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The Canadian Wheat Board (CWB): Assessing the future of wheat marketing in Canada. - Octoboer 20th, 2011
Brady Deaton: Welcome to FARE Talk where we set out to provide enduring discussions on contemporary topics relevant to our economy with particular emphasis on food, agriculture and the environment. My name is Brady Deaton Jr. Of the Department of Food, Agriculture and Resource Economics at the University of Guelph. I'll be your host.
Today, Dr. Murray Fulton and I will be discussing what's going on with the Canadian Wheat Board. Murray is an agricultural economist and a professor in the Johnson-Shoyama Graduate School of Public Policy at the university of Saskatchewan. He has a long interest in Agricultural policy and in marketing systems. He is the co-author of a report by the Economic Council of Canada titled, Canadian Agricultural Policy and Prairie Agriculture, and has extensively studied the structure and behavior of the agricultural marketing systems.
Murray, thanks for being with us.
Murray Fulton: Oh it's a real pleasure.
Brady: Murray, what's going on. How do we start this. How do we start to understand what's going on with the Canadian Wheat Board. Keep in mind there'll be people tuning in who aren't aware of the current situation.
Murray: Good starting point Brady. Here's what's going on. What we're seeing in Canada over this next year, I mean, by next summer, we will have in place in Canada a completely different marketing system for wheat and that includes Durum and Barley for human consumption, malt and barley.
When I say a completely different system, I mean that in the strongest sense. What is happening is the replacement of a marketing system that, while it's evolved in some considerable ways, has retained the major fundamental structure that it acquired back in the 1930s and the 1940s. That's a mixture of an administrative and market system with Canadian Wheat Board playing a key role in that grain handling and transportation system for those grains, wheat and barley, in Western Canada.
What we're going to have by next July is some kind of much more market oriented system without the Wheat Board, at least without the Wheat Board as a compulsory marketing agency, which has been the case since the 1930s. There is still a question, I'll come to this at some point about whether or not a voluntary Wheat Board might be in place. But regardless of that central role, that the Canadian Wheat Board was playing, will no longer exist.
There is considerable discussion going on by farm organizations, the industry participants, these are the railways, the elevator companies, the millers, as to exactly what kind of rules are going to be put in place come next July and August.
Brady: All right. One of the terms that's often used this Single Desk Selling Authority. My understanding is that that ensures that the Canadian Wheat Board can basically purchase all of the wheat and barley for export or human consumption. Is that for all of Canada or just particular provinces.
Murray: The Wheat board only applies to the Western wheat growing area. This includes the grain growing areas in [inaudible 00:03:40] Saskatchewan, and Alberta and up into the Peace River area as well. Wheat growing in Ontario does not for instance, does not come under the auspices of the Canadian Wheat Board.
You're right the term that is used is the Single Desk Selling. This is actually key to that central role that the Canadian Wheat Board has been playing. Just very quickly what this Single Desk means is that all farmers in the [inaudible 00:04:14] Wheat Board area are required by legislation to deliver their wheat or durum or barley for human consumption to the Canadian Wheat Board. The Canadian Wheat Board then on behalf of the farmers then markets that grain, both domestically and internationally.
What the board then .... This is an additional element in its, it's not strictly connected with the Single Desk though it's grown up with it. What the Wheat Board has done for the most part then is take that grain, all the receipts from that grain that it sells and offers back to farmers a single pool price. All farmers, basis the export position get the same price. Regardless of whether the grain that the farmer delivered to the Canadian Wheat Board was sold in November at a particular price or in May at a different price or even sometime in the middle of July at perhaps at a third price, all farmers would get exactly the same price.
Now, what I need to say is that, that's adjusted, the price that an individual farmer will get will be adjusted for where that farmer is located in the grain growing region. The reason is that, off of that price that the Wheat Board provides, has to come the cost of grain transportation and grain handling. Depending upon where you are and the kinds of distance you are to port, or the degree of competition that there might be between grain elevators, farmers will end up having a different deduction, one from another.
Brady: Okay, I want to work through, maybe a simple example of that, but I also want to then talk a little bit about the change that's coming because as I understand the change actually hasn't happened yet. I think there's some interesting nuances there. First let me just make sure I've got it straight.
If I'm a wheat farmer right now, under the Single Desk Selling Authority. Say, I've harvested my wheat crop, walk me through really quick, how I'll work with the elevator and the price that I'll receive. Again building off of what you said abstractly but say, I'm done with harvest, what happens to me now.
Murray: What farmers will have done and I won't give you all the gory details, but what they would have done in spring is signed a contract with the Canadian Wheat Board indicating roughly what their planting intentions were going to be so that they said, "Well, I'm going to be roughly seeding this much wheat, this much durum, for instance and malt and barley if that's what they were doing.
The Wheat Board has an indication of the amounts of grain roughly that are going to be out there. They adjust these planting intentions of course for yields that are occurring. The Wheat Board, if you like, has a basic idea of how much grain it has. It keep pretty good track of the quality that's coming in, if there is an early frost in a particular area, they know that that grains maybe marked down to a Number 2 or something like that.
As the Wheat Board, as their customers come forward and say, "We need grain of a particular type." They will go out to farmers and ask the farmers to deliver on those contracts that they had signed back in the spring. They may come and say, "In November, we want you to deliver 25% of that contract that you had signed." Farmers then would deliver that grain.
Here's where it's interesting. The farmers now have complete choice as to which elevator company they would like to deal with. What's happening at the same time is as the board puts out these calls to the farmers for grain, they, at the same time approach the elevator companies and have the elevator companies bid on the right to fulfill those contracts. For instance, Viterra, the largest grain handler may decide to bid on a particular amount and it is then up to Viterra to make arrangements with the railway to have sufficient cars in place.
Now, the railway also has to coordinate with the Canadian Wheat Board and I'll come back to that in just a second.
At the same time the elevator company has to go out and make sure it's offering the right kinds of incentives to farms to get that grain delivered, in this case to the Viterra elevators rather than to a competitor elevator.
You have, what I'm calling a mixture of an administrative system with the Wheat Board providing the broad demands that the system needs to meet and then having bidding going on or ordinary market competition to actually get the operational components to fit to those macro demands.
Let me just continue on that. A farmer will then say, "okay, I'm going to deliver to Viterra." They may for instance have a trucking subsidy in place that has encouraged them to go to Viterra, rather than to say one of the competitors. The farmer would deliver that. They would get, what's called and Advance Payment that pays them some proportion of what the wheat board anticipates will be the final payment due. The reason the board doesn't pay out the entire amount is that the board has to keep that contingency in place, in case the market should tank sometime in the future, the board would not be able to meet its obligations without incurring a deficit. This procedure occurs over the year, with farmers getting their Advance Payment.
At the end of the crop year, at the end of, sometime in July, the board totals up all the revenue that it had obtained, divides that through roughly by the amount of grain. This is done by various classes. You'll look at a top grade versus dropping down to a second grade and so forth and each of those will be done separately. They will take that total revenue, divide by the total number of bushels or tons that were sold and come up with that average price. The farmer then will get the difference between that final price and the initial price that they had been paid.
Now, often the board knows or has a pretty good sense part way through the year that they are going to be able to pay out a final price. They'll have some interim payments to farmers that get a little bit closer to that final price.
Now, meanwhile, the farmer also then has to pay the elevator company and the railway for the grain that they are hauling. They will have a bill that they will pay at the elevator that will break out the amount that the elevator company is collecting for storage and handling as well as the amount that the railway has charged the elevator company to haul that grain to port.
At the end of the day, the farmer gets that average kind of world price, which is the price at the port position, typically Vancouver but occasionally Thunder Bay, minus their costs of actually getting it to that location.
Brady: What this typically contract, so in the absence of then the Single Desk Selling Authority, farmers would deal with the grain handling and the transportation and typically bring it to a grain elevator and then get the price on that day. Is that too simplistic or ...?
Murray: Not too simplistic at all. That's exactly what will happen.
Typically, the elevator company will have contracted with the railway. Once again the farmer will simply see a ... In this case they'll simply see a final price at the elevator that they would get. If they deliver the grain that day they would get that price. If they wait the next day, they'll get whatever that price is.
That price is typically based off of futures market with what's called the basis subtracted off which is the difference between again, that price at the port minus all these additional costs.
Brady: Now. One thing I did want to touch on because I think it's really fascinating in a real difference between what's going on in Canada in terms of this and what might go on in a similar situation in the United States.
The actual change that we're talking about anticipating is occurring in August 2012. As I understand that the legislation actually hasn't come up yet. But, we can anticipate it because the current government has a majority. I wonder if in the United States, even if some say, the Democrats or the Republicans control both houses, if you would be as certain that a policy would go through, as certain as we are that this one is going through. In other words we're talking about it as it's going to happen because the conservatives have said that it's part of their policy and we expect it to go through without a hitch.
Murray: Yes. I guess what I would just add to that, you're absolutely right. I think this is actually one of the real advantages of perhaps our political system in this particular case is that one of the worst things that could happen is having uncertainly over what kind of marketing system we were going to have.
There is lots of debates going on in the countryside these days as to whether or not this is a good move or a bad move. Regardless if there is going to be a change, what you want to have is a situation that we have where we know that it's going to be one way or the other. This allows at least the opportunity to plan and to get expectations, at least somewhat in order before the change actually occurs. It would really be pandemonium, I think if it was uncertain as to which system was going to be in place come next August.
Brady: Real interesting difference. I want to move to a little bit of the debate about the capacity of the Wheat Board to increase prices. What I'd like to do is kind of ... I've reviewed some of the literature and I think I'd like to just lay out my understanding of it and get your comment. You may feel like this isn't actually where the conversation needs to be and that's find and we can move on.
When I was looking through as an agriculture economist it seemed like there was generally conceptual agreement on what needed to be done in order for the Canadian Wheat Board to actually help producers through its Single Desk Authority. That's one thing just to review is Canada is a small producer of, relatively small of, the total wheat production. Just say roughly 5% but a much larger percentage of the export market. It's like, in there it's roughly around 20%.
In order to that it seems that economists generally conceptually agree that it needed to be able to discriminate between different buyers of wheat between, let's say Japan and I don't know, another major importer, Indonesia. There seemed to be agreement on that. Then, they had to be able to discriminate and then they had to be able to stop the arbitrage, which basically just means that they can't sell a lot of wheat to Japan at a relatively lower price and then they turn around and sell it to Indonesia at a higher price.
Murray: That actually would be the other way around. What the Wheat Board would like to do is, and I think, has been practicing is selling, if you like shorting the Japanese market a little bit, keep the price up there selling at ... The Indonesians won't pay quite so much. They have a much more elastic demand receiving a lower price in the Indonesian market. What you don't want is, that grain going into Indonesia to find its way back into the Japanese market.
Brady: Okay sure. The key is that they can give different prices and then you're saying in this case it would make ... They won't want Indonesia to ship it back to Japan.
Murray: Exactly.
Brady: I think in our field there's general agreement about that and that if they can do that and also ensure that their cost, let's say, of handling the grain don't increase relative to an alternative system, then they can provide benefits to producers. That was kind of the conceptual issue. I thought, "Well there's broad agreement."
Then I thought from looking at a bunch of the articles and I'll make some of the links available to various articles on the website. Then, I thought well, there's few studies and they generally seem to disagree. Is that a correct characterization of again a little bit of the backdrop about how the Ag economists have tackled this issue.
Murray: Yeah. Let me just take that even a little bit further, I think, Brady because you're right. This issue about whether the Wheat Board had the ability to be able to as a single seller, whether it was able to get higher prices for farmers, in part is a reflection of the situation that was in place certainly at the time that the Wheat Board was formed in the 1930s.
What we have to do is cast our minds back to the debates that were going on, not so much actually in the '30s but in the '20s. The farm movement in Western Canada at that time had prior to the first world war had dealt with what they thought was the immediate problem, which was a lack of competition amongst the grain elevator companies. One of the major concerns by farmers say in 1900, 1905 was that they were getting squeezed on the amount that they were being charged for just handling that grain. The fees that they were paying were too high. There was also concerns about the power that the railways had and the prices that they were charging and the access that they were making available.
The farmers responded to those problems by creating a whole set of elevator cooperatives. These were by province and some of them were Pan-Western Canada with the consequence that by the beginning of the war, there was a consensus, I think that, that problem had been addressed.
Then there was a hiatus with the war and when the world came back to normal commerce starting in the 1920s the problem that the farmers saw themselves facing was no longer the same one that they had before the war but, it was a different one. They now felt that they weren't getting as good a price on the world market as they should be getting. They felt that there was, if you like, some market power being exerted. They were having their prices depressed, even at the same time that these companies were turning around and getting a very nice price on the world market. Classic case of both monopoly power that relative to the farmers and then these traders having some monopoly power on the world market.
The precursor to the Canadian Wheat Board was actually a voluntary marketing system established by three of the cooperatives in Western Canada, what eventually ended up being called the Three Prairie Pools, one in Alberta, one in Saskatchewan, one in Manitoba. They formed something called the Central Selling Agency where they agreed to take all of the grain that they were handling through their elevator systems. These are the same elevator systems that had been established earlier, and market that grain centrally on to the world markets. At that time, the major market was Liverpool.
That scheme was in place for about four years or maybe three. Then it collapsed, with the collapse of the stock market in 1929. What happened was that the Central Selling Agency and then these co-ops had made promises to farmers and in fact had given initial payments to the farmers, worth X amount and all of a sudden, the world price had fallen dramatically below X and They weren't able to cover off these ... They weren't actually able to raise the money that they'd already committed the farmers. They essentially had a debt on their hands.
The Board then was actually ... The first Canadian Wheat Board was actually created by government to take ownership of this grain that the Central Selling Agency had accumulated and to dispose of it in the world market. This of course was in the 1930s. One of the things that the Board did at that time was to dispose it in some kind of fashion that didn't aggravate the already very, very weak prices that the world was seeing at that particular point in time.
I say all of this because this was the environment and the mindset that the wheat board was then, when it was finally created in 1935 and then again reaffirmed in the 1940s that this was the mindset that farmers had that the board was a vehicle for getting additional market power and for practicing price discrimination of the kind that you so nicely described.
That view continued and I think for those of us who are interested in how marketing systems work, this is a great example where norms and, if you like institutions, get established. They're very hard to get rid of. Because this view actually prevailed then up until, I think roughly about 10 or 15, 29 years ago.
Interestingly it was still prevailing in the 1980s when there was actually a period of time when it was documented and this is part of this debate that was going on, in the 1980s about the role of the Wheat Board. It was actually documented in the 1980s that the board was able to price discriminate and get some higher prices. This of course was happening though at the time of the United States Export Enhancement Program where the Export Enhancement Program was in fact creating some quite dramatic divisions between the prices in the consuming countries around the world for grains.
The Wheat Board because of its Single Desk Selling, because of the fact that it could stop some of that arbitrage from occurring was, I think was able to actually obtain some of those benefits from price discrimination.
You're right. This was a focus of a great deal of discussion and part of the debate where people saying, "Well the board is able to do this and board is not able to do this." Part of the debate actually is because, I think in retrospect people were talking about different things.
Some people were talking about, "Was the board able to do it when the Export Enhancement Program was in place." Other people were saying, "Can it do it generally?" There is always the case of when you're not debating the same thing it's quite easy to come up with opposing views.
That's not to say that there weren't some sort of fundamental issues that were present between the economists that were debating these issues. I think here it's, I guess I would take a look at the current debate around what's the appropriate macro policy for instance in particular the US today. You have the one group saying, "It is imperative that we have an expansionary, some kind of expansionary policy, government spending needs to stay fairly high to provide some extra demand." Then, there is another group saying, "No, in fact what we have to do is get our fiscal house in order, cut back dramatically on expenditures and for instance perhaps even lower taxes."
In one way, that debate, the one today isn't ... It's partly about the economics. There's no question about that but it's also ... This current debate is about an ideological position. Do you believe that government has a role in the market or not? Do you believe in freedom of choice as the highest order or are there other considerations that need to be taken into account. I think that same ideological debate was alive and well in all of the discussions of the team, of the Wheat Board historically.
It wasn't just a debate about whether or not the Wheat Board was able to price discriminate, though it was about that but it was also about fundamental ideals about how society should be put together and what kind of rules should govern society and whether or not people should have ... What degree of freedom should people have in the choices that they make.
Brady: This seems to be a long standing debate in our field starting with ... Continuing from Adam Smith on to Hayek and Keynes. What is the appropriate economic role of government?
Murray: Very, very much so. It's funny Brady, at least funny droll kind of funny that, on the one hand we have some tools and concepts to say something about, which I think all economists would agree upon. We say, "Yes, let the market work, but if there're externalities then maybe we need to pay attention to this. If there's public goods that need to be provided, we need to think about that. We have to be concerned about issues of market power. That may be a reason for government intervention. If information needs symmetries, can certainly be another reason for government intervention. As well as I think some sense of keeping some kind of equity amongst citizens in a society." That one's much less agreed upon but there is certainly some people that would include that on the list.
Despite the fact that, we have that agreement on those concepts and how they might be used, it's fascinating how often it steps over into, what I think is another debate, which is, "Should government be involved at all." That's often how it's framed. It becomes black and white rather than shades of gray.
Brady: The American institutionalists they, I'm speaking mainly of Warren Samuels, and Allen Smith and Dan Bromley, it seemed to me, of my reading of what they were saying is, they didn't find this comparison of a market without government and a market with government so useful because they argued that government was ... We were always usually comparing different forms of government and governance as opposed to the absence of one. You think that's ...?
Murray: I think that, that's absolutely correct. The more that I've looked at this and in particular ... Again you want to come back to the Canadian Wheat Board. The Canadian Wheat Board provides a really good indication. It's a very good little case study of this where it becomes, when you really start to think about this, you can have a so called free market, marketing freedom. This is the way that the new system that we will be going to is being portrayed.
But, what is forgotten by many people is that that only works because you have government doing a whole range of things, making sure for instance that there are courts that if there are disputes, they can be settled. The government of course is providing a whole set of property right that are absolutely critical to the operation of not just this market but, in fact all markets.
In addition, there is a set of social services that are being provided by government to farmers, to the workers that are employed by the railways or the grain elevator companies that are all hinged on some kind of government intervention.
To take out that government completely, we don't know what that picture looks like unless we take a look perhaps at the transition that occurred say in Russia as it moved from the Soviet Union to its current state where you saw that almost complete breakdown of the system until they needed to put something back in place. What they've put back in place of course is something very, very different than what we've put in place. They have put a set of rules in place. This is a set of rules largely determined by a very powerful oligarchy as opposed to government in the sense that we know it.
Brady: Let me, even if we kind of agree, I think conceptually that government will be in play in either system, with and without the Wheat Board, the change in government or the change in governance structure usually benefits some and hurts others. What is your thinking about how the change, this change moving from the Single Desk Selling Authority to its absence, how will these different interests be affected and what are those different interests from your standpoint?
Murray: Let me just step back. What we're seeing here, it's a fascinating change. As an economist, as a social scientist, this kind of natural experiment of a fundamental change in a marketing system doesn't happen very often. This is an interesting thing to be able to watch if you like in real time because ...
Brady: Sorry, but is this substantively different than for example the change in other, the Australian Wheat Board or something like that? I mean, have there been other examples of this or this ...?
Murray: Oh yeah. Yeah, there are lots of other examples. The Wheat Board in Australia would be an example. You can go into developing countries around the world, in the last 20 years, one of the big things was the dismantlement of some of these state owned schemes for say, the marketing of coffee or what have you, where they were replaced with markets ... Those were equally as fundamental. We're not unique in that, but it is our chance to see one of these things up front and personal.
At least what I've learned over the years, as I've looked at these things. I can take a look at what's going on in Australia but, at some level I just don't understand what's going on because I don't know all of the institutions. I don't know the history, I don't know all of the little things that actually make a big difference to the story. I certainly don't know that when it comes to what's going on in a developing world. I can get the broad sense but to be able to really see the more micro changes that are going on, you have to know the system quite well. For me, this is my own, I guess personal one.
These kind of major structural changes, the political scientists call them Episodic Changes where there is an abrupt change, you move from one system to the next and then you go for a substantial period of time where you don't have any ... You have change then there is modifications and so forth but the basic structure stays more or less the same.
These things occur in large part because, and now I'm going to the political science literature. These structural breaks occur because typically one party that has been opposed to it, either opposes what was the existing system or believes that a new system would benefit them substantially. They get to the point where they have sufficient political power. The political scientists call this, they express this in terms of de facto political power to actually be able to change the rules of the game.
That's what we're seeing today is, a change in the rules of the game and it's come about because finally there was, and this was a combination of the electoral results plus the interest of particular groups in supporting a change and making that case to the government where there's been a group that now says, "We want change." And there is the actual political means to be able to do that.
This suggests to me that these are difficult changes to bring about. To bring this about means that there must be a group that sees this as being highly beneficial to them. I think those groups are fairly well understood. I think it's clearly the railways. I think clearly the grain handling companies feel that they are going to benefit from this move. There will be other smaller players in the system that also see a benefit. They typically have not had a lot of effect in terms of the lobbying the system. I'm thinking about consulting companies that are providing services to the railways or to farmers or so forth. They see a new market for their goods and services but they weren't particularly influential. I think some of the grain traders, if we can separate them from the grain companies were certainly in favor.
If that's the case you're getting this push to change the system from a group that believes that they are going to benefit. They will then likely put a set of rules in place that in fact will benefit them over what the current system is. Otherwise, why make the change.
Does this tell us anything? Well it says that if all we have is a zero sum gain, a zero sum gain is one where when you change the system from one if you like from A to B, the total size of the pie remains the same, then, if one group benefits then the other group or groups or whatever group has to actually become worse off. That suggests that there are some other players if it's a zero sum gain and I'll come back to that, that there is other players that are going to not benefit from this.
My guess is that, that's going to be perhaps certain grain handlers that aren't able to compete with some of the big companies like Viterra and Cargill. I think some of them may find themselves at a disadvantage in this new world. I think you also have to put into that group of people who are likely not to benefit some of the farmers.
Some of the farmers I think will find themselves better off but I think there's going to be a group of farmers who are going to find themselves less well off. These are going to be farmers who probably are located further away from places where they can get some competition from grain elevator companies where they are not located near the main lines of the railways. These are perhaps some of the smaller farmers who don't have a large volume of grain with which to bargain. These are probably some of the people who would end up not benefiting from this change.
Now, if this change that we're about to see is not a zero sum gain, but in fact it's positive sum gain, then, it is possible for, if you like, all groups to potentially benefit. Now, how could this be a positive sum gain. Well, the only way it can be a positive sum gain is if by making this change you create an opportunity.
Well one you reduce some of the transaction costs and so forth in the system and you're able to make the system operate more efficiently. If there is efficiency gains that comes with this, then, that would be one source of potentially some gains by all of the participants.
The other possibility in addition to efficiency gains is that the system could create a better set of incentives for innovation and creation of new value. That new value then would be one that could be distributed amongst all of the players.
I think there's been a lot of discussion around whether or not ... This is implicitly, it hasn't been an explicit discussion around whether or not this transformation is zero sum or positive sum. We won't know the answer to this until well off into the future and even then it's going to be very hard to go back and do the [inaudible 00:37:56].
In my mind the more interesting thing is the rhetoric that's used. What us see is the group that is clearly lobbying and pressuring for the change, they cast almost all of their discussion in terms of there being either efficiency gains or gains in terms of innovation. This becomes almost a mantra that they repeat. This could well be true, but it is an unexamined position that I think is repeated almost by [inaudible 00:38:30].
I think it's because there is this recognition that the way to sell this is to paint it as a positive sum gain. Whether it is or not I don't know. Certainly from those people that want to make the change it's highly beneficial to paint it as a positive sum gain because that at least allows the potential for everyone to gain.
Now, let me just finish this off by saying even if it is a positive sum gain, that doesn't mean that everybody gains. The new rules of the game will determine whether or not everyone gains or not. I think if we take a look at most of the changes that have gone on not just in grain handling but in other systems, there are inevitably groups that are left behind. The rules simply are not conducive to a particular ... Some groups are benefiting and I think that, that's likely to be the case here. There will be some of the players that won't benefit from this change.
Brady: I always use this example in my classes of asking students why basketball players get paid different salaries. The normal set of responses are some are fast, some jump high, some can pass the ball, some have charisma, some don't. You rarely hear them mention that the height of the rim is 10 feet.
Murray: Yeah, that's right.
Brady: Because clearly if you change the rim from 10 to five feet, you would set in motion immediately a very different set of comparative advantages. I always, because I love basketball, always think, and I'm not that tall, had the basketball rim been shortened, I would have been in the NBA.
Murray: Yes
Brady: I think, if I hear what you're saying, you're saying, well we've got a rule change and it's very likely that it will change the comparative advantages amongst farmers and grain handlers. We'll have to wait and see whether that change of the height of the rim actually ends up expanding the number of people who watch or the money coming into the NBA or to the Basketball League.
Murray: A very nice analogy Brady. I may use that if you don't ...
Brady: Feel free.
As we go forward Murray, what kind of questions should we be asking ourselves as people who are watching it and are involved in it? What are your thought? How are you going to watch? What do you think we should just take with us though this entire experience, as you put is unique to us to get to watch up close at least?
Murray: Yeah. Very good question. I am going to put my economist's hat on and say, I think this is a wonderful opportunity to actually address a question that has intrigued economists almost since day one but, really certainly since Coles wrote his classic paper on the nature of the firm, that is ... This discussion actually goes way back before Coles and that is, "How should we organize a system?"
If we think about a grain handling transportation system, what we need is, if this is going to operate effectively and make people better off and provide incomes and livelihoods and careers for people, it needs to operate efficiently and effectively. To do so, there's a whole host of coordination and cooperation problems that have to be solved.
You have to go back to the beginning of our conversation of that whole process involving getting grain from a farm to port and then off to a miller half way around the world. In fact, it's even bigger than that because you have to think about what the farmer was growing and why they were growing that particular crop and were they growing the right crops that year to meet the things that consumers were going to be looking for.
How do you organize these systems so that they behave in a way that creates the incentives for people to do the things that need to be done but also creates something that's beneficial to society. This is in my mind the question that economics has been trying to answer for the last 300 and some years.
We've got some ways along that. We say markets are one way a very good way of allowing this to occur. We have Adam Smith, you mention Hayek. Hayek in his 1945 paper does a masterful job of saying here is why the market will work. All you need to do is pay attention to price, you don't need to know why the price is going up. All you need to know is the price is going up and you adjust your actions accordingly and by doing so you will make the system operate and coordinate in a way that is beneficial. This is, if you like Hayek's version of the invisible hand and I think his presentation of it is really astounding.
But, and here is the but, what Hayek overlooks or let's put it this way, Hayek's story works fabulously as long as you don't have what we now come to look as the reasons why markets might fail. Hayek's story works wonderfully well if you don't have externalities. If, people's decisions based upon solely on price don't have negative impacts on other groups. If that price ... This is of course is why we've moved, tried to internalize into prices some of the environmental impacts that particular decisions are having.
We need to worry about externalities. We need to worry about public goods. Public goods don't work ... You can't watch prices and make good decisions about the provision of public goods. Information asymmetries where you need to know more than just price, you need to know something about the quality of the individual or the quality of the product that's being produced. This quality is difficult to observe then, that market system may not work very well or it has the potential not to work so well.
Then, finally, this system relying on prices works very well if you have lots of competition. Take away the competition and you start to have some significant problems due to market power. What I'm going to be doing is, I look at the [inaudible 00:44:51] transformation or the transformation of the grain handling and transportation system is to take a look at what are the externalities in the public good, in the information asymmetries and the market power factors that are in play in this particular sector.
Do we need to worry about some of those or can we just let the market work? What I find fascinating right now is that this debate is very much in its infancy. That's probably to be expected although people knew that this might happen. Until the conservatives really announced their intentions, it wasn't real. People, now I think are really coming to the table to debate these issues and discuss these issues.
Where I think we're still at on this looking forward and I think this is where the work needs to go in, is to say, which of these issues are really important and, which, they're not so important. What we've seen so far is a bit of a fall back to that ideological position that we discussed earlier. For instance there is just here a week ago there is a Working Group on Marketing Freedom that presented their report to the Minister of Agriculture Jerry Ritz. That's and interesting title. Working Group on Marketing Freedom. This seems to me to put the ideological perspective up front and center, rather than saying, what are these economic things that we really need to think about to make sure that this market operates efficiently and effectively down the road.
If I take a look at that particular report, they have taken account of some of the public goods. They have recognized that there're some public good that are no longer going to be provided once the Canadian Wheat Board disappears.
Brady: Murray could you just give us an example of one of the ... Sorry to interrupt you but example of one of those public goods.
Murray: The one that they actually paid particular attention to is the funding for research and development and market development. Right now the Wheat Board is collecting a levy on the part of farmers that goes to those activities. Without the Wheat Board in place that levy wouldn't be collected and there would be no way to fund some basic crop productivity research for instance. Interesting this working group has recognized that, that's an issue and they've got some recommendations that I think are pretty good on that score.
On that other hand if you take the issue of say, market power, they have for the most part said, "No, market power is not going to be a problem. We are going to have a perfectly competitive market and we don't have to worry about access of producers to produce cars in short lines, access of groups that are outside the major grain companies to say the port facilities, so that they can actually sell to international buyers." That issue has largely been ignored. Largely because I think there is a built in sense that there's going to be a fairly competitive market operating.
This is in spite of what we know particularly about the rail industry. This is a highly monopolistic industry with significant market power that has actually been commented on in number of successive reports over the last 10 years. This is where I think we need to get the debate is, we have to actually really think very, very hard about whether or not there are market power issues and how we might address them in this new system.
I guess Brady to kind of wrap up, what's interesting is there's a set of issues that I think the industry is now just getting their head around. They're looking at the question, "What can we do to put in place a system for next summer that addresses some of these potential imperfections?" Now, there's a lot of debate as to whether or not these imperfections are going to be there or not but the debate around this is starting to happen.
What's of course interesting is that it will be exactly the same issues that will be the focus of ongoing discussion in the grain handling industry for probably the next 75 years if we go back to what I said earlier, we probably won't have a regime change for at least that length of time.
In a sense it is those set of issues that ... I would say, as well, as well as, this question about who ultimately wins or loses from this change in the rules, whether the pie does get bigger and to what extent it gets shared. These are going to be the issues that are not just on top of mind here for the next nine months but in fact on top of mind for the foreseeable future.
Brady: Well, I think that is a perfect ending point for this podcast. Murray I've learned a lot and I really appreciate you spending time with us, talking about your thoughts on the Canadian Wheat Board.
Murray: Thanks Brady. I've really enjoyed this.
Brady: Thanks for joining us at FARE Talk. We hope you will continue to check our website for updates and the latest podcasts.
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