If you are one of those grain farmers who takes great pride in being a free enterpriser, the next sentence may upset you. You are a member of a collective. Perhaps you don’t have a certificate certifying your involvement in such a pinko outfit, but unless you sell all your grain to one customer who doesn’t buy from anyone else, that’s the reality of your business. If you haul 10 tonnes of wheat to the elevator, it is mixed with wheat from neighbouring farms and eventually with wheat from across the Prairies and becomes part of a huge vessel, perhaps a 70,000-tonne Panamax sailing from Vancouver for Indonesia.
That’s a journey of 19,900 nautical miles. So why would the Indonesian miller buy your wheat from that far way when he could get it from Kurmana, Australia (1,775 nautical miles); Vladivostok, Russia (3,306), Odessa, Ukraine (6,402) or Chennai, India (2,100)?
Yes, India, in case that last one surprised anyone brought up with tales about the “starving millions” in that country. India is now a major wheat exporter — it has 9.5 million tonnes on the books so far this year. (By the way, India was the world’s largest exporter of beef and rice last year.) Back to that question — why would the world’s major wheat importers such as those in Egypt or Southeast Asia buy Canadian wheat when there are other suppliers more close by?
One reason is that they don’t pay the extra freight — you do. Most buyers are paying a landed price. If you’re selling the same product, you have to deduct your price f.o.b. port by the amount of the extra freight to get the business.
That’s not the whole story. Many of your competitors in countries mentioned earlier, plus those in the U.S. and Europe, are located much closer to port. Nor do they have the Rocky Mountains to cross in one direction, or a double handle through the St. Lawrence Seaway in the other.
Moreover, any of your competitors have at least one of these advantages: more rainfall, a longer growing season, more government support, cheaper land and cheaper labour.
This has always been the case. But there’s a new factor at play. With a couple of exceptions, most Canadian wheat is now being sold by the same companies that sell everyone else’s — Glencore, ADM/Toepfer, Cargill, Dreyfus, Marubeni etc. So you’re not just competing to sell to the customer — you’re competing to be the one chosen by one of these companies to sell to the customer.
How can Canadian wheat producers survive in this competitive environment? Some are suggesting it is by growing the same product as the competition, even though they have lower costs, higher yields and are closer to market. That’s exactly the subtext of the message that Agriculture Minister Gerry Ritz delivered to the Prairie Recommending Committee for Wheat, Rye and Triticale when it met last month. He referred to the committee’s work in recommending grain varieties as an “unnecessary regulatory burden.” That’s code for “lowering the standards of Canadian wheat classes so that private breeders can concentrate on yield, not quality.”
We can hear the response. “Oh, no. This is to allow more flexibility for those breeding for buyers looking for specific end-use qualities they can’t get in the current grading system.” Nonsense. Other than some minor exceptions, there are no end-use wheat qualities that millers want and can’t find on one of Canada’s eight existing wheat classes.
Which takes us back to that 70,000-tonne cargo. If it does what buyers want — and so do the next and the next — then they will choose Canadian. It’s not just about quality, it’s about consistency of quality. That’s the Canadian advantage, but it depends on a common standard — not a regulation, a standard — for the varieties grown by the thousands of farmers whose wheat makes up that cargo.
Some grain merchants will not give you this message. We heard a hint of that when a U.S. trader told the Grainworld conference that Canada and the U.S. need to work together to streamline grades to help reduce confusion for international buyers.
Confusing for whom? Much of the world’s wheat trade is basis “optional origin” — the buyer sets the specifications and asks for offers. The multinational companies then shop around for the cheapest source. They’re the ones who get confused if the buyer specifies Canadian instead of optional origin.
The choice is clear. If farmers want customers to be able to specify Canadian wheat, then they need to stick together and keep the Canadian quality system, especially on CWRS. If not, then they can choose to compete on the basis of cost and yield. We hear there’s some really nice spring wheat coming out of Kazakhstan these days.
Canada’s image for quality wheat bound to suffer
By Blair McCann
The Star Phoenix August 26, 2011
Ever read the instructions on your bread maker and wonder why in the United States consumers must use flour that is specifically milled for bread, whereas in Canada you can use all-purpose flour?
Here’s why: The Canadian wheat used in our all-purpose flour is highly regarded around the world for its consistency in terms of its milling and baking properties. Our quality control and quality assurance systems (QC & QA) are very difference from that of the U.S., and unique among major grain exporters.
Institutions such as the Canadian Food Inspection Agency (CFIA) oversee varietal registration. Before a variety can be registered for field production in Canada, it undergoes rigorous field and laboratory tests to ensure that it not only performs well in the field, but also meets specific criteria in terms of milling and baking properties.
In contrast, the U.S. operates under a commercial system in which varieties can be registered regardless of their milling and baking properties.
Another key institution involved in our QC & QA system is the Canadian Grain Commission, which oversees the grading, handling, and shipping of grain. Before a shipment of grain leaves port, the CGC issues a certificate that assures the customer that the shipment meets the specific grade, class, and quality parameters defined in the sales agreement. Customers of Canadian wheat can be certain that any two boatloads of wheat, with the same grade and class specifications, will be the same.
Why is this so important to wheat customers? Around the world, the milling and baking industries are moving toward greater automation. Increased automation means that millers typically set up their plants for large runs that often contain wheat from a number of shipments. If there is no quality consistency among shipments, additional testing and adjustments are required within the run, resulting in potential downtime or worse, inferior end products.
Canadian wheat shipments are rated very high for consistency of quality, and customers are willing to pay a premium for this assurance. In contrast, the U.S. system cannot deliver the same level of consistency, often resulting in U.S. wheat being discounted because of the lack of consistency among shipments.
In the event that problems do occur with Canadian wheat shipments, the Canadian International Grain Institute helps resolve any disputes through its role in customer service and market development. CIGI, with its lab and milling facilities in Winnipeg, works closely with our customers to trouble shoot problems and to develop new markets for Canadian grain.
Working together, these institutions have established Canadian wheat as a brand that is differentiated from other grain exporters on the basis of quality and consistency. Grain customers around the world are willing to pay a premium for our wheat.
The Canadian Wheat Board, through its single-desk marketing structure, is able to capture this premium and pass it on to farmers. Because the CWB is the only seller of Canadian wheat, it can charge different prices in different markets, often extracting a premium over the world price.
For example, Japan is one of Canada’s biggest wheat customers, and Japanese buyers often pay as much as $1 per bushel over the world price for Canadian wheat. Why? They’re paying the premium for the Canadian brand.
Minister Gerry Ritz’s plans to dismantle the CWB, through the creation of a multiple sellers for Canadian wheat, will inevitably result in this premium being given to buyers in order to “make the sale.” Buyers will be able to play off the Viterras of the world against one another and in doing so, negotiate a lower price on their grain purchase.
With the loss of the premium, it may be hard to justify maintaining a unique QC & QA system for Canadian wheat. Cargill, Viterra, and JRI certainly won’t be supporting the system. Their business is largely based on volume, with the goal of maximizing shareholder value, not on obtaining the best price for Canadian farmers.
The grain companies would be better served by harmonizing the Canadian system with their U.S. operations, resulting in a reduction in the quality of Canadian wheat. Canadian farmers are very efficient in terms of growing wheat but the cost of getting our grain to port does not make us low-cost producers.
For this reason we need to maintain a system that produces a premium product and a marketing structure that can capture that premium. The CWB provides the structure needed to capture the premium necessary to maintain our Canadian wheat brand and in doing so, get the best return for farmers.