Monday 12 September 2011

The Canadian Government Wheat Monopoly

Canada Is Taking Aim at Its Wheat Monopoly says the WSJ:

The Canadian Wheat Board is poised to lose its monopoly grip on the country's wheat sales. Canada's Conservative Party captured a parliamentary majority this past spring, and newly elected government officials took that as a mandate to end the wheat board's reign.

The ripple effects from eliminating—or even weakening—the board's power would be widespread. Wheat prices, which already have experienced extreme highs and lows over the past three years, could become more volatile, some analysts say....

Farmers who favor the board, including its current chairman Allen Oberg, contend the benefits far outweigh the cross-border price differences that can emerge. By controlling the whole crop, the board has considerable power in global commodity markets to ensure Canadian farmers get the best price. Farmers also get an up-front payment that is backed by the government, and the board doesn't aim for a profit, so more money goes back to farmers than under an open-market system....

The board basically sells the grains and then divides the returns among the wheat and barley growers in western Canada.

So farmers get the average price over the course of a year, never capturing the top of the market, but also never selling at annual lows.

The board has added other pricing options over the years, including allowing farmers to sell their crop up-front for a fixed price.

The estimated return for a Canadian farmer in the board's traditional sales program is estimated at $7.19 to $7.48 a bushel for the spring wheat coming out of the fields now. That compares with Wednesday's U.S. cash price of $8.85 a bushel, according to MGEX.

The wheat board cautions against trying to compare the price Canadian farmers are expected to receive against current market prices in the U.S., saying the timing, location and system of sales are all different.

19 comments:

  1. Based off of the discussions we've had in class about producer and consumer surplus, it seems that disbanding (or weakening) the Canadian Wheat Board would decrease dead weight loss. If the CWB controls the supply of wheat by acting as the middle-man to consumers, they artificially keep the price high. Weakening the CWB would decrease producer surplus, increase consumer surplus, and increase total surplus. The benefit of this action clearly goes to the consumers, but the necessity to keep prices stable and the promise of steady income to farmers could outweigh the fact that the current price doesn't maximize surplus.

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  2. If prices become so uncompetitive that producers no longer find it lucrative to produce at the current levels ( it is no longer profitable Marginal Cost) only those who produce at the lowest MC will produce, and Canada will likely become a wheat importer rather than an exporter. In the case of staple goods (wheat, milk, eggs....) I personally find it more important to have a stable supply and pricing in the market rather than the most effective allocation systems. People need these things either way.

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  3. I agree with what Nic said about the increase in total surplus as a result of weakening the Canadian Wheat Board. Although currently total surplus is not being maximized, it is probably not going to be easy to weaken the CWB. The benefits gained by wheat farmers in the current system are large and concentrated. The benefits of lower wheat prices are dispersed among a large array of consumers that are probably not willing to put up a fight to save the extra few cents. The farmers on the other hand will be more willing to fight to keep the current system because they will be heavily and directly impacted by the lower prices.

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  4. To aim for efficiency we want the total surplus to be as big as possible- it does not matter how it is split up by consumer and producer surplus. Currently the monopoly could be experiencing extra costs. Some could include transaction costs of extracting consumer surplus or increase production costs for the farmers.

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  5. Based on this article, it does not seem as if Canada has a very bright future in the wheat exportation business, and will rather end up being a big importer of it. Wheat is a very necessary good to the sanctity of a nation.

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  6. Though some could say there is merit in receiving "secure" prices during a time when the economic climate is so volatile, it seems that the farmers should be able to determine whether or not they desire this security.

    If they want to test themselves in a competitive environment and experience true market high's and low's, it seems as though they should be able to explore the possibility of doing so.

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  7. The CWB is very important for farmers as it protects them from variability and guarantees them a certain price. I would not view the CWB as a middle man in the traditional sense, as the institution is representative of the farmers themselves and is not out to make a profit. The real question is whether or not the existence of the CWB significantly increases the price artificially. I don't think a slightly or even moderately higher price is a good reason to throw out an overall good institution. Many US farmers have been forced to sell harvests to true predatory middle men at low prices and of course many small US farmers have been run out of business because they do not enjoy protections such as the CWB provides. Would you rather have a family, or a corporation farming your food?

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  8. This article does make it seem as though Canada will become a wheat importer. The Canadian farmers are probably affected by the subsidies given to US wheat farmers.

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  9. I agree with Sumner. I think that CWB is very important because it protects farmers and guarantees farmers a cerain price. This is a question to ask if farmers want to have a competitive environment to higher their profits or a secure system that gives them certain profits regardless of the economic climate.

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  10. I think by ending the Canadian Wheat Board, that Canadian wheat growers are going to have less of an incentive to produce wheat. By making sure that everyone receives an average price, there will be some players who are worse off, while some are going to be better off. This is not a Pareto Improvement, and could result in a deadweight loss to society.

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  11. I agree with Nic’s post. Even though weakening the Canada wheat board may lead to surplus maximization, it will lead to market instability and uncertainty in income streams for farmers. The CWB imposes price controls to look out for the best interest of both producers and consumers. In the United States, the market settles the price as higher than what is set by the wheat board but the security of a steady income and a stable market should also be considered.

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  12. CWB, as a monopsony, acts in the farmers' favor in the sense that it reduces volatility in the market and gives them more market power in the global market as one. But this has a price. As is the problem with all monopolies,there is a deadweight loss of allocative inefficiency. If CWB returns all its profits to the farmers instead of the one-gain one-lose case in typical monopsonies, this would be a questionable idea because it means the farmers are in effect paying the administrative cost to set up an institution to inflict loss on themselves and benefiting no one in terms of surplus. Additionally, there's no way for the farmers to know if the CWB can do any better than it currently does to market their products. They also have no way to know if the price CWB currently gives is fair, which I guess may be not. Without the CWB, at least not in its current role, farmers may achieve greater profit by diversifying their products and marketing strategies. They will have more incentive to invest to improve their products because the quality now matters more and they can have discretion over the fate of their products instead of having to sell them to CWB for an average price. There will be loser though-the farmers who produce products of inferior quality. But there may even be new entrants who emerge because of the opportunities arisen and higher price without the monopoly. New competitions from other agribusiness companies may also result in better marketing schemes and investment for the farmers.Basically, this shares similarities with communism which has been proved wrong by practical experience. The american farmers are much better off with handsome government subsidies anyway.

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  13. While the CWB has been moonlighting as a farmer friendly organization, the association has, in reality, developed a monopolistic stronghold on the wheat industry and pricing mechanisms. While taking away the CWB's power may initially cause some instability for farmers, it will cause a great societal benefit by reducing a deadweight loss caused by allocative inefficency.

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  14. This comment has been removed by the author.

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  15. I think CWB is good for Canadians. Wheat market is a worldwide market with global competition.It's an oligopoly market consisting of many countries instead of a single monopoly market in Canada. CWB represents Canadian farmer's interest and help defend domestic wheat industry against international imports. CWB also benefits consumers with constant wheat price. The Canadian can abolish CWB, but can't abolish other wheat boards in the world. With a global view, there is a prisoner dilemma here. It would not be a good choice to keep the CWB if other countries refuse to abolish their wheat boards. But if all countries abolish the wheat boards, it will result in a more free global market.

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  16. I think if the conservative party comes in and debilitates the Canadian Wheat Board, producer surplus will decrease some because prices will fluctuate;however, I think the increase in consumer surplus will outweigh the decrease. The total combined surplus will be larger which is market efficiency. Although the market will be more efficient, the sellers (the wheat farmers) will probably protest this idea because they will be the ones having less of a surplus. Because one party benefits more than the other in this case, I guess this wouldn't be an idea of Pareto improvement.

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  17. The solution here seems fairly simple. We have discussed over and over in class how the free market minimizes inefficiencies, and allows surplus maximization to occur without requiring extensive research or guesswork. Maybe it is time for farmers to compete with one another again in Canada, and for the monopoly on wheat production to end.

    I also think that Canada is similar enough to the United States that it should be somewhat alarming that their wheat prices are so much lower than ours, maybe they should take a page out of our playbook when it comes to structuring their wheat industry.

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  18. There is no need for the agency to protect the wheat farmers from the volitile market price of wheat. The farmers have access to financial interments (options/derivatives) in order to lock in prices/guard against fluctuations in wheat prices. It should be at their disgression rather than a Canadian wide organization.

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  19. Although the risk of not having controlled wheat prices is a concern for the farmers involved, opening up wheat to the free market can create extra value. The wheat monopoly is likely creating dead weight loss in the industry, and, while it may create some drastic changes, removing the regulations will ultimately make the market healthier.

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