Section 301 Analysis of Effects of CWB on U.S. HRS/HAD

1. Section 301 Analysis of Effects of CWB on U.S. HRS/HAD Presentation to Policy Disputes Information Consortium March 8, 2002 By Dr. William W. Wilson

2. Introduction • Trade dispute (Section 301) initiated by North Dakota Wheat Commission • Dispute differs from previous trade disputes • Focuses on trade practices both in North America and Foreign Countries • Includes both hard red spring (HRS) and durum wheat • Findings • US ITC and STR deemed concerns as legitimate • Affirmative decision that CWB acts as arm of Government of Canada

3. Purpose/Organization • Describe the evolution and findings of case • Evolution and findings of prior cases • Details of section 301 case • U.S. Claims • Canadian Response • Interpretation of STR • Discussion of likely next steps and issues for future deliberations

4. Evolution of Trade Disputes

5. Section 301: US Claims • Special privileges and protections give CWB unfair advantage • Government borrowing for operations and export credit at reduced rates • Government guaranteed initial payment • Price pooling • Lack of price transparency • Prefential transportation legislation and regulations, and • Non-Tariff import barriers

6. Section 301: US Claims • CWB benefits from supply monopoly enabling long term contracting without regard to prices or market signals • NDWC indicated 8% advantage for CWB offers in third country markets • Longstanding pattern of CWB offers at average selling prices 5% less than U.S. bids • Overdelivery of protein - 2% advantage • Overcleaning of wheat - 1% advantage • Additional transportation benefits (Rail)

7. Section 301: NDWC Proposed Changes • Elimination of CWB supply and export monopolies • Definition of CWB aquisition costs under NAFTA to include all payments to producers • Full transparency of CWB operations including acquisition costs, export pricing, and other sales information unique to single desk exporters • National treatment for any US wheat entering Canada including full access to Canada's marketing and transportation system • Tariff rate quotas on imports • Durum - TRQ $50/ton for imports over 300,000 tons • HRS - TRQ $50/ton for imports over 500,000 tons

8. Section 301: Canadian Response • Generally limited and non-forthcoming response • Sumner and Boltuck provide most of Canadian response • Analysis of world global market did not take into account national producers as well as competing exporters • Focus on 8 exporting countries ignores losses in market share that are offset by gains in other markets • Analysis ignores performance of competing exporters, and • Study does no consider that efforts of CWB may actually increase U.S. exports

9. Section 301: USITC Findings • Structural Differences between durum markets • Canada produces 3 times volume of U.S. • No close substitutes for durum • Durum market is thin due to few large buyers and few large sellers • Canada can more easily forward contract, while U.S. market largely dominated by spot transactions

10. Section 301: USITC Findings • Structural Differences between U.S. and Canadian Industries • CWB has both monopsony and monopoly powers in marketing of western Canadian wheat • CWB has deduction applied to prices paid to farmers which they control and dictate (cleaning, transportation, handling charges). • NDWC argues these do not reflect actual costs and can be manipulated to increase final payments or reduce bids • CWB disputes this

11. Section 301: USITC Findings • CWB as Cooperative • CWB argues that it operates like a producers cooperative • ITC indicates: • CWB has financial security from government backing of its borrowing and lending • All western wheat producers must use the CWB to market wheat. Producer participation in a cooperative is voluntary. Thus, the CWB has no 'free riders' adding to Canadian supply, nor undercutting the CWB's pricing structure. • CWB does not have to accept all saleable wheat offered, while cooperative does. This gives CWB power over quantities as well as prices.

12. Section 301: USITC Findings • Pricing in U.S. Market • Many Canadian purchases quoted relative to U.S. prices • Prices for U.S. supplies include premiums/discounts for grade factors not meeting specifications • Canadian prices have premiums/discounts for grade differences (3 c/b for CWRS 1 over CWRS 2) • Canadian sales more likely to be forward and have longer delivery terms than U.S. sales Qualifier---- • No1 vs No 2 = 10c/b • US grades/futures spec’s do not include vomitoxin restriction • 20-30c

13. Section 301: USITC Findings • Third Country Export Market Practices • Foreign and U.S. buyers indicated that Canada was more likely to over deliver on quality than the U.S. • Most overdelivery for protein was within .2% • Canada more likely to have overdelivery of protein in excess of .8% • Direct price comparisons of export prices limited due to non-responsiveness and unavailability of prices. • Venezuela market found prices for No. 2 HAD and No. 2 CWAD offered to importers moved in same pattern (served by Accredited exporters)

14. STR Response • Found in favor of NDWC that the CWB's monopolistic system disadvantaged U.S. farmers and undermines integrity of the U.S. trading system. • USTR indicated that: "the monopoly CWB has taken sales from U.S. farmers, and is able to do so because it is insulated from commercial risks, benefits from subsidies, has a protected domestic market and special privileges, and has competitive advantages due to its monopoly control over a guaranteed supply of wheat."

15. STR Response • USTR committed to four inititatives • Examine possible dispute settlement against CWB in WTO • Examine possibilities of filing U.S. countervailing duty and anti-dumping petitions with Dept. of Commerce and ITC • Identify specific impediments to U.S. wheat entering Canada and present these to Canadians • Pursue comprehensive and meaningful reform of monopoly STEs within the WTO agriculture negotiations.

16. Response of Parties • Canadian Responses • CWB: since U.S. did not impose tariffs, CWB has successfully come through ninth trade challenge • Western Wheat Growers Association: ruling is a serious threat to western grain producers. Indicated that targets of investigation are practices of CWB and not non-board grains. Further, practices targeted are those that CWB claims as their strengths. • Western Barley Growers Association: CWB's lack of transparency continues to be irritant to trading partners, resulting in continuing action against Canadian farmers. Time for CWB and Canadian government to make participation in CWB voluntary.

17. Response of Parties • US Responses • Secretary of Agriculture: indicated investigation "clearly established that the trade distorting practices of CWB and country's restrictions on imports of wheat are detrimental to the U.S. wheat industry • North Dakota Congressional Delegation: supported ruling, yet wanted more immediate, stronger response by USTR • North American Millers Association: indicated they "looked forward to working with Administration and growers toward mutual goal of eleiminating monopoly powers of STEs"

18. Observations conditioning US Growers Motivations • GOC grants special rights and privileges • CWB tells its growers it is important to be able to price discriminate • CWB says it has higher quality and sells at a premium • Canada prices at farm are much less than US prices • US observes: price discounting in selected markets, persistent • overdelivering of quality etc

19. Farm Prices for Wheat Recieved by Farmers Adjusted for the U.S. Export Enhancement Program Saskatchewan, North Dakota & Montana, 1984-1999

20. Sources of Prices • Saskatchewan prices are prices received by farmers from Saskatchewan Agriculture • North Dakota prices are prices received by farmers from North Dakota Agricultural Statistics Service • Montana prices are prices received by farmers from Montana Agricultural Statistics Service • EEP subsidy from USDA-ERS

21. Assessment/Discussion • Given this is an ongoing case and that papers and evidence are not all publically accessible, discussion is limited. • Significant that findings were affirmative and indicated the CWB was an arm of the Government • Findings illustrate problems integrating disparately organized marketing systems and the resulting difficulties of harmonizing policies and business practices

22. Logic (Apparent) of the Complaint • GOC grants special rights and privileges to CWB • These facilitate greater discretion in pricing and competitive strategy than could be enjoyed by commercial firms ie facilitates price discrimination • Powers result in an unfair competitive advantage relative to rivals

23. Special Rights and Privileges • STEs can influence numerous regulations and policies to their advantage which are much more difficult to implement in a competitive commercial marketing system • Anything that reduces powers of STEs would reduce disadvantages of competitive rivals • Rationale: replication of these advantages in a commercial market system is costly and/or risky

24. Special Rights and Privileges • CWB has numerous rights and privileges • Guarantees on initial payments to producers • Procurement monopoly • Monopoly on sales to domestic and off-shore buyers • Protection of home market from US imports (eastern mills) • Less commonly recognized rights and privileges • Rail car ownership by governments and allocation authority for CWB grains • Special legislated rates on rail grains-(not common carriage) • Non-reporting of prices

25. Guaranteed Initial Payments • Guarantee of Initial Payments is fundamental tool of CWB • With supply monopoly provides advantages to selling organizations • Allows for fixed price deferred delivery contracts • Commercial firms could make these contracts in theory, however, they would be more costly to execute • Wilson et al. compare this to goverment of Canada providing a free option which they valued at 8 c/b. • Firms would still be subject to hedging costs, basis risks • Futures and options markets do not exist for some grains

26. Price Discrimination • Price discrimination is defined as • Same commodity sold to different customers at different prices (Phlips, 1985) • Generally considered an acceptable business practice, and in some cases a desirable business practice, subject to limits. • Generally used where • High fixed costs • Firm has monopoly power • Differences in demand elasticities among demand groups • Cost differences in serving different groups Pi/MCi = Pj/MCj

27. Analogy To RR Regulations/Legislation • -Price discrimination is not uncommon • Large difference between P and MC (in many markets) • Increased use of contracts…non-transparent (<40%) • Contract law require firms “similarly situated” have equal access • Allegation: price in some markets are high, and, used to cross-subsidize movements in other (more competitive) markets

28. Price Discrimination • What would be price discrimination • Different prices to different countries • Different qualities to different customers at same price • Selling to 1 buyer in an import market, but, not offering to others (that are similarly situated) • Same price for different time periods of delivery • Overdelivering quality to one market, not others, and charging same price • What is likely not be discrimination • Price diff. Between 2 sellers • Offering at $2/mt under US values (brutal/entry strategy)

29. Price Transparency • Price Transparency • Wilson et al. 1999 examined price transparency and bidding competition. Results in a stylized game indicated advantages of STEs of $1-2/MT • Difference between price transparency and transparency of operations. • Difficult to monitor price transparency as information on export sales is traditionally not released • Pervasive problem within most agricultural industries • Economists virtually would always favor greater transparency • Current reporting requirements of WTO on STEs do not require information that would allow for verification

30. Future Challenging Issues • Price discrimination and the extent that special rights/privileges are an enabling mechanism • To what extent is/can non-transparency of one rival versus others be compatible • NAFTA has relied on a loosely defined concept of acquisition cost to facilitate interpreting the prospect of anti-competitive behavior within North America • This will pose a continued challenge for policy analysts

31. Future Challenging Issues • Results are reminder of difficulties in integrating competitive rivals with entities subject to lesser competitive pressures as well as inconsistent policy mechanisms • Policies in U.S. reducing acres in an open border market • U.S. policies favoring storing versus Canadian pooling mechanisms favoring selling within a marketing year • More recent changes in Canadian grain marketing likely entails even more micro-scopic rights and privileges

32. Farm Prices for Wheat Recieved by Farmers Adjusted for the U.S. Export Enhancement Program Saskatchewan, North Dakota & Montana, 1984-1999

33. Sources of Prices • Saskatchewan prices are prices received by farmers from Saskatchewan Agriculture • North Dakota prices are prices received by farmers from North Dakota Agricultural Statistics Service • Montana prices are prices received by farmers from Montana Agricultural Statistics Service • EEP subsidy from USDA-ERS