“Forward  Looking  Issues  for  Canadian  Wheat”

Fields  on  Wheels  21Oct.  21,  2016

Harvey  G.  BrooksSaskatchewan  Wheat  Development  Commission

Saskatoon,  Saskatchewan

Sask  Wheat  Development  Commission• Formed  in  July  2013• Mission:  

• To  provide  leadership  in  identifying  and  supporting   research,  market  development  and  advocacy  that  contributes  to  profitable  and  sustainable  wheat  production  for  Saskatchewan   farmers.

• Producer  funded  through  $0.52/mt  check-­‐off• Voluntary  check-­‐off  

• Producer  elected  Board  of  Directors

Outline•Major  Drivers  for  last  10  years• Current  Situation• CTA  Review  Panel  Process• Producer  Recommendations  • Report  Recommendations• Implications  for  producers

• Future  Direction

Recent  Major  Drivers

• Chinese  demand  for  food  oils  and  coarse  grains• Soybean,  canola  and  corn  price  driver

• Biofuel  mandates• Wheat  and  corn  price  driver• Mandates  appear  to  have  maxed  out  fuel  blends  

• Exchange  rate  devaluation• Currency  Levels  drive  exports  from  Black  Sea,  Brazil  and  Argentina• Price  insulation  for  Canada

World  wheat  production,  consumption  and  ending  stocks

OECD  FAO  Ag  Outlook  2016-­‐25  (July  5)• Efficiency  gains  will  enable  prod  growth  at  lower  prices  • Food  demand  growth  limited  by  slow  popn growth  (saturation)• Biofuels  demand  is  saturated  • Prod  growth  primarily  by  yield  improvement  • Undernourishment  will  decline  • Global  exports  to  remain  highly  concentrated  • Real  Ag  prices  expected  to  remain  flat• Uncertainties• China’s  “Grain  Policy”  – soybeans  and  coarse  grains  (stocks)• Economic  growth• Significant  weather  events  

2016/17  Crop  Year  Issues

•Minimum  Beginning  Stocks• This  likely  the  biggest  issue  for  slow  shipping  start

• Harvest  weather• Quality  issues• Delayed  harvest

Supply  Disposition  All  Principal  Field  Crops: Sept,  2016  Forecast

2012/13 2013/14 2014/15 2015/16[f] 2016/17[f]

Yield  (t/ha) 2.67 3.46 2.86 2.92 3.13

Production   (kt) 76,716 90,293 81,292 85,166 90,636

Beginning  Stocks 12,796 9,591 19,705 14,770 12,325

Total  supply   (kt) 89,512 108,885 103,505 102,142 105,092

Exports  (kt) 41,889 48,519 48,901 48,351 47,934

Total  domestic  use  (kt) 38,042 40,673 39,835 41,466 43,468

Carry-­‐out  stocks  (kt) 9,591 19,705 14,770 12,325 13,690

• AAFC  – Outlook  For  Principal  Field  Crops,  Sept.  28,  2016

$0

$50

$100

$150

$200

$250

$300

2012  Aug

2012  Oct

2012  Dec

2013  Feb

2013  Apr

2013  Ju

n

2013  Aug

2013    O

ct

2013  Dec

2014  Feb

2014  Apr

2014  Ju

n

2014  Aug

2014  Oct

2014  Dec

2015  Feb

2015  Apr

2015  Ju

n

2015  Aug

2015  Oct

2015  Dec

Month

Export  Basis 2002-­‐2012  Ave.

Saskatchewan  Cash  – Vancouver  FOB   =  Export  Basis  2012  –Dec  2015    

October  Basis  to  World  Prices

FOB  Prices,  Street  Prices  and  Estimated  Export  Basis  (October  Historical)

DNS  14% 1  CWRS  13.5%

OctoberFOB  PNW  (US$/MT)

CAD/USD  Exchange

FOB  Vancouver  (C$/MT)

Street  Price  (C$/MT)

Export  Basis  (C$/MT)

2013 349 0.964 314 201 113

2014 371 0.886 333 200 133

2015 243 0.775 291 225 66

2016 251 0.759 322 213 109

Sources:  US  Wheat  Associates,  Banks  of  Canada,  AAFC  Weekly  Price  Series,  and  Government  of  Saskatchewan  

An  Economic  Analysis  of  Western  Grain  Export  Capacity  (2016)R.  Gray  and  M.  Torshizi  

•Modelling  of  grain  production  capacity  through  2025• Excess  basis  will  occasionally  reach  $120/mt• Producers  uniquely  affected•Without  increases  in  rail  and  handling  capacity,  production  increases  will  create  producer  losses  of  +$10  bln over  2016-­‐2025• Strong  incentives  to  expand  capacity

CTA  Review  Panel  Submission• Producer  recommendations  by  APAS,  Sask  Barley  and  Sask  Wheat

• A  Full  Costing  Review• completion  of  a  formal  costing  review  and  adjust  the  maximum  revenue  entitlement  accordingly.

• Maintained  Maximum  Grain  Revenue  Entitlement• the  maximum  revenue  entitlement  will  stay  in  place  to  ensure  fair  compensation  to  railways  for  

hauling  grain.  

• Information  Requirements• information  reporting  for  the  grain  handling  and  transportation  system  to  function  effectively.

• Rail  Oversight  and  Planning• the  CTA  require  a  rail  oversight/planning  group,  to  establish  performance  targets  and  assess  ongoing  

operations  of  the  railways

CTA  Review  Panel  Submission  Information  by  Producer  Groups• $6.7  Billion  in  losses  to  producers  over  2013/14  and  2014/15  (Gray  Study  2015)• $63/mt  loss  -­‐ $630,000  loss  for  a  5,000  acre  farmer  based  on  1  mt/acre/year• Farmers  are  uniquely  affected  by  handling  and  transport  constraints!

• Travacon Research  Ltd.  Update  of  Railway  Earnings• Excess  of  Revenue  over  “fair  and  adequate”  compensatory  costs  of  $8.32/mt  in  2013/14

• Grain  is  paying  its  “fair  share  and  then  some”!

• Gray  and  Torshizi  Study  (2016)  Economic  Analysis  of  Western  Grain  Export  Capacity• Producers  have  strong  incentive  to  see  expanded  capacity  to  keep  pace  with  productivity  growth!

• Removal  of  MRE  provides  “perverse  incentive”  to  Railways  to  reduce  capacity!

CTA  Review  Panel  Recommendations

• Elimination  of  the  MRE  within  7  years.

• No  consideration  for:• the  lack  of  competitive  market  forces• Railway  market  power  to  set  service  availability  • Lack  of  commercial  accountability  of  the  railways

Transition  Recommendations  of  the  CTA  Review  Panel

• Allow  1/3  of  cars  to  operate  outside  the  MRE• Exclude  containerized  grain  from  MRE• Exclude  inter-­‐switching  from  the  MRE

• What  are  the  consequences?• US  Style  rail  shipment  pricing• Massive  wealth  transfer• No  guarantees  of  improved  service  levels• Perverse  incentive  to  reduce  average  service  levels  for  regular  shipments  under  the  MRE  to  drive  up  demand  for  above  average  service.

Considerations  for  Future  Transportation  Policy

• System  is  working  pretty  well!!• MRE  ensures  railways  are  getting  “fair  and  adequate”  compensation  for  grain  movement  (and  then  some)• Rate  regulation  and  adequate  revenue

• System  efficiency  is  regularly  improving• Need  for  capacity  planning• Need  for  Transparent  Information• Price  and  logistics  information• CP  proposal  for  “Transparent  Yardstick”

Future  Transportation  and  Handling  System  Considerations

• Don’t  break  it  while  fixing  it!

• Continuous  improvement  should  be  the  model!

• Longer  term  capacity  on  west  coast  is  critical  objective!!• +10  mmt/year  capacity  increase  is  needed