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December 20, 2006
How the Canadian Wheat Board Acquired its Monopoly Powers
Most parties in the debate over the future of the Canadian Wheat Board (CWB) agree that Prairie farmers should be allowed a vote in the matter. But the agency's monopoly power as we know it today did not come into being due to popular demand. No farmers had a say when the single desk was imposed. And, despite sentimental folklore and media spin to the contrary, the marketing monopoly was not created to enhance the financial well-being of Prairie farmers. It was implemented in the autumn of 1943 as a wartime price control measure.
The CWB itself was created in 1935. It grew out of a series of very bad managerial decisions made by the three Prairie wheat pools. Back in the 1920s, the Saskatchewan Wheat Pool, Manitoba Pool Elevators and the Alberta Wheat Pool jointly operated a voluntary Prairie-wide wheat board. It was called the Central Selling Agency (CSA), and the dual marketing system it facilitated was thought by many to be enormously successful.
Unfortunately, at one point the CSA decided to pursue a very unwise marketing strategy. Its troubles began in 1928 when, instead of accepting prevailing market prices, it decided to carry 50 million bushels of wheat into the next crop year, in the false belief that the CSA would then be in a position to dictate what buyers would have to pay for it. These bushels were unhedged and without price protection. That decision led experienced grain traders and the editor of the Winnipeg Free Press to declare that the CSA was engaging in the "biggest game of stud poker the world had ever witnessed."
It was a gamble that would lead to the CSA's ruin. Factors contributing to the wheat seller's demise were many: Argentina had grown a big crop in 1928. Europe enjoyed a spectacularly heavy harvest. In '29, the stock market crashed. For the first time since the Communist revolution of 1917, Russia had emerged as an international wheat exporter. But few price-depressing factors cast a larger or darker shadow than the CSA's own massive unsold inventory. Every grain trader in the world knew of its existence.
As market prices fell, the CSA's bankers grew increasingly nervous. The gap between what the pools owed and what they would gain if they sold kept growing. Finally, the banks stepped in to foreclose. Then, because the economic implications were so far-reaching - namely, a collapse of the entire Prairie economy — Ottawa also stepped in. The treasury assumed responsibility for the CSA's financial obligations and appointed its own man to manage the CSA's affairs.
Ironically, instead of slowly disposing of the unsold inventory, the government-backed CSA did more of what had gotten the agency into trouble in the first place. It attempted to further manipulate prices, so much so that by 1935 it was holding more than 200 million bushels of unsold Canadian wheat. The politicians concluded that a political solution was needed, and on July 5, 1935, the Canadian Wheat Board came into being.
Its creation meant the entire affair was brought within the jurisdiction of Parliament. All existing CSA wheat stocks were transferred to the newly formed Crown agency, which was charged with the responsibility of disposing of the inventory. Although the CWB has been in place since 1935 and had limited influence in the latter part of the 1930s and the initial stages of World War II, its status as an export monopoly didn't come into being until part way through the war.
With conflict raging throughout Europe and on the Atlantic, Ottawa grew increasingly concerned with wartime inflation. To address the potential problem, it established a Wartime Prices Control Board, which soon decided to freeze the price of every single commodity in the country, with one exception — wheat. In the autumn of 1941, when the price freeze took effect, wheat was selling for 77 cents per bushel. Because the Prairie provinces had not yet recovered from the Great Depression, and because the region truly possessed a wheat-dependent economy, wheat was exempted from the price cap. Its value would continue to float on the open market.
To ensure that wartime inflation would be controlled, and that bread prices would not rise for consumers, Ottawa nevertheless froze the price millers paid for wheat at the then-prevailing price of 77 cents a bushel. The federal treasury would pick up the difference between this price and whatever the open-market price happened to be. The net result was that, every time the price increased by one cent, the federal treasury was compelled to pay out a $2.5-million subsidy.
By September of 1943, open-market prices had climbed to $1.23 a bushel. The pressure on the already war-ravaged federal treasury was enormous. As a consequence, the cabinet met and decided that as a wartime price control measure it would provide itself, through the CWB, with a temporary monopoly on wheat. Its stated purpose was to stop a continued advance in wheat prices as well as any further drain on the treasury.
After the war, the monopoly was temporarily extended, for the reason that it gave Ottawa the ability to provide low-cost wheat to the rebuilding of the mother country, Great Britain. By means of the postwar Canada-U.K. Wheat Agreement, Ottawa contractually agreed to supply, over a four-year period, 600 million bushels of prairie wheat at bargain prices.
This time there would be no offsetting payment to Prairie farmers. It was a policy that prompted John Diefenbaker to declare, "Fine, help Britain; I am all for it. But if gifts are made to Britain of aircraft, war material, or anything else manufactured, the cost doesn't come out of the manufacturer's pocket. You are treating farmers unfairly!"
In March of 1947, the Canadian Press ran a story that indicated during the first four years of its existence as a monopoly (1943-1947), the CWB had cost Prairie farmers $535 million in lost wheat revenues. And there were yet three more years of the postwar Canada-UK Wheat Agreement to be fulfilled.
After completion of that agreement, Ottawa then entered into additional International Wheat Agreements. To fulfill them, it again temporarily extended the CWB monopoly. These short-term extensions were repeatedly put in place right up into the 1960s, when a quiet and largely unnoticed decision was finally made to turn the CWB monopoly into a permanent fixture.
This history teaches three major lessons. First, a voluntary wheat board can operate effectively in a voluntary, dual market. Prior to the CSA's foolish decision to carry millions of bushels of non-price-protected wheat into the uncertain conditions of a pending crop year, it had successfully and profitably handled a very large percentage of the annual wheat harvest within that context.
Second, the CWB does not function in order to deliver farmers better prices, and it never did. This no doubt explains the perpetual insistence of the CWB that it operate in secrecy, outside the provisions of the Freedom of Information Act even pertaining to administrative and commercial transactions that are 10 or 20 years in the past.
Third, and most important, there have always been ardent supporters of a government-controlled wheat export monopoly, but it is historically false to say that the CWB monopoly as it exists was created due to their advocacy, or that this vocal group convinced growers it was superior public policy. In 1943, farmers never had any say in the imposition of its monopoly marketing powers. By what right do some now argue that we need a vote to cancel them?
Kevin Avram is a research associate for the Frontier Centre for Public Policy. He is a founder and former CEO of the Canadian Taxpayers Federation and the Saskatchewan-based Prairie Centre Policy Institute. He is currently undertaking several writing projects. He resides in Scottsdale, Arizona.
Kevin Avram is a research associate of the Frontier Centre for Public Policy. He is the founder and former CEO of the Canadian Taxpayers Federation and the Saskatchewan-based Prairie Centre Policy Institute, is currently undertaking several writing projects. He resides in Scottsdale, Arizona.