An Economic Analysis of Removing the Canadian Wheat Board’s Single Desk Authority and Rail Deregulation in Western Canada by Janelle Wallace A Thesis submitted to the Faculty of Graduate Studies of The University of Manitoba in partial fulfilment of the requirements of the degree of MASTER OF SCIENCE Department of Agribusiness and Agricultural Economics University of Manitoba Winnipeg Copyright © 2011 by Janelle Wallace Abstract Wheat is the most common cereal crop grown by farmers in Western Canada and is mainly used for export. The marketing structure for wheat in Western Canada is unique. The Canadian Wheat Board (CWB), a statutory marketing board, is mandated to sell all wheat grown by farmers for human consumption in Manitoba, Saskatchewan, Alberta and the Peace River region of British Columbia. Using historical price and basis data, this research attempts to quantify the economics of the current marketing structure for wheat in Western Canada. Simulations are developed to determine the economic profits and risk that could have been realized in an open market considering scenarios for three potential changes in the grain handling and transportation system (GHTS) and four alternative marketing strategies. Each are evaluated using a utility-based risk model to ascertain the most preferred marketing environment in terms of expected profit and risk. ii Acknowledgements I would like to thank my supervisor, Dr. Fabio Mattos (Department of Agribusiness and Agricultural Economics, University of Manitoba), for all your guidance during this research and for always making time for me. I would also like to acknowledge Dr. Jared Carlberg (Department of Agribusiness and Agricultural Economics, University of Manitoba), for encouraging me to pursue my education further and guiding me through the graduate studies program. I would also like to thank my advisory committee: Dr. Derek Brewin (Department of Agribusiness and Agricultural Economics, University of Manitoba) and Rick Steinke (The Canadian Wheat Board). Most importantly, I would like to thank Daniel for your support and encouragement as well as Z, Tanis, and Ashleigh for making the Graduate Studies program a fun experience. I would like to recognize the financial assistance received from the University of Manitoba, Douglas McRorie Memorial Scholarship and the Canadian Wheat Board Fellowship. iii Table of Contents Abstract....................................................................................................................ii Acknowledgements................................................................................................ iii Table of Contents....................................................................................................iv List of Figures........................................................................................................vii List of Tables ..........................................................................................................ix Chapter 1: Introduction............................................................................................1 1.1 Problem statement.........................................................................................1 1.2 Objectives .....................................................................................................3 1.3 Outline...........................................................................................................5 Chapter 2: Background ............................................................................................6 2.1 Farm level .....................................................................................................6 2.2 Elevator system.............................................................................................6 2.3 Rail lines .......................................................................................................7 2.4 Grain handling and transportation system ..................................................12 2.5 The export basis ..........................................................................................13 2.6 Calculation of the export basis....................................................................17 2.7 Influence of the Canadian Wheat Board.....................................................19 2.7.1 Export basis......................................................................................19 2.7.2 Price .................................................................................................20 Chapter 3: Theory ..................................................................................................23 3.1 Market structure and competition ...............................................................23 3.1.1 Market power affect on price...........................................................27 iv 3.1.2 Market power affect on basis...........................................................30 3.2 Risk .............................................................................................................32 3.3 Choices involving risk and expected utility................................................33 3.3.1 Risk preferences.......................................................................................35 3.3.2 Certainty equivalents ...............................................................................38 Chapter 4: Literature Review.................................................................................41 4.1 Previous Canadian studies ..........................................................................41 4.1.1 Prices................................................................................................41 4.1.2 Export basis (grain handling and transportation system).................42 4.2 Open markets ..............................................................................................50 4.3 Market power and price uncertainty ...........................................................54 4.4 Agricultural risk analysis methods..............................................................58 4.5 Summary.....................................................................................................63 Chapter 5: Research Method and Data ..................................................................65 5.1 Prices...........................................................................................................65 5.1.1 Base scenario (CWB pool price)......................................................65 5.1.2 Alternative scenario (open market)..................................................66 5.2 Export basis.................................................................................................68 5.2.1 Base scenario (CWB basis)..............................................................68 5.2.2 Alternative scenarios (open market) ................................................71 5.3 Expected utility analysis .............................................................................75 Chapter 6: Results..................................................................................................80 6.1 Overview of the wheat market in 2006/2007-2009/2010 ...........................80 v 6.2 Risk and expected profit for each marketing strategy in 2006/2007- 2009/2010 .........................................................................................................85 6.2.1 Scenario 1 (export basis increases by 46%).....................................87 6.2.2 Scenario 2 (export basis increases by 4%).......................................91 6.2.3 Scenario 3 (export basis increases by 7%).......................................95 6.2.4 Summary of risk and profit profiles.................................................99 6.3 Certainty equivalents for each marketing strategy in 2006/2007- 2009/2010 .......................................................................................................100 6.3.1 Certainty equivalents for different levels of risk aversion.............105 6.3.2 Analysis considering a downside risk measure .............................110 6.4 Sensitivity analysis....................................................................................117 6.4.1 Export basis unchanged .................................................................117 6.4.2 Changes in the export basis............................................................119 Chapter 7: Discussion and conclusions................................................................124 7.1 Conclusions...............................................................................................124 7.2 Implications...............................................................................................125 7.3 Limitations ................................................................................................126 7.4 Recommendations for future research ......................................................128 References............................................................................................................130 vi List of Figures Figure 1. Logistics of wheat in Western Canada ...................................................13 Figure 2. Price regulation of a monopoly ..............................................................26 Figure 3. Returns from price discrimination..........................................................30 Figure 4. Measuring risk preference ......................................................................37