Canadian wheat meets the free market and prospers

The Financial Post reports:

The Port of Hamilton seems like one sprawling, muddy construction site on a wet and windy day in late October. While a ship is loaded with grain at the Richardson International Ltd. terminal, trucks line up to have their loads of Ontario-grown wheat tested for quality.

Next door, construction of a new $50-million grain terminal by G3 Ltd. is well underway, with operations set to begin before the 2017 harvest. And down the road at Parrish and Heimbecker Ltd.’s terminal, instantly recognizable because of its two flesh-coloured storage domes, workers lay cement bricks for a new $45-million flour mill — the first such mill to be built in Ontario in 75 years.

More than $200 million has been invested in agricultural handling facilities in Hamilton since 2008, marking a renaissance of sorts for the city known as Steeltown even decades after the metal industry began slumping.

Like any economic rebirth, it is hard to point to one single catalyst. But the privatization of the Winnipeg-based Canadian Wheat Board four years ago and 2,000 kilometres away certainly stands out as one.

The upshot of that controversial decision is a rapidly changing grain transportation network that is affecting Canadian farmers, grain handlers, railways and ports from the West Coast to the Arctic and the St. Lawrence Seaway. And it’s big business: Canada’s grain and oilseed exports were worth $5.9 billion in 2014, according to Agriculture and Agri-Food Canada.

This year’s bumper wheat crop, expected to exceed 30 million tonnes for just the second time in 25 years, will be a key test of whether the rapidly evolving supply chain has adapted to a free-market world after decades of being hamstrung by a government-backed market monopoly that was established partly because Canada is one of the most difficult transportation markets on Earth.

All of this came one year after the dismantling of the Canadian Wheat Board, which since 1935 had held sole responsibility for marketing Western Canadian wheat and barley and played a key coordinating role in their transportation.

“The whole system started to back up,” said Ron Bonnett, president of the Canadian Federation of Agriculture. “We’ve really been pushing to expand export markets, but if we get a bottleneck in the railroads, we end up with a situation like we had in 2013.”

The end result was a huge backlog that left grain rotting in storage and cost Western farmers an estimated $5 billion in lost or deferred revenue.

Angry farmers in 2014 took their grievances to the federal government, which responded with minimum grain-hauling requirements for the railways and fines for non-compliance.

Two years later, those mandatory minimums have been removed and many stakeholders say the Canadian grain-hauling system is slowly but surely changing for the better as the supply chain adjusts to the end of the Wheat Board’s tight control over marketing and transportation.

They’re going through what we did 30 years ago!

“The CWB’s mandate was to pay farmers a base price for their grain, identify markets where the grain could be sold, negotiate the best price, deliver the product, issue advance cheques, and make final payments after the crop was sold,” David Emerson wrote in his CTA review. “If the wheat market went up, farmers captured the profits, and if the market declined, the government absorbed the loss.”

We called that SMPs.

The privatization of the Wheat Board let the private sector negotiate directly with farmers and choose the best route to get their crops to export markets.

The response by grain handlers was immediate. Three companies — Viterra Inc. (which was acquired by Glencore PLC for $6.1 billion in March 2012), Richardson International and Cargill Inc. — handle approximately 75 per cent of Canada’s grain exports, and all three have invested in significant new terminal capacity since the Wheat Board lost its monopoly on Aug. 1, 2012.

A lot of investment.

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