It is a flat world when it comes to wheat

Canadian Wheat Board Alliance
January 23, 2012

In the November 24 Western Producer D’Arce McMillan argues that “ending single desk won’t change realities of wheat market.” However, it was the problems created by those realities that the Canadian Wheat Board (CWB) was created to address. Without the CWB it will be the same old market Canadian farmers and consumers have been insulated from since farmers founded the Wheat Board in 1935.

From a consumer point of view, the contention that the mixture of wheat Canadians eat will not change once the single desk Board is gone is unrealistic. Here is why:

When it comes to commodity trading the world for all intents and purposes is flat. In the absence of orderly marketing, the private trade arbitrages all prices to a lowest common denominator almost automatically.
Part of that flat world is made possible by low-cost ocean transport. The Baltic Dry Index measures how expensive it is to move things by ship. Larger and more fuel efficient vessels have lowered unit costs by two thirds in the past five years.

Once a commodity is on an ocean freighter it can go anywhere in the world. This results in some odd things happening. For example, eastern Canada imports most of its oil from the Middle East half way around the world rather than pay the high overland shipping costs to get oil from western Canada.

Wheat also travels on the sea. So contrary to Mr. McMillan, that is why it is entirely reasonable to expect that without the CWB a lot of eastern Canadian flour will be milled from wheat coming in by ocean-going ships, rather than rail car from western Canada or even from south of the border.

Processors pay a premium for a reliable supply of a consistent quality grain. With the single desk the CWB is the only grain dealer on the planet with the logistical ability and the financial incentive to make a speciality of providing reliable supplies of premium grain. Along with a policy of encouraging domestic processing by having a uniform price, this gives domestic processors an incentive to use western Canadian wheat while still leaving a premium on the table for farmers.

However, if Harper removes the CWB single desk, processors will no longer have access to a reliable and consistent supply of wheat, not because the wheat disappears, but because the cost of assembling and delivering supplies will no longer be provided by the CWB and the logistical costs of assembling the required volumes will increase. This is exactly what is being reported by Reuter’s news service:

”Canadian millers, who include Archer Daniels Midland and P&H Milling Group, have said they may tap U.S. wheat to manage risks around no longer being able to secure all their supplies through a single supplier.”

The largest processors will also demand, and get, bulk discounts from the private trade, and the smaller processors will seek operational economies by sourcing cheaper grains elsewhere.

Without a single desk supplier like the Wheat Board, ultimately all sizes of processors will seek the cheapest source of grain, regardless of where it comes from. That is where the flat earth comes in. Like oil, grain from off shore will be cheaper than grain transported over thousands of miles of roads or rails from western Canada.

Many of those ships carrying wheat will come from two deep water ports. One will be the Piranha River which allows ocean-going vessels to travel up the center of the Argentinean wheat growing region. The other port is Odessa, the deep water Black Sea port that started the world’s wheat trade after the defeat of Napoleon in 1812.

Chernobyl sits just 600 very flat kilometres north of Odessa in part of the Eurasian wheat belt. Historically, it is grain grown in this area that was shipped around the world. The declining cost of ocean freight along with killing our Wheat Board means this area can again start shipping grain to Eastern Canada’s food processors just like eastern Canada’s refineries process Middle Eastern oil.

Without the CWB looking out for their collective interests, western farmers will find the world is as flat as the prices they can expect from a truly globalized wheat market.

Incidentally, for those who like to eat, the scientific literature is full of articles documenting contamination of grains from this area with radioactive materials from the Chernobyl accident. The good news is that 25 years later contamination levels in grains are lower and some mitigation efforts have reduced levels by a third on small test plots. The bad news is soil contamination levels are not appreciably lower.

So the evidence, on many levels is not as reassuring as some writers would have western farmers or their customers believe.