Thank you very much, Mr. Chairman.
Pike Management Group is a company operated out of Calgary, Alberta. We work with about 2.5 million acres in western Canada. We represent a lot of grain farms, ranging in size from 5,000 to 70,000 acres, and cow-calf operations of 250 to 3,600 head.
The majority are young, expanding farmers, and our company is actually farmer-owned. PMG provides marketing and management assistance to large, profitable grain farms.
Turning to the Wheat Board, there's an outline I would like to take a look at initially in speaking to whether or not the board is working today. I think this is one of the fundamental things we have to look at initially, and I'll talk a little bit about cashflow, market signals, and what has changed, and then move into the idea of a dual market and discuss the advantages of the board, the advantages to the trade and to the producer, and then summarize with some conclusions.
First, concerning whether the board works today—and you will be getting a handout on this once it's translated—I took the opportunity to look at pricing opportunities out of Unity, Saskatchewan, which is a central Saskatchewan location for No. 1 CWRS 13.5 protein. This was done on October 23, looking at the kind of revenue we can produce under various months of futures contracts and also what kind of revenue we get through the fixed price contract and from the initial price itself.
Looking at an average yield in that area, I must say that the fixed price contract will offer nearly $200 an acre, but the initial price only gets us to about $93 an acre, which is relatively low. At the same time, if we were trading with the same costs off the Minneapolis futures, we would be looking at a potential of $242 an acre, or nearly a full $1 a bushel better than we would get out of anything offered from the Wheat Board today.
Even under the current prices against the December contract, we would be looking at about $218, which again is $20 positive per tonne to the producer.
Not only are the prices stronger than going through the Wheat Board system, but I think the major influence is that there is no cashflow; the system does not provide for cashflow.
Also, for barley right now we're looking at world highs in barley prices, with the drought in Australia and so on. The board is constrained by its own structure from taking advantage of some of these opportunities right now. The initial price for feed barley is absolutely deplorable. If you lived in Unity, Saskatchewan, your initial price at the elevator would net you about $17 a tonne, which doesn't go a long way towards paying any sort of expenses.
If you were to use malt PRO and go to Vancouver, you'd end up with a gross per acre of about $203 or a net of about $53. This is not performing to world standards. Currently, the world export price of barley in malt landed Vancouver is about $270 a tonne, whereas the board's PRO is at $184.
So the opportunities in the spot market are very good right now, and we would expect that producers should be able to take advantage of these. The board is not adding value here.
What are some of the reasons the board is having difficulty in functioning in this environment right now and also in providing market signals? I think pooling is probably one of the real issues. Everyone refers to pooling, and I ask producers in our own group whether they understand how pooling works. It's not grade pooling at all; we're not doing grade pooling. The pooling process is a very sophisticated process, not well written up in the act, and it's the least understood process of any of the processes the board carries on.
To be very honest, the system is not working today because of the changes that have happened. This is a key issue, and it's rarely ever discussed. This is business, not philosophical rhetoric. It is the business about how the money is distributed from the sales, and it's outdated and it's misunderstood. This is something few people are acknowledging.
So what has changed? We've got the number of wheat classes and grades. We've gone from looking at 12, when we started the pooling process, to 48, plus proteins. Overall exports have remained relatively flat. We have not seen huge increases in that. The pooling periods have become outdated and the farms have grown in size and sophistication. So commercial farmers require market flexibility to manage their risk in business operations. All other parts of Canada enjoy the freedom to market their wheat and barley, and that's been covered by the folks prior to me.
Then I wanted to take a look at the dual market and look at the advantages of a dual market to the Wheat Board. First, there's no obligation to pool. Grade pooling can be an option for those who want the board to make the decision for them. The trade is willing to allocate space and work with them. The board can provide excellent pricing signals with the grade pooling. The other thing is that the pool periods can be adjusted to market conditions. This is essential. They've tried it in barley and it's been quite successful. If they had the freedom to go out and do this, this would add a lot of dollars. The board could be very effective in that situation. The opportunity to use all the risk management tools will significantly reduce the risk of any initial prices provided in those pools, so you can use and directly arbitrage against Minneapolis, Kansas City, or Chicago, depending on the quality of wheat. And this offers new opportunities for the board to take advantage of.
One of the things in the past was that the board was too large and couldn't play in those markets. Those markets have changed significantly with the advent of the hedge funds participating in them, so liquidity is not an issue anymore. That did exist at one time.
The other thing this would do is help alleviate the U.S. border tensions with a similar price discovery mechanism. If our basis is open and posted, then the price is open and posted, and it should alleviate some of those types of problems.
Now, let's talk about the advantages to the trade, and by “the trade”, I mean existing grain handlers and everyone else in the system. It will give them a better use of assets in a less regulated environment. They can pursue export markets with the knowledge that they can get the grain, instead of pursuing the market and hoping to get the grain afterward. They can better manage trade credit on inputs with the ability to contract all grains, which they already do, and in many cases they're having to rely on canola or peas or lentils or other products, but it's hard to get money against any of the wheat. And they can offer the same marketing tools for both eastern and western Canada.
If you take the time to look at Cargill's home page, you'll see that they have a western Canadian page and an eastern Canadian page. The options for wheat are very well laid out in the Ontario side of things, and that's a cost reduction.
The advantages to the producer? Cashflow management is the critical one. Pricing signals? There are opportunities for more of that, huge risk management opportunities using the U.S. futures market that you could arbitrage and design to go into. Basis trading on wheat? We have not been able to use any basis trading. Right now, the wheat market has tremendous carry in it, and we have not been able to take advantage of that.
The potential for a more efficient handling system, with all the parties moving together in the same direction, is something I can't emphasize enough. We have to back away and take a look at what the transportation system and the overall regulatory system looks like today, because it does need some revamping. It's going to provide additional opportunities for the value-added sector as well, and this has been mentioned by a number of people prior to me.
In conclusion, I'd say the dual market provides opportunities for all the current participants if they are willing to change with market conditions. The Canadian Wheat Board's stance that they can't operate in a dual market is true if they do not change, but in reality the system's not working today, and change is really, really needed. The business of agriculture is growing, and we're seeing some very good opportunities out there.
The U.S. futures are seen as the world price discovery mechanism, so the change to a dual market can be very smooth and executed relatively rapidly. I think these are real opportunities.
The coming together of food and energy is going to provide many new opportunities for the agricultural sector, and I'm very excited and ready to embrace change.
With that, Mr. Chairman, I conclude.