Overview

Canada is one of the world’s largest producers of wheat, barley and oats, ranking sixth worldwide in wheat production and second in barley and oats in 2006. Canadian cereal production is predominantly export oriented, with about 70% of wheat, 50% of oats, and 20% of barley being exported.

With the exception of Newfoundland-Labrador, cereals are produced in significant quantities across Canada, but predominantly in the West, particularly in Saskatchewan. Virtually all producers grow more than one cereal grain, and often pulses and/or oilseeds as well.

In major crop growing areas in Eastern Canada where there are sufficient heat units, economics favour soybeans and corn. Cereals are largely grown for their agronomic benefit, i.e. their fibrous root systems improve soil structure. In addition they provide the usual benefits associated with longer crop rotations.

In Western Canada, cropping decisions are complex as temperature, moisture, disease pressure in the previous crop, price outlooks, logistics of planting and harvest, agronomic considerations all influence planting decisions.

Table 1: Distribution of wheat acreage and production by province

Table 2: Distribution of barley acreage and production by province

Table 3: Distribution of oats acreage and production by province

Statistics Canada, 2001 Cat. No. 95FO-301-XIE; October 2006, Field Crop Reporting series, Cat. No. 22-002-XIB

Structure and size of the market

Cereal grain production is essentially a Western Canadian activity, with over 90% of the wheat and barley, and just under 90% of the oats being grown in Manitoba, Saskatchewan and Alberta. Eastern Canadian wheat production is virtually all in southwestern Ontario; oats are grown in Eastern Ontario and Quebec; barley is grown in small quantities throughout Eastern Canada.

The market for each of the cereal grains is distinct and has many segments. Wheat’s best and most common use is for milling and baking, and certain wheat varieties have different characteristics which are desired for various baked products. There are eight types of western wheat: six spring wheats; one winter wheat and one durum. Over the past 5 years, western Canadian production consisted of 67% red spring wheat, 20% durum, and 8% prairie spring. Production of other classes is quite small, at 2% or less each. There are up to four grades within each of the classes. Quoted prices are for Canada #2 grade, with associated premiums and discounts depending upon quality. In addition, premiums are paid for higher than required protein for some classes and grades. Wheat not making grade is classed as feed wheat.

Most barley (about 70%) goes into the domestic feed trade, but Canada is also a major world exporter of barley. Most of the exported barley is malting barley; some is first processed into barley malt in Canada and exported in that form. Domestic brewers use significant quantities of malting barley as well. Small amounts of barley are used in other food products.

Only about 50% of Canadian oat production is commercially traded, the balance being used on-farm. About 40% of Canadian oats is exported, primarily to the U.S. for the pony oats and milling oats markets. Canada supplies the U.S. with 70% of its oat imports, with Finland and Sweden supplying the rest. In the Canadian domestic market, about 4% of the oats is used for human consumption.

Feed barley and feed wheat supplies vary considerably in quantity and quality from year to year, depending on weather conditions. Feed barley, feed wheat and corn have different characteristics, and are only substitutable to a certain extent. In some years lower grades of milling quality wheat are used in the feed market.

Market Characteristics

Wheat - wheat is marketed in different ways in different jurisdictions of Canada. Because it is Canada’s major grain, wheat has a special place in the Canadian economy, particularly in the West. For this reason, wheat marketing is always a political issue as well as an economic one.

Growers in Manitoba, Saskatchewan, Alberta and parts of British Columbia (Peace River District) who produce food-quality wheat and barley are required to market through the Canadian Wheat Board (CWB). The CWB also markets feed wheat and barley for export. However, growers are not required to market domestic feed wheat or feed barley through the CWB.

The CWB participates in wheat marketing on a global scale, selling about 20 million tonnes (MT) to approximately 70 countries. Overall the CWB is a significant force on the world wheat map, and occupies a unique market space as the single marketer of Canadian western wheat.

CWB has effective control of the supply chain for Canadian milling wheat. CWB licenses wheat varieties, and with the Canadian Grain Commission (CGC) controls grading and other quality standards. Although the CWB is not itself a logistics provider, it negotiates for transportation and terminal facilities with the elevator companies, grain dealers, railways and port terminals.

The CWB offers growers a number of marketing and pricing options. The details of the CWB wheat marketing system are complex and beyond the scope of this report. The CWB publishes a comprehensive description of their marketing and pricing policies on their website. In short, growers can find a marketing program that best fits their individual time constraints, interest in marketing and willingness to accept risk.

Domestic feed wheat can be sold through the CWB or off-board through dealers or directly to feed processors or livestock feeders.

In Ontario, wheat may be marketed through the provincial Ontario Wheat Producers Marketing Board (OWPMB), but selling through the board is not mandatory. Three-quarters of Ontario wheat is marketed off-board, and from the growers’ perspective the board is simply one marketing option. Ontario wheat producers have these options: (1) cash sale whereby they receive the price of the day at the dealer or terminal elevator; (2) forward price selling, where the producer books a future price for future delivery based on CBOT price; and (3) simply deliver wheat to a licensed elevator and let the Board sell the crop, and take a pooled return.

In Quebec, all wheat for human consumption, except for small amounts of organic product delivered to micro-enterprises, is pooled and marketed through the Federation de Producteurs Cultivateurs du Quebec (FPCCQ). Feed wheat is marketed by the growers themselves.

Almost all of the milling quality wheat in Atlantic Canada is grown in PEI, where there is a voluntary wheat pool. There is a market with local flour mills. Atlantic Canada is a deficit feed grain area, feed wheat prices are based on either the WCE feed wheat futures plus a local basis, or the competitive price of barley and corn (ON plus local basis). For milling wheat, flour mills generally pay a price similar to what they would pay the CWB for similar quality wheat, landed in Halifax or Truro.

Barley - barley is divided into two general categories: two-row and six-row. These varieties may be malting, feed, or hulless (milling). Malting varieties are two-row or six-row and there is a grading distinction. Feed varieties are either two or six row, but grading standards make no distinction. Hulless barley is either two-row or six-row and there is also a grading distinction. In practice, 75% of the barley planted is intended for malting, and 75% of that is two-row. About 1.3% of barley acreage is planted to hulless varieties, which are used in milling and swine feeds. The remaining acreage is about evenly split between six-row malting and feed varieties.

Marketing of malting barley is similar to that of wheat, and producers have the same range of pricing and delivery options. The CWB publishes a comprehensive description of their marketing and pricing policies on their website. Growers can find a marketing program that best fits their individual time constraints, interest in marketing and willingness to accept risk.

Feed Barley - barley growers in Eastern Canada are free to market barley in any way they see fit. In practice, most barley grown in Eastern Canada is fed on-farm. Not all elevators deal in barley. Those that do typically offer cash prices for delivered grain, and basis contracts for future deliveries, with the base price being WCE feed barley, or CBOT corn.

Western barley producers have two marketing alternatives for feed barley: selling to the Canadian Wheat Board, or selling to the off-board market such as feed mills and livestock operations. If feed barley is sold through the CWB, growers can use the pooling system (two pooling periods per year) or use the CWB Fixed Price Contract. In either case the grower is committed to delivery to the Board through Guaranteed Delivery Contracts.

Oats - oats is an unregulated grain in all provinces. Oats has three distinct markets; horse market, milling, and feed. Oats entering each of these markets is priced, handled and marketed differently. Oats is segregated into each market primarily by quality. CGC grades provide a general guideline, but buyers have other specific quality criteria.

Like most non-Board grains there are basically two pricing alternatives that oat producers can use: the cash market or a contract market. Each pricing alternative has specific opportunities and risks.

• Cash (Spot) market - oats sold into the cash market can go to a local elevator, neighbor, feedlot, feed mill or grain dealer. Buyers will quote a cash price for grain delivered or FOB (free on board) the farm within a day or two. The advantage of selling on the cash or spot market is that the grain is sold at a known price, and payment is made within a few business days. Horse oats or milling oats should be sold for cash after growers have submitted samples and received offers from a number of buyers. Growers can sell directly into the cash horse-oats market in the U.S. In these cases, the U.S. companies/brokers can arrange the necessary export permits for delivering across the border.
• Contracts - grain dealers and oat millers offer contracts to suit any grower’s preference, need for cash-flow, and risk tolerance. Grain dealers may offer a number of pricing and advance-payment options including:

• Pre-delivery contracts - including deferred delivery contracts, pre-priced dealer car contracts, farm-gate purchase contracts and basis contracts.
• Post-delivery contracts - including deferred pricing contracts, basis contracts, and pre- or post-delivery contracts including target pricing contracts and futures contracts.

Buyers may have varietal preferences as well. Thus growers who intend to supply a special market should consult with buyers prior to seeding.

Key Changes or Recent Issues

A critical issue in the cereal grain sector is marketing. Of all the major wheat-producing areas in the world, Canada’s western provinces are the farthest from ocean ports. They are therefore at a price disadvantage in comparison to other production regions. Wheat production is on average a narrow-margin enterprise, and competitiveness for Canadian producers depends as much on logistics as on production.

Currently, the future of the CWB is a major political and social issue. Much debate and decision making is and will be taking place regarding its future and role as a grain marketer.

Low prices are a perennial concern. Cereal grain prices are determined mainly by factors that are beyond the control of Canadian growers. Often times, these factors are political and made in countries outside of Canada.

New demand for fuel products will have an impact on the sector as some feed-quality wheat and barley moves to the ethanol market and oilseeds move to the bio-diesel market. This may provoke a shift in acreage allocation as the relative profitability of grains and oilseeds shift with the demand for fuels.

Price Discovery

All grains marketed by the CWB are priced by the Board. This involves a two-step process – an initial price that is forecasted in advance of any marketing; and a final price that is the result of actual sales that have occurred. Typically, producers receive an initial payment followed by a final payment usually 12 to 18 months after the crop has been harvested.

Nevertheless, prices are not set in isolation and are related to actual markets. Non-durum wheat prices are determined by prices in major U.S. markets. Wheat cash and futures prices for the grades Canada Western Red Spring (CWRS), Canada Western Extra Strong (CWES), Canada Western Hard White Spring (CWHWS) are set in the Minneapolis Grain Exchange (MGEX).

Canada Western Amber Durum (CWAD) price discovery is more complex. There is no durum wheat futures contract, and the cash durum market in the U.S. is spotty and thin. Durum wheat cannot be readily substituted for other wheat varieties. The demand for durum is therefore quite inelastic. Canada is the world’s largest exporter of durum and prices are negotiated by the CWB for delivery contracts with foreign millers.

Prairie spring wheats and Western red winter wheat cash and futures prices are set at the Kansas City Board of Trade (KCBT). Soft white spring wheat price is set on the Chicago Board of Trade (CBOT). Eastern Canadian wheat is also priced at a quality and location basis to these prices.

Futures prices are determined by anticipated influences on supply and demand, which are determined by a great number of often interdependent factors. In the supply side, this includes:

• Current stocks;
• Growing and harvesting conditions in major producing areas;
• Planting intentions; and
• Transport and storage capabilities.

On the demand side, the factors include:

• Quality of certain cereal classes;
• Economic conditions in importing countries;
• Livestock numbers; and
• Stocks of competing cereals.

Generally, barley prices are related to corn prices set by the Chicago Board of Trade (CBOT). The WCE trades feed-barley futures contracts. Local basis may vary, depending on supply. Malt barley prices tend to track corn prices as well, but not as closely as feed barley. The CWB sells malt barley by negotiation with buyers, so there is no transparent price setting mechanism.

The supply of malt barley is usually far in excess of demand. If the general quality of the barley crop is high, the response is simply to tighten the selection criteria. If the general quality is low, the selection criteria will drop to the minimum standard. The major supply side factors include:

• Crop conditions in barley exporting areas, particularly in Australia which competes in the Chinese market and harvests early in the calendar year.
• Current stocks, particularly if it is of high quality for malting.
• Planting intentions.

The major demand side factors include:

• Corn situation;
• Livestock numbers; and
• Usage of malt, particularly in China.

Oats is traded on the CBOT, and prices at Canadian locations are determined from the CBOT prices. However, oats vary considerably in quality and end use. Prices may vary considerably from the commodity oats prices on the CBOT. High-quality Scandinavian oats compete in the horse market in the Southeast U.S., but the supply is not consistent. Factors impacting oat prices include:

• Canadian, U.S. and Scandinavian supply and demand;
• Quality of the oats;
• North American feed grain market;
• Transportation; and
• Trade subsidies.

Key Quality Issues

The wheat market demands uniformity and consistency from shipment to shipment and from year to year. Quality criteria include flour yield, flour ash, protein content, gluten properties, falling number and baking properties. Millers must be able to predict quality of their products simply by buying the desired wheat class and milling grade. Millers also want to be able to blend wheat varieties from different sources and obtain the desired results at a minimum cost on the basis of quality representation alone.

Wheat must be free of insect infestation, other cereal grains or foreign material such as chaff, straw, weeds and other possible contaminants. Strict grading standards and cleaning procedures are maintained both at primary and export levels. This keeps millers’ processing costs down and also results in higher milling yields.

Key quality issues are defined by the Canadian Grain Commission (CGC) grading standards. The first criterion is test weight. Other important factors include colour, uniformity of kernel size, screen out, cleanliness, plumpness, protein, moisture content and soundness. Green seed is of concern to most millers. A “green” kernel may be perfectly plump. However, “green” is also associated with immature seed, early ripening, frost, and other weather factors.

Malt barley has very specific quality requirements necessary for high-quality beer production. Specifications include protein, moisture, foreign-material levels, skinned and broken kernel limitations, sprout damage, color and plumpness of kernel. There are also stringent tests for the presence of diseases such as fusarium head blight.

Oats quality in general is also defined by CGC grading standards. Specific to oats entering the horse and milling oats markets is test weight above the grading standards. By cleaning and clipping, grain companies, processors, and seed cleaning plants, can take 38- pound oats and produce bushel weights of 42 to 43 pounds or more for the performance and milling markets. In years with near-ideal growing conditions, 42 pound oats can be cleaned up to 48 pounds or higher.

Other Factors

When dealing with the U.S. oat market, special attention must be paid to the definition of bushel weight. The U.S. uses a Winchester bushel (1.244 cu. ft. or 35.239 liters) while Canada uses an Avery or Imperial bushel (1.2843 cu. ft. or 36.369 liters). The Canadian Grain Commission can provide information on determining the metric test weight, and then converting to Avery or Winchester bushel. Consistency is important when discussing the product (bushel weight) and prices (based on a bushel weight expectation), particularly with U.S. buyers.

Organic markets do exist, and the CWB handles organic grain. Less than 1% of wheat (including durum) and barley is currently certified organic. About 2% of oats is certified organic. The amount of product available is growing slowly year by year, as growers learn how to deal with the challenges of organic production. Organic producers attempting to sell product into these markets should be certified as organic growers and follow certification procedures for harvested grain.

Closing Comments

Marketing cereals is complex and affected by numerous national and international factors. Stay current, learn as much as possible about the marketing environment locally, nationally and internationally. Know about the marketing options and the associated risks and profit potential.

Consider all the options and associated risks as you decide when to sell. Your ability to manage these risks will influence timing and pricing of sales. Markets can be volatile. There is no substitute for using accurate information, sourcing good advice, and making good judgments. Marketing decisions are much like production decisions, doing a lot of little things right can add up to the difference between profit and loss.