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Business English: Canada prepares for open wheat market
Traders vie for a head start with the end of wheat board monopolyCherilyn Nagel made history on the Canadian prairies in January. She signed a contract to deliver 1,000 tonnes of durum wheat in October from her family farm in south-central Saskatchewan to a nearby elevator owned by Viterra, a multinational grain trader based in Calgary.
Ms Nagel's contract marks the first time in more than 70 years that a western Canadian farmer has sold wheat or barley to anyone other than the Canadian Wheat Board. "It was pure pleasure, and it was a very good price," she said.
Like Ms Nagel, farmers and businesses across the prairies are preparing for far-reaching changes at the start of the next crop season in August when the Wheat Board is due to lose its monopoly over wheat and barley exports. Farmers will then be able to sell their crops either to the board or to private traders.
The Conservative government pushed through the enabling legislation late last year in the face of strenuous opposition from the CWB, which up to now has been the world's biggest single wheat exporter. A group of dissident farmers, led by former board directors, have challenged the law in a Manitoba court.
Besides giving farmers more choice, the new system opens up new opportunities for traders and processors. At present, the traders act only as agents for the CWB, so cannot reap the full benefits of their presence.
Three companies - Viterra, Cargill and Winnipeg-based Richardson International - have a head start thanks to their extensive networks of silos and export terminals, which they rent to the CWB.
But others, such as US-based Archer Daniels Midland, Bunge, Louis Dreyfus of France and London-listed Glencore, are expected to become increasingly active in the Canadian market. ADM, for instance, is already a big player in the unregulated canola market, and operates six wheat mills across the country.
Alliance Grain, a Saskatchewan-based grains processor, said the ability to buy wheat directly from farmers has encouraged it to build a C Dollar50m pasta and pulse-milling plant in Canada, rather than in the US or Australia.
Murad al-Katib, Alliance's chief executive, explained: "We have to be able to control the quality and the flow of our goods to provide a consistent branded food product. If we can't control the input, we can't control the output."
Farmers are not totally unfamiliar with a free-market system. Many already sell canola, lentils and other crops on the open market.
Even so, Brad Vannan, president of ICE Futures Canada, a subsidiary of Atlanta-based IntercontinentalExchange, said: "The marketplace has gone 69 years without an open market and price discovery. I get the impression that farmers are actively educating themselves on what options and opportunities they have."
ICE recently launched futures contracts in milling wheat, durum and barley to help farmers gain greater transparency on market prices and manage their trading risks. "This way, a farmer can measure the results of his own decision-making against the decision-making of the board," Mr Vannan said.
Richardson International said that, in anticipation of the changes, it was "bolting on a few parts to our existing machine". It has hired more sales staff and is seeking out potential customers, such as millers and pasta plants, in other parts of the world. "We're trying to find out who those buyers may be and introduce ourselves to them," the company said.
Richardson takes the view that much of the competition for farmers' business will be based not on price, which is set by the market, but on customer service. It recently extended its network of almost 80 grain storage and handling facilities by buying an operation in north-west Alberta. "We've spent a lot of time and a lot of dollars improving our grain handling network," it added. "We think we can hold our own very well."
Many predict that the Wheat Board, like its former Australian counterpart, will eventually be taken over by one of the private traders. For the time being, the prospect of competition is forcing even the board to raise its game. It unveiled a raft of new sales tools for farmers two weeks ago, including futures contracts, a pooling mechanism to contain risk and marketing advice.
Many farmers are expected to hedge their bets initially by splitting sales between the CWB and private grain traders.
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The Financial Times, 28.02.2012
© 2012 The Financial Times,
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