THE CANADIAN WHEAT BOARD
                BARLEY MARKETING

                EXECUTIVE SUMMARY

                Dr. Andrew Schmitz
                Dr. Troy G. Schmitz
                Dr. Richard Gray

                February 2005

The authors greatly appreciate the professional input of
 H. Carole Schmitz, Kjerstin Terry, and Carol Fountain
Executive Summary
                                             •   The specific objectives of this study
The operation of the CWB as the single-
desk seller of Western Canada’s feed-
barley and malting barley for export and
                                             1) To provide an overview of the world
for domestic human consumption within           barley trade for both malting and
Canada is at the centre of ongoing
                                                feed barley (Section II);
debate and controversy in Western            2) To     review      previous     studies
Canada. Some key issues raised are:
                                                examining the role of the CWB in
                                                the domestic and international barley
1) Does the CWB deliver higher returns
                                                market (Section III);
   to Western Canada’s feed-barley and       3) To develop a theoretical framework
   malting-barley producers than would
                                                to examine the role of the CWB in
   be the case in a multiple-seller             domestic and international feed-
                                                barley, barley-malt, and malting-
2) Are there benefits provided to               barley markets, and the potential for
   producers through the price-pooling
                                                the CWB and other market
   operations of the CWB (i.e., risk            participants to exercise market power
                                                (Section IV);
3) What are the inherent problems of         4) To test whether the CWB exhibits
   arbitrage between the annual pooled
                                                market power in the international
   return (APR) provided by the CWB             feed-barley market when utilizing
   and the cash off-Board market price?
                                                actual CWB contract data for the
4) Are there additional marketing costs         1995/96 to 2003/04 crop years
   that are unique to the operation of
                                                (Section V);
   the CWB as a single-desk seller?          5) To estimate the returns from a
                                                single-desk-seller marketing system
•   Recent studies that have examined           using an economic model that uses
    the economic issues surrounding
                                                actual CWB sales transaction data
    barley marketing in Western Canada          (Section V);
    and North America have focused
                                             6) To review and evaluate the
    primarily on feed barley, with less         additional marketing costs found in
    emphasis on malting barley. Thus the
                                                previous studies that have been
    lack of focus on the interrelationship      attributed to the CWB (Section VI);
    between these two different barley
                                             7) Discuss price variability in the
    markets has limited the usefulness of
                                                Canadian and U.S. barley markets;
    many      earlier   studies      when
                                             8) To discuss barley marketing in a
    determining the implications of
                                                highly volatile market setting; and
    various      possible       marketing
                                             9) To provide a summary and
    arrangements for barley producers,
                                                conclusion of the analysis (Section
    the livestock industry, and the
    malting industry. In addition, these
    studies have major data limitations
                                             •   World barley production has dropped
    because they have had little or no
                                                 sharply since the 1980s. The largest
    access to actual CWB sales prices
                                                 decrease has been in the production
    and contract terms.
                                                 of feed barley. Historically, the

The CWB and Barley Marketing                                                          i
    largest barley producer has been the    •   In this study, data were used from
    European Union. The major barley            every CWB sale of feed barley, 6-
    exporters are the European Union,           row malting barley, and 2-row
    Australia, the Ukraine, and Canada.         malting barley for the 1995/96 to
    Trade in malting barley has                 2003/04 crop years. The data were
    accounted for roughly 30% of world          compiled from CWB contract
    barley trade. Since 1994/95, world          records. All prices were brought to a
    malting-barley trade has increased by       common basis point of either FOB
    roughly 45%. The major malting-             Vancouver or St. Lawrence. The
    barley exporters are the European           sales data were aggregated into the
    Union, Australia, and Canada but the        following nine market segments: 1)
    European Union, Russia, and the             Japan’s feed-barley market; 2) U.S.
    Ukraine dominate the feed-barley            feed-barley market; 3) all other feed-
    export market. The European Union           barley markets;       4)     Canada’s
    is by far the largest barley-malt           domestic      6-row    malting-barley
    exporter, followed by Canada, which         market; 5) U.S. 6-row malting-barley
    exports primarily malt and malting          market; 6) offshore 6-row malting-
    barley. The largest importers of            barley markets;       7)     Canada’s
    malting-barley from Canada are              domestic      2-row    malting-barley
    China and the United States. Most           market; 8) U.S. 2-row malting-barley
    feed-barley produced in Canada is           market; and 9) offshore 2-row
    used as feed domestically and is not        malting-barley markets. In the
    marketed through the CWB. World             analysis, the CWB allocates the total
    barley markets are influenced highly        quantity of barley it receives from
    by political interventions and by           producers in a given crop year across
    agricultural policy.                        the above 9 markets in such a way as
                                                to maximize total sales revenue. In
•   Earlier work pointed out that the           order to measure the impact that
    CWB has been able to price                  multiple sellers of Canada’s feed
    discriminate     among       markets        barley and malting barley would
    (Schmitz et al. 1997). The average          have had on returns and trade flows,
    difference between CWB contract             a comparison was made between the
    prices for Japan and the United             actual market structure (i.e., prices
    States over the 1980/81 through             and quantities) observed under the
    1994/95 period was significant and          CWB and the prices and quantities
    averaged $25.29/mt. The difference          that would have existed if there had
    between CWB contract prices for the         been multiple sellers of Canada’s
    U.S. and ROW markets was also               feed barley and malting barley.
    significant, with an average price
    difference    of    $4.46/mt.    The        The key difference between the
    difference between CWB contract             CWB system and a multiple-seller
    prices to Japan and the ROW                 system is the ability to price
    markets was significant and averaged        discriminate. In the absence of
    $20.73/mt.                                  constraints on the quantity of feed
                                                barley, 6-row malting barley, and 2-
                                                row malting barley available for sale

Schmitz, Schmitz, and Gray                                                          ii
    by Canada’s producers, the law of        2) The calculated annual average price
    one price must hold for all                 difference between what the CWB
    international and domestic barley           received and what a multiple-seller
    sales      in    a     multiple-seller      structure would have received on
    environment. In the model used,             sales of 2-row malting barley for the
    multiple sellers were assumed to be         1995/96 to 2003/04 crop years is
    fully     competitive,    and     this      $40.29/mt. Relative to multiple
    competition resulted in one market          sellers, the CWB is estimated to have
    price for feed barley and one market        captured higher prices in 2-row
    price for malting barley at any point       malting-barley markets in every year
    in time, which is a characteristic of       considered here. Under the CWB,
    all competitive markets.                    the lowest price premium for 2-row
                                                malting barley was $19.64/mt in
•   The impact on prices and revenue of         2003/04 and the highest price
    replacing the CWB with multiple             premium was $61.82 in 2002/03.
    sellers of feed barley, 6-row malting
    barley, and 2-row malting barley for     3) The impact on producer revenue
    each year from 1995/96 through              from replacing the CWB with
    2003/04 are as follows:                     multiple sellers of Canada’s barley is
                                                large. For example, the introduction
1) The annual average price increase            of multiple sellers of Canada’s feed
   earned by the CWB for 6-row                  barley and malting barley in 2000/01
   malting barley relative to what a            would have caused Canada’s barley
   multiple-seller marketing structure          producers to lose $128 million in
   would have had from 1995/96 to               total revenue. Over the 1995/96
   2003/04 was $35.25/mt. This number           through     2003/04     period,   the
   was computed as the simple average           introduction of multiple sellers
   of the difference in the weighted-           would have resulted in an annual
   average price of 6-row malting               average loss of $59 million in
   barley under the CWB versus what             revenue accruing to Canada’s barley
   the equilibrium price of 6-row               producers. Multiple sellers of
   malting barley would have generated          Canada’s barley would have caused
   under the multiple-seller model. For         losses in revenue to Canada’s barley
   example,      the   2000/01      price       producers in every year considered
   difference was $43.19/mt, which is           here.
   equal to the difference between the
   weighted-average price of 6-row           •   Results were derived using different
   malting barley under the CWB and              values for the price elasticity of
   the weighted-average price of 6-row           demand for Canada’s feed barley in
   malting barley under a multiple               the rest of the world (ROW) and the
   seller scenario. Relative to multiple         price elasticity of domestic demand
   sellers, the CWB is estimated to have         for Canada’s feed barley. Under
   captured higher prices on sales of 6-         these alternative assumptions over
   row malting barley in all years               the 1995/96 to 2003/04 crop years,
   except 1995/96.                               the introduction of a multiple-seller
                                                 marketing system would have

The CWB and Barley Marketing                                                       iii
    resulted in an annual average loss of        to the fact that the price elasticity of
    between $36 million and $58 million          demand for Canada’s feed-barley
    in revenue accruing to Canada’s              exports to the ROW is set at a
    barley producers. Also, results were         relatively high level (i.e., –20.0
    obtained in which the malting barley         associated with the base results).
    selection rate under a multiple-seller       Third, the CWB’s ability to attain
    marketing system was constrained.            price premiums increased in the
    Under restricted malting barley              presence of the Export Enhancement
    selection rates over the 1995/96 to          Program       (EEP),     which      was
    2003/04 crop years, the introduction         terminated in the late 1990s.
    of a multiple-seller marketing system
    would have resulted in an annual         •   Some authors argue that the single-
    average loss of between $17 million          desk-seller marketing system has
    and $28 million in revenue accruing          larger system costs than does a
    to Canada’s barley producers.                multiple-seller marketing system.
                                                 While most of the costs identified are
•   The impact of replacing the CWB              present in Canada’s system, they are
    with multiple sellers of Canada’s            not unique to CWB grain marketing.
    barley was estimated by Schmitz et           Most, if not all, of the costs that
    al. (1997) for the 1985/86 to 1994/95        earlier studies identified would have
    crop years. On average, the revenue          been incurred in the absence of the
    accruing to producers of Canada’s            CWB as a single-desk-seller
    barley would have been reduced by            marketing system and likely in the
    $72 million per year under multiple          same order of magnitude. The CWB
    sellers of Canada’s barley. This             currently uses an annual pooled
    number is higher than the $58                return to distribute sales revenue to
    million per year estimated for the           producers. This mechanism does not
    1995/96 to 2003/04 crop years in this        provide a signal to producers that
    study. There are at least three major        fully responds on a timely basis to
    reasons for the differences between          changing market conditions within a
    the two studies. First, Canada was a         given crop year. If export market
    significant net importer of feed             prices change substantially during a
    grains (barley and corn combined) in         crop year, the prevailing pooled
    several years over the 1995/96 to            return will not reflect this change on
    2003/04 crop years (especially               a timely basis. This creates some
    2001/02 and 2002/03) whereas                 economic losses because the export
    Canada was not a net importer of             value of feed barley at a given point
    feed grains over the 1985/86 to              in time is not fully reflected by the
    1994/95 period. Second, there are            CWB pool return outlook (PRO) and
    several years over the 1995/96               by the cash off-Board market price in
    through 2003/04 period in which the          the domestic feed-barley market in
    ROW feed-barley-export market was            Western Canada. A situation in
    not the lowest priced market; this           which export feed-barley prices rise
    was not the case for the 1985/86             during the crop year and the PRO
    through 1994/95 period. This could           does not increase as rapidly, more
    have implications for the results due        barley is used as feed in Western

Schmitz, Schmitz, and Gray                                                            iv
    Canada than would result under a          •   The single-desk-seller marketing
    multiple seller marketing system              system of barley creates more sales
    without price pooling. This creates           revenue for Western Canada’s
    an economic loss. A loss also results         farmers than would be the case under
    when export barley prices fall during         a multiple-seller marketing system
    a crop year and the PRO does not fall         due to the ability of the CWB to
    as rapidly. In this situation, the PRO        exercise    market    power.    The
    and Canada’s domestic feed-barley             magnitude of the additional revenue
    prices are above the prevailing world         created varies by year depending
    price. As a result, less feed barley is       upon factors that include the
    fed domestically and feed-barley              occurrence and degree of export
    exports to the world market are               subsidization in feed-barley and
    larger than would otherwise occur.            malting-barley markets. The benefits
    Recent changes instigated by the              of the CWB single-desk-seller
    CWB as price signals to farmers,              marketing system are largest for
    such as cash off-Board market                 malting barley.
    pricing and two shorter pooling
    periods, are expected to reduce the       •   Feed-barley prices from 1999 to
    issue of incomplete arbitrage.                2003 are consistently higher for
                                                  Lethbridge, AB than for Great Falls
•   To analyze barley price variability,          MT by an average of roughly
    an earlier study compared Lethbridge          $20/mt. Second, during the drought
    AB off-Board feed-barley prices to            period of 2002, there was significant
    U.S. feed-barley-prices at Great Falls        variability in barley prices, but this
    MT and Devil’s Lake ND as well as             was clearly reflected in the CWB
    to other U.S. points. The average             malting-barley-price         forecasts.
    annual standard deviation in the              Imports of malting barley that year
    Lethbridge AB cash off-Board                  were due largely to shortages in
    market price for the 1988/89 to               malting barley in Canada. Because of
    1995/96 crop years was $7.88/mt.              the 2002 drought, Canada also
    The average September cash off-               imported large quantities of corn
    Board market price in Lethbridge              from the United States to make up
    AB was on average $7.88/mt above              for the shortage of feed barley. As a
    or below the average price for the            result, it is difficult to argue that
    crop year. This compares to $7.88/mt          barley markets are not arbitraged.
    and $7.23/mt measured at Great Falls
    MT and Devil’s Lake ND,                   •   There have been many studies
    respectively. However, from 1999 to           conducted on the CWB in the
    2003 feed-grain price variability was         marketing of barley that support the
    slightly higher for Lethbridge AB             notion that the CWB can price
    than it was for Great Falls MT.               discriminate in international markets
    However, barley prices were                   and, hence, can earn price premiums
    consistently higher in Lethbridge AB          above what a multiple seller of
    than in Great Falls MT.                       Canada’s barley would earn. Results
                                                  consistent with those presented in
                                                  this report were used in at least two

The CWB and Barley Marketing                                                           v
    legal cases involving the CWB– the
    Charter Case and the U.S.
    Countervail Beef Case against
    Canada. In both cases, allegations
    that the CWB was highly inefficient
    in barley marketing could not be

•   When analyzing the international
    barley market we emphasize that it is
    ever changing especially the feed-
    barley markets where Canada’s
    exports have decreased along with
    CWB sales of domestic feed barley
    within Canada. In addition, over the
    last several years, barley producers
    in Canada have not been subsidized
    through the CWB as there has been
    no deficit in the barley pool and
    government credit guarantees on
    sales have been negligible. Also, at
    least since 2000, Canada’s feed-
    barley prices have been consistently
    higher than those in the United

Schmitz, Schmitz, and Gray                  vi

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