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Government global grain reserves

Despite arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice.

Government involvement in grain markets probably goes back to the beginnings of settled agriculture. Egyptian and Chinese records document the role of dynastic administrations in collecting and storing grain thousands of years ago.

Nowadays governments worldwide may buy 10% to 20% of all the rice and wheat produced in a given year, so up to 240 million tonnes out of about 1.2 billion tonnes for the combined crops of the two cereals, but the variation in procurement from country to country is huge. Not just domestic purchases figure into the tally. State wheat importers in Japan, the Middle East and North Africa, and elsewhere may account for around 35 million tonnes.

Global reserves of cereals in government hands at any given time could be in the range of 200 to 250 million tonnes. The International Grains Council (IGC) forecasts 2013-14 ending wheat stocks at 188 million tonnes and rice at 108 million tonnes. China and India traditionally account for the lion’s share, but Thailand stockpiled a peak of 18 million tonnes of rice over the last two years before selling at a loss. Governments of Middle Eastern and North African nations may hold 15 to 25 million tonnes of wheat at any time.

Problems of government grain

In every country the issues surrounding government grain procurement are economically complex and highly political. And, of course, they are fraught with potential problems of poor governance.

There is a standard set of arguments against strategic grain reserves. First of all they require large investments to build the storage facilities, and even more to fill them. Grain markets are volatile and risky but state agencies must constantly decide how much to buy and when, and how to rotate the stocks through sales or other distribution.

Case against strategic grain reserves

  • Expensive and risky to operate
  • Without profit motive,inefficient management practices and waste
  • Creates market distortions
  • Guesswork in estimating need and setting prices - Market does a better job
  • Requires transparency and good governance

Efficient management of public grain stocks is extremely difficult. Most government grain facilities have at least two or three times the personnel of similar private operations. Often they are vehicles for political patronage through jobs. Operational costs can be high. Storage losses from infestation, moisture and pilferage can be an even greater cost.

Let’s go on a quick world tour and see what goes on with governments when it comes to grain reserves. This will be a very high level view.

East Asia

East Asia is a region where governments are very involved in buying and storing grain from the poorest country (North Korea) to the richest (Japan).

China has the world’s largest production of both wheat at 122 million tonnes and rice at 142 million tonnes on a milled basis based on IGC forecasts for 2013-14. Maize production is 218 million tonnes and is mainly for feed use, but some is also held in the government grain reserve.

Data about public grain stocks are treated as a state secret in China, but IGC projects total ending stocks of wheat in China at 57 million tonnes and rice at 50 million tonnes for 2013-14. It is probably safe to say that 90% is held by state grain companies. Grain traders sell mainly to these state companies and large millers depend on them for supply.

In China, two main policy goals have been at play: self-sufficiency in the two staple cereals and higher incomes for farmers. In February 2014, China officially announced the target of domestic production of 95% of the country’s grain consumption would be abandoned.

It is likely that state grain agencies will still buy a significant portion of both wheat and rice - from one third to one half. The government sets prices significantly higher than the international market price to ensure production targets are met. The grain is auctioned off to private millers and traders through central government auctions.

The public grain stocks are not used for food safety nets or for retail market intervention. The idea is to pay prices high enough to help close the income gap between poor farmers and the average city dweller. This in turn promotes social stability by slowing the massive migration of rural poor to cities.

Elsewhere in East Asia, governments buy large parts of the rice crop to keep prices high enough to sustain farm households, even while per capita rice consumption has gone down substantially with economic prosperity. Japan’s Ministry of Agriculture, Forestry and Fisheries maintains a monopoly over wheat imports, and often doubles the price when reselling to domestic mills, thus generating funds to subsidize domestic wheat production.

South Asia

India ranks number two in the world in production of both wheat, at 93 million tonnes, and rice at 103 million tonnes, according to an IGC estimate. State governments buy much of the surplus and public grain stocks at times may be as large as China’s.

In 2013-14 government procurement of rice will be about 32 million tonnes. For wheat it was 25 million tonnes, down one third from 38 million tonnes the year before.

Government ending rice stocks are forecast to be 20 million tonnes for 2013-14. The target stock level is 11.8 million tonnes. Wheat stocks were estimated at 22 million tonnes, down 10% from a year ago but still much higher than the official target level. This is one hazard of intervention. Once started it is difficult to limit.

India’s government frequently experiences well-publicized problems with management of these excessive stocks including tremendous losses from insects, moisture and pilferage, much of which results from traditional bagged storage practices.

India’s grain policy goals are quite different from China’s. The main purpose of state grain purchases is for distribution of food rations to the poor. This is done through state level Pubic Distribution Systems that supply cereals to Fair Price shops in every village and city district. Poor households holding ration cards pay just a fraction of the market price for several kg of wheat and rice per month. The Food Corporation of India coordinates the movement of both rice and wheat from surplus to deficit states. This scheme is estimated to cost the Indian government $20 billion per year. Most economists would argue this money could be better spent on infrastructure.

Bangladesh (population — 160 million) and Pakistan (population — 200 million) are large countries whose governments buy only limited amounts of grain. Nevertheless, despite still high levels of poverty, both have attained a satisfactory degree of food security.

Why governments hold grain?

  1. Emergency reserves
    • Sudden onset disaster
    • Slow onset disaster
    • Food safety nets
    • Public distribution system - India
    • Subsidized bread – Egypt, Tunisia, Turkey
  2. Market intervention
    • Buying to support farm prices
    • Sales to dampen price spikes

Bangladesh’s government buys 1 to 1.5 million tonnes of the annual rice crop that is now close to 35 million tonnes. The country no longer needs to import rice. Rather it may soon have to start exporting large quantities. The government does buy from abroad up to 1 million tonnes of wheat per year, mostly from India. The private sector imports in an average year another 2 to 3 million tonnes of wheat. The government stocks are rotated via distribution to the poor through a myriad of programs and as well as through open market sales if prices rise.

Southeast Asia and Australia

In Thailand, Vietnam and Myanmar governments procure surplus rice that eventually gets exported. In most other Southeast Asian countries, government grain agencies import rice. In the case of Indonesia, rice importation is a monopoly of Bulog, but the country is now on the verge of self-sufficiency with imports at just 1 million tonnes equivalent to around 3% of consumption. In the Philippines, the National Food Agency (NFA) imports some rice and gives licenses to private companies to also buy.

The Thai government has a long history of buying some surplus rice from farmers that it has then sold for export. In 2011, an election year, the Shinawatra government greatly expanded rice purchases at prices 30% to 50% above international prices. Forty percent of Thai households grow rice and the government was re-elected, but controversy, scandal and massprotests have ensued. The Thai government has owned up to a record 18 million tonnes of rice due to its “rice pledging scheme.” Thailand produces about 21 million tonnes but consumes only 10 million tonnes. Peak exports were 12 million tonnes but fell to 6.7 million tonnes two years ago due to the misguided policy. Many observers expect the government to fall as a result of the scandal surrounding its rice buying.

Since Australian Wheat Board’s loss of its single desk status, direct local government intervention in the wheat sector is minimal, though Australian wheat is purchased by many state-trading enterprises.

Middle East and North Africa

The Middle East and North Africa is the world’s most important wheat importing region. It is also the region where governments are most dominant in procuring and holding food grains. These countries are the ones that have been the most aggressive in recent years in expanding their strategic grain reserves.

The region’s imports account for 48 million tonnes of the international wheat trade of 142 million tonnes. These imports are split evenly between the North African countries and those in the Middle East.

The bulk of imports are handled by state-owned grain import monopolies. The largest government wheat importers are Egypt, Iraq, Saudi Arabia and Algeria. Government agencies in each country are major owners and operators of grain storage facilities, though there is some reliance on the private sector, too, especially in Egypt. Smaller countries in the region whose governments operate wheat import monopolies are Tunisia, Kuwait and Qatar.

Western Hemisphere

The United States has no public grain procurement or government stocks. Grain reserves were halted in the U.S. in 1996. The Canadian government gave up its wheat buying monopoly through the Canadian Wheat Board in the western provinces just two years ago.

The U.S. government still subsidizes farmers through federal crop insurance programs and direct payments costing taxpayers several billion dollars per year. And it provides food assistance via debit cards to 45 million low-income people. But this is done without government grain buying.

The only Latin American countries where governments are heavily involved in grain purchasing are Cuba and Venezuela. In effect, the huge stocks of high quality grain always available in the U.S. from Gulf ports serve as a de-facto strategic reserve for these two countries and others in the region.

European Union and Turkey

The 28 countries of the European Union produced 143 million tonnes of wheat and 301 million tonnes of total cereals (IGC 2013-14 estimates). The net wheat surplus is 20 to 25 million tonnes in most years.

The E.U. protects its markets with import quotas and tariffs and still has a system of minimum support prices for certain cereals. This means governments may buy grain from farmers when market prices are below a fixed level, which is the officially set as the E.U. intervention price of €101.

Because of high international grain prices, there has been no basis for intervention purchases by the E.U. in recent years. Surpluses could be exported profitability outside the E.U. Therefore E.U. grain holdings have been at a minimum.

Each E.U. country has a so-called paying agency that is funded directly from the European Union budget when intervention is done. However, E.U. rules do not allow governments to own and operate their own grain storage facilities. All E.U. grain is kept in leased private storages.

Turkey has a well-organized grain market where the government through the Turkish Grain Board (TMO) plays an important role. TMO is a state enterprise whose role is to hold emergency reserves and to intervene in the market to stabilize prices. It buys from farmers when the crop is large and prices are low. It may import when the crop is small to replenish its reserves. TMO has about 4 million tonnes in storage capacity at its own facilities.

Turkey is a candidate for accession to the European Union. It therefore must take some steps to harmonize its grain market policies with those of the E.U. TMO will have to be split into a paying agency on the one hand and a grain storage operator on the other once it is granted E.U. membership.

Sub-Saharan Africa

Among the 50 or so countries of sub-Saharan Africa, there are just a handful where there is public ownership of grain stocks. Eritrea, a closed country with a centrally planned economy, is the only one where the government completely monopolizes procurement of surplus grain and imports.

Zambia’s Food Reserve Agency buys most of the surplus maize to support incomes of small farmers but at a huge cost to the national budget when the maize eventually must be exported at a loss. Annual purchases have been up to 1 million tonnes.

Ethiopia has limited holdings. The government has privatized all grain processing companies but maintains a wheat import monopoly and cooperates with international food aid donors to operate a grain reserve holding 400,000 tonnes in a country that consumes about 20 million tonnes of food grains per year. Sudan’s government holds reserves of millet and sorghum purchased from farmers through the Agricultural Bank.

South Africa’s government abandoned its wheat marketing board in the early 1990s. There are no more public grain stocks in the country. The country is the major exporter of white maize to other countries in Africa and even to Mexico in some years. Large carry-over stocks held by private traders in the country serve as a reserve for the region.

Conclusion

Despite the arguments of liberal market economists, many governments, especially in Asia and the Middle East, continue to buy and stockpile wheat and rice. With the exception of Japan, most rich countries avoid the practice, and few of the poorest countries of Africa can afford to hold reserves either. Some nations may cut their stocks, but others are just as likely to create a new reserve or expand their holdings. Thus state reserves will continue to be an important factor in global grain markets for the foreseeable future.

Strategic grain reserves

The world economic crisis at the end of 2008 led to a profound distrust of financial markets, particularly among the developed countries that were impacted the most. Similarly, the twin price spikes that like bookends preceded the collapse and now accompany the global recovery, have caused political leaders in many developing countries to lose faith in grain and other commodity markets.

Many developing countries choosing to increase the size of their grain holdings during recent period of price volatility.

In December of 2010, Chief Industries UK of Essex, England, finished installing six steel silos with total storage capacity of 73,800 tonnes (12,300 tonnes each) that are 28.3 meters in diameter with an overall height of 29.4 meters at a facility in the Port of Qasim. Photo courtesy of Chief Industries.

After at least two decades of gradual withdrawal as part of an overall move toward free markets and economic liberalization, food price riots in 2008 and the recent unrest in many countries — sparked in part by renewed inflation — have prompted many governments to vigorously intervene in grain markets.

Outright bans, quotas or other restrictions on exports by Russia, Ukraine, Argentina, India, China and others are just one aspect of this trend.

Another is the policy decisions of many countries to increase the size of their strategic grain reserves whether composed of domestic or imported origin. The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain. There are numerous examples from many parts of the world.

Middle East

In the Middle East, a region heavily dependent on grain imports, wealthy governments have decided to invest some of their immense cash surpluses in strategic grain holdings. Industry sources report that Saudi Arabia intends to increase its stock on hand of imported wheat to 1.5 million tonnes, which represents a six-month supply based on an annual milling wheat requirement of 3 million tonnes. A number of large grain storage facilities are expected to be built, particularly at Red Sea ports, as the country has rapidly phased out domestic wheat production due to aquifer depletion after nearly 30 years of costly self-sufficiency.

The effects on world markets of these larger reserves have yet to be seen, but could make volatile markets even thinner as governments seek to hold, or as critics would say, hoard more grain.

On April 18, the head of the Iraqi Grain Trading Company stated that his agency would up its wheat purchases from abroad this year to 3.25 million tonnes, equivalent to one year’s import supply plus a 1-million-tonne strategic reserve. Last year the country imported 1.9 million tonnes. Iraq will also increase rice imports to 1.5 million tonnes in part for reserve purposes.

Oman recently announced plans to construct a total of 300,000 tonnes of steel silo storage for government wheat reserves at two ports. The country’s two domestic milling companies will draw from the reserve in order to rotate the wheat in storage.

In the UAE, there have been recent press reports of a plan to build a very large grain storage complex at the port of Fujairah on the Indian Ocean with financing from Abu Dhabi, the richest of the seven emirates. The location, which already houses a strategic petroleum reserve, would ensure access to imported grain in case the Strait of Hormuz was ever blocked. Saudi Arabia’s emphasis on Red Sea storage facilities may reflect the same geopolitical worries.

In line with this theme, industry sources report that Qatar’s government is considering building a huge underground grain storage bunker that would protect a wheat reserve from radioactive fallout in case of a nuclear catastrophe in nearby Iran.

In Jordan, where the state is the monopoly importer, the wheat reserve will rise by one third thanks to the addition of a 100,000-tonne-capacity concrete grain elevator at the Red Sea port of Aqaba. However, it could be argued that this increase merely keeps up with population growth.

In Egypt, with the government accounting for 5 out of 7 million tonnes of total wheat imports along with 2.5 million tonnes of domestic purchasing, there is little room to increase its activity except to push holdings up to six months stock, the upper end of the reported target level.

Iran, which has achieved near self-sufficiency in wheat production in the last decade, has gone against the regional tide of greater state involvement in the last couple of years by deregulating most of its wheat sector and allowing private milling companies to buy directly most of the over 15 million tonnes per annum of wheat produced in the country.

Sub-Saharan Africa

Despite its status as the earth’s least food secure region, governments in sub-Saharan Africa in recent decades have held only modest grain reserves, if at all. Above all, this has to do with financial constraints, since buying up domestic grain and rotating stocks can be a huge burden on national budgets, not to mention the cost of building proper storage facilities, the market risks of intervention, and problems of transparency and governance associated with such activity. Just as important, all but a few African governments have abandoned the socialist policies of the past, which often included state ownership of grain processing and storage facilities.

However, recently some countries, particularly cash-rich oil exporters, have begun laying the basis for greater intervention in grain markets. Nigeria has adopted a policy that 15% of the total annual grain harvest should be held in reserve. The National Food Reserve Agency (NFRA) will hold 5% as a core strategic grain reserve, and individual states are to hold another 10% as so-called “state buffer stocks.”

This policy initiative has already been backed by significant investment. In 2011, NFRA will complete the construction of steel silo storage capacity for over 1 million tonnes of grain, primarily maize, sorghum and millet, at 10 sites in key production areas. Existing NFRA storage capacity was 325,000 tonnes.

In Angola, the state also may divert some of its oil and gas export revenues to create a national grain reserve. The plan is for several hundred thousand tonnes of grain to be held in new government storage facilities under the Ministry of Agriculture. To date, just 45,000 tonnes capacity of steel silo storage has been built in five locations, thanks to development aid from the Spanish government. Despite 30 million hectares of unused arable land, Angola still imports much of its food. Guaranteed government purchases in order to build up a grain reserve could serve as an incentive to more investment in agriculture.

Kenya’s National Cereal and Produce Board has decided to double the reserves it stores from 4 million to 8 million sacks of 90 kg. The total of 720,000 tonnes will be almost entirely domestically purchased maize.

Zambia’s Food Reserve Agency, since about 2005, has become an active player in buying the maize surplus in the country, holding over 350,000 tonnes of maize, but in the process was subject to criticism for squeezing out private sector trade and contributing to overproduction and a 1-million-tonne surplus that could be neither adequately stored nor exported, resulting in a price collapse in 2010.

Sudan’s government, which operates a small reserve for domestic intervention in sorghum and millet, has largely stayed out of the wheat market since total deregulation of the sector in the late 1990s. However, recently it put out feelers for a tender purchase of 300,000 tonnes of wheat.

Ethiopia has operated an emergency grain reserve targeting a level of 400,000 tonnes for about 15 years. Thanks to economic reforms and outside investment, the country has experienced five years of GDP growth averaging 11%. Greater budget revenues should help the country realize a plan to increase the amount of grains held in reserve for both emergency relief and market stabilization.

South Asia

Bangladesh’s Food Department is increasing its public stocks of wheat and rice to 1.5 million tonnes from a previous target level of 700,000 tonnes. Up until the early 1990s, the country held 2.2 million tonnes and was praised by international economists for reducing this by two-thirds.

Pakistan and India could be viewed as going counter to the trend of increased food reserves. Thanks to bountiful harvests in recent years, Pakistan is in the process of exporting hundreds of thousands of tonnes of wheat from government stores in order to make room for the current harvest with planned government purchases of 4 million tonnes just in Punjab state.

India’s harvest of grain and pulses at 235 million tonnes is at record levels for the second year running. Despite this, the country has banned wheat and rice exports since international prices started rising in 2007. Now many high-placed people are calling for the country to export some of its surplus wheat from a carryover stock that exceeds 17 million tonnes held by the Food Corporation of India, plus another 7 million tonnes in private hands. FCI needs to make room for targeted procurement of 26 million tonnes from the new harvest. There are fears of poorly stored grain rotting. One paradox of large government grain holdings is that due to lack of investment in modern storage facilities, the goal of food security is subverted by storage losses that can exceed 20% in many cases, though this is rarely officially recognized. Most government grain reserve record-keeping shows one bag going out for every bag coming in.

Up to 75% of India’s food reserve wheat is still stored outdoors in jute bags piled on raised earthen platforms called plinths and covered with tarpaulins. Most of the rest is stored bagged in go-downs. Only about 650,000 tonnes of government wheat is stored in modern steel silo facilities built by private operator Adani Grain in the last decade. In Pakistan’s neighboring Punjab region, the storage practices are the same though a higher share of wheat purchased by the Punjab state government annually may be in go-downs.

Bangladesh is launching an ambitious project to build terminals for imported wheat and rice at a number of ports excluding Chittagong where grain terminals already exist. In other ports for lack of berths and ship unloaders, a couple of hundred laborers with shovels fill sacks in holds of vessels at anchor in the harbor for loading onto 1,500-tonne lighters and transport to mills up river. Handling and transport losses are thought to be significant.

East Asia and Southeast Asia

Though the total is a state secret, China’s government wheat holdings are estimated to reach 55 to 60 million tonnes following the harvest with an annual carryover of at least 20 million tonnes. Grain production and consumption represent 20% of the world total, but the impact on international markets is relatively benign due to a sacred policy of 95% self-sufficiency in grain, excepting about 57 million tonnes per year of soybean imports. Most other governments in the region hold large rice reserves. South Korea’s hit a record level of 1.5 million tonnes in the last year. In Indonesia, the food reserve agency Bulog has a monopoly on rice imports as does its counterpart in the Philippines.

Conclusion

In countries like Nigeria, increased grain reserves are mostly a domestic market phenomenon. But in the case of wheat, with some traditional exporters — particularly Russia and Ukraine — seeking to protect national stocks on the one hand while on the other hand governments in a number of importing
countries build infrastructure to increase their holdings, the implication could easily be less stable and less liquid markets over the medium term.

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Under attack

The Canadian Wheat Board is in an intense battle to maintain its wheat and barley trading monopoly.

The Canadian prairie provinces of Alberta, Saskatchewan and Manitoba have been the source of 15% of all wheat, 55% of durum wheat and 10% of barley in world trade during the last 10 years. A single organization, the Canadian Wheat Board (CWB), is the sole supplier of these grains and can thus lay claim to being the biggest international seller of wheat and barley.

But like its counterpart, the Australian Wheat Board (AWB), the CWB has been under increasing attack, both domestically and internationally, as a single-desk monopolist. The pressure on the CWB has increased since Canada’s ruling Conservative Party came to power at the beginning of 2006 on a platform that included granting marketing choice to western Canadian grain growers (i.e., removing the legal obligation that they sell their entire non-feed wheat and barley production to the CWB).

To date, Prime Minister Stephen Harper has not made good on his campaign promise, but it has not been for lack of trying. The Conservative party, though exercising executive power, does not enjoy a majority in parliament and would need the support of one of the two main opposition parties to put through the necessary legislation. Both of these parties oppose elimination of the single desk.

In place of lawmaking, the government in Ottawa has used other tactics such as firing of the CWB’s chief executive officer and placing a gag order on the organization that prevents it from us- ing any of its funds to lobby for continuation of the single desk.

The latest development in this highly politicized struggle was the government’s announcement at the end of March that it will terminate the single desk for barley exports, effective Aug. 1 of this year. This came after a vote in favor of marketing choice for barley by Prairie farmers. The government-called plebiscite gave farmers three choices: continuation of the single desk system for barley; a dual marketing system with the right to sell outside the CWB; and elimination of the CWB role in barley. The second option received 48% of the vote from farmers, while 14% chose the third option. The government can argue that the Canadian Wheat Board Act gives it such administrative authority provided a majority of farmers express support for the change, but there are sure to be all sorts of legal challenges.

With the ballot issue limited to barley, the government may have had an easier time getting a majority of farmers to vote for marketing choice. Barley represents only 12% of the grain handled by the CWB, so farmers have less at stake. Furthermore, farmers already are in the habit of selling their feed barley and feed wheat on the open market, while domestic wheat sales are still under the CWB monopoly.

Proponents of further reform hope the single desk for wheat can then be dismantled by Aug. 1, 2008, either based on a subsequent farmers’ plebiscite, this time on wheat, or thanks to new parliamentary elections yielding a Conservative Party majority.

Pros and cons

Both sides provide compelling arguments for their positions. The federal government’s case is true to its pro-business orientation and is based on classic free trade ideology. This makes sense for a country whose economy thrives on access to overseas markets. The Conservatives see no need for a governmentowned company, which was founded in the Great Depression of the 1930s and received its monopoly powers during World War II, to market Canada’s grain when private companies could do it more efficiently. The mere existence of the CWB as a state trading enterprise has made Canada vulnerable to repeated trade actions from the U.S., including a ban on some wheat exports from Canada to the U.S. that was lifted at the beginning of 2006.

It is unclear whether a majority of western Canadian grain growers also want to see the CWB wheat monopoly ended. Those near the U.S. generally favor marketing choice, since they would like the option to truck their grain to elevators south of the border when prices are better there. Under the CWB’s single desk, grain growers must rely on the Canadian railroads to get their grain to ocean ports. But there is a long history of railroad strikes, including some this year, that have caused congestion and delays, making farmers wish for the option to deliver grain to northern-tier elevators in the U.S. that have lower transportation costs to port. Opponents of the single desk often argue that western Canadian farmers are "held hostage" by an expensive and inefficient transportation system.

Farmers in Alberta are thought to support marketing choice more than their brethren in the two Prairie states further east. As noted, they plant more barley and are already used to selling on their own. Being closer to the Pacific Ocean perhaps makes them more open to the options that would be presented by freer trade. In Saskatchewan and Manitoba, which are further inland and where mainly wheat is grown, support for the CWB is stronger among farmers. This is reflected in the makeup of the two provincial governments, as they support the single desk while Alberta’s government opposes it.

The CWB argues that its sole mission is to serve the interests of western Canadian grain growers. Its goal is to generate the highest possible return in domestic and international markets on the sale of their wheat and barley. All revenues, after subtracting marketing costs, are distributed to the farmers at the end of the year. There are no retained earnings.

The CWB, based in Winnipeg, Manitoba, has a lean staff of about 400 to manage an average turnover of nearly 20 million tonnes of grain per year. It does this by owning few assets beyond its own office buildings and computer systems, and by contracting with transport and grain storage companies to handle the entire crop.

In marketing Canadian grain domestically and to 70 countries, the CWB’s special status presents certain advantages to Canadian farmers. One is that its borrowings are guaranteed by the Canadian government, ensuring lowest possible interest rates to finance grain inventories and to carry receivables. Another is that the initial payment they receive from the CWB, normally about 75% of the total payment, is guaranteed by the government, even if world grain markets suddenly collapse.

The CWB also enjoys government guarantees of overseas credit risk, freeing it of the need to write off bad debt. The CWB carries on its books about U.S.$1.7 billion of sovereign debt from a group of eight nations that have rescheduled their payments over five- to 25-year terms through the Paris Club. These long-term credits are a major source of income for the CWB, since it collects interest payments while obtaining funding at lower rates. However, this income has fallen sharply from C$92 million (U.S.$75 million) five years ago to C$36 million in 2005-06, as some countries have been rapidly paying down this old debt. In August 2006, Russia prepaid its remaining U.S.$827 million. Over the same period, CWB’s administrative costs have risen from C$50 million to C$70 million.

It is such underwriting by the government that is cited as an unfair trade practice in the negotiations for liberalized trade in agriculture products at the struggling Doha Round of the World Trade Organization. In an attempt to revive the talks, both the U.S. and E.U. have put on the table offers to dramatically reduce their farm subsidies, but on the condition that both Canada and Australia terminate their single desks.

International pressures aside, the current government says it seeks reform of the single desk structure for purely domestic reasons, the most important being to give farmers the freedom to sell their grain in any way they please by putting in place a dual marketing structure. Farmers would have the option to either commit their grain to the CWB operated pools, or they could choose to sell to traders outside the CWB system.

The CWB counters that a dual marketing system is a false concept, since, without its single desk powers, the CWB could not exist as the kind of entity it is today, selling grains "on behalf of " Canadian grain growers.

Life after the single desk

Despite its network of grain suppliers and overseas customers, the CWB would have to overcome several major obstacles to convert itself into a viable grain trading company.

Perhaps its biggest drawback is its lack of grain storage and transportation assets. In a free market, it would suddenly have to start competing with the same grain companies with whom it contracts for services now.

Another problem is the lack of a capital base. Through 70 years of existence, the CWB has returned all of its trading profits to its farmer constituents year in and year out, and has only a small amount of equity capital compared to the revenues it generates. Government guarantees on borrowing and overseas receivables means the CWB can operate on nearly 100% debt financing, but reform of the system would also mean withdrawal of these guarantees and require it to raise nearly U.S.$2.5 billion in operating funds through other means.

Though there are some parallels between the CWB and AWB, the Canadian organization is more dependent on its single desk. At its founding, the CWB was modeled after the AWB, but it has remained purely a state trading enterprise. The AWB has evolved a couple of stages beyond, having first made the transition to a farmer-owned corporation about 10 years ago, followed by a public share offering in 2002. These two moves provided the legal and financial basis for the AWB to diversify horizontally and vertically, such that the bulk of its revenues come from operations other than management of Australia’s wheat pool. These include the supply of all kinds of inputs and services to farmers, and even the trading of non-Australian grains.

The most important reform of the CWB was in 1998, when farmers were granted the right to elect 10 of the 15 seats on the CWB board of directors. The remaining five, including the chief executive officer, are selected in Ottawa. Previously the CWB functioned as an agent of the Crown, with all govern- ment-appointed commissioners.

Prior to the accession of the Conservative Party, the CWB had its own plans to transform itself somewhat along the lines of the AWB, in order to move into higher-margin processed products, so that farmers could share in the profits of some of the value-added activities that international grain companies often specialize in. However, just as the AWB depended on the single desk as a basis for its public share offering and entry into synergistic areas, the CWB’s retention of its monopoly is a prerequisite for planning any such transformation.

With the single desk in doubt, the CWB has begun a series of management reforms to better track its performance as part of an undeclared campaign to convince farmers that it does indeed operate efficiently, even in the absence of competition from other buyers.

The future of the CWB monopoly is of particular interest to the biggest users of Canadian wheat. Canada’s 10-year export average is 15.8 million tonnes, and the world’s largest wheat exporter, the U.S., has been Canada’s biggest customer in that period, taking 10% of the total. The second-biggest customer is Japan, with an average of 1.4 million tonnes per year, and Iran is the third largest at 1.2 million tonnes per year. However, Iran’s purchases peaked at 3.5 million tonnes in 2000-01, the most by any country in 10 years, and have fallen dramatically since.

It is notable that a number of the largest customers for Canadian wheat, with the U.S. being the main exception, are countries with government wheat import monopolies like Japan and Iran. Algeria, in theory, has liberalized wheat imports, but its state grain company acts as a de facto single desk for durum imports. Such large government-to-government contracts are naturally a prime target for an organization like the CWB, which must move almost 16 million tonnes of wheat per year. But with so many non-commercial factors at play, the question Canada’s farmers must ask themselves is whether they truly are getting the best possible deal enough of the time.

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