Farmers tiptoe into newly opened Canada wheat market

As some of the world's biggest grain traders fan out across Canada's Prairies to compete openly for farmers' wheat and barley for the first time since World War II, they're finding more farmers like Paul Balicki than Stephen Vandervalk.

Balicki, from Saskatchewan, says he's been unimpressed with early offers to buy the spring wheat he plans to grow this year, which he's been required to sell to the Canadian Wheat Board since 1943. Like many of the region's 100,000 farmers, most of whom have no memory of a free-market system, change comes hard.

He hasn't sold a single bushel.

The single-desk system - the last remaining such grain monopoly in the world - is set to expire on August 1, after the Conservative government passed a law in December. But the new system is effectively already in place with grain handlers now scrambling to lock in forward price contracts.

There's still some uncertainties and some variables, says Balicki. I don't understand all of it. It's still early, and everyone wants to protect themselves.

By contrast Vandervalk, of Alberta, a longtime critic of the CWB's monopoly over the region's spring wheat, durum and barley, couldn't wait to get started. Even before sowing a single seed, he's sold most of his anticipated barley crop and more than a third of his wheat to companies like Viterra, Richardson International and Parrish & Heimbecker.

I can lock (prices) in and that's what business is all about, said Vandervalk, president of the Grain Growers of Canada. It's a totally different mindset. I've put more research into increasing my yield and quality of wheat in the last month than I have probably in my life.

Despite the new law throwing open the competition for prized spring wheat, durum and barley supplies in the No. 4 wheat exporter, change hasn't come quickly and farmers, grain handlers and processors are signing deals with a large amount of caution.

Foreign firms like top U.S. farm co-operative CHS Inc, just opened a Winnipeg office, and Germany's largest grain trading house, Alfred C. Toepfer International, has started to collect Prairie processing facilities.

But the wave of mergers and acquisitions that washed over Australia once it gave up its wheat monopoly in 2008 hasn't materialized in Canada, and grain contracting has been sporadic.

The limited volume of deals for western grains early in Canada's open market era, leaves farmers and grain buyers alike exposed to price risk at a time when volatility has roiled grain markets. It also means supplies may remain up for grabs until nerves calm in the industry.

Grain handlers are grappling with how to set prices that have been under monopoly control for generations and fear that the CWB might yet survive the latest effort to strip its control spring wheat, durum and malting barley, key ingredients in baking, pasta production and beer brewing respectively. Canada is the biggest exporter of all three.

Everything is very, very uncertain and this is exactly what we were trying to avoid, said Wade Sobkowich, executive director of the Western Grain Elevators Association.

The companies now combing the countryside are counting on two things to invigorate business.

First is the outcome of a court hearing in Manitoba starting on Tuesday to decide whether the new law should be immediately suspended.

Second is the launch, on January 23, of new spring wheat, durum and barley futures contracts on the ICE Futures Canada exchange, which will give the industry better ways to set prices and hedge risk, assuming there is adequate liquidity.

COURTS TO RULE ON CWB

This week, eight former directors of the Wheat Board, all Prairie farmers, are asking a judge to suspend the law breaking the CWB's monopoly until a court decides whether the law is valid. In December, a federal judge ruled Agriculture Minister Gerry Ritz broke existing law by not allowing a farmer vote before moving to end the monopoly, but the judge also said that the ruling did not affect the government's new legislation.

The overriding element is the uncertainty relative to the court action, said Keith Bruch, vice president of operations at privately held grain handler Paterson GlobalFoods. There's still risk. You can never predict the outcome of a court case.

Grain handlers are all too familiar with the pitfalls of assuming that the Wheat Board monopoly is dead.

Courts stymied attempts by Canadian governments in 1993 and 2007 to remove parts of the CWB monopoly on barley, leaving grain handlers to pay penalties for contracts they could not fulfill.

Maltsters scrambled to secure supplies after the board did not honor contracts maltsters had signed with farmers.

In those times, there was a great flurry of activity on the assumption that (the monopoly change) was happening, said Bruch of Paterson. It cost a few companies some money and that certainly factors into the thinking today.

Handlers are trying to include caveats in their supply agreements with buyers to minimize or avoid penalties in case the CWB monopoly survives. But it's unclear whether customers will agree, Sobkowich said.

Canadian millers, who include Archer Daniels Midland and P&H Milling Group, have said they may tap U.S. wheat to manage risks around no longer being able to secure all their supplies through a single supplier.

VITERRA FIRST

Farmers, grain handlers and millers are making deals, albeit slowly and carefully, said Jean-Marc Ruest, vice president of corporate affairs for Richardson International, Canada's second-largest grain handler after Viterra and ahead of Cargill.

We've signed up quite a few contracts (with farmers), and on the sell side, there's a lot of interest from all corners of the world, international and domestic buyers, Ruest said.

Viterra aggressively bid for farmers' grain the day after the Conservative government's monopoly-busting bill became law in December, signing contracts days ahead of its rivals.

We've had some extraordinarily large days of buying and sales commensurate with those purchases, Viterra CEO Mayo Schmidt told Reuters. Compared with any other period in our history, those volumes have been very significant.

But others say signing contracts has been slow going.

In an average year, farmers might sign forward contracts for one quarter of the total crop of canola - an oilseed that has always sold in an open market.

Bruch doubts farmers will lock up that high a percentage of Western Canada's spring wheat crop in advance of the harvest, given the uncertainty and with the Minneapolis futures market pricing next year's spring wheat crop at a rare discount to on-hand supplies.

LEARNING CURVE FOR FARMERS

After Australia ditched its wheat monopoly in 2008, some farmers struggled to wield modern trading tools such as forwards and futures to make marketing decisions.

Western Canadian farmers already have open-market savvy by selling other crops like canola, but spring wheat is more complex with its several classes, grade discounts and protein levels adding more variability to prices, said Brenda Tjaden Lepp, chief analyst of FarmLink Marketing Solutions.

I guess there is more risk associated with the volatility in those quality premiums and discounts, but other than that, it's really not a lot different, said Tjaden Lepp, whose Winnipeg-based company helps farmers market their crops.

CWB 2.0

For those who want to continue selling to the board, it isn't planning to go away.

Wheat Board CEO Ian White said last week that the board will offer farmers forward price contracts and pooling options for 2012/13 crops, but the board has not started making deals.

The CWB held the upper hand in the past, through its monopoly, but in the open market, it has some key disadvantages.

The Wheat Board, like some private grain marketers who lined up some of the CWB's export sales under the monopoly system, does not own country elevators and port terminals to move Western Canadian grains.

Some companies without their own crop-handling networks are already offering to buy supplies from those who do, either for export or to move them to elevators in the United States, Sobkowich said.

Companies like Toepfer, and U.S.-based Bunge Ltd, Archer Daniels Midland and Gavilon historically played the marketer role in some Wheat Board sales, even though they do not own crop-handling networks.

That's where such companies, including the Wheat Board, might have a good match with big grain handlers, whose bottom lines rely on volume, a grain industry official said.

Without its monopoly, however, the board's significance is bound to shrink to being one of many Canadian grain marketers, instead of an unavoidable part of Prairie farming.

I had one farmer say, 'What are we going to talk about after the board's gone?' Sutton said. We always have the railways to complain about.