Our Wheat Gamble
FLOYD S. CHALMERS
CANADA has a lot of wheat to sell; nearly 250,000,000 bushels, in fact. It is selling very slowly. That is a problem.
Most of the wheat—more than nine out of every ten bushels—is being carried on the Government credit. That makes the problem a graver one.
The wheat has gradually been piling up ever since the bumper crop of 1928. Even two successive scanty crops have not removed our wheat surplus.
We are holding our wheat for a higher price than the
world is willing to pay for it. While we are doing that, energetic Argentine and Australian farmers are taking our markets from us.
There is a worse feature. Our big foreign customers—the most important being the people of Britain—are learning to like the taste of bread made either without Canadian wheat or with the very minimum the flour millers can use.
We are gambling with millions of dollars of the public credit. We are gambling with our whole future in wheat— our greatest economic asset.
That is our wheat problem.
The world’s largest single-unit grain elevator is at Port Arthur. It will hold 7.000.(XX) bushels of wheat. It would take thirty-five elevators of this size to hold Canada’s store of wheat.
The world’s largest lake vessel on any inland lake or waterway is owned in Canada. It is the Lemoyne. It will carry 571,000 bushels of wheat. It would take more than 400 Lemoynes to carry all the wheat Canada is holding today.
Country elevators dot the Western plains. We have nearly 6,000 of them. They have a total capacity of about 200,000,000 bushels. If we filled every one of them to the roof, we would still require the capacity of the eight largest terminal grain elevators in the world to store what would be left over of Canada’s unsold wheat crop.
It would take more than 2,000 full-length trains of fully loaded freight cars to move the wheat.
The wheat is the approximate equivalent of 50,000,000 barrels of flour, or fifteen billion one-jxmnd loaves of bread. It would provide a one-pound loaf of bread every day for every man, woman and child in Canada for four years.
It’s a lot of wheat. And the mere fact that we have it in store, that we have not sold it, that there is considerable doubt as to our ability to sell it in the near future—that is what makes it one of our great national problems.
Enormous surplus stocks of wheat do not arise overnight. Nor do great national problems. It takes more than one
wrong turning to arrive at a crisis. So a sketchy bit of the background must be told.
A Costly Guarantee
/CANADA came late to the world wheat-exporting party. ^ It is just over fifty years since Canada exported its first cargo of wheata short period in the history of man’s chief food down the ages.
When, in the first three decades of this century, we increased the wheat acreage of Canada nearly seven times, we became a star actor in the world wheat drama. We started at nowhere, and became the world’s largest wheat exporter in less than a farmer’s lifetime.
It is a grain axiom that every cereal-producing country in the world can grow wheat. It is another that the production is capable of being almost indefinitely expanded. In such a keenly competitive market we made our gains by high quality, good salesmanship and efficient marketing. We can hold these gains permanently only by the same factors.
Our farmers helped to win the war. They responded magnificently to the plea for more wheat. They got high prices, made good profits, but assumed great debts in expanding their production as a national duty.
After the war, the bright picture darkened.
European peasant-warriors went back to their farms. Russia and other countries, which had been pre-war bread baskets for the world, came back. But our farmers, debtburdened, could not drop out. They had to carry on with their increased acres. Wheat prices collapsed, stimulating farm discontent not always pointed in the right directions. The wheat-pool idea swept the West like a new religion as an answer to one phase of this discontent. The pools operated for several^ years on a rising market, putting more than half of Canada’s crop into the hands of one selling agency. This is not the place at which to assess the achievements and the mistakes of the pools.
But they began to meet trouble in 1928, when Canada’s record crop coincided with bumper crops the world over. Canada did not rush its crop to market, and carried over into the 1929 crop year over 100 million bushels of wheat —twice the previous high record.
We have never since got down to below the 100 million mark.
The year 1929 brought the world crisis, with lower purchasing power in every country, desperate financial problems in many of them, and, as part of the situation, a collapse of all farm prices, including wheat prices. Canada could not quickly adjust itself to the new prices. There was almost universal optimism that wheat would soon recover. The pools were not alone in this view. We were slow to sell our 1929 crop.
By February of 1930 the pools had reached a financial crisis. Their vast loans from the banks were endangered, and the banks were properly calling for more margin. It might have been provided by selling more wheat. Instead, the pools made an arrangement with the three Western provinces to guarantee their bank loans. This bucked up the market for a while. But it was a costly guarantee in the long run.
That it was the beginning of the present crisis is hardly to be denied by reasonable persons. From that day to this, our national wheat policy has been one of attempting to make the world buy our wheat at our price instead of at a price fixed by supply and demand (admittedly excessive supply and attenuated demand) in the world market. The seller can never dictate the price in a buyer’s market. He can refuse to sell except in limited quantities, but if at the same time he continues to produce, then he must deal with the problem of handling a steadily increasing carryover.
When the 1930 crop was ready, the Dominion Government guaranteed bank loans to enable the pools to make advances to their members. John I. McFarland was brought in to sell the pool’s accumulated holdings and to handle the new crop. An experienced grain man, he took the job of general manager of the pool’s Central Selling Agency without salary, as a public duty. He made some radical revisions in selling policy. Those revisions did not then, and have never since, embraced the policy of selling our wheat for what it would bring if pressed rapidly on the market.
Mr. McFarland soon faced serious problems.
He had to “cushion” the wheat market against the essential hedging operations of elevator companies buying grain for cash and protecting themselves by the immediate sale of a contract for future delivery. He was dealing in an abnormal market, and there were no longer many speculators to help provide this cushion.
In time he disposed of all his actual wheat and converted it into
“futures.” These were technical arrangements which concern us chiefly for two reasons. They had the result of making Mr. McFarland’s agency the ultimate carrier of a steadily increasing percentage of the total supply of Canadian wheat; and at some unknown but critical stage in the proceedings, Mr. McFarland’s agency began to buy wheat to support the market and to stabilize prices. This further enlarged his percentage of the total.
Today he is estimated to be in control of not far short of 210.000.000 bushels out of our 216,000,000 bushels of wheat in store. The figures are unofficial. Mr. McFarland publishes none himself and gives none to Parliament.
For whom does Mr. McFarland act? Who owns all this enormous total of wheat? Nominally Mr. McFarland is general manager of the Central Selling Agency and is the officer of the pool-elected directors of that organization. But he is operating on the credit of Canada. He is. in effect, a Governmental agent and acts for the nation as a whole. It is doubtful if he takes orders from anyone but the Prime Minister.
That is how our 246,000,000-bushel supply of wheat came into being. It has grown throughout the last live years, and is now gradually receding, as export shipments trickle overseas, from its recent peak. But it will not be long before the 1935 crop will be added to it.
The Price Problem
THROUGHOUT the period of its accumulation there has been one reason, more potent than any other, why our wheat has backed up on us. That reason is that we have put a higher value on our wheat than the British millers and the wheat buyers all over the world have been willing to put on it.
As a nation, we have disputed the world's valuation of our wheat, which is our privilege. Have we been foolish to exercise it? That is the point we shall shortly come to.
First, let us notice that we have sold some wheat—a great deal of it, in fact, although much less than we used to sell. From 1923-29 we did 10.6 per cent of the world’s exi»rt trade, from 1930-34 only 7.4 per cent. We have sold some wheat almost entirely because Canadian wheat is of gcx>d quality, usually very high in protein. To make certain kinds of good bread, flour buyers have had to buy some Canadian wheat. But they have bought as little as jx)ssible. and they are exercising all their ingenuity to mixtures.
Other countries have rushed their wheat more rapidly to market. For several years the United States played the same game we have attempted to play, but eventually liquidated its Government experiments in attempted price-fixing. Argentina and Australia have taken advantage of our reluctance to sell wheat and have increased their share of the world market.
Our price has been held above Argentine and Australian prices for several years. Early this year our wheat was quoted in Liverpool at thirty cents over Argentine wheat and twentv-five cents over
Australian. Considering comparative
quality, buyers might pay fourteen cents premium over Argentine wheat. They won’t pay thirty cents except for very .limited quantities.
Britain has always been our chief market. That country used to buy forty per cent of her imported wheat from us. We must sell wheat and we must sell flour in Britain in large quantities if our farmers are to prosper.
But the British are close buyers. They disliked the wheatpool wheat-selling methods, and they equally dislike Canada’s action today. The British gave us a six cents preference on wheat, but when they did it they stipulated that we sell at the world price, which is what we are not doing. John Bull is annoyed.
British millers are learning how to get along with a minimum quantity of Canadian wheat. One such miller boasted to a Canadian friend the other day that he once used between thirty and forty JXT cent of Canadian wheat in his mixture to get the flavor and quality he wanted, but now he gets along with eight per cent.
Almost imperceptibly, British millers have lowered the quality of their flour. A’et protests from British bread eaters have been almost entirely lacking. They have hardly noticed the change. In fact, there is a grave danger that the British taste in bread will change. A generation is growing up in Britain that will not know the taste of bread made with a thirty or forty per cent content of Canadian wheat in the flour. By our holding and our price-pegging we are changing the Briton's taste for bread. How many years will it take us to change it back again? That is one of the serious aspects of the problem.
Some things are being done to keep alive a British taste for bread using a high percentage of Canadian wheat.
Scotland, for instance, continues to buy Canadian wheat and flour. The rugged Scottish climate makes better bread necessary. Despite our high price, we hold our own amazingly well in that market. And Canadian flour mills are doing their best to keep a small but steady stream of flour trickling into the British market. They make only a tiny operating margin on their sales; often the price is fixed to provide as little as ten cents a barrel gross profit for the whole milling operation. Yet they get orders with the greatest difficulty because they have to pay a high price for wheat.
As a matter of fact. British flour has been laid down in Canadian ports at a lower price than the Canadian flour miller would have to pay for Canadian wheat to make it. "This is competitive bread flour, not to be confused with our highly publicized imports of Australian wheat and flour, wffiich were due to a shortage last year of good biscuit flour in Canada.
The Canadian flour shipments to Britain provide a competitive standard of quality in British bread that is enabling us to maintain at least a toe-hold in Britain, which in tum forces the British miller to buy some Canadian wheat at whatever price he has to pay. But it is a tenuous toe-hold. The point is that these purchases are at the minimum. Instead of being encouraged by the six cents preference on Canadian wheat to buy all they can here, British millers are being discouraged by our short-sighted wheat-price policy, and so they buy as little as they possibly can.
There is a grave probability that the Canadian treasury will lose an enormous sum of money on our wheat operations. If the wheat had to be quickly liquidated right now, the loss would probably run to eight very large figures, because we would have to meet foreign prices. It is estimated that the market price for our wheat is not greatly out of line with what Mr. McFarland’s holdings now cost him, although no information on that matter has ever been given the public. It is not the book loss but the potential loss that counts.
But this potential loss to the treasury on our gamble in wheat is a minor factor beside the threat which the gamble
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presents to our established wheat markets. By a continuance of our present policies we stand to lose our markets for a long time, and possibly some markets for all time. Can anyone deny that there is a serious menace to our national prosperity involved in our present policy?
C. F. G. Raikes. European manager for the Northwestern miller, says that our wheat policy is gradually killing the demand for Canadian wheat and flour in the European markets, and he includes the United Kingdom.
The Canadian West has been built on wheat. Eastern industry has been built on Western prosperity. Any policy that interferes with the export of wheat must have adverse influence on our entire national economy.
Our Chance to Recoup
NOW THAT is the menacing side of the situation. This review would not be fair or complete if we did not enquire what benefit the country may have obtained out of the policy we have pursued, and if we did not survey our chances of extricating ourselves from our wheat embroglio at an early date so that we can pursue more sensible and business-like methods in the future.
Undoubtedly the wheat policy lias given the farmer a higher price for his wheat. This has helped to stabilize Western buying power in the depression, and has eased the serious impact of the price decline on the farmer. Who has put up the money to pay the higher price? To the degree that we have been able to sell wheat, the buyers abroad have paid it. But most of it has really been advanced to the farmers on the credit of the Dominion. Foreign buyers will pay all of it if our gamble wins and we sell our wheat at a profit; otherwise the taxpayers will pay it. But the extra revenue won’t look as large as a ten-cent piece to the farmer if one of the results of our policy is to lose him his markets. His losses would then be many times his current gains.
Government guarantees that had the effect of piling up a wheat surplus were never necessary. If our banks had been allowed to advise on the disposal of the 1929 crop when the price fell, the farmer would have received a fair average price for that year and the present sorry mess would never have arisen. The farmer would undoubtedly have received a lower price for 1929, but a much higher average price than he has received for every subsequent year. This statement is not capable of statistical proof, but it is the considered opinion of many competent authorities with whom I have discussed the problem, and it is likewise logical economic reasoning. The surplus would have gone into use, and would not have been increasing in size and weighing down the entire world wheat price.
Moreover, if it had been necessary to ensure the farmer a minimum price, it could have been done by paying him that minimum price, selling the wheat and charging the difference to the Dominion treasury. Argentine has done that successfully, reimbursing the treasury by an ingenious control of exchange rates.
The second question is the important one. What chance have wre of getting out of our wheat difficulties at an early date?
Mr. McP'arland is publicly optimistic. As recently as the middle of February, he was quoted as promising that Canada’s carryover would be down below 100,000,000 bushels on August 1 next. He considers acreage reduction the world over to be the way out, and counts on the International Wheat Agreement to accomplish this. He points to a considerable reduction in the world carryover. There is less surplus wheat in the world at large, although there is more of it in Canadian hands.
There are other factors of promise that
should be referred to. World recovery may stimulate the demand for wheat. The United States may buy more of our wheat for feed and for flour. This year’s Argentine and Australian crops promise to be low and of jx)or quality. Central European countries would buy more wheat if they could get the foreign exchange to pay for it. France is relaxing its controls on wheat buying. There is a general world desire to see agricultural prices rise as a basis for further recovery. The moisture conditions in the United States and Canada are not good, and the two countries may not enjoy a bumper crop.
There are many “if's,” several of them quite promising, here. But there are other considerations. Crops might be good where they now do not promise well. This continent might harvest a bumper crop. World recovery might be delayed. Our artificially high prices have seriously reduced the consumption of wheat. The United States is not buying as much wheat as we expected to sell her.
In brief, the situation has all the elements of a colossal gamble. The stakes are many millions ol dollars of public money and the entire wheat-growing future of Canada.
Let us remember that last summer prospects were much brighter than now for disposing of our wheat surplus. There were crop failures almost everywhere. Competent authorities thought we would at last be able to get rid of most of our surplus.
Last fall, George Broomhall, the world’s No. 1 authority, estimated that the world would import 576.(XX),(XX) bushels of wheat, lie gave Canada 280,(X)0,(XX) bushels as its share. In brief, he thought Canada had a good chance of doing nearly half the world’s wheat trade. The wheat year which runs from August 1 to July 31—is more than half over as this is written. Canada has shipped less than 100,(XX),(XX) bushels of its allotment, although the six-months period has embraced our natural peak shipping season, the period between harvesting and the close of navigation on the Lakes.
Broomhall has revised his estimates downward. Now he counts on world imports of 24,000,000 bushels less than he earlier estimated. And he has cut Canada’s expectations by 40,000,000 bushels. This means that the importing countries, instead of buying as much Canadian wheat as Broomhall thought they might reasonably buy, have purchased more from other countries and have likewise got along.with less wheat.
Canada has sold about 3,500,000 bushels of wheat weekly since the present crop year started. To match even Broomhall’s reduced quota, we must step that up to nearly 6,000,000 bushels weekly.
Can we do it?
The job would be a gigantic one and could be accomplished only if there were a series of major crop failures in Europe or the Southern hemisphere, or if we changed our wheat policy to one of meeting the world price.
Even the sales on Broomhall’s optimistic basis would leave us with a carryover of not far short of 150 million bushels. Prior to 1928 we never finished a crop year with as much as 50 million bushels. Possibly, considering our wonderful elevator equipment, we should always have been carrying more of the world’s normal carryover of 500 million or so bushels of wheat than we used to carry. Possibly we can manage a normal carryover of 100 million bushels a year. This is putting it generously.
But Broomhall last fall was too optimistic. He did not count on our stubbornness in pursuing a short-sighted policy. He may be over-optimistic now when he thinks we will sell 140 million bushels before July 31.
I low long can we keep on with our present policy? In 1933, George S. Broomhall advised Canada to show that she can continue to produce superior quality wheat, to offer it as cheaply as her competitors, and to market it in such a manner that it would be the most popular wheat in Europe. We are not taking his advice.
We had our chance to clean up the situation last fall. Grasshoppers and drought gave us a small crop our second in a row. There was a bull market in August. We took no advantage of it. Not long afterward, Mr. McFarland was supporting a market that had turned down. Later he put in a “peg” to fix the market price.
Mr. Raikes says that in Britain this was regarded as “a gambler’s last throw.”
Our gigantic national gamble in wheat may succeed. But a gamble is a gamble, and when it is a gamble with established markets it is one with large stakes.
The commodity editor of the Wall Street Journal expresses a view that has been expressed by numerous authorities when he says that liquidation of Canada’s surplus as soon as possible at world prices would be the logical answer to our wheat problem..