“The potential bid comes as the company is poised to benefit from the end of the Canadian Wheat Board’s monopoly on the marketing of wheat and barley in Western Canada.
Viterra, formed by the merger of the Saskatchewan Wheat Pool and Agricore United, is a grain handler, marketer and food processor with operations across Canada, the United States, Australia, New Zealand and China.
A foreign takeover of Viterra would face a review under the Investment Canada Act to see if it would be a net benefit to Canada.
Last week, Saskatchewan Premier Brad Wall said an evaluation by the province would weigh several factors, including the impact on the provincial economy, on farmers and on provincial revenues.
Mr. Wall also said the future of Viterra Inc.’s head office in Regina, where the company has 550 employees, would also be an important factor.
In 2010, Saskatchewan undertook a net benefit review of BHP Billiton’s ultimately unsuccessful $40-billion (U.S.) bid for Potash Corp. of Saskatchewan. The study formed the basis of Saskatchewan’s opposition to that deal and recommendation to Ottawa, which decides on such matters.”
- Viterra confirms in exclusive talks with suitor, Paul Waldie, Globe and Mail Update, Mar. 19, 2012
Not long ago, the Tory Government argued that the death of the wheat monopoly, held by the Canadian Wheat Board, would mean more competition in the Grain Market. More players would come into the Canadian Marketplace and we would see better prices for Canadian Grain. The Harper Government argued that the market place would be more efficient without government intervention and this result would result in “more” for everyone in rural Canada.
Well, we are less than a year into the reforms and we can see some changes: the loss of players. The rumours of a big acquisition are no longer rampant, they have been confirmed. Newspapers in Canada are now reporting that Canadian agribusiness heavyweights, Agrium Inc. and Richardson International, are teaming up with global commodities giant Glencore International to purchase Viterra. These three players seem to want to split up Agrium. “Glencore is specifically seeking the company’s grain business, while Agrium is looking to get its hands on the retail fertilizer supply stores that Viterra runs. Richardson would look to get Viterra’s food processing business.” (Glencore, Agrium and Richardson International join forces for Viterra bid: source, John Shmuel, Mar 15, 2012). So, one can see that the market solution is simply rearranging the players on the field. Agrium’s head office, in Calgary, will likely have to hire a few people. The same is true of Richardson of Winnipeg. While, Glencore will either change the name on the door in Regina. While, Glencore might expand through small offices in Calgary, Winnipeg or Toronto; it is becoming clear that Glencore will transfer other responsibilities to their offices in London, Hong Kong and Baar, Switzerland. Or put differently, as Viterra is examined by its new owner; parts of its business will be eliminated.
As the Australian example has shown us, this is the likely example of the future that we are going to see. The change to the Canadian Wheat Board will likely be much more destructive than transformative for two reasons. Firstly, the government changes did not provide a “bridge” for farmers and other market participants to adapt to the new rules. Secondly, the changes made did not restrict non-Canadian government involvement in international grain markets.
Generally, when an industry moves from a closed market to an open market, governments provide some sort of assistance. For the rules change brings an unanticipated set of variables. For example, the loss of the Autopac in the 1990’s, meant that North American Car Builders needed to upgrade their facilities. While it was haphazard in nature, Federal, Provincial, State and Local Governments, through North America, provided the necessary funds and programmes. The same policy approach was applied when the Mulroney Government started cutting grain transportation subsidies in the 1990’s.
These subsidies are necessary when government is going to make a material change in the market because these changes are unanticipated. Or put differently, entrepreneurs and business people assume that governments will not make radical change. This is especially true when one deals with key or older programmes. If this assumption was not made, fewer businesses would be started because of the overwhelming amount of risk. This is generally understood by most governments. Consequently, when governments want to change directions, governments ask their various branches for the easiest and least painful way of moving forward. Additionally, governments might offer short-term grants, subsidies or interest-free loans to ease the pain of material market changes. This, however, was not the case when the Harper government changed the Canadian Wheat Board: an organization that has existed since the 1930’s.
Without that new capital, the results were clear: other competitors with the necessary capital would buy up Canadian assets. This happened with the Interest Trust Change in 2007 and it happened in Australia when they changed their grain marketing board. At this point those, foreign competitors have more resources, including but not limited to knowledge, system, capital and people. With this more efficient operation, they can simply buy up the assets that they need without hiring people. For example, let us take the International Commodity Exchange (ICE). In 2007, ICE purchased the Winnipeg Commodity Exchange. When, ICE heard of the death of the Canadian Wheat Board, they announced that they would start trading grain futures. However, they likely did not hire a single Canadian to do so. This can be argued because at this point ICE Canada contracts out major parts of its business to other ICE departments around the world. ICE Canada’s Market Supervision, for example, does not happen in Winnipeg, Toronto or Montreal. ICE Canada’s Market Supervision happens in New York and London. While, ICE Canada’s help desk is based out of ICE International’s headquarters in Atlanta.
ICE and Glencore are not the only companies interested in buying Canadian existing assets and not Canadian expansion. Looking on the TD Waterhouse website, I noted an article written by Thomson Reuters’ Rod Nickel. A quote from the article reads as follows: “Viterra, with roots in long-running farmer cooperatives in Saskatchewan, Alberta and Manitoba, is attracting plenty of foreign interest, from Glencore, U.S.-based Bunge, Archer Daniels Midland and perhaps others, industry sources say.” (ANALYSIS-Canada farms fear consolidation, not foreigners, in Viterra bid, March 18, 2012 by Thomson Reuters, By Rod Nickel).
There is even some talk that U.S.-based Cargill might enter the fold. The Cargill would be at a disadvantage because they already operate in Canada. They hold about 15 percent of the region’s grain-handling capacity. This means that their expansion would be looked at in both an eye to competition and one of foreign control. However, their expansion has not been written off by some. For example, the Wild Rose Agricultural Producers argued for the end of the Wheat Board Monopoly last year. Now, they might be dreading their support of the Harper Government’s plan. “There’s a fear on our side that an existing multinational like Cargill that’s already in this country would buy them (Editors’ Note: Viterra) and take away a lot of competition” among handlers vying for farmers’ grain, said Alberta farmer Lynn Jacobson, president of Wild Rose Agricultural Producers.
However, this is not the only example of problems with the transition process. For the Harper Government was hoping that the New Wheat Board would be able to negotiate access agreements with Viterra, Richardson International and Cargill. For the Board has never owned its own grain elevators or port terminals. In fact, the old Board depended on the private sector to take to take delivery of grain and move it to domestic and export customers. (Canada Wheat Board seen gaining grain handling deals: Board does not have elevators or port terminals of own. Rod Nickel, Reuters February 27, 2012).
Consequently, with a shrinking number of Private Sector Grain Handlers, the new Wheat Board is also in trouble. This would also mean that we might be looking at the likely closure of the port of Churchill in Manitoba. The truth is that the loss to the Canadian Agricultural Community could be much larger than anyone imagined. Accordingly, not having a financial bridge for the Canadian Grain and Agricultural Industry in this move – toward a free market – will devastate many rural portions of Western Canada. And I do not think that the Federal Government has the capacity or the willingness to provide any support after the damage is done.
This leads us to the second problem: Government Intervention. The Cairns Group is a set of 19 countries that wants to argue for Agricultural Liberalization. It includes Canada, Australia and Brazil. There is the only one problem. The Cairns Group is up against the EU, Japan, Norway, South Korea, Switzerland and United States. All of those countries and groups would rather leave various trade subsidies, tariffs and market barriers in place so as to favour their domestic agricultural industries. So as Canada moves to this new non-governmental market system, the US and Europe are among the biggest entities stopping agricultural market liberalization. They have gone as far as putting barriers in place so as to “kill” the negotiations at the World Trade Organization on this matter (also known as the failure of the Doha Round). Therefore, our farmers will not face fair competitive practices in the US. So one must ask right now, why are we going down this path?
Markets, as we can see, are not perfect. In this case, market participants would rather spend money to buy existing infrastructure when compared to the alternative: building new infrastructure in Canada. Consequently, something ironic will happen: we are going to see less competition in our agricultural economy and not more due to our adoption of a “more market based system”.
As a Liberal, I am appalled. The Canadian Wheat Board, previous to the Government Changes, was not a perfect system. However, for 70 years, it provided a stable income to those that have very little predictability. It was changed and adjusted over time to deal with farmers concerns. We know most farmers agreed with it because every vote was the same. 60% of farmers agreed with the system, while 40% wanted more change. This stalemate has gone on since the late 80’s.While, the conversation was not perfect; we all listened to each other in trying to create “a more perfect system”. Now, in a single decision all of that hard work might be lost.
As Liberals our goal should be to protect the “Other”. This means protecting the farmer against unknown changes in the weather. In the 1930’s, Canadian farmers learned that they could not fight prolonged drought and that is why we sought to have a collective form of grain marketing. This depression era tool might seem antiquated but we can look south of the border or across the ocean for a possible outcome. In 1998, American lawmakers argued that their financial system had evolved so much that they did not need their depression era regulations known collectively as the “Glass-Steagall Act”. Most Senators spoke, Democrats and Republicans, in favour of the legislation’s repeal. They ignored the fears of the critics like Byron Dorgan – a Senator from the State of North Dakota. For example, Senator Bob Kerrey of Nebraska said that “The concerns that we will have a meltdown like 1929 are dramatically overblown”. (Glass-Steagall Act: The Senators And Economists Who Got It Right , Huffington Post, Sam Stein, Updated: 05/25/11)
Byron Dorgan was only one of eight senators who voted against the measure and yet he warned all that the change in legislation should not occur because of the theoretical possibility of a market meltdown. In 1999, on the floor of the US Senate, Senator Dorgan said “I think, we will, in ten years’ time; look back and say we should not have done that.” (Moyers and Company, PBS). And as we all know now, in 2008, the financial markets around the world collapsed because of an excessive amount of speculation on the US Financial Market. Or we could look to Australia, where farmers are reliving the lessons of the Great Depression.
The truth is that a market solution will, in the Grain World, will lead to less competition, less security and less choice for farmers. These are the listens of the Pre-Depression Era; rules that we are going to learn again.