December 13, 2011 / 6:03 PM / 6 years ago

Analysis: Canada grain sector wary of Wheat Board battle

WINNIPEG, Manitoba (Reuters) - A wary Canadian grain industry will ease cautiously into signing forward price contracts for the prized 2012 wheat and barley crops, as legal entanglements over Ottawa’s plan to end the Wheat Board’s marketing monopoly hamper any swift moves into an open market.

A Conservative government bill is set to end the Canadian Wheat Board’s monopoly on western wheat and barley sales next August. The change would shake up the industry, creating an open market and leaving the CWB a smaller, optional grain buyer.

As soon as the legislation becomes law - possibly within the next week - handlers and farmers will be able to immediately sign forward price contracts for the 2012 harvest and forge deals to supply Canadian and foreign buyers such as millers and maltsters.

But while that race to secure Canada’s grain supplies was shaping up as a sprint, the latest court battle over the Wheat Board’s fate now has all players weighing the risks.

“People are seeking to understand this better now, everywhere,” said Wade Sobkowich, executive director of the Western Grain Elevators Association .

He expects some grain handlers to sign forward contracts, despite the risks, but also said they well remember the pain in earlier years of acting too soon.

“People have learned they need to proceed with caution.”

A Federal Court judge ruled last week that Agriculture Minister Gerry Ritz breached existing law by not consulting the Wheat Board or holding a farmer vote beforehand. But he did not order the new legislation to be killed and the government has appealed the ruling.

The latest bid to end the CWB’s monopoly on sales or wheat and barley for milling or export is similar to two failed past moves by Conservative governments to open the market.

In 1993, a Federal Court judge ruled Ottawa overstepped its powers by removing part of the CWB’s barley monopoly by regulation.

Fourteen years later, in March 2007, after most farmers voted against keeping the single-desk system for barley, then-Agriculture Minister Chuck Strahl said he would end the CWB’s barley monopoly by changing regulations.

But several months after that, a Federal Court again blocked such a move without a vote in Parliament. The vote never took place and the monopoly lived on.

In both cases, grain handlers were left to pay penalties to customers for contracts they could not fulfill, Sobkowich said.

In a “demand-pull” grain system, companies like Viterra, Cargill and Richardson International book sales to customers before agreeing to buy farmers’ grain.

If they can’t deliver on their commitments because the CWB’s monopoly survives, they would pay penalties to exporters or domestic millers like Archer Daniels Midland and P&H Milling that need to assure supplies, Sobkowich said.

One Canadian milling executive said the domestic industry is likely to wait through January before buying much wheat.

“I‘m not going to think about this for four to five weeks and, after that, maybe it’s a thing where the industry moves on (and buys wheat). You can’t just sit here.”

It’s hard to predict how eager Japan - the biggest buyer of top-quality Canadian wheat - will be to lock up supplies in the open market, said Jeffrey Smyth of Toronto-based Database Analysts, a consultant to Japanese food and milling companies.

A lack of communication between Canada and Japanese customers about how the changes to the Wheat Board will come about hasn’t helped confidence, Smyth said.

“I think that customers are really in the dark about what’s going to happen.”

Farmers usually start sketching out seeding plans early in the new year, but with so much confusion about the Wheat Board, some might avoid planting wheat or barley this spring, said grower Norm Hall, president of the Agricultural Producers Association of Saskatchewan.

Farmers might also be hesitant to sign forward contracts with grain handlers or hedge their price risk on new grain futures contracts being launched January 23 by ICE Futures Canada, Hall said.

“It’s all going to depend on the court case,” he said from Saskatoon, Saskatchewan. “If the (government) appeal is settled quickly, guys will be jumping on the bandwagon because guys need to cover risk on their farms.”

Ritz said on Friday that farmers should continue to plan for next year on the assumption that the monopoly will end as planned.

To become law, the legislation needs final approval by the Conservative-controlled Senate on Thursday, followed by royal assent from the governor general.

The Wheat Board and its supporters may then ask for a court injunction to stop the government from implementing the bill, once it passes, allowing the court proceedings to run their course.

Reporting By Rod Nickel; editing by Rob Wilson

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