Summary of Western Canada Crop Trade
I made a mistake on my previous report. Canola is one variety of rapeseeds. Based on the canola council of Canada (2017), for oilseeds to be named canola, they must pass specific standard: less than 2% erucic acid in the fatty acid and less than micromoles of any one or any mixture of 3-butenyl glucosinolate, 4-pentenyl glucosinolate, 2-hydroxy-3 butenyl glucosinolate, and 2-hydroxy- 4-pentenyl glucosinolate per gram of air-dry, oil-free solid.
Based on the figure 1 in my previous report, the canola in southern Alberta got the highest average price over the nine zones, with CAD$471per ton, and northeast Saskatchewan got the lowest price around CAD$463 per ton. Besides the soil and weather factors, the transportation distance is another reason to affect the price.
According to the comments from Sean in the last report, I traced the transportation as the factor to affect the price. However, I found lots of things I need to catch up on. Here is what I learned from this month. As we know, most grains were made and exported from Western Canada. Based on my understanding, there are three sectors directly involved in the trading systems: farmers, transporters, elevator and dealers. Before 2012, we had another sector Canadian Wheat Board as a coordinator for wheat and barley.
For farmers, they chose specific varieties of wheat, barley and another crop in their field. According to the Canadian Grain Commission (CGC, 2017), the three major wheat classes: Canadian Western Red Spring (CWRS), Canadian Prairie Spring (CPS) and Canadian Western Amber Durum(CWAD) accounted around 65%, 5% and 15% of the whole insured acres in western Canada. From 2014 to 2016, 80 varieties in CWRS, 24 varieties in CWAD and 20 in CPS were planted in these insured acres (Figure 1) on average. 22 varieties in CWRS, 12 in CPS and 18 in CWAD were planted over three years, respectively (the data of 2013 from CGC doesn’t make sense, so I did not use it).
Figure 1. Varieties number of three categories from 2014 to 2016 in Alberta, Manitoba and Saskatchewan.
After the Marketing Freedom for Grain Farmers Act, wheat producers need to sell their grains to licensed dealers or elevators directly. There are four different licenses in Canada: grain dealer, primary elevator, process elevator and Terminal elevator (CGC, 2017). In crop year 2017-2018, 150 grain companies got one or more licenses. Among them, 84 got grain dealer, 62 got the primary elevator, 35 got process elevators and 29 got the terminal elevators. Four companies: ADM Agri-Industries Company, Cargill Limited, Parrish & Heimbecker, Limited and Viterra Inc. got all the four licenses. 52 companies only have grain dealer license. The license issue was used for ensuring the producer got the payment, and making sure the dealer and elevator follow the regulations. According to the Agricorp, the producers, grain dealers and grain elevators were supervised in Grain Financial Protection Program. Fro my understanding, the producers only need to sell their products to the licensed dealer or store the grains to the licensed elevator, set up a payment timeline, and report the dealers who fail to pay the cheque in the timeline. The dealer and elevator have more responsibilities on application of the license.
Everything looks easy to run. I do not have strong background on business and I am not sure I truly understand the trading system. So, I have some questions here: the producers need to sell their product to the dealer with a price. I guess this price must be lower than the price list on the FDQ, since the producer is not involved directly in the international market. But it seems that the price between the producer and the dealer is a business secret. In general, the dealer wants to buy the grains at a low price and the producer wants to sell the grains at a high price. So how do the producers calculate the cost of the input in the farm, and usually what percentage do the producers want to gain from trading? Is there any model or any data/document I can read? Do they have a guide basic price each year based on different grains?
The dealers, based on the license, can be divided into big dealers and small dealers. In the handbook of the dealer and elevator, a business less than 15,000 was defined as a small dealer. I prefer to divide them into three categories: big dealers with licensed elevators, they have right to buy the grain in a relatively low price, they have place to store the grain and wait for the grain price high in the international market to sell; dealers as representative for some international companies, they can buy the grain directly from the farmers with lower price than the big dealers and directly shipped to overseas, they do not need the space to store the grains; small dealer without elevator and not representative for any company , they can have cooperation with the companies only have elevators, but they are less competitive than the previous two. And my question is how the third category survive in the market? They have higher chance to broke, and the producers have higher risk not get the payment.
The third factor in the system is transportation. In Canada, they are two major railways using for grain transportation. Based on the Canadian Transportation Agency, there is a ‘Maximum Revenue Entitlement’. Each year, the agency establishes the value for CN and CP. If the two companies exceed the number, they will get the penalty. Based on historical data from 2006 to 2016 (Figure 2) (Statistics Canada, 2017), Saskatchewan accounted about 50% of the whole grain delivery, followed by Alberta (32%) and Manitoba (17%). The crop year 2014-2015 (Figure 3), the two companies got the highest ‘maximum revenue entitlement’ above 700 million dollars. I calculated the correlation between real revenue and the MRE, the number is low only 22%, that means there is no significant relationship between real revenue and the MRE. But the amount for delivery and the MRE correlated 97% from 2006 to 2016. I read the formulation for the MRE, but I did not understand it clearly, I need to do more work on this part. And the MRE is set in April, how could the expert to predict this accurate?
Figure 2. Delivery amount of the grain in Alberta, British Columbia, Manitoba and Saskatchewan from 2006 to 2016.
Figure 3. the MRE value for Canadian Pacific and Canadian National from 2000 to 2016.
The other thing I am confused about the trade before 2012 and after 2012, the difference between them is Canadian Wheat Board. Some reports said this is a bad policy, without CWB, the Canadian grain service is getting poor, and the international buyer is not happy about that, Canadian grain producers lose the benefit from the international market. The Canadian producers lost their power on transportation and the price setting. However, some other reports said Canadian producers got more the money from international market because the trading freedom. If I am a grain producer, I prefer the CWB, they are professional on selling, allocating grains, they are experts in the local and international markets. If I am a transporter and buyer, I prefer the trading freedom. It is easier to negotiate the price with farmers one by one. So I wonder if we have any association like CWB established after 2012.