CWB Announces Final Payments for 2002-03 Crop Year

(December 15, 2003 - CWB)    The Canadian Wheat Board today announced the final payments that farmers will receive for durum, feed and designated barley marketed by the CWB in the 2002-03 crop year, which began August 1, 2002 and ended July 31, 2003. There will be no final payment for wheat.

Final payments represent the balance of the money owing to farmers after their grain has been sold by the CWB, and after operating costs have been deducted. The cheques, dated December 12, 2003, were mailed today and will be received by direct deposit on December 16, 2003. Final payments, in dollars per tonne, for the base grades in each pool account are listed below. The total payment is based on the value of grain in store at Vancouver or the St. Lawrence.

A complete listing of payments for all grades in dollars per tonne and dollars per bushel is posted on the CWB’s Web site, under the Payments link at www.cwb.ca.

There is no final payment in the wheat pool account because total earnings in the wheat pool are $9.86 per tonne less than what was actually distributed to farmers through initial and adjustment payments. Based on a pool size of slightly less than 8.7 million tonnes, the CWB has calculated the shortfall at $85.4 million. Payments that farmers have received to date will not be affected

Shortfalls are covered by the Government of Canada by virtue of its guarantee of initial payments. The CWB has submitted its financial statements to the government. The government will conduct its own independent review of the amount and will consult with the CWB in this regard.

The shortfall in the wheat pool was the result of a number of extraordinary factors that affected pool returns in 2002-03, including the late harvest and drought-reduced crop, the market share that was gained by countries like Russia, Ukraine and Kazakhstan and the surge in the Canadian dollar.

The below backgrounder details these factors.

Controlled by western Canadian farmers, the CWB is the largest wheat and barley marketer in the world. As one of Canada’s biggest exporters, the Winnipeg-based organization sells grain to more than 70 countries and returns all sales revenue, less marketing costs, to Prairie farmers.

Backgrounder

The deficit in the wheat pool account came about as a result of the concurrence of a number of extraordinary factors in 2002-03. These factors are described in detail below.

The 2002 crop
The CWB came into 2002-03 with tight wheat stocks (about five million tonnes compared to a 10-year average of 5.7 million). Low stocks, combined with an almost 50 per cent drop in production due to the drought in the summer of 2002, meant less wheat to sell. The U.S. and Australia also experienced dry condition and Europe experienced flooding, further reducing expected production levels, which caused the price of wheat to climb over the summer months, as the following chart indicates.

The early sales pace
During the summer of 2002, the CWB sold grain to meet the needs of customers and to spread out sales in order to get the best price. Sales were being made at a cautious pace, however, because crop conditions deteriorated as the summer progressed and harvest had yet to begin, which caused a surge in prices. It should also be noted that a significant portion of sales during the early fall period were actually old year stocks, as new crop is typically not available for sale until September or October. These sales are accounted for in the wheat pool returns received by farmers for the 2001-02 crop.

The 2002 harvest
While the Prairies received much needed rain in the fall of 2002, the precipitation caused huge delays in harvest and severely downgraded the quality of the crop. Many farmers were not finished combining until December, and in some cases, harvest dragged into May of the following spring. Only 37 per cent of the 2002 wheat crop graded No. 1 or 2 CWRS, compared to an average of 65 per cent. Most importantly, the total volume of No.1 and No.2 CWRS was only 3.2 million tonnes, the lowest level ever on record.

Contract sign-up
When wheat prices were peaking in late September, the CWB did not have a clear picture of the quantity and quality of the wheat crop that it would have for sale because of the late harvest. This situation was further exacerbated by the fact that there was a small crop and therefore, a small margin for error. Farmers were slow to commit to delivery contracts with the CWB because they didn’t know what they were going to get off the field, if anything. The October deadline for Series A contract sign-up was pushed back to November 15 to give farmers a chance to get their crop harvested. That proved to be insufficient: farmers continued to sign up well into December.

Stepping back from the market
The CWB limited sales of wheat during the early fall period (late August, September 2002), due to concern that there would not be enough good quality grain to meet the needs of western Canada’s best customers, namely Canadian millers, Japan and the United Kingdom. Sales continued to be made into these markets, but the CWB stopped serving other markets because it could not afford to over-commit and then short its best customers. Concern over its ability to supply its core customers with higher quality wheat led the CWB to approach its customers with requests to downgrade or defer purchases of No. 1 or 2 CWRS. The CWB also bought back some sales contracts so that this grain could be allocated to higher return markets and to solidify long-term business relationships with its core customers.

The “minor” exporters
By the end of September, prices in the commodity markets began to drop. The large volumes of wheat harvested and marketed by countries of the former Soviet Union (Ukraine, Russia, Kazakhstan), which the industry often refers to as minor exporters, were the prime reason. The grain industry became aware that a large crop had been harvested in these countries. However, because it was lower quality wheat and because these countries had not been a major presence in the market for many years, global markets were caught off guard by just how much grain they eventually sold, especially to customers who usually buy good quality wheat. By selling at values of about $100 US below market values in North America, these countries were able to gain a much larger share of the international wheat trade than any other sellers – including the CWB – had expected (about 39 per cent over the course of 2002-03). In reaction to this aggressive selling by the “minor” exporters, the EU also resumed its export subsidy program. As a result, 60 per cent of the world trade in wheat in 2002-03 was sold at less than commercial US values.

How buyers reacted
Prices continued to fall through November and December. By this time, harvest in Western Canada was finally winding down and the CWB was at last getting a clearer picture of the crop available for sale. However, achieving a fair price for the wheat crop became very difficult, as buyers contined to use blends with a higher portion of lower quality wheat from the “minor” exporters. Buyers also purchased hand-to-mouth because they believed prices would drop further, or they had already forward-bought enough grain to satisfy their needs.

The wheat market overall
After peaking at a value of $189.32 US per tonne in early October, nearby futures on the Minneapolis exchange fell steadily, reaching a low of $121.35 US on June 27, 2003. In addition to ample supplies of lower quality wheat and limited buyer demand, prices were also pressured downward in the spring of 2003 by much improved crop prospects in many of the major exporting nations including Canada, the U.S. and Australia.

The Canadian dollar
Another challenge was also emerging. In January of 2003, the value of the Canadian dollar began to strengthen against the U.S. dollar. Over the following six months, it strengthened from $1 US = $1.5672 CDN on January 2, 2003 to $1 US = 1.4048 CDN on July 31, 2003, reaching a high of $1 US = $1.3350 CDN on June 13. This had a direct impact on wheat prices because CWB sales are priced against the U.S. markets. Estimates of the impact on the final pool return for wheat due to Canadian dollar appreciation are about $12.25 per tonne.

The CWB Pool Return Outlook (PRO)
The combination of the drop in the value of wheat on the commodity markets and the increase in the value of the Canadian dollar was huge. Nearby futures on the Minneapolis exchange in Canadian dollars declined by over $135 per tonne from the fall of 2002 to the spring of 2003 (see chart above). The CWB’s PRO followed wheat markets up and down. However, because it is a pooled price for the entire year as opposed to a spot price, changes in the PRO were neither as extreme nor as sudden. The PRO for No.1 Canada Western Red Spring (CWRS) 13.5 per cent protein peaked at $312 per tonne in October 2002 and fell to $250.20 by July 2003. This is a decline of $61.80 per tonne. It could not fall any further because the federal government guarantees the initial and adjustment payments made to the farmers of Western Canada through the CWB.

Conclusion
The combination of market events in the 2002-03 crop year – the precarious supply situation due to severe drought during the growing season and adverse weather conditions during harvest, the selling activity of the former ‘minor’ exporters and the dramatic rise of the Canadian dollar – were unprecedented and unexpected. The government of Canada guarantee provided to farmers is specifically designed for unforeseen or unpredictable events that cause rapid downturns in the market.

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