It is my pleasure to be here at the 93rd Annual Meeting of United Grain Growers to highlight what we see ahead for the industry and the CWB as we look to the year 2000 and beyond. Just so everyone is clear as to where I am coming from, let me say that the CWB intends to be around for a long time yet.
The new CWB corporate governance structure, called for by many farmers, has now been in place for almost a year. The farmer-dominated board of directors has the final say in key policy decisions, and they are determined that the CWB will remain the preferred supplier of Canadian grain to customers around the world. There is no contingency plan for the CWB to be a residual supplier of Canadian grain. Our vision is to broaden and deepen our involvement in marketing, and represent farmers' interests on all fronts of value added marketing.
I will touch on three areas this afternoon that are on our agenda. First is the marketing of the 1999 crop. Second, our plans to improve services to farmers. Third, is to talk about what we are doing to meet customer demands in both the near and longer-term.
First, the prospects for this crop year.
Although some parts of the Prairies struggled through seeding, and some areas, particularly on the Eastern Prairies, did not get seeded, over 50 million tonnes of the six major grains were harvested this fall. Wheat, canola and rye recorded record yields. Overall Prairie production is up some 2.5 million tonnes over 1998.
While the harvest was delayed by adverse weather in many parts of the Prairies, the quality of the crop is surprisingly high - - a normal grade pattern for milling wheats and above average for durum wheat. Survey samples to date show that around 70 per cent of the bread wheat will fall into the top two grades and close to 70 per cent of the durum wheat crop should also fall in the top two grades. Everything else being equal, it's always easier to market a high-grade crop than a lower-grade crop.
Exports of bread wheat from Canada will be larger than last year. The combination of the larger carry-in stocks and larger production will allow the CWB to increase total export tonnage this year. We will endeavour to accept all of the wheat and durum offered to us under contract by farmers. The CWB should also be able to accept all of the feed barley and malting quality barley that farmers offer to us. This latter projection, however, depends to some degree upon farmer sign-up under the earlier contract series. Early sign-up allows us to better plan grain movement and the efficient use of transportation resources.
Exports of the six major grains in 1999-2000 are expected to be 26 million tonnes, up from 21 million tonnes last year. Exports of CWB grains (wheat, durum and barley) are projected to be 19 million tonnes, up 24 per cent from the 15.3 million tonnes we exported last year.
Our 1999-2000 sales plan calls for over 40 per cent of this grain to be exported by the end of December. This is approximately two million tonnes more exports than the same period last year. By the end of May 2000, we are committed to over 80 per cent being exported. The sales program calls for some of the smaller-volume wheat classes, in particular Canada Western Red Winter wheat and Canada Prairie Spring Red wheat, to move quickly into export position early in the crop year. Delivery opportunities for CWRS wheat will be steady throughout the year.
Lower protein CWRS will move more quickly than higher protein CWRS in the fall and winter. We want to ensure we have high protein supplies available for our traditional and premium customers over the full marketing period. Demand for malting barley is strong and we expect steady movement throughout the crop year, particularly to our largest customer, the Canadian malting industry.
The price of wheat is still a problem. We expect that it will average slightly below last year. Prices for middle and lower quality wheats will likely be pressured by larger stocks in export competitor countries, particularly the U.S. and the European Union (EU). Protein premiums should remain strong this year due to below average protein levels in both the U.S. and Canada. On the demand side, global trade is expected to expand as a result of higher imports in North Africa and the Middle East due to drought.
As opposed to our previous projections, we are now cautiously optimistic about durum prices, particularly for higher grades this year. Strong North African import demand, as a result of drought in Morocco and Algeria, should support durum prices this year. Due to poor weather conditions, the quality and size of the U.S. durum crop will be much lower than previously expected. However, large carry-in stocks in North America and increased production in Australia may limit price gains.
Strong import demand for feed barley and limited export supplies available from competitors (other than the EU) have supported offshore feed barley prices. This has allowed the EU to maintain a strong export program while at the same time reducing its export subsidies. Feed barley returns this year and delivery opportunity will be dependent on the quantity and quality of farmer deliveries to the CWB.
While malting barley barley prices remain somewhat disappointing, there are some positive factors in the market. Poor harvest weather has reduced the exportable supplies of quality malting barley in the EU. The EU export subsidy is also much lower than last year. Reduced barley acreage and poor weather conditions in the U.S. have resulted in reduced supplies of six-row barley. The result is good demand and prices for Canadian six-row malting barley.
Turning now to improving services for farmers, the CWB has embarked on a number of initiatives which we hope will provide farmers with greater marketing flexibility, improved information, and performance measurements of their marketing organization.
Under the new Canadian Wheat Board Act there is latitude to offer farmers payment options other than the usual initial, adjustment, final payments. While we believe the existing payment system will remain the first choice of the majority of farmers, we are currently developing three payment options, which if implemented, could provide farmers with greater marketing and cash management flexibility.
The payment options under consideration include: a fixed price contract which would allow farmers to lock in a full and final price for CWB grain prior to the beginning of the crop year; an early pool cash out contract which would allow farmers to leave the pool before it is closed; and a pool equity loan program which would allow farmers to borrow against their projected equity in their pool account.
These payment options will be based on the estimated returns in the pool accounts or Estimated Pool Returns. Our objective is to have at least one of these options available to farmers next year.
Related to this, the CWB has already offered farmer-members of New Generation Cooperatives (NGC) the option of a fixed-price contract to enhance their cash-flow opportunities. A fixed-price contract would allow the farmer, if he so chooses, to receive full and final payment for his grain at time of delivery to the NGC processing plant if he so chooses.
The CWB has also agreed to offer the NGC members unrestricted delivery opportunities for product committed to the cooperative, and a "stock switching" plan. Under the stock switching plan a farmer located anywhere in Western Canada could become a member of the NGC and deliver his grain to a local elevator in proportion to the number of shares he holds. Through a stock switch, the NGC could source the equivalent quantity and quality of grain from the plant's immediate catchment area. This would allow the NGC to potentially attract producer investment from 110,000 producers from across the Prairies rather than being limited to producer investment in the area adjacent to the plant.
Like all other domestic processors, the NGC's will be required to purchase all their wheat and barley requirements from the CWB. The CWB's price to NGC's will be a North American competitive price or the Domestic Human Consumption (DHC) price. The DHC pricing policy gives domestic processors the advantage of forward pricing contracts, basis contracts and supply assurance. This approach puts all processors in Western Canada on the same footing as far as the cost of the raw material is concerned.
Although the CWB has a 1-800 Call Centre, an Internet site and 17 area representatives located across the Prairies, we want to improve our communications links with farmers.
One of the alternatives is to expand the amount of business we do electronically with farmers. For example, we want to allow farmers to have access to their own records at the CWB. Updated contract information, delivery records, cash advance payments and grain movement projections are now a phone call away.
The possibilities for conducting business through the Internet (or e-commerce) are almost limitless. We are currently looking at some of them. We will introduce them if they improve our service to farmers.
The CWB is also concerned about its marketing performance. To this end the CWB is attempting to establish benchmarks against which its performance can be measured. This is a difficult task in an ever-changing market, but we believe that it is important to demonstrate in measurable ways the value we provide to farmers as their marketing agency.
As the link between farmers and customers, the CWB must be sensitive to customer demands. Over the last year the CWB has undertaken a number of projects to better position Canada as the preferred supplier among customers. Our job is to ensure that the commodities we produce are marketed to their maximum advantage, while at the same time developing customer loyalty. We must anticipate their demands and have the products and the capacity to serve them. Accordingly, we have a number of projects underway to position us for the future.
The CWB, in cooperation with the Canadian International Grains Institute (CIGI), has set up a pilot pasta plant as a market development demonstration facility for customers. This plant will add to Canada's international reputation for applied research for milling, baking and noodle production.
The CWB is also working with its industry partners to establish a malting barley and brewing technical institute in Winnipeg. The facility, officially named the Malting Barley and Brewing Technical Centre, will conduct applied research, customer education and commercial evaluation of new malting barley varieties. We are confident that this initiative will enhance Canada's position as a supplier of some of the best malting barley and malt in the world.
In the immediate future perhaps one of the most important questions our industry faces is that related to the issue of Genetically Modified Organisms (GMOs). Consumer acceptance of GMOs has important implications for farmers in North America.
The 15 nations of the European Union are currently implementing regulations which will require that all products containing genetically modified ingredients be labeled as such. Two of Japan's leading breweries recently announced they will stop using genetically modified corn by 2001. And here in North America, I understand that ADM is asking farmers to keep genetically modified crops separate from non-modified crops. Certainly this points to the sensitivity of North American food processors to consumer concerns. What is the CWB doing as a marketing organization in the face of this kind of market uncertainty?
We recently conducted a survey of our customers, to determine their attitudes toward genetically modified wheat and barley. Our long-standing relationship with customers will help us determine how to successfully introduce genetically modified wheat and barley into the market, if we as an industry decide to do so. The bottom line is that we believe that the introduction of genetically modified wheat and barley into the market should be done in a manner that is fully acceptable to our customers. Some customers may want to purchase genetically modified grain. Others may want to purchase only non-genetically modified grain. Still others may want to purchase both, but not mixed. Long experience tells us that the customer is always right.
We believe that it is in the best interests of Prairie farmers that our premium markets be protected by ensuring our system is able to accurately segregate GMO from non-GMO grain. Until such technologies are in place, the CWB is of the view that wheat and barley varieties developed through modern biotechnology should not be registered for production in Western Canada. With this in mind, the CWB has agreed to contribute funds toward the development of a Rapid Instrument Objective Testing (RIOT) project. If successful the RIOT technology will allow the Canadian grain industry to maintain its international leadership in customer quality assurance.
As I indicated earlier, a number of our major customers are demanding product identification and segregation. The Canadian grain industry is well positioned to deliver and guarantee high quality products to its customers because of our unique quality control system and disciplined varietal registration system. Handling and marketing crops developed through modern biotechnology will require a disciplined industry approach, something that very few of our competitors can achieve.
And of course, a critical aspect of serving customers is the ability to deliver the right product on time. As you are very much aware, the grain handling and transportation system in Western Canada is undergoing significant change. Established grain companies and new entrants alike are busy constructing high throughput elevators across the Prairies. The questions they will be facing are: How do we make these capital investments pay? and, Who controls the movement of the product from the farm to the customer? There is only so much money that can be taken out of a grain sale for handling and transportation before there is little left at the farm level.
On the marketing side, the trend has been towards an increasing number of customers purchasing grain in smaller quantities, with more specific class, grade and protein requirements. Adding to this is the anticipated complexity of keeping GMO varieties separate from non-GMO varieties. It is clear that the grain handling and transportation system must be able to respond to the needs of the customer in a cost effective and efficient manner.
The CWB believes there needs to be more commercial and contractual operating arrangements between the various players in the grain handling and transportation system and reduce costs. We also believe that the CWB, as a marketing organization, has to be actively involved in managing transportation resources to meet its marketing needs. When you are in the market and negotiating spot sales or long-term contracts, you need to know you can deliver on your contracts.
While there have been numerous reports and meetings on how to improve the handling and transportation system, I suggest there are a number of things we need to remember. One, the system is working, it is changing and it is becoming more competitive and accountable all the time. Two, farmers ultimately pay for all the costs in the system and it's important that the benefits of improved efficiency be passed back to them. Three, if the CWB is not in the country, there will be increased price risk that will increase costs for grain companies and these costs will be passed back to farmers through a higher price basis - the difference between what the customer pays and what the farmer receives.
The CWB has been actively involved in the Estey-Kroeger review process and in the development of recommendations to improve of the grain handling and transportation system. We will continue to push for the changes we believe are in farmers' best interests and that allow us to do the best job possible meeting customers' needs.
I would be remiss if I did not comment on the current trade environment and the upcoming WTO negotiations. As Canada prepares for these trade negotiations which begin on November 30th in Seattle, the CWB is very much aware of the political sensitivity on both sides of the 49th Parallel created by some of the lowest commodity prices in decades. Canada, as a large and growing exporter of agricultural products to the U.S., will be the target of U.S. negotiators who are being urged by their farm lobbies to curb the power of state trading enterprises (STEs) like the CWB.
The CWB is prepared to defend its action in the trade arena and its status as an STE. The approach and message we are carrying is that as Canadians we have the right to organize our marketing system in the way we want and to suit our needs, and the CWB is operating within the bounds of current trade rules. We say, "Judge us on what we do, not who we are."
Over the last decade the CWB has been involved in eight investigations by the U.S. and has been shown to be in full compliance with NAFTA and WTO rules. These investigations consume a great deal of staff time and farmers' money. We do not take these challenges lightly because we recognize that restrictions on trade have enormous costs to farmers.
Canada has put considerable work into developing its WTO negotiating position. The reality is however, that the EU, the U.S. and Japan are the key players, and the ultimate deal makers, in this high stakes international chess game. We expect the negotiations to continue for a number of years. President Clinton does not have fast track authority to negotiate without having an agreement picked apart by Congress. The U.S. presidential election is in November 2000, the new president will take office in January 2001 and there will be a new farm Bill in 2002. Add to this the implementation of Agenda 2000 in the EU, and you have a very complex setting for these international trade negotiations.
In closing I want to re-iterate that the CWB's future is in the hands of its 15 member board of directors, 10 of whom are elected by farmers. While we will continue to manage the business and endeavour to do things right; the future largely depends on the CWB doing the right things. Opinion surveys indicate that although many farmers want change, they still want a CWB. A number of interesting issues and questions are currently on our radar screen.
As a marketer, the CWB needs to ensure our research priorities are on the right track. Feed wheats and hard white wheats are currently under development. Extra strong high protein durum is coming on stream.
As a marketer, the CWB also needs close ties to its suppliers - particularly Prairie farmers. How do we do this? Is it through buying on farm and tendering for handling and transportation services? Do we tender for specific classes of wheat matched to sales? Do we buy at prices other than the initial price to meet specific contracts?
As a marketer, should the CWB be involved in providing shipping services right to the customer's mill? Does this involvement come through commercial contracts and strategic alliances with other companies? Should the CWB be expanding its freight forwarding operations and be increasingly involved in ocean freight?
These are just a few of the questions we need to be asking ourselves in this highly competitive international business.
As the CWB evolves, all options have to be considered. Ultimately, farmers will decide how it changes.
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Last Updated on 11/15/99
By Karen Lutz