Canadian wheat headed into the ‘Bozo Zone’
When Steve Jobs returned to Apple in 1997, it was a company in deep trouble. Its stock was $3.19 a share and it was six weeks away from bankruptcy. Today, Apple is worth more than every company on the Russian stock market combined. Jobs’ turnaround made him a business legend.
One secret to Jobs’ success was the belief that people will pay a premium for quality. If you were competing on price and volume, someone else would always undercut you and you would end up in what he called “the bozo zone”.
For decades, this was also the secret to the success of the Canadian Wheat Board. By focusing on quality – high protein content – it earned Canada a reputation for the best wheat in the world, and customers would pay more for it.
This strategy worked. Flour mills and pasta makers in America and around the world would rather opt for Canadian wheat, even at a higher price, than wheat from the US or elsewhere. This spurred several unsuccessful trade challenges from U.S. farmers who claimed the Canadian government was somehow subsidizing Canadian grain farmers. But in every single case, Canada and the Wheat Board prevailed.
In a global grain market that is dominated by five giant companies, the Canadian Wheat Board was unique. It was the only entity that worked to maximize profits for farmers.
In addition to pursuing quality and premium prices, the Wheat Board had other ways of ensuring the maximum return for farmers. As a “single desk” it was the only buyer and seller, and used its leverage to negotiate better prices with railways and private grain companies. It lowered costs by providing logistical coordination to ensure that trains and ships were loaded quickly and efficiently. If there were extra earnings, they went back to farmers – not to the CEO. (By comparison, CP Rail’s Hunter Harrison earned $49 million last year).
All of that is now gone, dismantled by Agriculture Minister Gerry Ritz and the Harper government. Grain shipping is a mess, the brand of Canadian wheat has been tarnished, and the prices farmers are getting for their wheat has collapsed.
Farmers now getting less than half what they earned
Last year, a bumper crop coincided with record high global wheat prices – a once-in-a-generation phenomenon that should have delivered a record windfall.
Under the single desk between 2007 and 2010, for every dollar a customer paid for wheat, the farmer received about 90 cents, while rail and grain companies received about 10 cents. Earlier this year, in 2014, farmers were getting 41 cents on the dollar, rail companies 11 cents and grain companies 48 cents.
Incredibly, much of the crop hasn’t even left the prairies. The government’s (largely empty) threats of $100,000 fines per day or week for delays in grain have been meaningless. No one has followed through.
Ritz also decimated the Canadian Grain Commission, which was responsible for quality assurance. Canada’s reputation for high-quality grain is being eroded. According to Reuters, customers are getting lower quality wheat than expected, grain is being mixed in with other crops, and some shipments have been light – in one instance, 375 tonnes light.
With the drop in quality has come a drop in price, by $12 a tonne. Iraq recently bought 50,000 tonnes of Canadian wheat at the lowest prices in the world – cheaper than from nearby Russia. For the first time in memory, Canadian durum is selling for less than American durum.
None of this should come as any surprise: Ritz was warned that this would happen if the Wheat Board’s single desk was scrapped, but he dragged western Canada’s grain farmers into the “bozo zone” anyway.
Ritz’s new solution is to “privatize” what is left of the Wheat Board – rejecting a $200-million offer from a farmer’s group – and apparently giving it to a multinational company for free.
This will solve nothing, because none of the market challenges have changed since the Wheat Board was first created. Farmers are still at the mercy of railways and grain companies, whose total control of transportation infrastructure creates a crushing disparity in negotiating power that is no different today than it was in the 1920s or 30s.
We all recognize that if you take the risk, you should reap the reward, and grain farmers still take the greatest risks and face the greatest losses, year after year.
The imbalance in power is too great for the market to overcome – except when there was a Wheat Board with the power of the single desk to advocate for farmers. The maximum return for producers – not railways or grain companies – is best not just for farmers, but for farm communities. The question is whether too much damage has been done, or if we’re stuck in the bozo zone for good.