The Economic Impacts of the Canadian Wheat Board Ruling On
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THE ECONOMIC IMPACTS OF THE CANADIAN WHEAT BOARD RULING ON U.S.{CANADA MALT BARLEY CONTRACTING by Heidi Schweizer A thesis submitted in partial fulfillment of the requirements for the degree of Master of Science in Applied Economics MONTANA STATE UNIVERSITY Bozeman, Montana April, 2013 c COPYRIGHT by Heidi Schweizer 2013 All Rights Reserved ii APPROVAL of a thesis submitted by Heidi Schweizer This thesis has been read by each member of the thesis committee and has been found to be satisfactory regarding content, English usage, format, citations, biblio- graphic style, and consistency, and is ready for submission to the Graduate School. Dr. Anton Bekkerman (Co{Chair) Dr. Vincent Smith (Co{Chair) Approved for the Department of Agricultural Economics and Economics Dr. Wendy Stock Approved for The Graduate School Dr. Ronald W. Larson iii STATEMENT OF PERMISSION TO USE In presenting this thesis in partial fulfillment of the requirements for a master's degree at Montana State University, I agree that the Library shall make it available to borrowers under rules of the Library. If I have indicated my intention to copyright this thesis by including a copyright notice page, copying is allowable only for scholarly purposes, consistent with \fair use" as prescribed in the U.S. Copyright Law. Requests for permission for extended quotation from or reproduction of this thesis in whole or in parts may be granted only by the copyright holder. Heidi Schweizer April, 2013 iv TABLE OF CONTENTS 1. INTRODUCTION ........................................................................................1 2. CHANGING INSTITUTIONAL FRAMEWORK............................................5 Canadian Wheat Board (CWB) .....................................................................5 CWB History ...........................................................................................5 Current Status of the CWB.......................................................................8 Canadian Grains Commission (CGC) ........................................................... 10 Historical Role of the CGC...................................................................... 10 Variety Registration................................................................................ 11 Current Status of the CGC.......................................................................... 12 Canadian Rail Policy................................................................................... 14 History of Canadian Rail Policy............................................................... 14 Current State of Canadian Rail Policy ..................................................... 15 Surrounding Framework: Trade Policies........................................................ 16 Summary.................................................................................................... 19 3. LITERATURE ...........................................................................................21 State Trading Enterprises (STEs)................................................................. 21 Organization and Classification................................................................ 21 Imports/Exports..................................................................................... 23 Welfare/Rents ........................................................................................ 25 Canadian Wheat Board (CWB) ................................................................... 26 Marketing Services.................................................................................. 26 Price Discrimination/Higher Prices .......................................................... 27 Market Share/Market Power.................................................................... 28 Firms ......................................................................................................... 30 Disease................................................................................................... 30 Transportation........................................................................................ 31 Quality .................................................................................................. 32 Summary.................................................................................................... 32 4. THEORETICAL MODEL...........................................................................34 A Model of Canadian Farmers' Decisions to Contract with U.S. Maltsters...... 34 Discrete Case.......................................................................................... 34 Risk Aversion ......................................................................................... 35 A Model of U.S. Maltsters' Decisions to Contract with Canadian Farmers...... 38 Conditions for a Feasible Contract ............................................................... 40 v TABLE OF CONTENTS { CONTINUED Price Movement...................................................................................... 41 5. DATA AND EMPIRICAL MODELING STRATEGY ...................................43 Data .......................................................................................................... 43 Estimation of Yield and Price Distributional Properties ................................ 47 6. RESULTS ..................................................................................................57 Canadian Transportation Act Deregulation................................................... 61 Canadian Grain Commission Disengagement ................................................ 63 Summary of Findings .................................................................................. 65 7. CONCLUSION...........................................................................................73 REFERENCES CITED....................................................................................76 APPENDICES ................................................................................................83 APPENDIX A: Continuous Case of the Farmer's Decision to Contract ........ 84 APPENDIX B: Normal Copula Methodology .............................................87 vi LIST OF TABLES Table Page 2.1 Recent CWB history .............................................................................7 2.2 Major trade disputes ........................................................................... 18 3.1 Classifying STEs ................................................................................. 22 4.1 Equation 4.18 derivatives..................................................................... 41 5.1 Estimated yield distributions and goodness of fit p{values ..................... 52 5.2 Selected yield distributions and distributional specifications ................... 53 5.3 Estimated price distributions and goodness of fit p{values ..................... 54 5.4 Selected price distributions and distributional specifications................... 55 5.5 Sample size issues when determining correlations................................... 56 6.1 Malt barley shipping distance by province of origin ............................... 67 6.2 Mean farm price results ....................................................................... 68 vii LIST OF FIGURES Figure Page 2.1 Years, on average, from development to market for wheat ...................... 12 4.1 Concave preferences............................................................................. 37 5.1 2012 barley production ........................................................................ 50 5.2 Barley yields in Manitoba .................................................................... 51 6.1 Probability of favorable conditions........................................................ 66 6.2 Mean farm price results ....................................................................... 69 6.3 Probability of favorable conditions without revenue caps........................ 70 6.4 Probability of favorable conditions without variety regulations ............... 71 6.5 Mean farm price results without varietal restrictions.............................. 72 viii ABSTRACT The August 2012 termination of the Canadian Wheat Board's (CWB) monopsony and monopoly powers changed the market structure for Canadian grains. In this pa- per, we examine what this change means for North American malt barley markets. We develop decision{making models of Canadian barley producers and U.S. malt barley procurers (maltsters), and account for the relative costs of altering each party's ex- isting contracting decisions. The contract decision model provides the foundation for an empirical simulation{based analysis of contracting decisions by Canadian and U.S. malt barley market participants in the new institutional environment. The simulation model is calibrated to jointly characterize the relationship among Canadian malt bar- ley production factors such as yields and expected barley malting rates; transportation costs impacting U.S. firms; and relevant government policies and changes. The latter category includes termination of the CWB's single{desk authority and the continuing jurisdiction of the Canadian Grain Commission and the Canadian Transportation Act (1996). Our model suggests that terminating the CWB's monopsony and monopoly powers may give U.S. brewers and Canadian farmers incentives to contract for malt barley and further deregulation of transportation rates and wheat variety controls could benefit North American malt barley farmers.