Wheat and Western Canada

Econ 4300

2008

Monopolies in western Canada

• 1670-1870 – the Hudson’s Bay Co.– Monopoly seller– Monopsonist buyer– Red River colonists could not deal in furs

Monopolies in western Canada

• Canadian Pacific Railway– No competition allowed– 1888 the monopoly clause cancelled– The CPR was compensated – East ↔ West battle

• Monopolies were not a national concern

• Many industries were not competitive

Market Power Impacts

Agriculture Ag. Implements

Prices Production Prices Production

1929 100 100 100 100

1930 82 102 99 73

1931 56 98 99 19

1932 48 113 97 9

1933 51 104 94 14

Agriculture in the early West

• Continual protests over low prices

• Target – mostly Eastern interests

• Proposals: state owned grain trade, cooperative organizations

• Actions to help raise selling price and lower cost of goods purchased (today, FNA)

Wheat Pricing, early 1900’s

• World price → Liverpool price• Winnipeg price was the spot price• Spot price = Liverpool less transport, handling,

insurance, profit, etc.• Canadian producers – no impact on Liverpool

price• The Liverpool-Winnipeg price spread could

maybe be altered, and farmers viewed the spread as excessive

• Producer target → elevator companies

Elevators

• First elevator, Gretna, MB, 1881

• A large capital expense

• Large storage capacity because of seasonality of grain supply

• “Line” elevators, some farmer owned

• Elevators were grain merchants and warehousers

• Limited rail and terminal capacity

1906 Royal Commission

• Improper weighing

• Excessive dockage

• Rail car shortage and allocation

• Grading and inspection concerns

• Uncompetitive bids (telegraphing prices)– Courts agreed with grain co.s

• The Winnipeg Grain Exchange was not viewed as the source of the problem

Continued

• Terminal elevators – Undercleaned – poorer quality product

exported– Excessive dockage charges– Mixing of foreign material just to meet

minimum standards, even if brought to lower quality than producers delivered

Locally Owned Elevators

• Farmers raised capital to construct elevators• The Grain Growers Grain Co. operated as a

merchandiser for the farmer elevators• Low turn-over all most farmer elevators, little or

no profit• Locally owned elevators could not compete with

the line elevators• Provincial legislation to facilitate cooperatives

– MPE, SWP, AFCE Co.

• 1917 – GGG and AFCE combined → UGG

Post WW I

• 1916 – poor US wheat crop and Canadian crop badly rusted

• 1917 – spring, there started to be the realization there was inadequate wheat supply to match wheat future bought

• WGE requested government intervention

• Fed. govt established the Board of Grain Supervisors with wheat monopoly powers

BGS

• To control the distribution of grain as between domestic requirements and Allied purchasing agencies

• To prevent to the utmost possible extent neither value inflation or depreciation by speculation, hoarding grain, or by other means

BGS• Handled the rest of the 1916 crop and all

of the 1917 and 1918 crop• Note: There was a similar entity in the

United States during this time period• The WGE started trading again on July 21,

1919– Trading pushed prices up and by July 31,

1919, the Canadian Wheat Board was established with exclusive responsibility to handle the 1919 crop

CWB - 1919

• Was to be temporary

• Initial price paid, additional funds paid at the end of the crop year

• The CWB closely resembled the Australian Wheat Board

• Ended in the autumn of 1920

• Smooth ending, the CWB continued to use the private grain trade during the year

After the CWB

• There was a large decline in grain prices with the 1920 crop

• Wheat price fell from about $3/bu to $1.15/bu over several months

• 1917-1920 with CWB → prices high

• 1920 onward under WGE → price low

• Conclusion by some: WGE was responsible for the low prices

WGE post 1920

• Viewed as detrimental to farmers

• Perception that speculators were driving down the price to make a profit

• Producers at the mercy of speculators

• However, cash and futures prices were closely related

• Prices lowest at harvest

Speculators

• Take on price risk

• Part of price discovery

• Prices lowest at harvest because that is when all producers were wanting to sell and there is a cost to carry the grain to later in the year– Warehousig, insurance, and price risk

1930’s

• Prices fell by about one-half from 1929 to 1932-35

• Increased pressure by producers and some producer organization to abolish the WGE and replace it with a government agency

• 1935 – a wheat board was established, but it was voluntary (contract sign-ups)

Wheat Pools

• The wheat pools grew during the 1920’s• The pools had a common selling agency

to cut out the middle man• Paid producers an initial payment and final

payments if any surplus• Price was pooled over the year – same

price no matter when you sold• Pooling ended in 1931• Pools went on to operate as elevator co.s

Pools’ Central Selling Agency

• Selling agents domestic and abroad

• Initial price < market price

• Producers contracted, but delivery could not be enforced

• Post 1929, market prices fell and initial price > market → lots of deliveries

• 1931, the CSA was in the hands of the Fed. Govt to bail out the system

1930’s

• The Central Selling Agency, under the Fed. Govt, pursued “stabilization” policies

• 1935– The second CWB was established (voluntary)– Took 2 years to sell the inventories of the

CSA– Price < market in 1936-37 → no deliveries– Price > market in 1938 → received entire crop

Board to Continue?

• 1939 – an Act was introduced to maintain the board, set the initial price, and limit producer deliveries to 5,000 bu

• WW II– Wheat board retained as optional– Initial price increased due to producer

pressure– Yields high, markets lost (Europe),

accumulation of grain stocks• Marketing quotas (1940), acreage reduction (1941)

Board Permanent

• Sept. 27, 1943, the CWB ceased to be an alternative, and was given exclusive jurisdiction to receive Canadian wheat

• Trading of wheat on the WGE ended• A reaction to war time emergency, not a

policy change• Prices increased due to reduced supply in

the US and Canada• A concern about increasing prices in 1943

CWB

• After the war, the CWB was retained, not like in WW I

• Other crops were added to the CWB jurisdiction (oats, barley)

• In the 1980’s, oats were removed from the CWB

• Future – a current political issue 65 years later

CWB - pricing

• Initially, all deliveries of a specific grade were pooled and one price paid to producers

• Alternative pricing options exist now– Pooling, initial payment plus interim and final– Contract, hedged on Minneapolis – Full payment at delivery with no interim or

final payments– Other payment options could be forthcoming

CWB - pros

• Is able to price discriminate in premium markets and get higher prices (Japan, UK, USA)

• Coordinates grain movement to get appropriate grain at terminal locations

• Counters some of the market power of the few multinational grain companies

• Sales and promotion of Canadian wheat

CWB - cons

• Restricts producer choice

• A level of administration that is not costless

• No ability to off-load price risk out into the future

• Distorts trade (mostly from other trading countries)