David R. Henderson  

August 1: Freedom for Western Canadian Wheat Farmers

Peter Thiel's Question... Education and Disruption...

On August 1 this year, the Canadian government's monopsony over western Canadian wheat will end. For 68 years, farmers in western Canada have been able to sell their wheat legally only to one entity: the Canadian Wheat Board. But starting August 1, they will be able to sell their wheat to anyone they wish.

One Manitoba farmer, who farms near where I grew up, is Rolf Penner of Morris, Manitoba. Rolf is a particularly articulate spokesman for farmers' freedom. Here's an interview he did with host Charles Adler last year. Some highlights:
2:45: "The main thing is I have not been able to sell my wheat and barley to who[m] I want, when I want, for how much I want."
2:50: "Freedom is so very precious when you don't have it."
5:09: His evidence that the monopsony has held the price of wheat to farmers down.
5:20: The first contracts were signed in December 2011 once it became clear that the monopsony would end. "Arbitrage is working."

Rolf sent me an op/ed he has written for a local publication and gave me permission to quote from it. Here are three key paragraphs:

In an open market, it was claimed, all our cereal grains would head south, flooding the U.S. and thus crash the market. But when we look at the prices offered by our local elevators today and compare them to what's available in the States, we see that they are just as good here, and in some cases a bit better, than they are down south.

Rather than seeing the grain pulled south, the price has come to us. It's called arbitrage. We were also told, "Okay, it may work everywhere else in the world and with every other commodity in Canada, but it could never possibly work with wheat and barley." Well it can and - surprise, surprise - it does.

In the past, under the monopoly system, it was not uncommon to see Prairie producers offered prices heavily discounted from those seen in the northern States (under the former Board's "Fixed Price Contract," for example). This column has documented those differences numerous times in the past, as have the Western Canadian Wheat Growers Association, risk-management specialist John De Pape, Informa and various economists such as Al Loyns, just to name a few. Not only is it nice to see those discounts disappear, it's great to see that they disappeared so quickly.

I'll be near his place next month and he has offered to take me out on a combine for a couple of hours, something I never did when I was kid in the Carman, Manitoba farm community. One big difference: the combines usually have air conditioning now, something they didn't typically have in the mid-1960s.

Comments and Sharing

COMMENTS (8 to date)
Ken B writes:

Good news indeed and incidentally a victory for those willing to support supposed 'fringe' political parties on principle. Let me explain for Yankee readers.

Some time ago the Canadian Right was splintered by the formation of a prairie based party, Reform. In general it was more small-l libertarian than the conservative party in Canada (not entirely but certainly on economic issues). The result was some easy elections for the centre and left but eventually the Refom pulled the other parts of the right at least some distance towards smaller government. Now the re-unified right is the ruling party, and this action was a priority for the old Reform.

I was one of a small number of Ontarions who supported Reform from the start. *bows*

Nyongesa writes:

I must admit to being shocked by the Headline and then the content of the post. I mean this 2012. I guess chalk another one up to; assumptive freedoms rank much higher in the minds eye than realities on the ground, for the average western citizen.

joshua writes:

Ending monopoly and restrictions.. free trade... of course this all sounds awesome to me. But - apologies if I'm being dense - I'm struggling to understand what the effects will be.

Were Canadian wheat farmers generally paid less than the market price, meaning that costs might go up for Canadian consumers but there will be more wheat on the world market? That's what I gather from the farmer in the interview, but then why was the farmer in the commercial opposed to it? That commercial sounded like farmers were generally paid more than the market price, meaning the government was subsidizing them and that costs would go up for Canadian consumers. Comments on The Economist article talk about gov'ts propping up farmers like that. Or did the Wheat Board's price difference depend on the time and/or the farmer, so that it depended whether farmers were getting penalized or subsidized? Of course either way it's bad for both individual freedom and overall utility, misallocation of resources, etc, but I'm just trying to figure out which it was and what will happen going forward.

Ken B writes:

@joshua: Competitive farmers did worse under monopsony; favoured inefficient ones did better. A solid block of farmers wanted to keep the wheat board. You can guess why.

Mike writes:

As someone who grew up there and was around for the opening salvo to end the monopoly, I think one factor in the successful termination was the lack of interest by leftist intelligentsia. Although the topic has some components--agriculture, small business, government intervention--much beloved by the left, the fact is that Canadian farmers have moved substantially from the left to the right over the past couple of generations, and are almost exclusively interested in global markets. As a result, they are no longer in full communion with the community activists, humanities professors, labor leaders, etc., who normally would be on to this.

joshua writes:

@Ken B: thanks. I was assuming that the Wheat Board paid the same price to all farmers, so farmers who grew more would make more, even if the going rate was manipulated. Are you saying there were favoured inefficient farmers getting paid more than the others even though they grew less?

Ted Lightly writes:

Ok, remember that the Wheat Board was not really a grain buyer, when the farmer delivered to the board the grain was 'sold' at a preliminary price, paid for with a guaranteed loan from the government. When the year was over the total selling amount was divided amongst the farmers in proportion to the amount they delivered. In other words they all received the average price over the year for that type of grain. Since the wheat board had a monopoly on Western high quality (hard high protein, standardised milling properties) grain, they could extract a premium from the markets that would pay a premium. Now the grain companies can do that. The difference is that the price the farmer sells for is the last he'll see of it. The CWB returned those premiums to the farmer.The board never defaulted on a loan, so the taxpayer never paid a cent of subsidy through the grain board.
You can say that getting the average price penalised the efficient farmer, but in every commodity market half the product is sold in the bottom third of the price range. The efficient marketer is the lucky one who sells in top of the market.
The board was a farmer designed method of getting seller power in a buyer controlled market.

Ken B writes:

@joshua: I am not up on all the mechanisms, and the situation is complicated by the fact that only the prairie farmers are under the CWB, and that most Canadian wheat is exported. But essentially the govt doles out the profit on sales. Ian Lee:

As the CWB is mostly selling wheat internationally, they are
unable to assign quotas and fix prices, as wheat is an international commodity with an international price.
Rather, the CWB requires farmers to sell their wheat through the CWB, which tries to maximize sales while
negotiating transportation costs on behalf of the farmers and then “price pools”, sharing the different
prices earned by the market share of each farmer.

Efficient farmers underwrite inefficient.

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