Allan Dawson in Manitoba Cooperator, March 31, 2014
Farmers unable to move crops this winter have had plenty of time to notice the difference between what grain companies are paying in the country and selling for off the West Coast.
“Our calculations demonstrate the grain companies have taken over $1.6 billion in excess profits from wheat alone so far this crop year,” said CWBA spokesman and former Canadian Wheat Board director Kyle Korneychuk last week.
University of Saskatchewan agricultural economist Richard Gray independently reached a similar conclusion after comparing prices in the country, where elevators are plugged, against export sales at West Coast ports where prices are in some cases double.
The result is unprecedented grain company margins, despite what is expected to be record demurrage costs.
The CWBA estimates grain companies are earning almost $169 a tonne in excess profit from wheat, based on exports of 9.7 million tonnes to date. Gray’s calculations put company profits at $160 per tonne.
“These record-high basis levels (gap between futures and elevator prices) are costing farmers $100 to $200 per acre in forgone revenue and several billion dollars in total,” Gray wrote in an op-ed piece published in this week’s edition. “At the same time, these margins have substantially increased the bottom line of grain companies and processors (and they) will likely post record profits this year.”
Question the numbers
University of Saskatchewan agricultural economist Richard Gray expects western grain companies to earn record profits this crop year despite record demurrage charges.
The Western Grain Elevators Association denies grain companies are profiting from the transportation crisis.
“Grain companies don’t make money if they can’t move grain,” executive director Wade Sobkowich said in a statement. “We question the numbers put forward by the CWB Alliance.”
With four months left in the crop year grain companies have already paid an estimated $55 million in demurrage, Sobkowich said in an interview. The previous record of $50 million was set in 2010-11, according to Quorum Corporation, Canada’s grain monitor.
Demurrage is costing $15,000 to $25,000 per vessel per day, Sobkowich said. At the peak, 53 ships were waiting off the West Coast.
“My members have said, ‘we are bleeding badly,’” he said.
However, Gray said companies can make back their entire demurrage in one week of shipping. “And they will have change left over.”
Canola-crushing plants, also owned by grain companies, enjoy similar margins, he added.
“If they crush 10 million tonnes that’s $1.6 billion, so I suspect they’re doing pretty well,” Gray said.
Solutions differ
Gray and Korneychuk agree getting the railways to move more grain will help, but beyond that their solutions differ.
Korneychuk wants the Canadian Wheat Board’s single desk reinstated.
“The farmers’ share of the international price of grain has gone down from 84 per cent under our single-desk Canadian Wheat Board to around 40 per cent today,” he said. “It is the grain companies that have taken the lion’s share… because the railways are constrained by legislation from taking much more than 12 per cent.”
Wheat board co-ordination and system oversight was more efficient, he said.
Gray said the single desk would not have prevented this year’s anomalies in shipping and basis levels. He’s calling for expanded West Coast grain-handling capacity and more competition.
“We’ll get our highest net prices if grain goes west,” Gray said. “But for that to happen we need to nearly double West Coast capacity.”
The West’s three biggest grain companies — Richardson International, Viterra (Glencore) and Cargill own most of Vancouver’s terminal space.
“It’s not a lot of competition,” Gray said.
“Prince Rupert is particularly sinister,” he added, because the same three firms jointly own the grain terminal there. As a result, it gets used as a last resort because companies would rather maximize exports through their own terminals.
It would be more competitive with one owner, even if it was one of the big three, Gray said.
West Coast constraints
There’s little room to expand export capacity in Vancouver and even if there was, there is no incentive for existing players to solve the problem, Gray said.
Sobkowich said grain movement appears to be improving. In Week 34, the railways planned to move 8,000 cars, up a bit from previous weeks.
On March 7, the federal government gave the railways four weeks to start shipping at least 11,000 cars a week in total or face fines of $100,000 a day.
The government also promised to introduce legislation, perhaps as early as this week, to encourage better rail service for grain.
With a projected carry-over of 23.6 million tonnes there is no quick fix.
“Whether we have a normal, large or even a short crop (this fall) we’re still in this for 18 months to two years minimum,” Sobkowich said.
“Even if the railways hit the government numbers… we’re still going to have a problem.”
Farmers can also expect the basis to remain wide as more grain should be exported from the West Coast than it can handle, Gray said.
“This is a really complex thing and it’s going to require some real investment and not just a policy change,” he said. “We need to think long term and we need to think big and create capacity.
“Billions of dollars are at stake.”
Editor’s note: Mr. Sobkowich of the grain elevators association can question our numbers all he wants, but they are NOT our numbers. They come from Minister Ritz’s version of the CWB, the audited statements of the farmer-controlled CWB done by Deloitte and Touche Chartered Accountants, and the independent grain monitor, Quorum Corporation.
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