This is an excerpt from John Morriss’s editorial in the Manitoba Cooperator, August 11, 2011. Morriss explains the difference between “price pooling” and “price averaging.”
Opponents of the CWB monopoly . . . are throwing out red herrings claiming that the CWB would still be around in some fashion, including one that the board could run a pool for the farmers who wanted it.
A voluntary pool may sound like a good idea, but it’s a non-starter. First, this has nothing to do with the board surviving as a sales agency. Assuming the pool could work, you wouldn’t necessarily need a wheat board to run it. All you’d need is a few people with computers, a spreadsheet program and a bank account. When you sold to a grain company, wheat board or otherwise, it would send the money to the pool, which would issue the initial payment, calculate the returns at the end of the crop year, and issue a final payment.
You could even run a pool for canola. In fact, that might work fairly well. There’s only one main grade, and canola is sold pretty much evenly through the crop year. Calculating representative returns would be reasonably straightforward.
Wheat is another matter. There are dozens of classes, grades and protein levels. This is where it gets tricky. Let’s assume that it’s been a good harvest year across the Prairies, with most wheat grading 1 CW or 2 CW, but you were one of the unlucky ones with a couple of showers at harvest and you pulled off a crop of 3 CW. However, the wheat board finds a market for a couple of cargoes in October and takes it all off your hands, selling it to a customer for $200 per tonne. No. 1 CW selling on the same day is fetching $250. Soon after, there are concerns about crop conditions in other countries and wheat prices rise sharply. For the entire crop year, No. 1 CW ends up selling for an average of $350. Should you only get $200 for your 3 CW, $150 per tonne or $4 per bushel less than your luckier neighbour with 1 CW?
What if the market went in the other direction, with your 3 CW getting $300 when it was sold but 1 CW averaging only $250 for the year? Should you get more for your lower-quality wheat? You would probably answer “no” to the first question and your neighbour with 1 CW would definitely answer “no” to the second.
Pooling is not averaging
However, because of the way the wheat board runs the pooling system, such situations almost never arise. That’s because while pooling is often referred to as “price averaging,” it’s not. In determining payments for each class or grade; the CWB doesn’t calculate the average selling price. It calculates the average “spread,” or difference between them, for the entire crop year. Otherwise, in order to be fair, it would have to sell one-twelfth of each class and grade every month of the crop year, which would be logistically impossible.
Right now the system works because the board sells everything, and knows what numbers to put into the formula. If it’s only selling dribs and drabs of different grades at different times through the year, the process becomes arbitrary.
And what if it doesn’t get much grain into the pool, which you can bet it wouldn’t in a rising market? Where does the money come from to distribute a fair price to that 3 CW grower, even if it could be calculated? Certainly not from a government guarantee, which would be unfair to other companies.
Even if the pool could be actuarially sound, it would need a large number of growers to commit in advance (subject to legal action) to ensure that deliveries didn’t dry up in a rising market.
There’s not much evidence that they would. Perhaps the largest corporate failure in Canadian history was the Prairie Pools’ voluntary wheat-marketing agency in 1929. And last winter, the Manitoba Canola Growers Association floated the idea of a voluntary canola pool (again, which might actually work) and received little support. In fact, it received considerable abuse, notably from some of the same critics who are now dumping on the wheat board for lack of gumption or imagination in offering a voluntary wheat pool. . . .