive • Producer target → elevator companies

7. Elevators • First elevator, Gretna, MB, 1881 • A large capital expense • Large storage capacity because of seasonality of grain supply • “Line” elevators, some farmer owned • Elevators were grain merchants and warehousers • Limited rail and terminal capacity

8. 1906 Royal Commission • Improper weighing • Excessive dockage • Rail car shortage and allocation • Grading and inspection concerns • Uncompetitive bids (telegraphing prices) • Courts agreed with grain co.s • The Winnipeg Grain Exchange was not viewed as the source of the problem

9. Continued • Terminal elevators • Undercleaned – poorer quality product exported • Excessive dockage charges • Mixing of foreign material just to meet minimum standards, even if brought to lower quality than producers delivered

10. Locally Owned Elevators • Farmers raised capital to construct elevators • The Grain Growers Grain Co. operated as a merchandiser for the farmer elevators • Low turn-over all most farmer elevators, little or no profit • Locally owned elevators could not compete with the line elevators • Provincial legislation to facilitate cooperatives • MPE, SWP, AFCE Co. • 1917 – GGG and AFCE combined → UGG

11. Post WW I • 1916 – poor US wheat crop and Canadian crop badly rusted • 1917 – spring, there started to be the realization there was inadequate wheat supply to match wheat future bought • WGE requested government intervention • Fed. govt established the Board of Grain Supervisors with wheat monopoly powers

12. BGS • To control the distribution of grain as between domestic requirements and Allied purchasing agencies • To prevent to the utmost possible extent neither value inflation or depreciation by speculation, hoarding grain, or by other means

13. BGS • Handled the rest of the 1916 crop and all of the 1917 and 1918 crop • Note: There was a similar entity in the United States during this time period • The WGE started trading again on July 21, 1919 • Trading pushed prices up and by July 31, 1919, the Canadian Wheat Board was established with exclusive responsibility to handle the 1919 crop

14. CWB - 1919 • Was to be temporary • Initial price paid, additional funds paid at the end of the crop year • The CWB closely resembled the Australian Wheat Board • Ended in the autumn of 1920 • Smooth ending, the CWB continued to use the private grain trade during the year

15. After the CWB • There was a large decline in grain prices with the 1920 crop • Wheat price fell from about $3/bu to $1.15/bu over several months • 1917-1920 with CWB → prices high • 1920 onward under WGE → price low • Conclusion by some: WGE was responsible for the low prices

16. WGE post 1920 • Viewed as detrimental to farmers • Perception that speculators were driving down the price to make a profit • Producers at the mercy of speculators • However, cash and futures prices were closely related • Prices lowest at harvest

17. Speculators • Take on price risk • Part of price discovery • Prices lowest at harvest because that is when all producers were wanting to sell and there is a cost to carry the grain to later in the year • Warehousig, insurance, and price risk

18. 1930’s • Prices fell by about one-half from 1929 to 1932-35 • Increased pressure by producers and some producer organization to abolish the WGE and replace it with a government agency • 1935 – a wheat board was established, but it was voluntary (contract sign-ups)

19. Wheat Pools • The wheat pools grew during the 1920’s • The pools had a common selling agency to cut out the middle man • Paid producers an initial payment and final payments if any surplus • Price was pooled over the year – same price no matter when you sold • Pooling ended in 1931 • Pools went on to operate as elevator co.s

20. Pools’ Central Selling Agency • Selling agents domestic and abroad • Initial price < market price • Producers contracted, but delivery could not be enforced • Post 1929, market prices fell and initial price > market → lots of deliveries • 1931, the CSA was in the hands of the Fed. Govt to bail out the system

21. 1930’s • The Central Selling Agency, under the Fed. Govt, pursued “stabilization” policies • 1935 • The second CWB was established (voluntary) • Took 2 years to sell the inventories of the CSA • Price < market in 1936-37 → no deliveries • Price > market in 1938 → received entire crop

22. Board to Continue? • 1939 – an Act was introduced to maintain the board, set the initial price, and limit producer deliveries to 5,000 bu • WW II • Wheat board retained as optional • Initial price increased due to producer pressure • Yields high, markets lost (Europe), accumulation of grain stocks • Marketing quotas (1940), acreage reduction (1941)

23. Board Permanent • Sept. 27, 1943, the CWB ceased to be an alternative, and was given exclusive jurisdiction to receive Canadian wheat • Trading of wheat on the WGE ended • A reaction to war time emergency, not a policy change • Prices increased due to reduced supply in the US and Canada • A concern about increasing prices in 1943

24. CWB • After the war, the CWB was retained, not like in WW I • Other crops were added to the CWB jurisdiction (oats, barley) • In the 1980’s, oats were removed from the CWB • Future – a current political issue 65 years later

25. CWB - pricing • Initially, all deliveries of a specific grade were pooled and one price paid to producers • Alternative pricing options exist now • Pooling, initial payment plus interim and final • Contract, hedged on Minneapolis • Full payment at delivery with no interim or final payments • Other payment options could be forthcoming

26. CWB - pros • Is able to price discriminate in premium markets and get higher prices (Japan, UK, USA) • Coordinates grain movement to get appropriate grain at terminal locations • Counters some of the market power of the few multinational grain companies • Sales and promotion of Canadian wheat

27. CWB - cons • Restricts producer choice • A level of administration that is not costless • No ability to off-load price risk out into the future • Distorts trade (mostly from other trading countries)