They’ll never take our FREEDOM! …to market our wheat.

On December 15th 2011 the Canadian Government passed bill C-18.  The super catchy title of this bill was “An Act to Reorganize the Canadian Wheat Board and to Make Consequential and Related Amendments to certain Acts.”  The focus of this bill was obviously the Canadian Wheat Board (CWB).

Existing in its current form since 1934 the CWB was implemented after the great depression to try and help out wheat farmers.  The CWB was given exclusive rights to the marketing of wheat from western Canada.  This meant that all farmers were required by law to sell their wheat to the CWB.  The CWB would then sell the wheat on the world market as one large company.  The CWB is often referred to in the press as a monopoly.  As in, they have monopoly on the marketing of the wheat for all western Canadian farmers.  There is a less common term that is actually more accurate for the powers that the CWB possesses, it is a monposony.  This means that they are a single buyer in a market with many sellers.

The most common example used to explain monopsony is a large company that is the only source of employment in a city.  The company can then force workers to take lower wages because they have no other choice but to work there.  The CWB had a government backed monopsony in place but there was one major difference.   The CWB’s goal was not to force costs down to produce cheaper products as is normally the case. Instead their goal was to maximize the returns on wheat sales and return the surplus profit it generated to the farmers. So yes, they maximized profits, but profits were given back to the farmers.

On August 1st 2012 bill C-18 will come into effect and farmers will be free to sell their grain on world markets directly. The debate on this issue is fairly intense and there has been a number of studies that focus on the breakup.  I will not cite the studies directly; instead I will summarize the pros and cons of the CWB covered in the large body of literature.

Argument for the CWB
The first point is that the combined size of the CWB gives farmers more market power. There is more to this, however, than getting a better price when selling their wheat.  Wheat that is produced in the CWB zone must be transported by rail to ports for export.  CN and CP are the two big rail companies that operate in that area.  Farmers bring their grain to elevators and then pay by the container to have it shipped.  So the CWB is not only able to get a better price for wheat when they sell they are also able to purchase more grain cars and get better deals on shipping.

Second, there have been studies showing that the CWB is able to charge a premium internationally for Canadian grain because it has a good reputation for a reliable supply of high quality grain. It is argued that the loss of the CWB means a loss of this premium.

Argument against the CWB   
The main argument against the CWB is that it has a poor performance during times of high price volatility in grain markets.  The farmers and politicians that were fighting (and succeeded) to change the CWB argued that individual farmers would be better off if they could sell at spot prices when prices were high than rely on the constant large scale contracts of the CWB. Some studies found that the effect of missing out on spikes in market prices meant that overall the CWB served no purpose as it provided no overall benefit to farmers.

The less common (and more generic) argument is that the issue is freedom.  Freedom is what people want, and the CWB denies them that.  So on August 1st, farmers get their freedom.

The Rest
The CWB is not being abolished altogether. It will still exist as a voluntary entity.  So proponents of the changes say that this means more choices for farmers.  Supporters of the CWB claim that with the removal of the mandatory monopsony means the CWB loses all of its power, becomes useless and is likely to dissolve in a few years.

So there you have the two sides of the story in an extremely simplified form.  Both sides agree that this change will open the markets to large multinational grain corporations.  One side claims that this means that smaller farmers will be forced to sell their farms because they will be unable to compete. The other side claims that even smaller farmers will be able to get better prices as the large the world market competes to buy their goods.

There is no way to know how this will pan out unfortunately but I do see one large issue.  Most of the anti-CWB arguments were about how the free markets would be better for everyone.  These types of statements are normally made by people that have either never learned real economics or have forgotten.  Market failures occur when there is imperfect competition. Most intro to economics courses base everything they teach on perfect competition.  The main function of government intervention is to acknowledge and correct for market failures.

So now I will provide you with the million dollar word of the day that describes one such market failure. You can use it to impress your friends and intimidate your enemies.  The farmers will have the freedom to sell onto the world market but that market is controlled by a few, very large, corporations.  This is what is known as an oligopsony. This means that the idea of a “free” world market is not entirely true and therefore the outcome might not be what intro to economics leads us to believe. More than likely the oligopsony market will force prices down and squeeze out the small farmers that cannot compete with the lower costs that large grain corporations achieve through economies of scale (make lots of something so each unit becomes cheaper), as predicted by some of the analysts.

The argument is now over however because the change has been made and even after a number of appeals it has held up in courts.  This means that beginning August 1st we will be able to finally see which ideas from the academic papers were correct.  Unfortunately this experiment is taking place with the incomes of real people so my hope is that the change is a good one and that Canadian farmers will end up better off.

For a more complete look at both sides of the argument you can read my paper entitled “The Canadian Wheat Board in 2012: The Beginning of Marketing Freedom”.  It contains references to a large body of academic work on this topic.
(edited to change the linked file to a pdf)

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