Legal Uncertainty Persists Over Canadian Wheat Board Dissolution

By James Wellstead- Exclusive to Potash Investing News

A group of Canadian wheat farmers has filed a class action lawsuit against the Federal government worth CDN $15.4 billion as a result of dissolution of the Canadian Wheat Board (CWB) late last year. The suit is just the latest controversy since Bill C-18—the Marketing Freedom for Grain Farmers Act—was introduced three months ago, raising legal questions over the marketing environment in which Canadian wheat farmers now operate.

With Bill C-18 receiving Royal Assent into law on December 15 of last year, farmers now have the choice of either voluntarily marketing their grain through the reformed CWB marketing desk 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 new law has divided wheat farmers across Canada’s Prairie provinces, the legality of the government’s actions in passing the bill remains uncertain. In early December, a federal court judge ruled the government had broken the law by introducing the bill as the provisions in the 1998 Canadian Wheat Board Act required a farmer plebiscite before any major changes were made to the organization.

Following this decision, eight of the CWB’s former farmer-elected directors who were removed when Ottawa took control of the board last month, announced they would ask a Manitoba court on January 17 to suspend the open-market law until another court can determine whether the law is valid.

And now, participants of the class action lawsuit allege that because the CWB is being dissolved without approval by a farmer plebiscite, the actions amount to confiscation of farmers assets without due compensation. As a result, the plaintiffs are requesting financial compensation representing the value of the wheat board’s tangible and intangible assets, including premiums paid to wheat and barley farmers totalling $7.4 billion and transportation and logistics savings of $7.7 billion over the next 20 years.

Federal Agriculture Minister Gerry Ritz reacted to the lawsuit Monday, stating that “[i]t’s disappointing to see further misguided legal action against western Canadian farmers and their right to the same freedoms as farmers in Ontario already enjoy.” Ritz also said that “this baseless action in no way affects the duly passed Marketing Freedom for Grain Farmers Act or western farmers’ ability to forward contract right now for an open market on Aug. 1, 2012.”

The legal basis pursued in the suit, Saskatchewan lawyer Tony Merchant argues, stems from the 1995-96 “Crow Rate” settlement in which the Federal government paid Western farmers about CDN $1.6 billion for the elimination of a grain freight subsidy. Merchant argues that the forgone price premiums and transportation and logistics savings the monopoly offered farmers also require similar remuneration.

However, Calgary, Alberta-based lawyer Gerry Chipeur recently told Reuters that “it’s going to be very difficult to say you made less money this year and the reason you made less money is because you don’t have a monopoly anymore.”

Legal uncertainty for farmers

The implications for farmers yields are yet to be determined. As the fourth largest wheat producing nation transitions to a free market system, there are likely to be great impacts felt across the marketplace.

While some farmers have already begun to enter into delivery contracts for and after the August 1 date, confusion remains for contracts before that date. Doug Chorney, president of Keystone Agricultural Producers, said that “[2012] may be one of the most challenging years for the grain industry that we’ve seen in our lifetime”

But despite the uncertainty for individual farmers, Canada’s largest grain handler, Viterra (TSX:VT) has said that it expects to see higher earnings and grain handling volumes as a result of the CWB dissolution. Viterra has also said that it feels court challenges are unlikely to delay the privatization of Western Canadian grain markets.

Economic uncertainty and potash implications

Outside of the Canadian legal uncertainty, the global economic picture continues to keep farmers in a “wait-and-see” phase of potash purchases. As a result, Potash Corporation of Saskatchewan (NYSE:POT) stated this week that they plan to extend cuts in potash output by halting operations at its Allan mine for four-weeks beginning February 4.

Mosaic Co. (NYSE:MOS) chief, Jim Prokopanko also noted that “seasonally slow buying patterns this year have been exacerbated by economic uncertainty,” which has “caused distributors around the world to become cautious and we anticipate significant sales volumes will be delayed until our fourth [March-to-May] fiscal quarter.

But despite the uncertainty surrounding Canadian grain farmers’ mode of engagement with potential grain customers, there is little likelihood that potash producers will see short-term impacts arising from the elimination of the CWB. According to Statistics Canada, of the 12.29 million metric tonnes (MT) of potash produced in Canada between June and March 2010-2011, only 322,000 MT was destined for Canadian crops. And while Canadian production of potash grew by 63 percent over the same period the year before, Canadian shipments of potash grew by only 36 percent.

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