Agriculture Committee on Oct. 31st, 2006

[Wayne Easter, Liberal, Malpeque, PE]

Okay, that's fine.

Jim, we have heard a lot from people on value-added, but the Wheat Board, in its presentation before the Senate committee, had this to say, and they quoted from the Milling & Baking News. It was noted that the Milling & Baking News:

...reported in August 2002 that a comparison of flour production among the leading milling nations since 1990, showed that Canada's mills enjoyed the sharpest increase of any country - including the European Union, the U.S., Argentina and Australia. The location of this milling also tells a story about the CWB's success in encouraging value-added processing in the west. About 32 per cent of this milling takes place in Western Canada, compared to just 15 per cent of U.S. capacity located in the grain-growing regions of North and South Dakota, Montana and Minnesota.

Jim, you mentioned that 22% of Ontario wheat goes to value-added production. You compared that with the percentage in the west of wheat. Do you have the tonnage?

[Jim Smolick]

No. It's that 55% of Ontario was produced domestically and 22% is the national average. These are stats the Grain Growers of Canada got from Agriculture and Agri-Food Canada, from Stats Can, and that's where those numbers came from.

[Wayne Easter, Liberal, Malpeque, PE]

The more important figure would be tonnage. Do you have those figures?

[Jim Smolick]

I'm sorry, I do not have the tonnage.

[Wayne Easter, Liberal, Malpeque, PE]

Thank you.

Mr. Pike, in your discussion you talked to some extent about comparing prices across the border.

[Gary Pike]

No, I did not, excuse me, just to clarify.

[Wayne Easter, Liberal, Malpeque, PE]

I believe we can go back to the record and determine that, but in terms of comparing prices, you are talking about spot prices and you're talking about initials with the Canadian Wheat Board. Do you, in your comparisons, compare final pooling prices, what the net result is through the Wheat Board versus what you would have gotten in the open market?

That's what the Wheat Board really goes to in their figures, in their $655 million. They include the final prices. The initial price is just that, it's an initial price, and the final price makes the difference.

[Gary Pike]

I have the Canadian Wheat Board fixed price contract in place. The initial price and the current futures for December, March, May, and July backed off in the same cost structure as the fixed price, and the fixed price, of course, is pretty well at the PRO, if you'd care to look. So you're compared to the best estimate that the board is giving as to the pooled results.

I apologize for not having these for you. I was unable to get them translated, but you will get them very soon, I gather.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Easter.

Thank you, Mr. Pike.

Mr. Roy.

[Jean-Yves Roy, Bloc, Haute-Gaspésie—La Mitis—Matane—Matapédia, QC]

Thank you, Mr. Chairman.

My question is for Mr. Loyns.

You've stated that those people who are in favor of pooling don't really have any justifications and that those who are not don't really have any either.

My question is simple. As an economist, you've probably looked at various scenarios. I'm not an economist but I suppose that, if we were to abolish the Canadian Wheat Board and that a system of voluntary pooling was set up, as a producer I would have to negotiate directly with the big corporations. Is there really any benefit for the producer to be put in such a situation?

I would be surprised if all the producers managed to get the best price individually. I believe that pooling is really necessary. If you're part of a number of producers, you have more negotiating power. As far as I'm concerned, it would be extremely difficult for an individual producer or for a small group to manage to get the best price.

It's not a matter of belief, it's simply a practical matter. I'm sure that you can get a better price when you're part of a group of 1,000 producers than if you're part of a group of 10.

[Dr. Al Loyns]

Thank you for the question.

I guess I'll start with my mutual fund analogy. A mutual fund is a pool. It's out there. It can be accessed by any investor under the terms and conditions of that pool. So the voluntary pools do work. I want to reinforce that point. It's not directly on your question, but I want to reinforce that point.

In terms of the collective approach to bargaining, which I think your question goes to the heart of, yes, there's theory and practice of collective bargaining. However, as I read it as an economist, the evidence, again, is that the Canadian Wheat Board does not produce net benefits. It has collective bargaining capability and monopoly powers, which is kind of unique. There aren't many collective bargainers out there that have monopoly power. Unions have very limited monopoly powers, at best.

Collective bargaining power notwithstanding, the way this organization is organized--over the large area, over the market conditions that exist--and the way things have changed over time, produces economic effects and results that at least I interpret as not producing net benefits. That's the best way I can answer your question I think. And it won't be satisfactory, I'm sure.

But the other one is that we don't need this collective bargaining power in most other organizations we're in. I'm in a hog operation. We don't do very well against the big companies, but we think we're doing better than when it was regulated in our province. It was partly as a consequence of the shift in the structure of production in the province of Manitoba that led to deregulation of the hog board.

These are historical events. They're not happening simply because western rednecks or free enterprisers or what have you.... Again, speaking as an economist, I claim to be neither of those, although there are doubts in this room about that, I'm sure. As an economic analyst, the fact of the matter is that people are moving away from that.

Now if you want to talk about the needs of competition in the agricultural sector, to make market power more balanced by other means, I'd love to come back to the committee and talk to that. But we can't do it today.

[Jean-Yves Roy, Bloc, Haute-Gaspésie—La Mitis—Matane—Matapédia, QC]

Thank you, Mr. Chairman.

My next question is for Mr. Carlson.

In your statement, you've talked about improvements that were implemented over the years in the marketing process of the Canadian Wheat Board but you did not give us any concrete examples. Could you give us some?

[Herb Carlson]

Oh, you're talking about some of the changes that have taken place. First of all, I talked about the change in the government structure. At one time it was controlled by some commissioners who were appointed by the government and they really had the final say. That was changed probably ten years ago, or something like that. To elected farmers, the board of directors of the Canadian Wheat Board--there are five appointed directors and ten who are elected by the producers of western Canada--are now the governing body of the Canadian Wheat Board. That is a pretty significant change, I think, in terms of who controls the Wheat Board and a farmer's ability to influence the actions of the Wheat Board.

The other point I made was that there have been changes in the way it operates since those changes were made in the governance structure. For instance, I think one of the other speakers talked about the fixed price option; there are early payment options; there's a number of basis contracts. There is a number of those kinds of changes that have been made.

I also want to say that when you come to electing farmer directors for the Wheat Board.... I consulted a number of my colleagues, and these people are all farmers who farm between 3,000 to 5,000 to 10,000 acres. The farmers who support the Wheat Board are not all half-section farmers back on the farm somewhere. This is widely held, because farmers are business people and they make serious decisions about what they want.

Now that we have the opportunity to elect directors, this gives us the opportunity to influence the change. If the board of directors gets to the point at which they think there needs to be another change, at whatever level, then let them do it.

[The Chair, Conservative, Gerry Ritz]

Thank you, Mr. Roy.

Mr. Bezan for five minutes, please.

[James Bezan, Conservative, Selkirk—Interlake, MB]

Thank you, Mr. Chair.

I want to thank all of you for coming and making a presentation today. I appreciate you taking time out of your hectic schedules to be here.

We've had a number of witnesses here who are saying, and I think Mr. Carlson will agree, that the Wheat Board is generating hundreds of millions of dollars more to the farm gate. To get both Mr. Pike and Mr. Smolick up here saying that definitely in today's world we're actually losing money by using the Wheat Board...I want to know if that is only this year, or are you basing this on historical...? Jim, you said this is a once-in-a-decade price run on wheat and we're missing out on it. Is it only this year that the Wheat Board doesn't work, or is it every year that it's not working?

[Jim Smolick]

Thank you.

I guess one of the issues is that this year it's more prevalent; it's more noticeable because there is a spike in the run-in prices. But it is correct, the Wheat Board has introduced other measures, but those measures all come down to the question, why are we not picking up the true value of what the wheat is doing on the world market? Part of it is basis, and I know you've heard a lot of that comment, but that's probably the biggest area right now in which we see they're not using a correct or a true basis.

[Gary Pike]

The least well understood part of this is pooling, and it is not grade pooling. In other words, we don't take all the No. 1 Canada western red spring 13.5, put it in a bank account, average it out, and divide it by tonnes at the end of the day. What they do is an average of spreads. In other words, how does one grade sell compared to No. 1 Canada western red spring 13.5? And that shifts values within the system. So at the end of the day, at the end of the year, the producer has...it's a real disconnect.

On a year in, year out basis, it's not hard to find situations where the board did not perform as well. I don't think it's because the people at the board are doing a bad job, don't get me wrong. I think the structure is wrong. The structure is failing to produce the kinds of returns that are reflective of a futures market in a mutual fund type of averaging system, which the pool could be. So year in and year out, depending on where you are on the prairies, yes, there have been problems with the board.

[James Bezan, Conservative, Selkirk—Interlake, MB]

Essentially, you're saying that some grades are subsidizing other grades.

[Gary Pike]

Yes.

[James Bezan, Conservative, Selkirk—Interlake, MB]

Some farmers are subsidizing others, more than you want to share in that. You accumulate losses because of the type of crop you brought in.

[Gary Pike]

Yes.

When I was on the Wheat Board advisory committee for four years, I built a model to try to model pooling. Ken Beswick, who later became a commissioner, helped me. We built a model to model pooling because we couldn't understand how some of the numbers were coming out the other end either. With that model, it was finally Ken who got to test it, because he was a commissioner and had the opportunity to test it. He said it worked, and it worked in the days when we didn't have the kind of information we have today.

It's not well written in the act either. The act simply says that each grade shall bear the proper relationship with the other grades. I don't know the exact quote, but that's the effect of it. The situation is that's it's not working today. It has become outdated and antiquated with all of the extra grades that have come into play.

[James Bezan, Conservative, Selkirk—Interlake, MB]

I understand that, but we need to talk about this whole—

[Gary Pike]

Value is better on the open market.

[James Bezan, Conservative, Selkirk—Interlake, MB]

But what about market power? We always hear that the Wheat Board has marketing power. Is that a belief you're...?

Al, you made mention that some studies show there is definitely a return at export position but that it's not being reflected back to the producer.

[Dr. Al Loyns]

I'd like to spend some time talking about market power. The long and the short of it is that they have market power inside Canada, because they have a monopoly inside Canada, but outside of Canada they don't. The monopoly power outside of Canada is certainly challengeable and can be debated.

Part of the issue of the difference in benefits out there—the $500 or $600 that we're hearing now as a benefit, versus the costs Morris showed or the costs we showed—is a question of apples and oranges.

First of all, there's the problem with economists. If you laid them end to end, they couldn't reach a conclusion--and if you laid them end to end, it would probably be a good thing. But economists have different analytic techniques, and when they sit down in a room like this and thrash out their differences, they probably could start reaching conclusions. However, when it gets into propaganda machines or the media, where everything is treated rather superficially and to somebody's benefit, the logic, the analysis, and the results get distorted.

Briefly, one of the biggest differences at the time was and probably still is in the results of the KFT—the Kraft, Furtan, and Tyrchniewicz—study and the Carter and Loyns study. They were done back to back. They were apples and oranges: KFT did analysis of benefits only at the port; we did analysis of costs at the farm level. There's a disconnect.

The reason I'm suggesting you read George Morris is that they go through all of these and pull this together at the end—including ours, using our model, but using other peoples' results as well—and reach their own conclusions. That's the only definitive, comprehensive, one-methodology study that exists out there, plus it's a good literature review.