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Price pooling and single-desk selling
What is the purpose of price pooling?
Price pooling shares the market risks among all western Canadian farmers by giving each farmer his or her fair share of the highs and lows of the marketplace. It also removes the risk for farmers that prices will drop before they are able to harvest
or deliver their crop, because it guarantees that farmers will receive the same total payment for the same grade of grain, regardless of when the grain is actually delivered during the crop year.
Price pooling also has an important impact on the CWB's ability to market farmers' grain. Price pooling allows the CWB to focus on taking advantage of different customers' willingness and ability to pay for different levels of quality for grain and optimizing the efficiency and effectiveness of the Canadian grain handling and transportation system as a whole. The goal is to optimize the total net returns for each of the pool accounts for the crop year.
How does price pooling work, in a nutshell?
Price pooling is sometimes mistakenly viewed as an averaging of the actual prices received for a specific grade of grain during a crop year. However, if the CWB pooled returns by grade, this could result in a situation where a lower grade might
receive a higher return than a higher grade. This could happen if the lower grade was sold during a period of the crop year when the market price structure was higher than during the period when the higher grade was sold. Clearly, this is not the
intent of price pooling.
The CWB's price pooling policy states that farmers will receive a total net pooled return that reflects the relative market values that the market has placed on the different grades of grain sold by the CWB during the crop year. The CWB does this by keeping track of the price spreads that existed in the market for the different grades sold by the CWB during the crop year. Therefore, the total net pooled returns received by farmers are not a simple average of the actual prices received for each grade sold by the CWB during the crop year.
What factors are taken into account in price pooling?
While the average price received by each grade of grain is affected by a number of factors, the CWB's price pooling policy also states that the total net pooled returns received by farmers shall not be unduly influenced by the:
- timing and direction of sales, which are largely determined by buyers, and to a lesser extent, by the existing constraints in the Canadian grain handling and transportation system;
- discretionary application of different grades to different markets, in order to optimize the total sales revenues for each of the pool accounts for the crop year;
- adverse impacts of competitors' export subsidies, which can vary over the course of the crop year, by type of grain and between countries; or
- impact of any increases in operating costs caused by such events as weather related transportation problems, a shortage of rail cars, or demurrage charges due to delays in loading vessels at port.
Price pooling attempts to remove the impact of the above factors, where appropriate, by ensuring that the:
- total net pooled returns received by farmers reflect the price spreads that existed in the market for the different grades sold by the CWB during the crop year; and
- total operating costs are spread across all classes and grades within a pool account, and thus are shared equally among all farmers.
What factors are not pooled?
The CWB does not pool the quality of grain or the costs to transport the farmers' grain to the nearest point of export. Farmers receive an initial payment based on the quality of their grain, and
they pay for the costs of transporting their grain to the nearest point of export.
How does the CWB determine the relative market value of each grade of grain?
The CWB tracks the price spreads that existed in the market for the different grades sold during the crop year. These price spreads are used to
determine the relative value contributed by each grade to the pool accounts.
Price spreads are calculated by analyzing the estimated selling prices for similar grains sold by competitors. The estimated selling prices are, for the most part, based on the U.S. futures prices, which are readily available and very transparent. The estimated selling prices also reflect the different quality (market) premiums and discounts that are available at each of the U.S. port positions, but do not reflect the additional premiums that the CWB is able to extract from some of its customers. Instead, the additional premiums which are attributed to the CWB's status as a single-desk seller are shared equally among all farmers within a pool account.
However, it isn't always possible to determine the price spreads based solely on an analysis of the competitors' selling prices, particularly where grades sold by the CWB are not available from other exporting countries. The CWB must also exercise its discretion in determining the price spreads that most appropriately reflect the relative value contributed by each grade to the pool accounts during the crop year. This is done based on customer knowledge, sales experience, and an assessment of the current market conditions and price expectations.
How does the CWB calculate the total net pooled returns to farmers?
The total net pooled returns to farmers are based on the final weighted average price spreads. These are calculated by multiplying the monthly price spreads
times the total amount of grain sold by the CWB during each month of the crop year.
The weighting of the price spreads by the total amount of grain sold for each month, as opposed to the total amount of grain sold by grade for each month, ensures that the "inter-grade" price relationships within a pool account are maintained regardless of when a specific grade was sold by the CWB during the crop year.