Canadian Wheat Board Dismantled

By James Wellstead – Exclusive to Potash Investing News

The Canadian Federal Government tabled legislation this past Thursday which will bring the end to Canadian Wheat Board (CWB), the ‘single desk’ marketer of Canadian wheat since 1943. The Marketing Freedom for Grain Farmers Act—likely to be passed in the Conservative majority parliament—“will give Western Canadian grain farmers the right to choose how they sell their wheat and barley,” said Minister of Agriculture Gerry Ritz, “just as they have when selling their canola or pulses.”

The privatization of the CWB will give farmers the choice of either voluntarily marketing their grain through the reformed CWB or entering the open markets through spot or forward contracts for the purchase or sale of wheat, barley and durum for execution after August 1, 2012. While the exact function of the CWB after its privatization is not yet completely understood, analysts are predicting the impact could revolutionize the agribusiness sector in the world’s fourth-biggest wheat and fourth-largest barley exporter.

A number of players are already preparing for this transition as ICE Futures Canada plans to unveil new futures contracts denominated in Canadian dollars for milling wheat, durum wheat and barley should the legislation pass.

“These contracts recognize Canada’s central role in the global agricultural marketplace and they serve an essential role in providing transparent price discovery and risk management tools,” said Brad Vannan, President and Chief Operating Officer of ICE Futures Canada.

US-based Minneapolis Grain Exchange (MGEX) has also shown interest of issuing contracts delivering Canadian wheat against its 128-year old spring wheat contract from mid-2013.

The CWB and grain production

Canadian grain farmers have had a rough start to the year as rain and flooding wiped out most acreage in the spring, but optimal mid-summer weather put them back on track. Statistics Canada recently reported that total wheat production in the West is expected to reach 21.7 million tons in 2011, up 3 percent from 2010, led primarily by durum wheat gains.

Barley has also increased in both production levels at 7.9 million tons, up 3.8 percent from 2010, and in yield to 62.5 bushels per acre in 2011, up 5.6 percent. Canola production levels have also increased, up to 1.1 percent from 2010, driven by record harvested area of 17.9 million hectares which was an increase of 6.3 percent from last year.

The outcome of Canadian wheat farmers in Alberta, Saskatchewan and Manitoba selling on open markets will likely be falling grain prices as producers compete for market share. The impacts of change will also make it easier for cereal traders to buy directly from Canadian producers, which would also increase the need for hedging instruments by companies like ICE or MGX mentioned above. It is also likely that considerable consolidation could take place amongst Canadian producers as smaller farmers are squeezed at the margins when forced to market their own grains.

Despite this, Canadian-based agribusiness CEO Mayo Schmidt said that these changes mean that “the future of agriculture in Canada looks brighter than ever.”

Potash overcapacity?

Despite earlier projections in the year, potash supplies appear to be catching back up in response to higher potash and food prices. Russian producer Uralkali revealed recently a 4 percent increase in output during the first nine months of the year to 8.06 million tons from its own operations and those of its subsidiary Silvinit.

Despite the demand for greater food production across the globe, China recently raised concerns that its own measures to increase domestic potash production may have pushed the potash market into overcapacity. But some analysts are sceptical of the Chinese claims and suggest these projections should be taken with a grain of salt.

Despite these data discrepancies, investment in potash production has been on the rise this year in efforts to meeting the growing food shortages around the world. Ethiopia in particular has been the site of intensive activity, with 5 new companies active in potash, new resources being discovered and over US $6 billion of investments directed towards Ethiopian potash mining projects.

Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company mentioned in this article.