WINNIPEG, MANITOBA--(Marketwired - April 2, 2014) - The Western Grain Elevator Association (WGEA) today responded to recent allegations in the media that grain companies are taking advantage of grain farmers, a conclusion drawn by some based on a straight comparison of grain company street prices versus export prices.
The railways have outstanding orders of approximately 70,000 railcars, a number that has been building since September 2013. Grain has already been purchased through farmers contracts, and sold to US, overseas and domestic buyers, against those outstanding railcar orders. "What we are seeing is a dysfunctional market as a result of the shortfall in rail capacity," said Wade Sobkowich, Executive Director. "Grain companies have not been making new sales of any serious magnitude because of the congested system." As railways gear up and continue to move larger volumes, grain companies can become more aggressive in making new sales and, in turn, making new purchases from producers. Up until now the focus has been on executing existing sales and trying to clear up the backlog of grain purchases from producers that was expected to move over the past six months.
The WGEA points out that grain companies are not purchasing any grain to speak of at the advertised prices and the vast majority of the grain that is being delivered is from outstanding producer contracts from months ago, where prices were more competitive. "The street prices set by grain companies are designed to dissuade farmer from wanting to deliver non-contracted tonnes so grain companies can first and foremost honour previously contracted grain," said Sobkowich. "Any grain purchased at today's prices primarily applies to situations where a producer delivers on a contract call, and over-delivers by a few tonnes." Sobkowich added this is something grain companies do not want to encourage because it takes space away from other potential contracted deliveries from other producers waiting to deliver. The fact is over the past number of months grain companies have had to go "no bid" in the country for certain delivery months, commodities, grades, etc. due to having no rail capacity to move product. There are still many locations that can only bid in deferred months for limited quantities to fill windows of what they project to be open capacity.
Grain companies have invested in larger, more efficient assets to handle increasing volumes to help maximize supply and demand opportunities. Today, we have a huge supply and a very strong demand scenario, however, we have not been able to realize the anticipated rail capacity. "Country assets sit plugged while terminals sit with unused fobbing and storage capacity," said Sobkowich. "Processing plants running out product, customer contract extension penalties, contract defaults, vessel demurrage, and delayed execution on producers' deliveries are all adding costs to the system."
The WGEA is of the view that as soon as the shortfall is cleared up and there is more predictability on volumes that will be moved by rail, that we will see grain companies making new sales. This will result in a narrowing of the basis, and grain prices returning to more normal values. "Today, the grain is trading based on the availability of rail freight, not based on a normally functioning market," added Sobkowich. "It would be completely illogical for grain companies to be aggressive on making new sales, and be aggressive on new purchases, when we cannot execute on our existing sales and purchases due to the rail capacity constraints."
The WGEA is an association of grain businesses operating in Canada, which collectively handle in excess of 90% of western Canada's bulk grain exports.