MARKETING 0F CANADIAN WHEAT AN ECONOMIC ANALYSIS WITH PROJECIIONS FDR-1975 AND 1980 Thesis: IOIDIthei“ Degree of Ph D D ' ‘ MICHIGAN sIAIE UNIVERSITY HARRY BRUCE HUFF ‘ ' 1959 " ' i ”Q L IE R A R 1' I‘AICIII {23.11 S If '9. :6 University 5" I This is to certify that the thesis entitled MARKETING 0F CANADIAN IIIHEAT: AN ECONOMIC ANALYSIS IAIITH PROJECTIONS FOR I975 AND I980 presented bg HARRY BRUCE HUFF has been accepted towards fulfillment of the requirements for Ph.D. degree in AqricuIturaI Economics m ,flmZM/éé/ Major professor Date M4001 é/fé? 0-169 I III HII‘ v . I , .3: III.” ifiyé VIII. 9 II I i. I n ‘ H . .lanu. I ABSTRACT #56 MARKETING OF CANADIAN WHEAT: AN ECONOMIC ANALYSIS WITH PROJECTIONS TO 1975 AND 1985 BY H. Bruce Huff Several recent events affecting Canada's role in the interna- tional wheat market and a concern about the present organization of the Canadian wheat market stimulated this research study. The primary objective was to develop a system of demand and supply equations for the Canadian wheat market in order to examine economic relationships, test policy alternatives and develop projections. An examination was conducted of the wheat production, consump- tion and trade of major importing and exporting countries. An analysis of the results of these data and of several projection studies indicate that surplus supply conditions will persist over the next decade. This situation results from the expansion of production in most wheat export— ing countries, outside of North America, and from the contraction of import demand in most wheat importing countries. The market outlook for Canada, from this analysis, indicates a substantial decline in wheat exports by 1975. The core of this analysis is an aggregate econometric model of the supply and demand for Canadian wheat. The model encompasses economic relationships influencing wheat supply, price, exports to the H. Bruce Huff UK, EEC, Japan, and all other free world countries, domestic consump— tion for food, feed, and seed, and farm—stored stocks of wheat. The model was estimated by a Three Stage Least Squares technique from a sample period of 1946/47 to 1967/68. From the results of the statistical estimation of the model, a better perspective of the economic forces in the Canadian wheat market can be obtained, and thus, an improved concept of how it functions. Several domestic policies for the production and marketing of Canadian wheat were evaluated. If a two—price system had been intro~ duced in 1967/68 by charging domestic consumers an additional one dollar per bushel, then it is estimated that producers‘ incomes would have been increased by 12 cents per bushel. Other policies evaluated included: (1) guaranteeing producers a minimum three percent per year price increase, and (2) guaranteeing to purchase all produced wheat at a specified price. Each of these policies would probably stimulate an increase in wheat acreage. In a period of large surplus stocks, the adoption of these policies would be inappropriate without some form of control on wheat production. A third use of the econometric model was to evaluate, for periods of l, 5, and 10 years, the impact on the Canadian wheat market Of changes in: (1) Canadian wheat exports to Centrally Planned Economies, (2) wheat production in the UK, (3) carryover wheat stocks in Argentina and Australia, (4) food aid wheat shipments, (5) production per acre in Western Canada, and (6) US wheat prices. A need exists to improve market forecasts of supply and demand Conditions in the Canadian wheat economy for two important reasons: H. Bruce Huff (l) the Canadian Wheat Board "stabilizes" wheat prices, thereby distorting the normal channel of market communication; and (2) increased commercialization of agriculture requires additional certainty of costs, prices and Volume of wheat sales. This study presents a method which can be used to provide short, intermediate, and long—run forecasts of supply and demand conditions in the Canadian wheat market. Using these forecasts, the approximate acreage required to match supply with demand can be calculated. Forecasts were constructed for 1968, 1969, 1975, and 1980 crop years. These forecasts indicated that during the next decade: (1) wheat acreage will decline, but yields will rise; (2) exports will rise slightly; (3) domestic consumption will rise; (4) over-production will continue, thus increasing farm stocks; and (5) there will be a strong downward pressure on prices. MARKETING OF CANADIAN WHEAT: AN ECONOMIC ANALYSIS WITH PROJECTIONS FOR 1975 AND 1980 by II I Harry Bruce Huff ‘ II A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1969 PREFACE The author wishes to express his appreciation to his Guidance Committee: Dr. L. V. Manderscheid (Chairman), Dr. V. L. Sorenson, Dr. M. E. Kreinin, and Dr. J. H. Stapleton for their assistance during his graduate program at Michigan State University. Special thanks are given to the author's Thesis Committee: Dr. V. L. Sorenson (Chairman), Dr. L. V. Manderscheid, and Dr. G. E. Rossmiller for their guidance, advice, and encouragement in the development and preparation of this research project. Financial assistance for this study has been provided by the Department of Agricultural Economics, Michigan State University and the Canada Council. The author is grateful to both of these institu- tions. Acknowledgments are also due to Drs. Wood and Hudson of the University of Manitoba, Dr. Bjarnson of the Canadian Wheat Board, and Mr. James Clarke of Hedlin-Menzies Ltd. for their helpful comments on the Canadian wheat market. Most of all, the author is especially indebted to his wife, Janet, for her assistance, interest, and encouragement during his gradu— ate program. She has, in addition, contributed many hours at the typewriter, including the preparation of this manuscript. Any errors or omissions found in this manuscript are 50191Y the responsibility of the author. ii PREFACE . . . . . TABLE OF CONTENTS LIST OF TABLES . LIST OF FIGURES LIST OF APPENDICES Chapter I. INTRODUCTION . . . . . . . Procedure of the Study . . . . . . . . . . . . Other Related Research . . . . . . . . . . . Outline of the Study . . . . . . . . . . . . . II. WHEAT MARKETING IN CANADA . . . . . III. IV. TABLE OF CONTENTS . n u . n o o c o n 0 Origin of the Present Marketing Structure . . . . . . Production and Distribution of Canadian Wheat . . . . Post-War Public Policies for Wheat . . . . . . . . . . International Arrangements for Wheat Trade . . . . . . Summary and Conclusions . . . . . . . . . . . . . . ROLE OF FOREIGN COUNTRIES IN THE CANADIAN WHEAT MARKET . Major Exporters of Wheat . . . . . . . . . . . . . . . Major Importers of Wheat . . . . . . . . . . . . . . . Projected Demand for Canadian Wheat in 1975 . . . . . Summary . . . . . . . . . . . . . . . . . . THE CONSTRUCTION AND ANALYSIS OF THE MODEL . . . . . . . Rationale of the Model . . . . . . . . . . . . . . . . Procedure for Analysis . . . . . . . . . . . . . . . . Page ii ll 16 20 31 34 34 55 82 85 89 89 105 Page Chapter V. ECONOMIC FORCES IN THE CANADIAN WHEAT ECONOMY . . . . . . 111 The Estimated Model . . . . . . . . . . . . . lll Evaluation and Analysis of Individual Equations . . . . 115 Refinements in the Model . . . . . . . . . . . . . . . . 124 Summary and Conclusions . . . . . . . . . . . . . . . . 125 VI. EVALUATION OF PROPOSED POLICIES AFFECTING DOMESTIC PRODUCTION AND MARKETING OF CANADIAN WHEAT . . . . . . . 127 A Two-Price System . . . . . . . . . . . . . . . . . 128 Parity Prices for Producers . . . . . . . . . . . . . . 132 Acreage Diversion Schemes . . . . . . . . . . . . . . . 133 Federal Storage of Grain . . . . . . . . . . . . . . . . 135 New Varieties of Wheat . . . . . . . . . . . . . . . . . 136 VII. TESTING LONG—RUN CHANGES IN THE CANADIAN WHEAT MARKET . . 139 Procedures Used in Developing Projections . . . . . . . 140 Wheat Exports to Centrally Planned Economies . . . . . . 142 Wheat Production in the UK . . . . . . . . . . 146 Carryover Stocks in Australia and Argentina . . . . . . 148 Food Aid Shipments . . . . . . . . . . . . . . . . . . . 151 Increased Wheat Yields . . . . . . . . . . . . . . . . . 154 Change in US Wheat Prices . . . . . . . . . . . . . . . 157 Summary and Conclusions . . . . . . . . . . . . . . . . 160 VIII. FORECASTING IN THE CANADIAN WHEAT MARKET . . . . . . . . . 161 Needs and Importance of Improved Forecasting Techniques 162 Method of Constructing a Forecast . . . . . . . . . . . 166 Shortcomings of Forecasting Models . . . . . . . . . . 169 Forecasted Values of the Endogenous Variables . . . . . 171 Summary and Conclusions . . . . . . . . . . . . . . . . 174 IX. SUMMARY AND CONCLUSIONS . . . . . . . . . . . . . . . . . 176 Summary of the Study . . . . . . . . . . . . . . . . . . 176 Evaluation of the Analyses . . . . . . . . . . . 181 Policy Implications . . . . . . . . . . . . . . . . . . 184 BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . . . . . . 189 APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . 193 iv Table II:1 II:2 II:3 II:4 II:5 III:2 III:3 III:5 III:6 III:8 LIST OF TABLES Five Year Averages of Prairie Wheat Acreage in Million Acres, Total Canadian Wheat Exports, Exports to Communist Countries, Domestic Food and Feed Wheat Consumption in Million Bushels for 1945/46—1967/68 . Five Year Averages of Net Exports as a Percent of Production of Wheat in Canada . . . . . . . . . . . . Three Year Averages of the Destination of Canadian Wheat Exports for Crop Years 1946-1967 by Percentages Three Year Averages of the Distribution of Export Clearances by Grade for Crop Years 1946- 1966 by Percentages . . . . . . . . . . . Canadian Wheat Food Aid Shipments for 1962/63-1966/67 in Million Bushels . . . . . . . . . . Average Supply and Distribution of Argentine Wheat for 1952/53-1965/66 in Million Bushels . . . . . . . . . . Exports of Argentine Wheat to Communist Countries 1961/62—1966/67 . . . . . . . . . . . . . . . . . Primary Destination of Argentine Wheat Exports by Region for Crop Years 1957—1966 by Percentages . . . . . . . Important Importers of Argentine Wheat, Average Imports 1957/58—1966/67, in Thousand Metric Tons . . . . . . Average Supply and Distribution of Australian Wheat for 1952/53—1959/60 and 1960/61—1965/66 in Million Bushels Australian Wheat Exports to Communist Countries for_ 1960/61-1966/67 . . . . . . . . . . . . . . . . . . . Primary Destination of Australian Wheat Exports by Regions for Crop Years 1957-1966 by Percentages . . . Important Importers of Australian Wheat 1957/58-1966/67 in Thousand Metric Tons . . . . . . . . . . . Page 12 13 14 15 16 37 37 38 38 42 42 43 43 Table 111:9 111:10 111:11 III:12 111:13 111214 111:15 111:16 111217 111:18 111:19 111120 III:21 III:22 III:23 US Exports of Wheat by Type of Export Program by Percentages and Total Wheat Exports in Million Bushels for Crop Years 1948—1967 . . . . . . . . . . . . . . . Imports of US Wheat by Region for Crop Years 1957—1966 by Percentages . . . . . . . . . . . . . . . . . . Important Importers of US Wheat 1957/58-1966/67 in Million Bushels . . . . . . . . . . . . . . . . Five Year Averages of Major Exporters' Percentage of World Wheat Trade and the Total Volume of World Wheat Trade in Million Bushels for the Crop Years l924~1966 Five Year Averages of Wheat Exports of Largest Fringe Exporters 1954/55—1966/67 in Million Bushels . . Source of Japanese Wheat Imports for Crop Years 1957— 1966 by Percentages . . . . . . . . . . . . . . . . . Japanese Wheat Production and Imports in Million Metric Tons and Yield in One Hundred Kilograms per Hectare for 1957/58—1966/67 . . . . . . . . . . . . . . . . . Source of UK Wheat Imports for Crop Years 1957—1966 by Percentages . . . . . . . . . . . . . . . . . . UK Wheat Production and Imports in Million Metric Tons and Yield per Acre in Bushels per Acre for 1957/58— 1966/67 . . . . . . . . . . . . . . . . . . . . . . Source of Wheat Imports into EEC Countries for Crop Years 1957-1966 in Percentages . . . . . . . . . . . Free World Exports of Wheat to the USSR in Crop Years 1960—1966 in Million Bushels . . . . . . . . . . . . . Primary Destination of USSR Exports of Wheat in Crop Years 1957—1966 by Percentages . . . . . . . . . . . . Quantities of Wheat Imported in Million Metric Tons by the Nine Largest Importers of USSR Wheat for Crop Years 1957-1966 . . . . . . . . . . . . . . . . Exports of Chinese Rice for Crop Years 1955—1965 in Million Bushels . . . . . . . . . . . . . . . . . . . Source of Mainland China' s Wheat Imports for Crop Years 1957-1966 by Percentages . . . . . . . . . . . . . . . vi Page 48 50 50 54 54 58 58 62 62 66 7O 7O 71 73 74 Table III:24 III:25 III:26 III:27 III:28 VII:1 VII:2 VII:3 V11:4 VII:5 VII:6 V111:1 Page Source of East European Imports of Wheat by Percent- ages for Crop Years 1957—1966 . . . . . . . . . . . . 76 Percentage of Wheat Traded Among Developed (DC), Less Developed (LDC) and Centrally Planned Economy (CPE) Countries 1959—1961 . . . . . . . . . . . . . . . . . 78 Flow of Canadian Wheat Exports to Developed (DC), Less Developed (LDC) and Centrally Planned Economy (CPE) Countries for Crop Years 1959—1965 by Percentages . . 78 Production and Imports in Million Metric Tons of Wheat In Developing Countries, 1961—63 and High and Low Estimates for 1975 . . . . . . . . . . . . . . . . . . 81 Estimates of Total Volume and the Canadian Share of Wheat Exports to Various Regions in 1975 . . . . . . . 83 Parameter Estimates of the Structured Equations in the Model . . . . . . . . . . . . . . . . . . . . . . . . 112 Effect on the Canadian Wheat Market of 0, 100, 200, and 300 Million Bushels of Canadian Wheat Exports to the Centrally Planned Economies, Projected for 1, 5, and 10 Years . . . . . . . . . . . . . . . . . . . . . . . 143 Effect on the Canadian Wheat Market of 100,150,200, and 250 Million Bushels of UK Wheat Production, Projected for 1, 5, and 10 Years . . . . . . . . . . . . . . . 147 Effect on the Canadian Wheat Market of Carryover Wheat Stocks in Australia and Argentina of 50, 100, 200, and 400 Million Bushels, Projected for 1, 5, and 10 Years 149 Effect on the Canadian Wheat Market of Canadian Food Aid Shipments of O, 25, 50, and 100 Million Bushels of Wheat, Projected for l, 5, and 10 Years . . . . . . . 153 Effect on the Canadian Wheat Market of the Introduction of a Hybrid Wheat with Yields of 20, 30, 40, and 50 Bushels per Acre, Projected for l, 5, and 10 Years . . 155 Effect on the Canadian Wheat Market of US Wheat Prices at 180, 165, 160, and 150 Cents per Bushel, Projected for l, 5, and 10 Years . . . . . . . . . . . . . . . . 158 Assumed Values for the Exogenous Variables for 1968, 1969, 1975, and 1980, used in Making Forecasts in the Wheat Market . . . . . . . . . . . . . . . . . . . . . 167 Table VIII:2 VIII:3 Page Theil U Measure of Past Predictive Accuracy for the Endogenous Variables between 1946/47 and 1967/68 . . . 170 Forecasted Values of the Endogenous Variables for the 1968, 1969, 1975, and 1980 Crop Years . . . . . . . . 171 The Estimated Volume of Canadian Wheat Exports to . . . . . 182 Various Regions in 1975, in Million Bushels viii LIST OF ILLUSTRATIONS Figure IV:2 VI:1 Page IV.1 Partial Equ111br1um Model of the Supply and Demand for Wheat in the Importing Countries (a), World (b), and Exporting Countries (c) Markets . . . . . . . . . . . . . 97 Substitution of Domestic Production of Soft Wheat for Imports of Hard Wheat . . . . . . . . . . . . . . . . . 100 Optimal Price Level in the Domestic and Foreign Wheat Markets to Maximize Total Revenue . . . . . . . . . . . 130 ix Appendix A. LIST OF APPENDICES Page Data Used in the Esti mation of the Econometric Model . c o o . a n . o o n u o o u o a o o . . . . 193 Formulae Used to Cal culate the Values of t Variables for Foreca he Exogenous sting Purposes - - 196 a ‘ o a o o CHAPTER 1 INTRODUCTION Wheat is Canada's most important agricultural product, accounting for 24 percent of Canadian farm income in 1966. In addition, it is the second largest source of foreign exchange earnings, with over two-thirds of the crop exported. Canada is the world's second largest exporter and fourth largest producer of wheat. As a result of its magnitude and importance in the Canadian economy, there needs to be considerable and continuing research devoted to the production and marketing of wheat in order to maintain a viable and efficient industry in the presence of numerous technological and structural changes. This study was stimulated by several recent events which have created considerable concern as to Canada‘s export potential in the next decade. These include: (1) dramatic increases in wheat production by Less Developed Countries (LDCs); (2) substantial output increases in large wheat exporting countries outside of North America—-namely, Australia, Argentina, the USSR, and France; (3) changes in the US policy concerning food aid and farm support programs; (4) increases in the impact of restric— tive trade policies; and (5) technological innovations in the baking industry which have allowed an increased percentage of soft wheat to be mixed with hard wheat for breadmaking. These events suggest that there will be a shrinking market for Canadian wheat, at least during the next decade, creating numerous problems in the Canadian wheat economy. The majority of Canadian wheat is produced in the three prairie provinces (Alberta, Saskatchewan and Manitoba). The type grown is a hard, high protein, red spring wheat. Because of this geographical concentration of production and the differences in the organization of the marketing systems, this study will focus on wheat production and marketing in the prairie region. The marketing system of this region will be examined in detail in Chapter II. Procedure of the Study The core of this analysis is an aggregate econometric model of the Canadian wheat economy. The model is a 12 equation linear simul- taneous system. It emphasizes the demand factors and encompasses economic relationships influencing domestic supply, selling price, exports, domestic consumption and the prairie farm stocks. In order to study demand more effectively, the export market was divided into five regions and the domestic market into three categories. The five regions for the export sector are the United Kingdom (UK), the European Economic Community (EEC), Japan, Centrally Planned Economies, and all Other Countries. The categories for the domestic market are food, feed and seed demand. The study has four basic objectives: 1) To establish the basic economic relationships on the aggregate level in the Canadian wheat market; 2) To emphasize the important role that foreign supply, demand and policy actions play in determining outcomes in the Canadian wheat market; 3) To evaluate the economic effects of implementing various public policies which affect wheat production and distribution; and 4) To develop long—run projections of adjustments in the Canadian wheat market. The purpose of selecting these four as the major objectives will be more apparent in succeeding chapters which outline the problems and organization of the wheat market. Other Related Research Previous research studies involving wheat marketing or using similar methodology provided assistance for the initial stages of this study. There have been two similar quantitative studies of the US wheat economy, one by K. W. Meinkenl and one by W. Y. No.2 Both were constructed to examine US policy problems and therefore are inadequate for a Canadian model. The study by Meinken was a comprehensive analysis of all aspects of the US wheat market. His major contribution, however, was the formulation of an eight equation econometric model quantifying the economic forces existing in the US wheat market. Applying this model to the Canadian situation, the major weakness would be the export sector, Meinken hypothesizes that the quantity of wheat exported simply depends on the price spread betWeen the US and the UK, adjusting for transportation, tariffs, and subsidies. It will be demonstrated later that this formulation is inadequate for Canada, since over two—thirds of its wheat crop is exported each year. The study by Mo includes estimates of dynamic multipliers which are used for forecasting of long—run adjustments of the endogenous variables in the model. The six equation, dynamic, recursive model of this study showed impressive statistical results. Its use for the 1K. W. Meinken, The Demand and Price Structure for Wheat (Washington, D.C.: US Department of Agriculture, Technical Bulletin #1136, 1955). 2 . . W. Y. Mo, An Economic Analys1s of the Dynamics of the US Wheat Sector (Washington, D.C.: US Dept. of Agric., Econ. Res. Service, Technical Bulletin #1395, 19681 Canadian market, however, is limited because of the weakness in the theoretical structure of the export equation. The underlying assump- tion of this equation in Mo's study is taken from Say's law and may be stated as export supply will create its own import demand. The most important contribution by M0 is the analysis of the dynamic properties of his model. Studies of the Canadian wheat market during the past decade have been limited. In 1964, Anderson1 published a descriptive study of the world wheat supply and demand conditions and included a review of the Canadian situation. A substantial part of the bulletin was devoted to an analysis of world food requirements and one of his major conclusions was that, although the traditional market for Canada would decrease, demand in LDCs would rise. Because of substantial increases in the production of food grains in LDCs during the past year, there may be some reservation about Dr. Anderson‘s conclusion. A recent study by Andrew Schmitz2 presents an excellent theoretical framework of the economic relationships in the wheat market. Data limitations and short— comings of his estimating procedure, however, reduce the emprical value of the study. Alex McCalla3 presented a theoretical structure for pricing wheat in the world market, in which he concluded that the US and Canada formed a duopoly, with Canada acting as the barometric price leader. As 1W. J. Anderson, Canadian Wheat in Relation to the World‘s Food Production and Distribution (Saskatoon, Saskatchewan: Modern Press, 1966). 2 . . Andrew Schmitz, "An Economic Ana1y51s of the World Wheat Economy" (Unpublished Ph.D. thesis, Department of Economics, University of Wisconsin, 1968). 3 Alex F. McCalla, ”A Duopoly Model of World Wheat Pricing," Journal of Farm Economics, XLVII (August 1966), pp. 711—27. 5 a result of the reversal in US farm policy in 1964, this pricing model is probably obsolete.1 Outline of the Study Chapters II, III and IV constitute the basic framework required to carry out this study. In Chapter II, there is a descriptive analysis of the organization of wheat marketing, past and present, in Canada. It contains a review of institutions, public policies, historical develop- ments, markets, and major problems of the industry. Chapter III contains an analysis of the current and projected supply and demand situation for all major wheat importers and exporters. In addition, this analysis includes implications of these projections for Canadian wheat trade. The rationale for the structure of the econometric model and the methodology used to accomplish the study's four objectives are detailed in Chapter IV. Chapters V, VI, VII, and VIII contain the empirical results of the analyses. In Chapter V, the quantified economic relationships, hypothe— sized in the theoretical structure of the model, are examined for inter— pretations and implications in order to provide a more complete under— standing of the functions of the Canadian wheat market. In Chapter VI, several domestic policy alternatives for the Canadian wheat market are evaluated in terms of their probable economic consequence. The long—run effects on the Canadian wheat market of various levels of change in several external (exogenous) variables are shown in Chapter VII. In Chapter VIII, the procedure for and the results of forecasting short, intermediate, and long—run adjustments in the Canadian wheat market are presented. lAlex F. McCalla, "A Duopoly Model of World Wheat Pricing," Journal of Farm Economics, XLIX (December 1967), pp. 1038—50. _ I 6 Chapter IX contains a summary of the study's achievements and the conclusions which can be drawn from these. CHAPTER II WHEAT MARKETING IN CANADA In order that the reader may understand the importance of the four selected objectives and evaluate the rationale employed in the methodology of this study, a comprehensive examination of the Canadian wheat market is required. The aim of this chapter is to provide a sufficient information base of the industry's functions, institutions and problems, on which to develop the remainder of the study. In the first section of this chapter, a brief history of the evolution of the marketing institutions in the Western Canadian wheat economy will be outlined. This outline will show the motives for the replacement of the private enterprise marketing system by the present mon0poly system. Information concerning the production and distribu— tion channels of Canadian wheat is presented in the second section. Included in this section is a brief sketch of the major problems faced by the wheat economy. In the third section, various public policies involving the use of subsidies in wheat marketing are outlined and in some cases, the costs and consequences are also given. The role of Canada in international agreements for wheat is described in the fourth section. In the concluding section, a summary of the chapter and the conclusions which can be drawn are outlined. These five sections com— Prise a relatively complete description of wheat marketing in Western Canada. 8 Origin of the Present Marketing Structure The present monopoly situation in Canadian wheat marketing from agrarian protests against the results of the open market system. Producers distrusted the large companies that marketed their grain. Particular complaints were of low grades, excessive dockage, and under- weighing. They contended that low prices were caused by grain selling agents who marketed two—thirds of the wheat crop in the first one-third of the year. It was believed that speculators in wheat futures disrupted the market since they were unaware of market conditions. These com— plaints were magnified since farmers were forced to deal with one elevator, due to the limits of the transportation facilities of the early twentieth century. There was continuous agitation by farmers for group action to bypass the large grain handling and purchasing firms. Raising sufficient capital to establish a cooperative elevator of economical size, however, was often difficult. Moreover, even when established, many of these farmer~owned companies failed for one or more of these reasons: (1) over— grading, (2) bad management, (3) lack of patronage, or (4) uncompetitive— ness. Group action on a large scale got its major start in the 1923— 1924 period when Aaron Shapiro toured the prairie provinces advocating “orderly marketing'. As a result of his oratory, producer wheat pools were established in each province.1 Before long, the pools were handling one-half of the Western Canadian crop and had established overseas selling agencies as the Canadian Cooperative Wheat Producers Ltd. The disasterous lAlberta Wheat Pool was established in 1923, Saskatchewan and Manitoba in 1924. conditions of the 1930's almost ended the pools after six very successful years. They had overestimated their influence on wheat prices and over~ paid growers during the depression. By 1931, they Were forced to mort— gage all of their assets to the provincial governments. This was the beginning of the end of the free market system. During 1930-35, the Canadian government established a federal stabilization organization which controlled wheat sales. Monopoly trading in wheat was not a new experience for Canada. A monopoly had been created in 1917 to sell wheat to the Allies and to direct domestic distribution. To the growers, monopolies were associa— ted with high prices and the open market was associated with low prices, as a result of several timing coincidences. During 1917, under the federal board, there was a world shortage of good quality wheat which led to high prices. In 1920, when the monopoly board was dissolved and trading on the Winnipeg Grain Exchange (the open market system) was resumed, the post-war recession was just starting and wheat prices (like all other agricultural prices) dropped. For the grower, this incident added additional evidence to their conviction that the Winnipeg Grain Exchange was detrimental to the farmer's interests. In 1935 the Canadian Wheat Board (CWB) was established by the federal government. The Board's commissioners are responsible to the cabinet minister, normally the Minister of Trade and Commerce.1 There was no producer vote to establish the Board, nor is there any producer representation on the Board. The CWB has no physical facilities and leases country elevators to provide these facilities. 1The single exception was during the late 1950's, when it was responsible to the Minister of Agriculture (Alvin Hamilton). 10 During 1935-43, sales to CWB were on a voluntary basis. In 1943, wheat prices were twenty to thirty cents above the CWB's initial payment. Thus, in order "to meet Mutual Aid Commitments and to continue the practice of negotiating bulk sales of wheat to the British Imports Com- mittee, . . . the Canadian Wheat Board . . . became the exclusive initial recipient of Canadian wheat as delivered from the farm."1 Farmers receive a "pooled" price for their wheat. At the time of delivery, they receive an "initial payment", based on grade, minus fixed handling and transportation costs to the Lakehead. The initial price is generally static for several years and is also often substantially below market prices. Thus, it does not fully reflect present market conditions. The producer may receive an interim payment and receives the final pay— ment when the pool is closed out. The final payment reflects the CWB profits. The farmer, however, is not aware of his final selling price until well after he plants his crop the following year. Since initial payments remain the same regardless of date of delivery, there is no incentive for the farmer to store his wheat for part of the season. This necessitates that quotas be assigned to all producers, based on "each producer's specified acreage seeded to cultivated grasses and forage crops."2 These quotas indicate the quantity of wheat which can be delivered to the CWB. Excess Wheat above the quotas backs up in on-farm storage. Consequently, the producer bears the burden of oversupply. The burden being not only the storage Costs, but also a severe limitation on his cash income. As a result, ____________________________ 1V. C. Fowke, The National Policy and the Wheat Economy (Toronto: University of Toronto Press, 1957): PP- 275-76' 21966-1967 Annual Report of The Canadian Wheat Board (Winnipeg: ___________.1 the Canadian Wheat Board, 1968), p- 20- 11 purchased inputs——ferti1izer, herbicides, machinery——may be purchased at below optimum quantities. trade in wheat and wheat flour in the prairie provinces and parts of British Columbia and Northern Ontario. Production and Distribution of Canadian Wheat The majority of Canadian wheat-—close to 95 percent--is grown in the prairie provinces. In this area, the type of wheat produced is a hard spring wheat. As a result of climatic conditions in parts of this region, especially where it is extremely dry (such as in Southern Saskatchewan), wheat provides the highest income of any crop.l Conse- quently, producers tend to plant wheat whenever it appears practical. Wheat acreage harvested in the prairies has varied widely during the post-war period, from a low of 20.9 million acres in 1957/582 to a high of 29.8 million acres in 1966/67. Five year averages of these data are illustrated in Table II:1. There has been relatively little increase in productivity in the prairie wheat producing regions. Calculation of a linear time trend over the period 1908 to 1966 shows that production per acre has - 3 'b'l't' of increased at the rate of only 0.1 bushels per year. Poss1 l l 1es the development of a new hybrid which could dramatically affect these \ lAverage gross returns for prairie farms during 1960-64 was 2-69 (Canadian) dollars per acre higher for wheat than for barley. For 1955- 59, this value was 2.18 dollars per acre, from Gerald I. Trant, Dav1d L. MacFarlane and Lewis A. Fischer, Trade Liberalization and Canadian Agri- . ' ' Press 1968) pv 15 Culture (Toronto. Univer51ty of Toronto , r 2Crop year in Canada ends July 31. 3§=14.3 + (.10027)x, where f is the predicted Yield in bUShels per acre, . . X is time equaling l for 1909, 2 for 1910, 12 production data, however, should be considered. In addition, the use of fertilizer in the prairies is increasing at a rapid rate, the effect of which should be reflected in wheat production statistics in the future. Table II:l.——Five Year Averages of Prairie Wheat Acreage in Million Acres, Total Canadian Wheat Exports, Exports to Communist Countries, Domestic Food and Feed Wheat Consumption in Million Bushels, for 1945/46—1967/68. Exports to Domestic Feed Harvested Total Communist Human Con- Grain Years Acreage Exports Countries sumption Use 1945/46—1949/50 23.737 246.3 —— 49.5 62.5 1950/51—1954/55 24.702 298.0 0.7 51.1 66.1 1955/56-1959/60 22.022 293.8 16.0 53.2 70.9 1960/61—1964/65 26.184 407.4 135.2 57.0 50.3 1965/66—1967/68 29.047 478.5 284.6a 60.0a 51.5a a1965/66—1966/67. Source: Quarterly Bulletin of Agricultural Statistics (Ottawa: Dominion Bureau of Statistics, Agriculture Division, 1945, 1946, . . . 1968). Grain Trade of Canada (Ottawa: Queen's Printer, Statistic Division, Board of Grain Commissioners, 1945, 1946, . . . 1967). In the post—war period, domestic wheat consumption in Canada averaged 154.21 million bushels annually. Of this amount, 53.2 million bushels were for human food, 62.5 million bushels were for animal feed, and 35.5 million bushels were for seed use.2 Five year averages of 1In this study, all statistics for domestic consumption and exPorts include both wheat and flour. The consumption of flour is exPressed in terms of wheat equivalent. 2 Grain Trade of Canada (Ottawa: Queen's Printer, Statistics Division, Board of Grain Commissioners, 1945 . . . 1967). 13 these data are illustrated in Table II:1. A linear time trend shows that per capita wheat consumption has been falling at the rate of 0.04 bushels annually during 1946/47 to 1967/68. With a population of approximately 20 million in Canada and current per capita consumption of approximately 3.0 bushels, it would require a population increase of at least 1.4 percent (less than present rate) to offset this decline. The majority of Canadian wheat is exported. The ratio of exports to total production is shown in Table II:2. The variations in these percentages reflect the production level and stock accumulation and disposal. For example, during the early sixties, this percentage rose to very high levels as stocks were being depleted. Wheat exports account for approximately 10 percent of all Canadian exports, making it an important element in the strength of the Canadian economy. Table II:2.——Five Year Averages of Net Exports as a Percent of Production of Wheat in Canada Crop Years Exports/Production 1924-28 73 1929—33 62 1934—38 66 1949-53 55 1955—59 66 1960-64 80 1965-66 73 Source: Trends in Wheat Consumption (London: International Wheat Council, 1963). Quarterly Bulletin of Agricultural Statistics (Ottawa: Dominion Bureau of Statistics, Agriculture Division, 1960, . . . 1967). Willi. 14 The traditional market for Canadian wheat has been Western Europe and the UK in particular. In Table II:3, this is clearly illustrated. However, the dominance of the UK and West Europe in the Canadian market has diminished considerably during the period shown. Three important new markets have emerged. One of these is Japan, a rapidly growing market which replaced the UK as the world‘s largest wheat importer in 1967/68. The other two are Communist China and the USSR--East European markets. These markets are variable in nature and it is questionable as to their long run~demand. These markets have played a very important role for Canada in that they entered the world wheat market at a time when Canadian wheat stocks were reaching critical proportions. Table II:3.-—Three Year Averages of the Destination of Canadian Wheat Exports for Crop Years 1946—1967 by Percentages. 1946- 1949- 1952— 1955— 1958- 1961— 1964— Region 1948 1951 1954 1957 1960 1963 1966 1967 UK 79.4 46.5 34.9 34.6 31.3 21.1 15.4 19.4 Japan 0.0 4.8 12.0 13.2 17.7 13.0 11.5 12.2 EEC 6.8 14.2 22.3 25.9 22.8 16.7 10.7 13.0 Other W Europe 4.1 9.6 10.3 7.7 6.9 4.2 2.7 2.5 USSR- E EurOpe —- 0.5 1.6 8.9 5 6 20.3 29.3 18.9 Africa 3.3 4.1 3.7 0.9 2 5 1.6 1.2 1 8 Other Asia 4.0 6.8 5.6 4.1 5.3 3.1 7.8 8.9 N&S America 2.2 10.6 9 6 3.9 3.7 3.6 5.4 7 7 China 0.1 —- —— 0.5 3.8 16.3 16 0 15.5 Source: Canadian Grain Exports (Ottawa: Queen's Printer, Statistics Division, Board of Grain Commissioners for Canada, Crop Years 1946—47 to 1965—66, Crop Year 1966—67, Crop Year 1967—68). 15 The system of grading wheat used by Canada is one of the impor— tant reasons for its large export market. In Table II:4, the distribu- tion of exports by grade are illustrated. The grade distribution for exports probably differs slightly from the grade distribution of produc- tion, since a higher percentage of the lower grades, and Eastern wheats are probably consumed domestically for feed (although not necessarily by the same producer). The majority of wheat exported during the postwar period has been Number 2 and 3 Manitoba Northern. In certain years, Number 1 Northern has accounted for a significant percentage of exports, but in other years there has been a substantial percentage of lOWer grades. It is difficult to establish any trends in grades of exports due to the extreme variability from year to year, although this is partly masked by the three year averages as shown in Table II:4. Table II:4.-~Three Year Averages of the Distribution of Export Clearances by Grade for Crop Years 1946-1966, by Percentages 1946— 1949- 1952- 1955— 1958- 1961- 1964- 1948 1951 1954 1957 1960 1963 1966 #1 Man North 23.2 12.1 7.8 2.2 1.0 11.3 3 7 #2 Man North 37.5 27.7 44.1 34.5 31.5 52.8 30 3 #3 Man North 18.8 16.7 24.9 26.8 34.1 20.0 29 6 #4 Man North 6.3 15.4 9.2 12.1 15.1 6.4 20.0 #5 —— 10.5 8.2 14.0 6.1 3 4 7 0 #6 —— 1.0 0.6 1.7 0.1 -- __ Feed —— 0.1 —— 0.3 -— -— __ c w Garnet 2.5 1.9 0.7 0.3 —— 0.2 0.1 lberta Red Winter 0.8 0.5 0.1 0.4 0.2 0.4 0.8 ther 4.9 7.0 0.7 2.2 1.5 0.7 0.1 astern 0.7 1.4 1.3 0.5 0.5 0.4 0.5 urham 5.2 5.7 2.4 5.1 10.0 4.4 7.0 ource: Canadian Grain Exports (Ottawa: Queen's Printer, Statistics Division, Board of Grain Commissioners for Canada, Crop Years 1946—47 to 1965—66, Crop Year 1966—67, Crop Year 1967-68). 16 Shipments of wheat for food aid to LDCs have been a relatively unimportant factor for Canada, especially in comparison to her southern neighbor. Recently, however, food aid shipments of wheat have reached more substantial proportions (Table II:5), with the majority of wheat shipments going to India. In 1966/67, 78 percent of all Canadian wheat food aid was sent to India. During that year, a total of 49.5 million bushels were shipped under the (bilateral) Canadian International Food Aid Program, while 3.2 million bushels were shipped under the (multi- lateral) United Nations World Food Program. As surplus stocks increase in magnitude, there will be more political pressure to increase shipments of wheat for food aid. Table II:5.——Canadian Wheat Food Aid Shipments for 1962/63-1966/67 in Million Bushe1s Year Shipments 1962/63 1 7 1963/64 2.7 l964/65 11.8 1965/66 30.1 1966/67 53.1 Source: 1966—1967 Annual Report of The Canadian Wheat Board (Winnipeg: The Canadian Wheat Board, 1968), p. 9. Post-War Public Policies for Wheat Most developed economies have substantial protection and numerous forms of subsidization for their agricultural sectors. Canadian wheat producers, although they are highly protected against imports, have received little governmental subsidization; one of the major reasons 17 for this is that wheat is such a large segment in the economy that Canada cannot afford a large scale subsidization of this sector. Public policy regarding domestic marketing of wheat was discussed in the previous section. Few innovations have occurred in this area since the introduction of the CWB. Export marketing will be analyzed in the following section. Public policies to increase productivity have been in the form of research, extension and education expenditures. The major policy change in the post—war period has occurred in the area of stabilizing income and prices to producers. This section is devoted to an elaboration of some of these policies. These are: 1) Provisions for farm credit to partially subsidize the capital input for agriculture. 2) The Prairie Farm Assistance Act (1939)1 is a form of reim- bursement to farmers who suffered losses from natural disasters. Average payments from 1959 to 1962 by the Act were $25.7 million. Farmers contri— bute one percent of sales to the fund, and average receipts during 1956— 1965 were $7 million. If wheat yields in a township or block of sections are low, payments are made which range from $2 to $4 per acre for one— half of the total cultivated acreage in all farms. 3) Federal Crop Insurance Act (1959) was designed to supplement the Prairie Farm Assistance Act and make low cost insurance available to farmers. Producers are not eligible for both programs. The federal government pays oneehalf of administration costs and up to one-quarter of the producer's total premiums. 4) The Prairie Farm Rehabilitation Act (1935) originally provided lPrairie Farm Assistance Act (Ottawa: Canada Department of Agriculture, Publication 1151). 18 funds for rehabilitation of drought and soil drifting areas. It has now been expanded to include irrigation projects and the development of community pastures. 5) Compensation of approximately $65 million was made for the losses from low prices during the Anglo*Canadian Wheat Agreement (1946— 50). CWB prices for both domestic and UK sales were negotiated at substantially below world wheat price levels. 6) The Temporary Wheat Reserves Act (1955) authorized the Federal Minister of Finance to pay the storage and interest cost for wheat stocks held by the CWB in excess of 178 million bushels (average carryover for 15 years preceding 1951/52) on August lst of each year. During 1955/56 to 1966/67, payments under this act averaged $37.1 million annually (range 28.8 to 50.4 million). 7) To compensate for financial hardships of western grain farmers during the late 1950's, the federal government paid wheat acreage payments in 1958, 1960, and 1961 of $1 per acre, up to $200 per farm. The cost of this program was approximately $40 million. 8) The Prairie Grains Advance Payments Act (1957) allowed farmers with farm-stored wheat (unable to be delivered to the CWB) to receive interest—free cash advances up to $3,000 maximum per farm. Farmers could receive $0.50 per bushel for up to six bushels per acre. It is repaid from grain deliveries to the CWB. 9) Freight rates for wheat are regulated by the Crow's Nest Pass Agreement. The railroads reduced rates by approximately 20 percent in return for a $11,000 per mile subsidy on a rail line built through the Crow's Nest Pass.1 Freight rates from Regina to Port Arthur have been 20 1A. C. Currie, Canadian Economic Development (Toronto: University of Toronto Press, 1942), P- 179' 19 cents per hundred weight since 1897. In 1958 losses to the Canadian National Railroad were estimated to be $37.6 million and to the Canadian Pacific Railroad, $33.1 million, as a result of this agreement. 10) For the first time, farmers were guaranteed a minimum price above the world price in 1967/68. Minimum prices for the 1968 World Grain's Agreement were negotiated in 1967 at $1.955 per bushel (for No. 1 Northern at the Lakehead). During the period between the time of the negotiation of the agreement and ratification, world prices fell below this minimum. 11) Under the Feed Grain Assistance Program, transportation costs of feed grains shipped from the prairies to other parts of Canada are subsidized. The cost of this program in 1961 was $18.4 million. 12) The Canadian Exports Credits Insurance Corporation (a govern— l for credit terms ment agency) insures cereal sales to certain countries of 10 percent cash, balance in 24, 30 and 36 months. From 1961/62 to i965/66 total exports under this agency were 140.5 million bushels. Also, the CWB sells wheat to Mainland China and East Germany on redit terms through loans guaranteed by the Canadian government to tharter banks. Credit terms are 25 percent cash, balance in 18 months. 'otal exports during 1961/62 to 1965/66 under this plan were 351.7 illion bushels. 13) Food Aid by Canada has been rather minor in comparison 1th the US. Wheat has been contributed under the Colombo Plan for >utheast Asia, under its bilateral Food Aid Program (29.2 million bushels 1 1965/66), and under the World Food Program (0.24 million bushels in lCurrently to Bulgaria, Czechoslovakia and Hungary, National ain Policies (Rome: Food and Agriculture Organization, 1957), p. 52. 20 1965/66). Recently, food aid shipments have been reaching rather sizable proportions and with large carryover stocks, this trend will probably continue. International Arrangements for Wheat Trade Canada exports approximately two-thirds of its wheat crop each year. As a result, it is very interested in promoting conditions for orderly marketing of wheat on the international level. During the past two decades, the International Wheat Agreement (and its successor, the International Grains Agreement) has played a role in stabilizing prices in world wheat trade. Because of these two factors and, in addition, to illustrate some of the constraints preventing the movement to a vastly improved international wheat agreement, this section concerning the historical development of international agreements for wheat has been included in this chapter. International Commodity Agreements (ICAs) for particular agri- cultural commodities have been devised as the solution to overcome such problems as (1) large price fluctuations, (2) persistant discrepancies between supply and demand, (3) declining (net barter) terms of trade, and (4) periodic large surplus stocks. These situations arise from an inelastic supply and demand, a highly variable supply from year to year, a tendency for persistent overproduction, and the domestic_production and import policies of importing countries which restrict entry of agri— cultural commodities. These problems are accentuated when a country depends on a single commodity for the majority of its export earnings. Further complications in this area have been the pressure from LDCs to use these agreements as a means of transmitting resources from rich to poor nations. 21 The economic focus of most ICAs has been on (1) the maintenance of stable prices in the export market, and (2) the attempt to raise commodity prices above the level which would have occurred in the absence of the ICA. ICAs have provided forums for the discussions of the prob- lems involved with trading agricultural products in the international market and thus, have provided a means of 'moral suasion' in promoting orderly international marketing of agricultural commodities. These factors may be the most important achievements of ICAs. Canada has been involved with several bilateral and multilateral wheat agreements since 1932. The following is an outline of these agreements: Imperial or Ottawa Conference (1932) A six cent per bushel preference was obtained for Canadian wheat in the UK market. This preference may have increased Canada‘s share of ‘the UK market, but total world trade did not increase because of increased rotection of wheat production that was occurring in most countries. It as a short—lived preference and the major impact was a stronger bargaining osition for Canada in the US—Canada—UK trade talks in 1938. At this time he preference was discontinued. 933 World Wheat Agreement Production quotas for exporting countries were established for 33/34 and 1934/45. In the first year, the total quota was 560 million ushels of which Canada's share was 200.1 This share was to be increased I 63 million bushels the following year. Importers agreed to discourage 1Shares for other countries were: Argentina: 110 mil. bu., stralia: 195 mil. bu., US: 47 mil. bu., Danubians: 50 mil. bu., and hers (including Russia): 48 mil. bu. 22 any future production. The minimum price was set at 63.02 (gold) cents. This was the first attempt (and to date, the last) to match supply and demand, thus eliminating price depressing surpluses, while at the same time, prices were being stabilized at remunerative levels. The Agreement was not very successful. Argentina violated the quota by 40 million bushels in 1933/34. In the prairies, politicians were in favor of reduced world wheat acreages. Producers, on the other hand, did not share this view. The Anglo—Canadian Agreement (1946) In 1946 Canada agreed to sell 600 million bushels of wheat to the UK during the next four years. Price was established at $(Can.) 1.55 per bushel (#1 Northern) for the first two years and to be rene- gotiated for the last two years. Even as the Agreement was signed, world wheat prices were $2.00 per bushel. Shortly thereafter, Canadian export prices were raised to $2.05 per bushel and to $3.10 per bushel in 1947/48. In the renegotiations, prices were established at $2.00 per bushel, while world prices were at $3.15 per bushel. The loss to Canada from the low prices in the third year was $27 million. During the final year of the Agreement, average world price was $2.16 per bushel. The 1949 International Wheat Agreement (IWA) The implementation of the 1949 IWA began a new era of interna— tional trade agreements in wheat. This multilateral treaty remained the basis for a decade of IWAs and the foundation of the wheat agreement existing today. 23 The objectives of the IWA were: (1) price stability, (2) price equity, and (3) assurance of markets and adequate supplies. Most of the emphasis has been on price stability, which may not be the most important goal. Originally proposed as a five year agreement for 1948, it failed to be ratified by the US government (and others). It was implemented the following year as a four year agreement and became effective August 1, 1949. This IWA covered 4 major exporters——Australia, Canada, France and the US, and 37 importing countries. Exporters agreed to sell and importers agreed to buy at least a specific quota of wheat (or flour) each year within the price schedule of the IWA. The quotas covered wheat trade of 456 million bushels (slightly over one—half of world trade) and the price range was $(Can.) 1.50 to $1.80 per bushel for #1 Northern at the Lakehead, and was to decline $.10 per bushel for the following three years. Canada's ‘share of the quota was 203.1 million bushels.l Several large exporters-- Argentina, Russia and the Danubians——did not sign this IWA. A major shortcoming of the 1949 IWA was that buyers were not obliged to purchase their quota unless prices were at the minimum of the specified range and exporters were not obliged to fulfill their quota of sales unless prices were at the maximum of the specified range. The IWA had no direct restriction on wheat exports or prices of Meat sold outside the Agreement nor on the level of production and omestic prices. Thus, its main focus remained on price. 1Quotas for other exporters were: Australia 80 million bushels, rance 33 million bushels, Us 168.07 million bushels and Uruguay 1.84 illion bushels. Source: Wheat Situation (Washington, D.C.: Economic esearch Services, US Department of Agriculture, (March—April 1949), . 16. 24 During the four years of the 1949 IWA, 56 to 62 percent of the world trade in wheat moved under the terms of the IWA.l For Canada, 71 percent of its total wheat and flour exports moved under the IWA.2 It was surprising that exporters agreed to the maximum price of $1.80, since world wheat prices were substantially above this level even at the time of the signing and they remained there throughout the life of the IWA. Therefore, one~ha1f of the world trade was arbitrarily maintained at quite depressed prices. This had the consequences of: (l) stimulating demand beyond available supplies, (2) increasing the use of wheat for feed purposes, (3) distorting the allocation of acreage from wheat to non—restricted crops3 (fortunately wheat yields in 1950- 52 were above average or critical wheat shortages might have developed), (4) moving the US into a program of maintaining producer prices at free world levels, with the treasury absorbing the IWA losses, (5) benefiting the non-IWA more than the IWA exporters, and (6) preventing importers from obtaining their full quota even at the ceiling prices. The 1949 IWA exemplifies the problem of selecting an appropriate price range at which to stabilize wheat prices. If the range selected deviates too far from the level of market prices, then certain undesirable events, which may have long—run consequences, may result. lHelen C. Farnsworth, "International Wheat Agreements and Problems L949—56,” Quarterly Journal of Economics (May 1956), p. 218. inalist (Ottawa: Canada Department of Agriculture, 1953), p. 66. 3Prairie farmers reduced acreage of wheat 1.4 percent in 1950 nd 7.0 percent in 1951, below the 1949 levels. 2R. M. Esdale, "A New International Wheat Agreement," The Economic 25 The 1953 International Wheat Agreement The most significant changes in the 1953 IWA were an increased maximum price and the failure of the UK to join the IWA. The maximum price was raised by 25 cents per bushel to the new range of $(Can.) 1.55 to $2.05 per bushel. Unfortunately, this change was taking place during a period of rapidly rising wheat production in many of the importing countries and increasing surplus wheat stocks.l Failure of the UK to join the 1953 IWA reduced its total quota by 177 million bushels. Canada's share of this revised quota was 163 million bushelsz. The new IWA went into effect on August 1, 1953 for a three year period with four major exporters (accounting for 85 percent of world wheat trade during the four previous years) and 41 importing countries.3 These higher prices, in a period of increasing supply, had several important effects:4 (1) the CWB set one export price for both IWA and hon—IWA (Class II) exports, in September 1953; (2) the US followed the banadian lead and set one export price (the treasury subsidized both types bf exports); (3) some additional expansion of wheat production occurred, 1 hlthough this effect was probably minimal; and (4) importers did not 1 purchase their entire import quotas. I 4 Canada assumed a dominant role in price setting and supported 1 1heat prices substantially above the minimum levels "when unprecedently .havy world wheat surpluses would seem to have warranted prices at or 1 1 1US stocks on July 1 were 237 percent in 1953, 365 percent in 1F54; and 406 percent in 1955 as large as the 1952 stocks. 1ZQuotas for the US were 210 million bushel and Australia 48 illion bushels. 1 1 3Wheat Situation (Washington, D.C.: ERS, USDA, July—Sept., 1953). 4 1 Farnsworth, p. 230. 1 .1 -1 1 11 26 . l . . below the minimum Agreement level." Canadian price never fell below $(Can.) 1.71 per bushel. The 1956 International Wheat Agreement The problems that existed in the latter part of the 1953 IWA remained unsolved by the 1956 renewal of the Agreement. This three year extension consisted of the same basic formula as the 1949 IWA. During the late 1950's, carryover stocks increased very sub- stantially. Trade under the IWA dropped to a very low percentage of the total world trade. In the first year (1956/57), only 22 percent of Canada's wheat exports were under the IWA. Only one-fifth of the world and one-third of the intra-IWA countries trade in wheat was governed by the IWA during 1956/57 to 1957/58.2 Substantial structural revisions in the IWA were obviously required if the agreement was to influence inter— national trade in wheat marketing. 1 In the new Agreement, prices were dropped 5 cents per bushel to 1 a new price range of $(Can.) 1.50—$2.00 per bushel for #1 Northern. Again, prices were only established for one grade of wheat, an unsatisfactory 1 1ituation for importers. Two new eXporters joined the IWA-~Argentina 1 {nd Sweden——bringing the total to six. 1 Vhe 1959 International Wheat Agreement 1 1 The parties involved with the establishment of the 1959 IWA were 1 pced with the problem of production in excess of effective demand. This 1 Ftuation was the result of: (1) national price and income support 1 Flicies, (2) rapid technological change, (3) prohibitive trade regulations, 11 1 lIbid., p. 231. 2Esdale, p. 66. 27 and (4) lack of foreign exchange in LDCs to purchase wheat. Faced with this surplus problem and the near collapse of the 1956 IWA standard formula, some basic changes were instituted in the new 1959 IWA. The most important of these changes were in terms of the obligations of importers and exporters. The 35 importers were required to purchase a percentage of their total annual commercial imports from the nine exporters,l within the specified price range. The new Agreement was effective at all prices within the stipulated range, not just at the two extremes as in the previous IWAs. The percentage of obligations varied from a low of 30 percent to a high of 100 percent, with the mean for all countries being 70.5 percent based on the 1954/55 to 1957/58 total commercial imports. If all exporters priced wheat at the maximum price, the importing coun- tries would be freed from these percentage obligations. Exporters were required to meet commercial requirements of importers. When prices 1eached the maximum, however, this vague requirement became a precise 1datum quantity". The datum quantity consisted of a specified amount 1 which must be made available to each importer based on the past five 1 . . . . year's commerc1al imports. Moreover, sales by exporters at below minimum 1 prices were considered to be a 'breach of the exporters undertaking', 1nstead of not contributing to exporters IWA requirements as previously. 1 1 The 1959 IWA looked more promising than its predecessors. The 1 1 p.90 per bushel. The International Wheat Council was to undertake a %udy of consumption patterns and make an annual review of the world K had now rejoined. The price range was established at $(Can.) 1.50- 1 1 I I I n I peat Situation in production, stocks, markets, and surplus dlsposal ‘1; ales. This was an important step in improving market information and 1 19"— 1 1Italy, Mexico and Spain were new exporting members in the 1959 IWA. 28 making it available to all members. Surplus disposal received more emphasis. A record of all trans- actions was now maintained. Principles of surplus di5posal were estab— lished such that these programs should: (1) be designed to increase the total wheat consumption, (2) proceed in an orderly manner, and (3) not be harmful to regular commercial trade patterns. The 1962 International Wheat Agreement The basic structure of the new Agreement remained unchanged from the 1959 IWA. The price was increased 12.5 cents per bushel to a new 1 range of $(Can.) l.625—$2.025 per bushel. A major achievement was the inclusion of the USSR along with the 9 previous exporters, as an exporter 1nder the new Agreement. This meant that practically all world wheat xporters were now members. The members of the IWA expressed concern about low wheat consump— ion in the LDCs. A means to correct this situation was a new objective 1 this Agreement. This concern arose partly from economic necessity d partly from humanitarian reasons. In 1965, this Agreement was extended in its original form, for In 1967, the Agreement a year. A similar extension occurred in 1966. extended only for the administrative provisions of the IWA and not economic provisions. This situation created an uneasy feeling concern— wheat prices in the prairie provinces. These extensions occurred e the Kennedy Round of tarriff negotiations and trade talks were Hg place in Geneva. Review of the WOrld Wheat Situation 1961-1962 (London: Inter— nal Wheat Council, 1962), p. 48. 29 The International Grains Arrangement, 1967 Initially there was some hope for a dynamic new Agreement encompas— sing all trade in cereals. It became obvious that rapid transformations in the field of international trade in agricultural products'are difficult to achieve. Thus, the new Agreement was very similar to the 1962 IWA, except for the inclusion of a new comprehensive food aid program. The major portions of the Agreement came into effect July 1, 1968. The outcome of the negotiations was the International Grains Arrangement (IGA) which was composed of two parts: the Wheat Trade Convention and the Food Aid Convention.1 The Agreement for both Conventions is for a three year period 1968-1971. As of July 1, 1968, 33 countries and the EEC were in the Wheat Trade Conference2 and 17 countries and the EEC had ratified or filed provisional application for membership in the Food Aid Convention. l The Wheat Trade Convention was an extension of the 1962 IWA in Tts basic approach. Prices were increased 33 cents per bushel to a new [rice range of $(Can.) 1.955 to $2.355 per bushel (for #1 Northern at the Qakehead). The limits of the range, hOWever, were more precisely defined for 14 classes of wheat. In addition, other minor changes in pricing and latum quantities were made to reflect the dynamic situation of trade 'atterns and to remove some of the objectionable effects of past agree— 1A description of the International Grains Arrangement is found in eview of World Wheat Situation 1966/67, pp. 64—69. 217 countries had ratified the Agreement, 17 countries and the 3C were in the provisional stage and 4 countries had accession to the anvention, Wheat Situation (August, 1968), pp. 5-6. 3O ments In the Food Aid Convention, all participating members—-both importers and exporters-~were committed to contribute grains suitable for human consumption or cash equivalent to LDCs. Minimum contribution for Canada is 0.495 million metric tons.2 The objectives were to ensure that normal patterns of production and trade were maintained. Recipient countries were to maintain a specified level of commercial imports. In the Kennedy Round of trade negotiations, the grain exporting countries were trying to obtain four main objectives:3 1) Maintaining their present share of the importing countries‘ grain markets; 2) Increasing the minimum wheat price level (with specific price spreads for various classes of wheat); 3) Adopting a more equitable method of adjusting supply and 1 demand among all grain producers in both commercial and food aid markets; and 4) Instituting a multilateral food aid program supported by both grain importing and exporting countries. 1Some of these include: a new basing point (US Gulf ports) and basing variety because of the seasonal transportation cost differen- tials from Port Arthur, increased importance of Rotterdam and Yokohoma as major trading ports, changes in establishing datum quantities for countries with rapidly expanding import demand, members are obliged to trade with non—members within stipulated price range. 2Examples for other countries are: US, 1.890 million metric kons; EEC, 1.035 million metric tons; UK, Australia and Japan (each), 0.225 million metric tons. 3Irwin R. Hedges, "Kennedy Round Agricultural Negotiations and the World Grains Agreement," XLIX, Journal of Farm Economics (December h967) , pp. 133—34. 31 With these objectives in mind, the exporting countries were disappointed with achievements of the Kennedy Round of trade negotia— tions. Some of the major shortcomings of the new IGA were: (1) no concession from the EEC on their variable levy system for grains, (2) lack of access and supply management provisions, and (3) limiting the Agreement to wheat only. Summary and Conclusions The aim of this chapter was to provide sufficient information to evaluate the objectives and the methodology of this study. This was accomplished by: (1) providing a description of the evolution of the market structure, (2) relating data on the production and distribution of wheat, (3) reviewing some of the public policies of the wheat economy, and (4) analyzing the international wheat agreements. The open market system of the prairie grain market evoked many producer complaints, Royal Commissions,and unsuccessful cooperative ventures in the early 20th century. In 1923 and 1924, Aaron Shapiro initiated group action on a large scale which was extremely successful for six years. During the 1930's, however, Cooperatives overestimated their economic influence and were liquidated. In 1935, the Canadian Wheat Board (CWB) was formed and in 1943 it became the exclusive recipient of wheat for interprovincial and international trade. Producer delivery (or arketings) of wheat is restricted by quotas.r At the time of delivery, n initial payment is made and when the year's pool is closed, a final pay— ent is made to producers. Between 1957 and 1966, acreage harvested in the prairies increased rom 20.9 to 29.8 million acres. Approximately one—third of the crop is 32 consumed domestically, mainly for food, feed and seed uses. The decline in per capita consumption has been more than offset by increased popula— tion growth. The traditional export market for Canada has been to Western Europe, and especially the UK. The emergence of the Communist markets—- China, USSR-—East Europe——and Japan, during the early 1960's counter— balanced the decline in wheat shipments to the traditional markets. The USSR-East Europe market, however, may have been only a temporary phenomenon. Food aid shipments from Canada to LDCs have increased to a relatively substantial proportion of total exports, since 1964/65. Most of these aid shipments have been to India. Wheat producers have been facing problems of: (1) declining demand as a result of technological changes in breadmaking, slow population growth in major markets, low soft wheat prices, trade restraints, lack of foreign exchange in LDCs, and the recovery of the USSR wheat economy; (2) low productivity in wheat production from a lack of new varieties and below optimum levels of such inputs as fertilizer; and (3) a higher return from wheat than from most other crops in the prairies, but it often cannot be delivered to the CWB. In the post—war period, new public policies in wheat economy have mainly concentrated on stabilizing income and prices through: (1) subsi— dizing inputs and production costs, (2) crop insurance, (3) establishing price floors, (4) providing income supplements, and (5) subsidizing some consumption-~both domestic and foreign. Results of public policies to increase productivity have not been reflected in aggregate production statistics. Public policies regarding domestic marketing of wheat have 0t changed substantially since the introduction of the Canadian Wheat oard. Results of policies in the export market were analyzed in the ection on international wheat agreements. 33 Ianada has been involved with and has promoted several international agreements for wheat trade. In terms of solving some of the basic aroblems of wheat trade, none have been very successful because of several shortcomings inherent in their structure. Most have tried to stabilize prices and have found that undesirable consequences result ;f the price range deviates too far from existing supply and demand :onditions. For improvements in orderly marketing of wheat, agreements xust go beyond their present scope and deal with domestic production ind marketing policies, trade restrictions, surplus disposal, cost of storage, diversification, efficiency, equity, and long-run growth. CHAPTER III ROLE OF FOREIGN COUNTRIES IN THE CANADIAN WHEAT MARKET This chapter is designed to provide a snapshot survey of wheat policies and market statistics of major wheat exporting and importing countries. Its purpose is to emphasize the effects of foreign elements on Canadian wheat trade and to provide the perspective of the current and future trade patterns in which Canada will be situated. It is divided into two sections. The first includes the major wheat exporters~~Australia, Argentina, the US, and the fringe exporters. The second section deals with wheat importers who are categorized into fhree groups-—Developed Countries, Centrally Planned Economies (CPE), and Less Developed Countries (LDCs). The countries that are major trading artners of Canada are examined individually. These are Japan, the UK, e EEC, USSR, East Europe, and Mainland China. In regard to LDCs, the ain considerations are (1) their potential demand, and (2) food aid versus ommercial sales of wheat. Major Exporters of Wheat Each country in this section is examined as to the nature of its riculture, wheat policies,l recent market activities, and the implica— ons of its actions for Canada. lMajor source of information was National Grain Policies (Rome: ited Nation Food and Agriculture Organization, 1963, 1964, 1966, 1967). ditional references will be cited for individual countries. 35 1) Argentina Introduction — The primary objective of Argentine agricultural policy is to revitalize the industry in order to return it to its pre-war prominence. The basic elements in this program include maintaining remunerative prices, encouraging private enterprise, stabilizing domestic prices and promoting research and extension. Wheat policies — To ensure that adequate domestic supplies of wheat were available, exports were restricted in 1962/63, 1963/64, and 1965/66 crop years. In addition, to encourage increased marketing of wheat, compensation payments were made in 1963/64. The National Grain Board of Argentina guarantees the wheat pro— ducers a minimum price, and purchases wheat if private enterprise does not. The level of the guarantee is largely influenced by world price, since the Board must resell any purchased wheat. In 1965/66, a two—price system was initiated. Producers receive a "compulsory" minimum price 1 “from private grain traders) and the Board stipulates a minimum "support" price at or above which it will buy wheat. The support price was $(US) 1.18, $1.32 and $1.17 per bushel in 1965/66, 1966/67, 1967/68 respectively, for £0. 1 hard wheat on wagon in Buenos Aires port.1 Argentina does not subsidize exports and, in fact, exports are iubject to tax. Grain is exported by private firms. Argentina maintains 10 surplus wheat stocks. All wheat in storage is an exportable balance. imports are subject to a tariff 220 percent c.i.f. value and importers aust obtain permits. 1 Review of the World Wheat Situation: 1967/68 (London: Interna- Onal Wheat Council, 1967), Appendix Table VI, p. 89. 1 36 Recent market activities - As illustrated in Table III:1, exports play an important role in the Argentine wheat economy. One—half of its crop is normally exported, averaging 8 percent of the total world wheat trade in the past 15 years. Presently, both low acreage and yields are the major constraints to expanding Argentine wheat exports. Communist sales have not been an important factor for Argentina's wheat export trade. The major exception occurred in 1965/66 with large sales to both China and USSR (Table III:2), which accounted for Argentina's record—breaking export year of 290 million bushels. An average of 84 percent of Argentina's wheat exports entered the South American or West European market during the past 10 years (Table III:3). Brazil is by far the largest single purchaser with China, Peru, and the EEC also being important importers (Table III:4). In the future, wheat shipments from Argentina to LDCs, especially in Latin America, can be expected to increase because: (1) it will remain a low cost, unsubsidized producer,1 (2) it is the only LDC that is a najor wheat exporter, and (3) trade among Latin American countries will )robably increase, particularly if the Latin American Free Trade Associa— ion progresses satisfactorily. Argentina's exports are projected to almost triple from the 1961- 3 average of 88 million bushels to 231—234 million bushels in 1975.2 It s questionable, however, as to whether production necessary to support his level of exports can be maintained, even though exports did surpass nis level in 1965/66. In this instance, it was a result of substantially lAgricultural Commodities--Projections for 1975 and 1985 (2 vols.; >me: United Nations Food and Agriculture Organization, 1967), I, p. 73. 2 Ibid., p. 88 37 Table III:1.~—Average Supply and Distribution of Argentine Wheat for 1952/53 — 1965/66, in Million Bushels. Average Range Exports 110.6 40 - 230 Domestic Consumption 136.9 115 — 151 Production 247.3 154 — 414 Carryover 50.9 9 — 123 Exports/Production .44 .26 - .90 Source: US,Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968, p. 5. Table III:2.—-Exports of Argentine Wheat to Communist Countries 1961/62 — 1966/67. Total Percent of China Communist Argentine Year (Mil. Bu.) (Mil. Bu.) Exports .961/62 3 3 1.4 .962/63 4 4 1.9 .963/64 36 40 12.2 .964/65 22 25 6.0 .965/66 82 167a 73.2 966/67 12 13 10.7 Year Total 159 252 a81 million bushels to the USSR. Durce: US,Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968, p. 19. 38 Table III:3.-—Primary Destination of Argentine Wheat Exports by Region for Crop Years 1957—1966 by percentages. 1957— Region 1959 1960 1961 1962 1963 1964 1965 1966 W Europe 42.6 38.5 59.7 47.7 26.7 45.3 17.2 26.5 E Europe -- -- 0.4 "- 2.7 1.1 1.2 0.4 N & C America —— —- —- —— -- 0.1 0.1 -— S America 54.5 56.5 33.4 44.3 34.7 36.1 23.6 54.0 Near East 0.5 2.4 -- -— -- 0.9 0.9 0.3 Far East - 3.7 5.4 35.6 13.9 28.9 16.5 Africa 1.1 0.5 1.6 2.6 -— 1.3 0.7 1.7 Source: World Wheat Statistics (London: l959,....1968), Table 9. International Wheat Council, Fable III:4.-—Important Importersa of Argentine Wheat, Average Imports 1957/58—1966/67 in Thousand Metric Tons. Ten Year Zountry Average Range irazil 911.0 472 - 1315 fhina 433.7 0 - 2241 K 301.2 87 — 488 'Germany 226.7 22 - 572 eru 221.8 77 - 378 taly 187.8 53 - 482 etherlands 171.5 60 - 478 rance 86.0 0 - 244 Elgium-Luxembourg 47 . 7 20 — 103 a Primary destination. mrce: World Wheat Statistics (London: 1959,....l968), Table 9. International Wheat Council, - n: £73,(—:::—-i—r: :, w" 39 above average yields and acreages in the previous year. On the basis of a 20 year average yield, an increase of almost 50 percent above the 1965/ 66—1967/68 acreage would be required to achieve the necessary production level. Implications for Canada - Food and Agriculture Organization (FAO) supply and demand projections show a 165 percent increase in production and a 268 percent increase in exports from the 1961—63 period to 1975. In addition, Argentina is a low cost producer and can export wheat at competi- tive prices. Therefore, even if world wheat trade volume does not increase, it is quite probable that Argentina will increase its share of the world market. In the pre—war period, Argentina accounted for approxi— mately 20 percent of world wheat trade, compared to 5 to 10 percent during the post—war period.1 At the present level of world trade, Argentina is likely to account for 10-12 percent of world wheat trade. Argentina competes in many of the same markets as does Canada, especially the UK, the EEC and China. There may be pressure on Canada's share of these (and other) markets, if and when Argentina is able to expand its wheat production. 2) Australia Introduction — All national and international marketing of wheat is controlled by the producer-monopoly Australian Wheat Board. There is no stockpiling of wheat. All carryovers are exportable surpluses. "Australia produces a soft white wheat, similar to that of the US Pacific \Iorthwest"2 and Europe. Until recently, one of its major handicaps on 1See Table 111:12. 2 Anderson, p. 59. 40 :he world market was its inadequate grading system which did not differen— tiate between hard and soft wheats. Wheat policies — The fifth, five year wheat stabilization plan was initiated in 1967/68. This and previous plans were designed to guarantee producers a minimum price over a five year period. In each of the pools, the government guaranteed a minimum price, based on production costs, for all domestic sales and up to 150 million bushels of exports (earlier pools had a 100 million bushel limit). This price was $(US) 1.84 per bushel in 1967/68.1 If the export price exceeds this level, the difference in price (up to 1.7 cents per bushel) is contributed to the Stabilization Fund by growers, until a ceiling of L30 million is reached. If the market price falls below the guaranteed price, the Stabilization Fund or the government pays the difference. Contributions by the Common- wealth Government Treasury have been made since 1959/60, which have pmounted to $(US) 25.4 million, $2.1 million and $20.2 million in 1962/63, 963/64, and 1964/65, respectively. Income from all sources is pooled and armers receive a five—year pooled price. Guaranteed prices have been ove world prices for several years. The stimulus to production resulting from the high guaranteed rices of the stabilization plan may have reached its peak. In current roposals for the next pool, the cost of production would not influence e guaranteed price. In addition, this price is being reduced by 12 ercent from the 1967/68 level. Tariffs on wheat and flour are 10 percent. The Tariff Commission, OWeVer, has the authority to impose quotas or raise tariffS, if lPrice refers to average quality wheat, bulk basis, free on rail, 6 ocean ports. 41 l . , ' necessary. Australia has entered several bilateral wheat agreements. Some of the countries involved are the UK, Japan, West Germany, Ceylon, and Malaysia. These bilateral treaties have helped Australian wheat to sell very well in recent years, and were intended to ensure that Australia retained its market share. Recent market activities - Since 1960, Australian wheat production and exports have increased substantially relative to the 1950's (Table 111:5). Its volume of exports during 1968/69 could conceivably equal or surpass that of Canada‘s. Exports during the 1960—65 seasons averaged 2.6 times those of the 1952—59 seasons while production increased 1.7 times. This substantial increase in production may be attributed to two factors-—depressed wool prices and "semi—guaranteed" wheat prices. In addition, increased sales of wheat to communist countries (mainly China, Table 111:6) have allowed Australia to move most of its exportable surplus on the world markets. Generally, Australia exports between one—half and three-quarters of its wheat production, accounting for 10.5 percent of world wheat trade in the past 18 years. Australia supplies a significant percentage of the free world wheat sales to communist countries, which accounted for 60 percent of its total wheat exports in 1963/64. The Far East is the most important region for Australian wheat exports (Table 111:7). This is partly due to large Chinese imports since 1960/61. Western Europe, especially the UK, is the next most important wheat importing area. Exports to Oceania (mainly New Zealand) have declined both relatively and absolutely. C. F. Wehrein, “Government Grain Programs of Canada, Australia, Japan and the UK," Journal of Farm Economics, XLVII, (November, 1965) pp. 993-1008. 42 Table III:5.—-Average Supply and Distribution of Australian Wheat for_fl‘ 1952/53-1959/60 and 1960/61—1965/66 in Million Bushels. 1952/53-1959/60 1960/61—1965/66 Average Range Average Range EXPortS 95.6 54 - 127 225.3 180 - 27o Domestic Consumption 73.8 69 - 79 79.6 71 - 97 PIOdUCtion 175.3 98 — 215 297.5 247 — 369 Carryover 57.4 17 - 95 32.3 22 — 64 Exports/Production .56 .33 _ .74 .76 .69 — .87 Source: US, Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968, p. 5. Table III:6.——Austra1ian Wheat Exports to Communist Countries for 1960/61 - 1966/67. Percentage Percentage of China USSR Total of Total Free World ear (Mil. Bu.) Exports Exports 960/61 47 —— 47 19.8 28.7 961/62 73 -— 73 40.1 27.6 962/63 ’ 79 —— 79 34.3 27.1 963/64 95 57 154 60.9 22.0 964/65 84 32 116 43.0 24.9 965/66 74 21 95 52.8 12.4 966/67 _§g —— _§g 32.2 19.9 Year Total 534 110 644 ource: US, Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968, p. 19. 43 Table 111:7.——Primary Destination of Australian Wheat Exports by Regions for Crop Years 1957-1966 by Percentages. 1957— Region 1959 1960 1961 1962 1963 1964 1965 1966 W Europe 28.6 30.9 28.6 16.4 16.2 10.3 13.6 10.5 E Europe —- 0.6 —- 0.5 0.5 -— 0.2 -- N & C America -— -- —- 0.1 0.3 0.2 0.1 —- S America -— —— —- 0.4 -- -- 0.1 2.5 Near East 8.7 9.6 4.6 5.3 6 2 9.0 1.2 9.2 Far East 41.4 49.7 51.7 69.1 50.9 60.8 40.4 67.0 Africa 7.6 4.8 6.0 3.8 2.6 2.0 5.5 7.2 Oceania 13.2 4.4 3.6 4.3 3.3 3.8 4.0 2.2 Source: World Wheat Statistics (London: International Wheat Council, l959,....1968), Table 9. Table III:8.-—Important Importers of Australian Wheat 1957/58—1966/67 in Thousand Metric Tons. Ten Year Country Average Range Mainland China 1417.5 0 — 2543 United Kingdom 609.8 321 - 818 Japan 364.8 184 — 512 India 255.2 12 — 576 alaysia 236.7 190 - 465 New Zealand 181.3 105 - 264 Pakistan 137.2 1 - 698 Germany 87.9 0 - 304 ource: World Wheat Statistics (London: International Wheat Council, l959,....1968), Table 9. :markets in competition with Canada, further aggravating the present surplus and Trade, January 1969, pp. 18—19). 44 In Table 111:8, the importance of the Far East market is emphasized by the fact that four of the top five importers are in this area. Because Australia's wheat substitutes for Europe's soft wheat, exports to Europe tend to vary inversely with their crop size. Long term projections made for Australian agriculture show that wheat acreages, production, and exports are expected to increase signifi- cantly during the period 1965 to 1980. From an average production of 223.6 million bushels and exports of 160.8 million bushels in the 1958/59 — 1961/62 period, there is a projected increase of 157 percent in pro- duction and 198 percent in exports. In addition, acreages were projected to increase from 12.4 to 23.0 million acres during the same period.1 By 1967/68, however, actual acreage had increased to within 0.7 million acres of the 1980 estimate. FAO estimates for 19752 project the level of wheat production at 375 million bushels and exports at 282 million bushels. These are sub- stantially below the projections of Gruen. Given current trends, even the latter's may be an underestimate. Implications for Canada ~ The increased production and exports of Australia probably will continue, at least in the near future.3 More— over, if demand continues to decrease in communist countries for wheat imports, there will be a shift in the Australian exports to other commercial 1F. H. Gruen et'al, Long Term Projections of Agricultural Supply and Demand: Australia, 1965 and 1980 (Australia: Monash University, May 1968). 2Commodity Projections...(FAO), I, p. 88. 3Estimates of Australian wheat production for 1968 are 525 million bUShelS (US, Foreign Agricultural Service, World Agricultural Production 45 situation. Since Australian farmers receive a guaranteed minimum price for their domestic and for part of their export sales, pressures of lower world prices will not influence farmers to restrict production. Wool prices fluctuate severely and since there has been no direct subsi- dization, stabilization or governmental intervention in the wool industry, further shifts from sheep to wheat may occur.1 In addition, high domestic prices decrease the domestic feed wheat consumption and hence increase the exportable surplus. 3) United States Introduction — In 1964. the Us made a major reversal in its farm policy, switching from one of price supports with export subsidies to one of ”free market" prices with direct payments. The result of this change has been the emergence of a more competitive and aggressive wheat exporter. Acreage controls for wheat are still included in this new program, nut marketing quotas and export certificates have been discontinued. The US conducts a very extensive food aid program under its Public raw 480, the Agricultural Trade and Development Act (1954). Wheat has 1 1een a very important commodity in these aid shipments to LDCs. The US carries out a policy of storing surplus wheat. It is the 1nly exporter, other than Canada, to follow such a policy. Private grain raders, subject to government regulation, handle most of the grain marketing unctions in the Us, including private commercial storage facilities where ossible. Wheat policies - Wheat prices are supported by two methods: (1) 1W. M. Cordon, "Australian Economic Policy Discussion in the Postwar ariod," American Economic Review Supplement (June 1968), p. 124. 46 non—recourse loansl using the commodity as security, or (2) sale of eligible grain (not under loan) to the Commodity Credit Corporation (CCC). Since 1965, the support price has been $(US) 1.25 per bushel, somewhat approximating world prices. The cooperator2 in the wheat program, under the Food and Agri— culture Act (1965), receives the market price for that portion of his wheat which is exported and receives 100 percent of parity price for that portion of his wheat used domestically. Cooperators were issued domestic marketing certificates for 45 percent of their projected production in 1966 and 35 percent of their projected production in 1967 when there was no acreage diversion. The domestic market certificate is valued at parity price minus the national average loan rate.3 Part of the cost of this certificate is directly passed on to the consumer by requiring millers to purchase certificates at $0.75 per bushel for domestically consumed wheat. Until 1966/67, financial assistance was provided to private grain traders for commercial wheat exports. This was accomplished in two ways: (1) a cash payment (export subsidy) established daily, which in the 1964/65 crop year cost $0.28—$0.49 per bushel, or (2) selling the wheat acquired under support programs to traders at the world price. 1Loans are non-recourse so the producer can re-obtain his commodity in order to resell it, simply by repaying the loan plus interest. On the other hand, delivery of the commodity at the end of the loan period serves as full settlement. Thus, farmers are assured that prices will not drop below the support level. 2A cooperator is one who does not exceed his farm acreage allotment and sets aside the difference between that allotment and the present year's allotment for soil conserving uses. 3 Parity prices are established at the beginning of the marketing year, July 1. In 1967/68, the value of the marketing certificates was 51-36' since parity price was $2.61 per bushel. 47 Wheat is exported by the US under four main programs. Two of these are dollar sales, handled by private traders and two are conces- sional export sales. Regular commercial sales account for approximately one-third of all export sales (Table 111:9). These are handled by private traders who received an export subsidy until 1966/67. The second export program is the short—term CCC export credit sales. These are sales from privately—owned stocks (this includes purchases from CCC). Once the necessary financing has been obtained, the CCC holds the accounts 1 receivable and pays the exporter. General length of credit is six months, but in certain cases, payments may be deferred for up to three years. This‘ has been a rather minor program, with total sales amounting to only $(US) 185 million from February 1965 to 1967. Most other exports are under government concessional sales programs. The majority of these exports are now shipped under the various titles of PL 480.2 Title I, the most important in terms of volume, is government 1to government agreements with sales paid for in local currencies. Title 11 is being phased out, and no soft currency sales will be made after 1971. fit will essentially become Title IV (described below) under the provi- sions of the Food for Peace Act of November, 1966. Shipments under 1 Title II are donations for (1) direct assistance in cases of disaster or 1 1 emergency relief and for economic development, or (2) the World Food 1 Program (April 1962) of the United Nations. These shipments are CCC Dwned commodities. Ninety—two countries have received aid under this Title. 1For a more complete description, see National Grain Policies, 967, pp. 71-72. 2Descriptions of various titles were obtained from Food Grain tatistics, p. 16. 48 Table III:9.——US Exports of Wheat by Type of Export Program by Percentages and Total Wheat Exports in Million Bushels for Crop Years 1948-1967. PL 480 Other Army Crop Total Dollar Title Title Title Title Foreign Civilian Year Exports Sales I II III IV Aid Supply 1948 502.6 25.2 -- -— —- ' -- 41.5 33.3 1949 302.5 15.1 -— —- —- -- 45.6 39.3 1950 365.6 52.7 —— -- 0.7 —- 38.0 8.6 1951 474.7 66.4 —- - 3.7 -- 28.9 1.1 1952 317.2 90.7 —— —— 1.2 -- 7.2 0.9 1953 216.5 53.6 —- —- 4.6 - 41.1 0.7 1954 273.6 42.2 8.7 6.2 17.0 -- 25.6 0.4 1955 345.6 31.3 27.3 3.2 20.1 —- 18.1 ~- 1956 548.6 31.1 36.6 2.3 18.0 -- 12.1 -- 1957 401.8 36.5 44.6 3.4 6.9. -- 8.6 -- 1958 442.1 31.8 51.6 2.6 9.1 -- 4.9 -- 1959 509.0 26.9 59.1 1.7 9.8 -- 2.6 -- 1960 660.8 35.2 49.5 4.7 9.8 -— 0.8 -- 1961 719.0 31.4 52.7 3.9 10.6 1.0 0.3 -- 1962 643.6 25.5 63.3 3.9 6.3 0.9 0.2 -- L963 855.9 41.0 45.3 3.7 8.5 1.4 -— -- L964 724.7 21.5 60.9 2.7 6.7 8.2 - -- .965 866.9 34.1 44.1 3.8 9.1 8.9 01 - .966 742.4 50.0 29.0 7.0 9.1 5.1 0.2 - 1967 697.9 38.9 42.3 2.0 11.5 5.2 0.1 —- Dept. of Agr., Food Grain Statistics, eat Situation (Washington: Economic 7 and August 1968). ource: US, Economic Research Service, Stat. Bulletin #423, 1965. Wh 196 Research Service, US Dept. of Agr., August 49 Shipments under Title III are for barter or donation and come from CCC stocks. Barter transactions are to obtain strategic materials used in the US foreign aid programs or for stockpiling purposes.l Dona— tions are through voluntary relief organizations. Since January 1967, this part of Title III has operated as part of the amended Title 11. Title IV, established in 1959, covers sales of surplus agri— cultural commodities on long-term dollar credit. Ninety—eight agreements with 35 countries were signed between August 1961 and December 1966 for wheat exports with a (c.i.f.) value of $(US) 439 million. US legislation now requires that 50 percent of these shipments go in US ships, substantially raising their cost. Food aid shipments under other programs have been minor since 1963. These shipments have been under such programs as the Marshall Plan, United Nations Reconstruction and Rehabilitation Act, Economic Cooperation Admini— stration, and Agency for International Development. In addition, until l955, there were Shipments for Army civilian supply. These were shipments Of food relief for civilians living in occupied areas as designated by the Department of Defense. Recent market activities — PL 480 is an extremely important element in the Us wheat export program. In the ten year period 1956/57- 1965/66 over two—thirds of all wheat exports moved under this scheme. The bulk of US exports go to Asia (Table 111:10). An average of 39 percent of its wheat exports went to India, Pakistan, SOUth Korea and Iapan, during 1957/58—1966/67 (Table III:11)- The second largest import- Lng region was the Western Hemisphere. Brazil accounted for 42 percent _____________________________ 1For a more complete description, see National Grain PoliCies, -967, pp. 71-72. 50 Fable III:10.——Imports of US Wheat by Region for CrOp Years 1957—1966 by Percentages 1957- Region 1959 1960 1961 1962 1963 1964 1965 1966 W. Hemisphere 14.4 11.9 14.8 15.3 11.5 12.6 11.3 15.7 EEC 8.8 11.9 10.6 5.0 8.4 4 l 8.3 8.3 Other W Europe 8.3 10.8 10.6 3.1 6.0 3.1 6.3 5.6 E Europe 9.3 8.6 7.6 10.3 15.0 6.3 6 7 2.4 Asia 52.5 45.9 39.7 50.4 45.6 60.9 56 4 51.2 Africa 6.5 10.8 16.5 15.9 13.5 12.9 11 O 16.7 Source: US, Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968, p. 17. Table III:11.——Important Importers of US Wheat 1957/58—1966/67 in Thousand Bushels. Ten Year Country Average Range India 145,463 77,413 - 262,230 Tapan 51,102 32,436 - 78,465 JAR 41,800 0 - 68,545 ?akistan 39,296 18,426 - 64,606 Brazil 36,882 11,019 - 52,615 (ugoslavia 28,494 11,481 - 54,815 IK 20,024 4,944 — 29,690 3 Korea 18,631 9,477 - 29,991 ’oland 18,468 957 - 42,908 1 Germany 12,667 3,418 - 20,848 Iource: US, Economic Research Service, Food Grain Statistics, Statistica 1968, p. 17. Department of Agriculture, 1 Bulletin #423, April 51 of the imports to this area. Venezuela and Chile also import large quantities of US wheat. In Africa, the United Arab Republic (UAR) accounted for 55 percent of the exports. Algeria and Morocco Were also important importers. Although their market share in the EEC declined, the volume of wheat exports increased during the ten year period. West Germany and the UK were the largest European importers. The US market share in East Europe declined during the period, except in 1963/64 when Russia was importing tremendous quantities of wheat. The largest importers were Poland and Yugoslavia, although the Polish market dropped considerably in 1964/65—1966/67. FAO projections show that US wheat production will increase to 1.64 billion bushels in 1975, leaving 855—862 million bushels for export.1 In 1968/69, production is near this level. Exports, however, have been at least 100 million bushels below this projected level, in recent yearS. Therefore, there may be pressure to both reduce acreage and increase exports. Implications for Canada - McCalla contends that there has been considerable interaction between officials in Canada and the US in setting wheat prices. During 1956—65 he suggests that Canada was the barometric price setter and the US was the residual supplier.2 Since 1964, the US has shifted from its policy of price supports and the contro— versial export subsidies to direct payments and free market prices. Consequently, it has assumed a more dominant role in world trade and lCommodity Projections, (FAQ), I, p. 88, 2McCalla, JFE, August 1966, pp. 711-727. 52 probably depressed world wheat prices.1 At present, the US is attempting to expand its commercial sales and contract PL 480 shipments. The present US farm policy of direct payments on only part of the producer's output is more internationally acceptable, since few economists would argue that it stimulates production. However, when such factors as indivisibilities, economies of scale, fixed assets, tradition and habits remaining from previous high price supports are introduced, it is unlikely that producers base output decisions on marginal conditions. Consequently, as parity prices rise, US producers will continue to maintain production even if there is a substantial decline in world wheat prices. The US has the potential to substantially expand wheat output. This was demonstrated in the 1967/68 season when quotas were expanded. Moreover, US farmers are uneasy about their acreage restraints while other major exporters—“Australia, Argentina and Canada expand wheat acreages. The 1966 amendments to PL 480 require that (1) soft currency sales (Title I) be phased out by 1971, (2) 50 percent of wheat be shipped in US vessels, and (3) recipient countries improve their domestic production and marketing facilities. As a result, the cost of PL 480 ship— ments is increased, and probably there will be a decreased demand by recipient countries.2 Therefore, if the US hopes to maintain its quota of 750 million bushels of exports, more wheat must move on the commercial market. lMcCalla, JFE, December, 1967, pp. 1038—50. 2Gary L. Seevers, Resource Benefits and Costs of Food Aid: An Analysis of Indian Shipments (unpublished Ph.D. thesis, Department of Agricultural Economics, Michigan State University, 1968). 53 During the 1957/5891966/67 period, 28.5 percent of all US wheat exports went to India and Pakistan. There is considerable evidence that Pakistan and India, with the aid of new Mexican wheat varieties, increased use of fertilizer, price incentives and favorable weather, can reduce food aid shipments sharply during the next few years. This could mean a diversion to other markets of up to an additional 300 million bushels of wheat or approximately 15 percent of world trade. The US does not compete for the Mainland China market because of political reasons. Sales to USSR and East Europe are also repressed due to very strict shipping requirements. The US has increased its competi- tion, with Canada, for the expanding Japanese market by expanding rail facilities from the Plain States to the Pacific Northwest. 4) Fringe Exporters Fringe exporters are those exporters other than the big four. These countries accounted for between 8 and 33 percent of world wheat rade, on a five year average, between 1924-28 and 1949-53 (Table 111:12). ince 1953, the fringe exporters have accounted for between 13.4 and 29.2 ercent of world wheat trade, when the Communist bloc trade is included. France and USSR are the major fringe exporters. Because these ountries have a large domestic demand relative to production, small varia— ions in production result in large variations in exports. French exports uring 1964/65—1966/67 have almost doubled over the previous five year eriod (Table 111:13). Production of food grains (wheat and rice) is r0jected to increase from 13.98 million tons in 1964 to 15.80 in 1975.1 1V. L. Sorenson and D. E. Hathaway, The Grain—Livestock Economy and ads Patterns of the EEC with Projections to 1970 and 1975 (Michigan State lversity: Institute of International Agriculture, 1968), p. 108. 54 Table III:lZ.-—Five Year Averages of the Major Exporters' Percentage of World Wheat Trade and the Total Volume of World Wheat Trade in Million Bushels for the Crop Years 1924-1966. Crop World Years Argentina Australia Canada US Others Total 1924—28 19 12 37 22 10 825 1929—33 20 17 31 13 19 704 1934—38 18 16 26 7 33 671 1939-43 22 13 49 5 11 490 1944-48 8 9 24 51 8 904 1949—53 8 11 32 37 12 922 1954—58 9.3 7.9 24.8 33.9 24.1 1,117.1 1959-63 4.9 11.7 22.1 40.4 20.9 1,666.9 1964—66 9.1 11.4 24.4 37.2 17.9 2,082.6 Source: Crop years 1924—1953 are from W. J. Anderson, Canadian Wheat in Relation to the World's Food Production and Distribution (Saska— toon: Modern Press, 1964), Table 12, p. 53. Crop years 1954— 1966 are from World Wheat Statistics (London: International Wheat Council, 1959,...1968). Table 9. Table III:13.——Five Year Averages of Wheat Exports of Largest Fringe Exporters 1954/55~l966/67 in Million Bushels Crop Years France USSR W Germany Italy Sweden Others 934/35v1938/39 16.7 26.1 3.5 6.0 2.3 NA 954/55—1958/59 64.6 115.2 15.2 18.3 7.4 NA 959/60—1963/64 79.6 163.4 33.7 7.7 6.2 48.1 964/65-1966/67 151.9 91.7 23.8 17.7 8.2 78.5 ource: World Wheat Statistics (London: International Wheat Council, 1959,...1968), Table 9. 55 This will create a 27 percent increase in exportable surplus. The EEC as a unit is projected to shift from a deficit area in wheat with net imports of 44 million bushels in 1961—63, to a surplus area with net-.« exports of 114—128 million bushels in 1975.1 The USSR is projected to increase net exports from 29.4 million bushels in 1961-63 to 77—304 million bushels in 1975.2 Therefore, the trend appears to be that there will be a larger volume of exports from the fringe exporters. Major Importers of Wheat Japan, the UK, and the EEC are the first three countries or regions examined in this section. These are developed nations, and the two latter have been major traditional purchasers of Canadian wheat. The second group examined in this section includes the Centrally Planned Economies-- the USSR, Mainland China and East Europe. The last group is that non— homogeneous group of countries known as the Less Developed Countries. No one country will be examined individually but the market potential and 1effective demand will be examined for these areas as a group. ‘1) Japan Introduction — Because of its fast growing population, rising standard of (Westernized) living and limited potential for increasing crop production, Japan has become the world's largest wheat importer, surpassing Britain in 1967/68. Thus, it is one of the most lucrative markets for wheat exporters. lCommodity Projections...(FAO), I, p. 88. 2 . . Ibid., The large range is accounted for by a small variation in Projected production under different assumptions, i.e. 19.2 versus a 28.8 percent increase in production from 1961—63 to 1975. 56 Wheat policies - The Food Agency of the Ministry of Agriculture and Forestry of the Japanese government purchases most wheat offeredw in the domestic market at yearly established parity pricesl (under the authority of the Food Control Law). It is the intent of the Agency to stabilize wheat prices, demand and supply. Purchased wheat is resold at a discount to processors. Profits from imported wheat offset this loss. Grain importers must obtain one of two types of import licenses. The first type, the Automatic Approval (AA) system includes wheat imports, whereas wheat flour imports are under the second type, the Foreign Exchange Fund Allocation (FA) system license. For the FA licenses, applications for foreign exchange are required. The Japanese Food Agency imports wheat via registered private grain traders. Import allotments are constructed each fiscal year, taking into account domestic requirements and supplies for each specific grade of wheat (soft, semi—soft and hard). Feed wheat (and most of the bran) imports are purchased exclusively by the government, which sells it at a loss in order to stabilize prices for the domestic livestock industry.2 The normal 20 percent duty on wheat has been temporarily lifted. Wheat flour remains subject to a 25 percent duty. Recent market activities — The US and Canada supply nearly 90 percent of the Japanese wheat imports, with Australia supplying most of the remainder. Since 1963/64, the US has increased its market share at 1Prices have increased frOm $(US) 2.56 to $3.64 per bushel from 1956 to 1967. Prices are established in June each year according to adjustments in the agricultural parity index. This is an index of prices 0f goods and services purchased by Japanese farmers. 2Wehrwein, p. 1003. 57 Canada's expense (Table III:14). Japanese wheat production has decreased substantially from its 1961/62 peak of 1.78 million metric tons, even though yields appear to be increasing (Table III:15). This fact, plus the increase in total consumption has meant a 160 percent increase in imports during 1957/58—1966/67. Per capita demand since 1934—38 has almost tripled. This dramatic increase has probably reached a plateau and further increases will be modest. Gruen projects Japan's 1970 production at 1.4 to 1.6 million metric tons and 1980 production at 1.6 to 1.9 million metric tons, a substantial increase over the 1963/64—1968/69 rates. Consumption is projected at 3.86 to 3.96 million metric tons for 1970 and 4.14 to 4.28 million metric tons in 1980. The projected imports are below the 1965 level of 3.51 million metric tons and are expected to be 3.16 to 3.31 million metric tons in 1970. By 1980, imports are exptected to be 3.54 to 3.78 million metric tons.1 Spurlock2 provides a more optimistic outlook for wheat exporters, in that imports into Japan are expected to rise above the 1965 levels for 1970 and 1975.2 Contrary to Gruen, this study hypothesizes a decline in Japanese wheat production. Data for 1967/68 and 1968/69 support this hypothesis.3 High non—farm wages and high wheat production costs are cited as the main reasons for declining production. This trend, however, lGruen et_alj pp. 330—32. 2Hughes H. Spurlock, The Competitive Position of US Farm Products in the Japanese Market (Washington, D.C.: Economic Research Service, US Department of Agriculture, Foreign Agriculture Economic Report # 32), 1966, p.111. 31967/68 production was 0.9997 million metric tons, and pre- liminary 1968/69 production is 1.011 million metric tons (World Agr. Production and Trade, January, 1969, pp. 18—19). Table III:l4.——Source of Japanese Wheat Imports for 58 1966 by Percentages. CrOp Years 1957— 1957- Country 1959 1960 1961 1962 1963 1964 1965 1966 Australia 10.1 12.6 15.2 12.9 13.1 12.4 10.1 9.8 Canada 46.7 53.7 47.4 47.2 33.6 40.1 35.8 37.0 US 42.5 32.3 36.9 37.6 53.3 46.2 54.1 53.2 Others 0.5 1.4 0.5 2.3 —— 1.3 -- —— Source: World Wheat statistics (London: 1959,. ..1968), Table 9. International Wheat Council, Table III:15.——Japanese Wheat Production and Imports in Million Metric Tons and Yield in One Hundred. Kilograms per Hectare for 1957/58—1966/67. Total Imports/ Year Production Importsa Supply Production Yield Ave. 1954/55- 1958/59 1.29 2.27 3.56 1.76 21.8 1957/58 1.33 2.66 3.99 1.20 21.6 1958/59 1.26 2.49 3.75 1.97 21.2 1959/60 1.42 2.54 3.96 1.80 23.6 1960/61 1.53 2.78 4.31 1.82 25.4 1961/62 1.78 2.77 4.55 1.56 27.4 1962/63 1.63 2.58 4.21 1.58 25.4 1963/64 0.72 3.58 4.57 5.38 12.3 1964/65 1.24 3.47 4.71 2.79 24.5 1965/66 1.29 3.42 4.71 2.66 27.0 1966/67 1.03 4.38 5.41 4.28 24.3 aPrimary destination. Source: World Wheat Statistics (London: 1959,. ..1968), Tables 2b, 3b, and 9. International Wheat Council, 59 is unlikely to continue.1 A third study, FAO projections, shows a decline in Japanese wheat production between 1961-63 and 1975, thus creating an 80—100 percent increase in wheat imports or 5.5-6.0 million metric tons.2 Implications for Canada — The Japanese market has the potential to surpass the UK as the largest importer of Canadian wheat. The proba— bility of this occurring will certainly increase if the UK joins the EEC . Imports into the Japanese market are strictly allocated by the government agency, which has the power to discriminate among sellers. Because of this power, Canadian wheat sales to Japan could hinge on the level of total Canadian—Japanese trade. Canada‘s market share during 1957/58-1966/67 was 43.5 percent. Using Gruen's estimates, with this market share, Canada's wheat exports to Japan in 1970 will be 1.37—1.44 million metric tons and in 1980 will e 1.54—1.64 million metric tons—-both are below the 1966/67 level. The utlook is even more cloudy since Canada‘s market share is declining.3 oreover, Japan is currently testing French and Argentine wheat in order 0 expand its sources of imports,and presumably, in an effort to export ore Japanese goods. On the other hand, both Spurlock and FAQ give a ore favorable outlook for exports to Japan. In addition, Japan produces ainly soft wheat and, "increasingly, Japan has turned to hard wheats lSpurlock, p. 43. 2Commodity Projections...(FAO), I, p. 88. 3In'the year ending March 31, 1968, market shares were: US 5.8, Canada 30.4, Australia 13.8 percent (Toronto Globe and Mail, ctober 9, 1968, p. Bl). 60 with a high protein content and other associated qualities required by the rapidly expanding modern baking industries."1 2) United Kingdom Introduction - The UK agricultural policy is designed so that the industry (1) produces as much food as is in the national interest, (2) maintains low consumer prices, and (3) returns a good level of living for farmers. Wheat policy is determined by those objectives, plus balance of payments considerations, and the 1964 UK Grains Agree- ment. Wheat policies — On April 15, 1964, bilateral agreements were signed with the four major, and subsequently, with sixteen occasional suppliers of wheat and feed grains. The Agreement stipulates a minimum import price for wheat entering the UK. This minimum price is main— :ained by a consignment, country or general levy of variable size representing the difference between the minimum import and the landed 'orld price. To date, it has not been effective for wheat. Wheat farmers are paid deficiency payments, but only on a standard quantity" of wheat. In 1965/66, the standard quantity was at at 3.4 million tons. Deficiency payments are based on the dif- 2rence between the support price and the higher of: (1) lowest :tional average regular market ”at farm" price, or (2) the government tablished target-indicator price.2 This differential is then adjusted the ratio of the standard quality to actual production. Therefore, a total deficiency payment is of known maximum cost. lSpurlock, p. 43. 2Wehrwein, p. 1005. 61 The support price is established early in the calendar year with incremental increases during each of the five accounting periods to stimulate orderly marketing.1 The government does not intervene to influence market prices. There are no production controls. The standard- quantity does not deter production since farmers are unaware of the acreage adjustments of other producers. Private firms handle all grain purchases and sales--both domestic and foreign. Wheat imports are duty—free if import price is above the minimum. Wheat flour has a 10 percent ad valorem duty, except for Commonwealth countries. Recent market activities - The UK has traditionally been the most important market for Canadian wheat. Canada supplies approximately one— half of all wheat it imports. The four major exporters—-Canada, US, Australia and Argentina-—supp1ied 85 percent of the UK market during the 1957—1966 crop years (Table III:16). France, and occasionally the JSSR, are the only other suppliers of any magnitude. UK domestic production increased about 50 percent during 1957/58— 966/67, while imports dropped almost 20 percent. Thus, importers have ost a large share of the UK market. Productivity of the UK has in~ reased substantially during the observed period (Table III:17). FAO projects that the UK will increase domestic wheat production > 5.4 million metric tons by 1975. Demand, during this period, is going > increase very slightly, so that imports into the UK will fall to 2.4— 5 million metric tons.2 Even if Canada maintains her market share, 1In 1963/64 and 1964/65, prices were $1.80 July l—September 30, .91 October 1—November 30, $2.03 December l—February 28, $2.14 March April 30, $2.18 May l-June 3o (Wehrein, p. 1004). 2 Commodity Projections...(FAO), I. p. 88. 62 Table III:16.-—Source of UK Wheat Imports for Crop Years 1957-1966 by Percentages.a 1957- Country 1959 1960 1961 1962 1963b 1964 1965 1966 Argentina 7.1 5.1 7.6 6.6 1.8 11.7 7.4 4.9 Australia 11.0 18.4 15.4 12.4 17.1 13.3 14.8 9.9 Canada 56.1 55.8 50.4 57.0 50 3 54.1 46.6 48.3 France 6.7 2.3 4.0 3.3 11.5 6.1 8 3 2.2 W Germany 0.3 0.2 -- 0.5 2 6 0.5 O 4 1.1 Italy 1.8 —— -— —- —— —— —- -- Sweden —- —— —- 0.8 0.6 0.2 0.6 1.4 US 13.1 11.3 10.6 3.6 10.9 5.8 17.8 13.9 USSR 2.2 6.6 7.3 9 2 1.5 -— —— — aPrimary destination. bEstimated final destination. World Wheat Statistics (London: International Wheat Council, 1959,...1968), Table 9. Source: Table III:17.——UK Wheat Production and Imports in Million Metric Tons and Yield per Acre in Bushels per Acre for 1957/58-1966/67. Total » Imports/ {ear Production Importsa Supply Production Yield L957/58 2.68 5.11 7.79 1.91 47.4 .958/59 2.76 5.29 8.05 1.92 45.9 ,959/60 2.83 4.47 7.30 1.58 53.9 ,960/61 3.04 4.70 7.74 1.55 53.1 961/62 2.61 4.68 7.30 1.79 52.5 962/63 3.97 4.12 8.09 1.04 64.7 963/64 3.05 4.59 7.63 1.51 58.1 964/65 3.79 4.18 7.97 1.10 63.2 965/66 4.17 4.65 8.82 1.12 60.5 366/67 3.47 4.15 7.63 1.20 57.5 a . . . Primary destination. urce: World Wheat Statistics (London: International Wheat Council, 1959,...1968), Tables 2b, 3b, and 9. 63 this will be a very substantial loss in exports. Implications for Canada - The UK has been, and often still is, the most important purchaser of Canadian wheat. Both the total wheat imported and Canada's market share of the UK market has dropped during the observed period. This trend and the possibility that the UK might enter the EEC could result in a very significant decline in Canadian wheat exports to the UK over the next decade. The UK Grains Agreement (1964) was considered by exporters as a method to guarantee a constant share of the UK market to exporters. There is nothing explicit, however, in the Agreement to guarantee this access. The Agreement does have mechanisms to reduce wheat imports. This can be accomplished by: (1) raising the minimum import price, (2) increasing the guaranteed price, or (3) increasing the standard quantity. Therefore, the Agreement appears to be more of a method to solve Britain's balance of payments than to guarantee market access. Any one of the above changes could seriously affect Canada because of her large share of the UK market. UK wheat production is not affected by world prices because of their deficiency payment system. In addition, the establishment of a standard quantity does not imply that wheat production will be limited to that quantity. Thus, it appears that during this period of surplus wheat conditions, the market pOWer is more heavily concentrated in the hands of the buyer. 3) European Economic Community Introduction — The signing of the Treaty of Rome (1957) created a common market of six West European countries—«Belgium, France, Germany, 64 Italy, Luxembourg and the Netherlands. The resulting dynamic changes have had very important implications for international wheat trade (and most other commodities). Wheat policies — The EEC is establishing a single grain market, with consistent prices and policies for the entire community. The Common Agricultural Policy (CAP),as it relates to grains, relies on the price mechanism to achieve marketing and production goals. The previous existing wheat policies of the individual countries1 were replaced by a new single system of prices within the EEC market. A set of seasonally adjusted target prices was "established in the area of greatest deficit (Duisberg, Germany). . .Derived target prices are then established in outlying areas of the community based primarily on the transportation cost differential."2 Intervention agencies in surplus production areas stand prepared to purchase grain if prices fall below the intervention gripe! which is five to ten percent below target prices. In deficit areas, variable levies maintain threshold prices, which are the minimum c.i.f. import prices and approximate derived target prices. The inter- vention agency must then resell the purchased grain either on the domes- tic or the export market, with the Guidance and Guarantee Fund absorbing the transaction loss. The Fund also pays export subsidies for surplus commodities. Its revenue is derived from agricultural product import duties. Thus, major importers transfer resources to major exporters, i.e., Germany to France. 1For a brief description, see Sorenson and Hathaway, p. 22. 2G. E. Rossmiller, The Grain—Livestock Economy of West Germany With Projections to 1970 and 1975 (Michigan State University: Insti- tute of International Agriculture, 1968), p. 6. 65 Recent market activities - Three—quarters of the EEC's wheat imports come from the US, Canada and Argentina. The USSR and France are the only other sizable exporters to the EEC countries. Since 1963/64, the USSR wheat exports have been negligible because of low production. This has allowed US, Canadian and French exports to be larger (Table III:18). Germany imports approximately one—half of the wheat that Canada exports to the EEC. Since 1964/65, however, the German market has fallen off sharply for Canada. Epp estimates that as a result of the new EEC price levels, wheat prices during the period 1960—1970 will fall 4—10 percent in Germany, remain about constant in Belgium and Italy, rise about 17 percent in the Netherlands, and 20—24 percent in France.1 The EEC has switched from a net deficit to a net wheat export- ing region during the 1960's. Two factors have been proposed as being responsible for this transformation. The first is that the large price increase for wheat in France the largest EEC wheat producer) has increased the incentive to expand output. The second is that technology and shifts in location of production have been the most important determinant of increased grain yields and that grain acreage is not sensitive to price changes of the magnitude that will occur under EEC policies.2 FAO projections show a shift from a deficit wheat area in 1961— 63 to a net exporting region by 1975 of 3.1 to 3.5 million metric tons. 1D. J. Epp, Changes in Regional Grain and Livestock Prices under the EEC Policies (Michigan State University: Institute of International Agriculture, 1968), p. 58. 2 Sorenson and Hathaway, p. 73. 66 .m wHQoB .Awmma . .mmma .HHUGSOU vows: HmcowuocuwucH "coccoqv muaumwumum Hmong UHHOB u QUHUOW ms.m sm.s mo.m mm.a ma.m mp.m No.6 am.o as.v wH.m sm.a imsos .2 .Hasc muHomEH Hmuoe m.m m.m 0.6 m.m «.4 N.HH s.m m.o N.MH o.ms o.w msosuo H.a m.o II .. o.H o.s a.m m.m 0.6 m.oa m.o ammo o.sm m.am m.mm v.83 o.mm m.mm p.sm H.Nm m.ms m.mm o.aH ms m.H H.o 6.0 s.m H.H m.H v.m o.m H.H m.s m.s apposm w.H H.o II II II H.o w.m v.H w.v m.m w.v wqmfihow 3 m.o H.o «.0 I- I- N.o H.o I- m.o m.H m.o aspuH o.oH 6.0H m.aa m.ms 6.m N.v m.m m.w m.oH s.m m.ms mosmsa .N o.m N.o II m.a m.H N.m m.m s.m m.o I- mssmsumss M.6H a.MH m.sa N.om m.HH H.4H H.ma 0.6 m.sfi s.HH m.ms pssssmsss . . . . N. m s.ms iommusozc mm mm mm mm nm E E E E .m>a mama moms 46mg moms moms Hows coma mmmfi mmas ammo asussoo .s» 0H a m HOQEH bombs a coma nmma mummy mono Mom mmfluucsou 0mm who cos. p mommucmouom c. I mo mUHDOmII.mHuHHH wanms 67 This is the result of an estimated production increase of 9.2 million metric tons, while demand is estimated to increase only 4.5 to 4.9 million metric tons.1 Sorenson and Hathaway are less Optimistic for food grain imports by the EEC. They project that production in the EEC will rise 139 percent to 36.1 million metric tons in 1975 (versus 35.0 for the FAQ).2 The major difference is that Sorenson and Hathaway project a drop in consumption to 21.6 million tons while FAO projects that consumption will increase to 31.5 to 31.9 million metric tons. The dilemma which confronts the EEC is that it will be a surplus producer of soft wheat, but will still require imports of hard wheat to mix with its soft for bread making, especially in the northern countries. It is estimated that by 1975, the EEC's hard wheat imports may be as low as one million metric tons annually.3 Implications for Canada — Because of high import levies, high support prices, new technology to allow increased substitution of soft for hard wheat in bread making, decreasing per capita wheat consumption. and slow population growth rates, less Canadian wheat will likely be imported into the EEC market. France, Germany and Italy presently all have surpluses of food grains. The projections for the EEC have two major qualifications. First, its exportable surplus of soft wheat could be considerably reduced if France diverts more wheat for feed grain utilization, since all other lCommodity Projections...(FAO), I, p. 88. 2Sorenson and Hathaway, p. 108. Increases in Germany, France and Italy are 114, 127 and 478 percent, respectively. 3Ibid., p. 111. 68 EEC countries have feedgrain deficits. Second, the demand for hard wheat imports will be strongly affected by the amount that Northern EEC countries are willing or technically able to substitute soft for hard wheat. The EEC will probably become an increasingly important fringe exporter during the next decade, and an exporting region to which other major exporters will have to adjust. 4) The USSR Introduction - The USSR is categorized as a wheat importer, mainly because of its relationship with Canada during the past decade. This is probably a misnomer due to the fact that the USSR has been a substantial net exporter until 1963/64 and since 1966/67. It may continue to import some wheat from Canada for the eastern regions of its territory, even if production returns to normal levels. The USSR is the world's largest producer of wheat, surpassing the US by a substantial margin. Small percentage changes in production, therefore, can cause large shifts in import demand. Wheat policies — The USSR practices a policy of self-sufficiency for wheat and other grains. Huge investments are being made in ferti- lizer production to increase farm output. Recent market activities — The USSR is the world's largest pro- ducer and normally is a net exporter. In the 1960's, two major events caused the USSR to enter the world wheat market as a major importer. First, unfavorable harvests in the 1963 and 1965 seasons depleted its reserve stocks and it was unable to meet domestic requirements. Second, Per capita domestic demand for basic food items doubled during the 1950's, far outstripping production increases. Income elasticity for 69 wheat has been estimated to be as high as 0.6—0.7.l As a result, the USSR is not expected to regain its position as a major wheat exporter in the next few years, since domestic demand and stock replenishment will probably receive primary priority.2 During 1963/64 and 1965/66, the USSR purchased 651 million bushels of wheat, which accounted for 16 percent of all world wheat trade. Canada was the largest supplier, shipping 400 million bushels in these two years (Table III:19) These sales occurred at the same time that the US was sending extensive PL 480 shipments to India, especially in 1964/ 65. As a result, exporter's wheat stocks were sharply lowered and renewed specultation was provoked on an impending world food shortage. In present perspective, these were only temporary shortages, but invoked long-run production increases. The USSR may continue to import some wheat for its eastern regions. Barring harvest failures, however, quantities will be much smaller than in the recent past, and may decline to the levels of the 1955—62 period of 10.6 million bushels annually. Most of the Russian wheat exports go to East Europe. Western Europe is the next largest importing area. These two areas accounted for an average of 83.7 percent of Russian exports during 1957/58-1966/67. Exports to Western Europe, however, were a negligible 2.6 percent of Soviet sales during 1964/65—1966/67. The largest importers of USSR wheat were East Germany, Czechoslo- vakia, Poland and Finland (Table III:21). Since 1966, Cuba has become 1A. M. Tang, “Agriculture in China and the Soviet Union,“ Journal of Farm Economics (December 1967), p. 1131. 2 Arcadius Kahan, "Changes in Productivity in the Soviet Union," Conference on International Trade and Canadian Agriculture (Ottawa: Queens Printer, January 1966). Po 379- 70 Table III:19.——Free World Exports of Wheat to the USSR in Crop Years 1960-1966 in Million Bushels. Country 1960 1961 1962 1963 1964 1965 1966 Average US -~ -- -— 65 2 —— —- 9.5 Canada 8 —— —— 208 36 192 100 77.5 Australia -- —— —— 57 32 21 -— 15.7 Argentina —- -— -— -- l 81 1 11.9 France —— —- -— 5 4 5 5 2.7 Other :1 Z : l 7 : "" —‘ 2 . 4 Total 8 —— -— 352 75 299 106 120.0 Source: US, Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968, p. 19. Table III:20.——Primary Destination of USSR Exports of Wheat in Crop Years 1957—1966 by Percentages. 1957— Region 1959 1960 1961 1962 1963 1964 1965 1966 W Europe 18.6 23.0 17.9 22.9 13.7 6.3 0.1 1.5 E Europe 77.0 61.5 58.8 51.7 71.5 66.7 86.2 68.8 N & C America ~-— 2.9 8.1 8.9 6.6 18.8 -— 2.8 S America 0.1 3.7 5.8 9.6 4.2 —- —- 0,5 Asia 0.9 2.4 7.8 4.7 3.0 7.5 5.5 8.2 Africa 3.0 1.0 1.3 2.3 0.9 0.7 8.1 18.2 Source: World Wheat Statistics (London: International Wheat Council, 1959,...1968), Table 9. 71 a large importer and the United Arab Republic is also a sporatic large importer of wheat from the USSR. Table III:21.—-Quantities of Wheat Imported in Million Metric Tons by the Nine Largest Importers of USSR Wheat for Crop Years 1957— 1966. 1957- Country 1959 1960 1961 1962 1963 1964 1965 1966 E Germany 1.34 1.30 1.34 1.19 0.54 0.39 0.91 1.31 Czechoslovakia 1.37 1.02 0.88 1.16 0.31 0.28 0.85 0.88 Poland 0.71 0.22 0.59 0.19 -- —- 0.14 0.65 Finland 0.28 0.09 0.10 0.33 0.02 0.07 -- —- Cuba - 0.15 0.41 0.47 0.09 0.22 -- 0.12 UK 0.10 0.29 0.34 0.39 0.07 —- -- -— UAR 0.14 -- -— —- -- -- 0.16 0.54 Hungary 0.19 0.37 0.06 0.06 -- -- e- -— Netherlands 0.16 0.21 0.13 0.13 0.15 -- ~- 0.31 Source: World Wheat Statistics (London: International Wheat Council, 1959, . . . 1968), Table 9. Projections for 1975 indicate that the USSR wheat production will increase 19 to 29 percent, consumption will increase 14 to 16 percent, and net exports will increase 262 to 1040 percent, above the 1961—63 levels.1 The production projection has already been exceeded since 1966. Implications for Canada - The USSR entered the world market and bought substantial quantities of wheat during the 1960's. This windfall gain helped postpone a crisisin the world wheat market for another decade. Canada benefited directly from the large sales to Russia, and indirectly from sales by other countries which reduced their stocks and allowed 1 Commodity Projections . . (FAQ), I, p. 88. 72 world prices to rise. It is highly speculative that Canadian wheat sales to the USSR will continue, at least on the magnitude of the 1960's. More— over, as production rises, USSR exports to East Europe will increase, reducing Canada's market share in these areas. The key unanswered question pertains to the potential of the USSR agricultural sector and its ability to produce grain. It does have sufficient resources to produce adequate volumes of wheat for domestic consumption and still have a large exportable surplus. One of the lacking ingredients may be price incentives for producers. As in the prairies, weather also plays a major role in determining the volume of grain production in the USSR. The mix of USSR grain output is important to Canada, also. Feed grains are also in short supply in East Europe and Russia. Resources used in feed grain production reduce the potential for wheat production, hence increasing imports. The immediate outlook is not overly promising. The present year's crop (1968/69) in the USSR is estimated to be 75 million metric tons, the second largest crop recorded.l There does remain, hOWever, a substantial portion of unpurchased wheat from a three year agreement signed in 1966/67 between Canada and the USSR. 5) Mainland China Introduction - Since 1960/61, the Chinese wheat market has been one of the most important for Canada. Because of the government control of both production, trade, and all other statistical information, it is difficult to project any trends for this country. lAgricultural Production and Trade (January 1969), pp. 18-19. 73 Wheat policies - Like the USSR, China practices a policy of self-sufficiency in food production. On the other hand, China either exploits its comparative advantage or its political advantage, since it is a substantial exporter of rice. During the 11 years 1955/56 to 1965/ 66, China exported an average of 864.0 million bushels of rice (Table III:22). In five of those years, Chinese rice exports were even larger than those of the Us. The quantity of wheat China imports may depend on the relative supplies and prices of wheat and rice. Table III:22.-—Exports of Chinese Rice for Crop Years 1955-1965 in Million Bushels. Crop Year Exports Crop Year Exports 1955 648.9a 1961 444.1 1956 1053.7a 1962 572.7 1957 505.5 1963 626.8 1958 1318.9a 1964 805.3 1959 1615.9a 1965 738.4 1960 1173.9a aChinese exports were larger than US exports of rice. Source: US,Economic Research Service, Department of Agriculture, Food Grain Statistics, Statistical Bulletin #423, April 1968. Recent market activities - Since 1960/61, China has imported substantial quantities of wheat from Argentina, Australia and Canada. The latter two countries have accounted for an average of 84 percent Of its imports since 1957 (Table III:23). For the PaSt three years, China has been the second largest importer of Canadian wheat. Because of its foreign policy relations with China, the us does not trade In this market. 74 Table III:23.—-Source of Mainland China's Wheat Imports for Crop Years 1957-1966 by Percentages. 1957- Country 1958a 1960 1961 1962 1963 1964 1965 1966 Argentina _ —— —— 1.9 2.0 19.0 11.9 35.2 6.4 Australia 10.1 59.9 41.2 42.3 48.9 44.6 31.7 43.0 Canada 87.6 39.5 41.5 34.4 19.3 34.8 32.2 49.3 France 0.7 -- 4.2 17.9 4.3 7.9 0.6 1 2 W. Germany —— 0.5 8.2 2.5 —- -— —— —~ Italy —— —— —— —- —— -— 0.4 -- USSR —— -— 3.4 0.9 —- -- ~- -- Others 1.8 —- -— —— 8.5 0.9 —— -— Total Imports (mil m tons) 0.07 1.96 4.74 4.87 5.20 5.05 6.37 5.03 aThere were no imports of wheat in the 1959 crop year. Source: World Wheat Statistics (London: International Wheat Council, 1959, . . . 1968), Table 9. Projections for 1975 indicate that Chinese wheat production will increase 54—61 percent, consumption will increase 45—51 percent, and imports will increase 2 percent above the 1961—63 levels.l Therefore, there should be a substantial continuing market for wheat exports to China in the next decade. Based on historical shares, Canada could expect to export 72—90 million bushels annually to China, during the period to 1975. Implications for Canada - The substantial sales of wheat to Mainland China were one of the major factors promoting Canadian wheat pro— duction. These sales, which helped to reduce Canada's surplus stocks, coupled with the resultant bouyant market prices, largely contributed 1 . Commodity Projections . . . (FAQ), I, p. 88. These figures include Mongolia, North Korea and North Vietnam. 75 to the 50 percent increase in wheat acreage from 1958 to 1966. Sales in 1967/68 to China declined from the previous year, although it remained the second largest importer of Canadian wheat. This has renewed specula- tion that this market may not be permanent——at least on the scale of the past few years. i It appears that the US will not change its position in the near future with regard to sales to China. However, with the number of countries establishing diplomatic relations with China (including Canada), the US may follow suit before 1975. 1 6) East European Countries Introduction — Trade patterns of East Europe are strongly tied with the USSR. The USSR and the East European countries form the COMECON trade bloc (Committee on Mutual Economic Cooperation). Most trade within this group is by barter arrangements. Wheat policies - The East European countries try to exploit a comparative advantage in labor intensive enterprises which increases grain imports. Nevertheless, with the exception of Czechoslovakia and East Germany, these countries plan to increase wheat yields and acreages so that they will be self—sufficient. East European countries prefer to import from the USSR because: (1) hard currency to make purchases from Western countries is scarce, and (2) they have a large trade imbalance with the USSR. Kahan expects that "Soviet grain exports to the [East European] bloc [will be] a function of the short-run fluctuations of Soviet Grain output."2 1 . . . Albania, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania. 2 Kahan, p. 383. 76 Recent market activities s~East European countries imported 57.9 percent of their wheat from the USSR during 1957/58 to 1966/67 and 84.7 percent during the first three years of this period (Table III:24). Canada was the second most important supplier to East Europe, averaging 14.0 percent during the 10 year period. Because of the transhipment problem, however, this may be an underestimate of actual exports.l As expected, Canadian exports increased substantially during the period when the USSR production was low. France is also an important exporter to East European countries, accounting for 20.6 percent of their imports during 1962/63—1966/67. Table III:24.——Source of East European Imports of Wheat by Percentages for Crop Years 1957—1966. 1957— Country 1959 1960 1961 1962 1963a 1964 1965 1966 Argentina -— —— 0.2 —— 3.6 1.1 1.8 0.3 Australia -— 0.6 —- 0.5 0.6 -- 0.2 —— Canada 2.8 9.6 16.9 11.1 34.3 41.0 15.9 19.3 France 0.1 0.6 -— 12.6 8.7 27.1 35.3 16 5 taly 0.2 —- —— 0.5 1.8 -— -- —— W Germany 0.3 0.6 3.1 0.5 3.3 0.5 1.1 0.2 SWeden — —- —- 2.0 1.3 1.5 2.3 —— US 11.2 23.4 10.4 12.2 29.6 1.2 1.3 3.2 USSR 84.7 64.9 66.5 60.5 15.1 16.5 35.3 59.0 Others 0.1 0.3 2.9 —— 1.6 11.1 6.9 1.6 Total Imports (mil m tons) 4.55 4 79 4 47 4.55 6 08 4 70 5.37 4.81 aEstimated final destination in 1963/64. World Wheat Statistics (London: International Wheat Council, 1959, 1968), Table 9. Source: 1 . . . Using estimates of final destination in 1963/64, Canada's market share was 34.3 percent instead of 17.6 percent for primary destination. ml III .|. | IllIll . 4 _ i|||IIIIIL 77 The US was a large exporter of wheat to East European countries until 1963/64. During 1957/58 to 1963/64, the Us accounted for 16.3 percent of wheat imports. This dropped to 1.9 percent during 1964/65—1966/67, as the result of highly restrictive US shipping requirements on trade with these countries. Projections for 1975, as a percent of the l961~63 period, show production at 128 to 132 percent, consumption at 111 to 112 percent, and imports at 45 to 55 percent.1 As a result, its important requirements in 1975 will be considerably lower and probably the share of the market available to the free world (and particularly North America) will decline. Implications for Canada — Failure of the USSR to produce sufficient supplies of wheat to meet the demands of East European countries has meant a sizable market for Canada. Again, the most important determinant of wheat exports to this market is the ability of the USSR wheat economy to expand production. Canada has a slight edge in this market over other competitors because of the credit terms which are allowed on sales to some of these countries. 7) Less Developed Countries (LDCs) LDCs may hold the key to the oversupply conditions prevailing in the wheat market of developed countries. Over 45 percent of the wheat exports of developed countries go to LDCs (Table III:25). For Canada, however, this percentage is considerably lower (Table III:26). The reason for suggesting that the LDCs may solve the wheat crisis are three- fold: (1) population is rapidly increasing in these countries, (2) per capita consumption of wheat (and other staples) will undoubtedly rise 1 Commodity Projections . . . (FAQ), I, p. 88. 78 since caloric requirements in these countries are not being met, and (3) it is obvious that developed countries cannot absorb the present world production. Table III:25.——Percentage of Wheat Traded Among Developed (DC), Less Developed (LDC) and Centrally Planned Economy (CPE) Countries, 1959-61. Importers Exporters DC LDC CPE Total DC 37 36 6 79 LDC 3 3 - 6 CPE 3 l 11 15 Source: Agricultural Commodity Trade and Development—-Prospects and Problems (Rome: Food and Agriculture Organization, 1964), p. 27. Table III:26.——Flow of Canadian Wheat Exports to Developed (DC), Less Developed (LDC) and Centrally Planned Economy (CPE) Countries for Crop Years 1959—65, by Percentages. Importer 1959—63 1964 1965 DC 60.6 46.5 33.7 LDC 10.6 11.1 7 8 CPE 28.7 41.7 58 5 Other 0.1 0.7 —— Source: World Wheat Statistics (London: International Wheat Council, 1959,. . . 1967), Table 9. 79 Food requirements are two dimensional—~quantity or caloric require— ments and quality or nutritional requirements. Usually, either the latter or both of these types of requirement problems may exist and can be solved by a variety of means. Increased wheat content in the diet raises the caloric level, but may fail to solve the protein (and other nutrient) deficiencies. Food requirements for LDCs are met from three sources: (1) domestic supplies, (2) commercial imports and/or (3) a residual which may be supplied by food aid shipments. In development planning, emphasis is now being concentrated on improving agriculture's productivity in LDCs through the introduction of new inputs such as improved varieties, fertilizer, irrigation, etc. The recent introduction of new, high yielding varieties of Mexican wheat has increased optimism that the LDCs may obtain self—sufficiency in wheat production.1 A self—sufficiency goal, for many of these countries, is not economically justified in terms of comparative advantage. When obstacles of scarce foreign exchange, trade barriers on the LDC's export goods, and a large rural population are considered, the reasons for persuing self—sufficiency are more obvious. Commercial food imports are limited by foreign exchange availa— bility. Moreover, imports of industrial goods usually receive a higher priority than food, unless food shortages reach critical proportions. In order for significant changes in the quantity of commercial wheat imports to occur, these countries will have to export more products. 1In 1968, one—third of Pakistan wheat was sown to the new "Mexi—Pakistan" variety, which has in some cases quadrupled yields obtained in the previous year with traditional varieties. Foreign Agriculture (September 16, 1968), p. 5. 80 The markets for many of the export products from LDCs, however, have not expanded because of slow growth in demand, increased utilization of substitute products, and numerous tariffs, quotas, and other trade restrictions.l Food aid, on a large scale, is probably a strong retarding factor in the development of a healthy commercial agriculture. It is now recognized that food aid is only desirable to meet short—run food shortage emergencies. Moreover, the era of the concept that food aid shipments can bail out developed countries' surplus wheat problems has passed. Aid to LDCs in terms of food, moreover, is not the most economical method of assistance, if the food is produced specifically for this purpose. This may not be true if this is a method of disposing of persistent surpluses, i.e., the commodity has a negative value to the exporter. If commodity surpluses accumulate, there will be renewed political pressure for governments to expand food aid shipments, as was initiated by the US PL 480 in the 1950's. Increases in food requirements in LDCs will depend mainly on: (1) population growth rate, and (2) income changes. Population growth in most LDCs is increasing at a very high rate. Growth rates for the 1965—75 period are expected to be 2.6 percent per year.2 Birth control measures may enable this problem to be partially controlled. Income increases place strain on the marketing system, the strength of which l . For a discussion of these trade questions, see Harry G. Johnson, Economic Policies Toward Less Developed Countries (Washington, D.C.: Brookings Institute, 1966), Chapter VI, pp. 163~21l. 2 . .. Commodity Projections . . . (FAQ), 11, p. 7. For indiVidual areas, the growth rate per year (percent) is Latin America 2.8, Africa 2-6, Near East 2.7, Asia and Far East 2.5, India 2.4. 81 depends on the income elasticity of demand and the increased numbers of non—farm consumers. In Table III:27, the FAO estimates of production and imports of wheat for LDCs for 1975, are shown. The import projections range from an increase of 53 percent to a decline of 43 percent, depending on the assumptions of production, income and population growth. As a result of recent production advances, however, even the high production estimates for 1975 could be a substantial underestimate. Wheat produc- tion in Afnka and Asian countries——except Japan, China and the USSR-- was 39.06 million metric tons in 1967 and is estimated to be 47.84 million metric tons in 1968.1 If production continues to increase at these rates, and population growth can be partially controlled, LDCs will be importing considerably less wheat. Table III:27.-—Production and Imports in Million Metric Tons of Wheat In Developing Countries, 1961—63, and High and Low Estimates for 1975.a 1961-63 1975 (Low) 1975 (High) Production 37.8 53.1 69.3 Imports 14.2 21.7 8.1 Imports/Production 0.38 0.41 0.12 aOmits Argentina. Source: Agricultural Commodities--Projections for 1975 and 1985 (2 Vols; Rome: Food and Agriculture Organization, 1967), I, p. 88. MW 1 World Agricultural Production and Trade (January 1969), pp. 18-19. 82 The implications for Canadian wheat trade are obvious. Canadian wheat exports to these countries cannot be expected to increase. In addition, because the US wheat export market has been dominated by sales to the LDCs, there may be additional exports shifting to compete in the same commercial markets in which Canada now trades. Similarly, other wheat exporters may also be diverting exports to compete in markets in the developed countries. Projected Demand for Canadian Wheat in 1975 The implications for Canada from the present and anticipated changes in the world wheat market are expressed in terms of: (1) the expected decrease in the quantity of Canadian wheat exports, (2) the reduction in acreage required to adjust to the anticipated foreign domestic wheat demand, and (3) the economic effects for Canada of these adjustments by producers. Individual estimates for eight world regions were constructed to illustrate both the total and regional potential demand for Canadian wheat in 1975. First, projections of total wheat import requirements in 1975, by each of these regions were selected from published studies. These projections are shown in column (1) of Table III:28. Second, the share of these markets for Canada was obtained from historical data, as shown in column (2). Column (3) is the product of these first two columns (except for the EEC, USSR, and LDCs) and indicates the antici- pated quantity of Canadian exports to these regions in 1975. In the case Of the EEC, USSR, and LDCs, column (3) is the average Canadian exports to these regions for the 1957/58 to 1966/67 period, adjusted by the expected Change in that region's total import requirements, assuming market shares are Static. 83 Table III:28.——Estimates of the Total Volume and the Canadian Share of Wheat Exports to Various Regions, in 1975. Total Imports Canadian Market Canadian Exports (Mil. Bu.) Share (Percent) (Mil. Bu.) Region (1) (2) (3) Japan 126.4a—202.lb 0.35 44.1—70.5 UK 90.01 0.50 42.5 EEC 36.7c 0.31 11.4-34.9e Other Developed Countries NC NC 7.0e USSR 36.7 0.75 27.6e East Europe 93.7 0.11 10.3 China 187.4 0.35 65.4 Less Developed Nations 297 .6b NC 23 .9‘3 (Total) (234.8-284.7) aF. H. Gruen $5.211 Long Term Projections of Agricultural Supply and Demand: Australia, 1965 and 1980 (Australia: Monash University, May 1968). bAgricultural Commodities~—Projections for 1975 and 1985 (2 vols.; Rome: United Nations Food and Agriculture Organization, 1967), I, p. 88. cVernon L. Sorenson and Dale E. Hathaway, The Grain—Livestock Economy and Trade Patterns of the EEC with Projections to 1970 and 1975 (East Lansing: Michigan State University, Institute of International Agriculture, 1968), p. 111. dWorld Wheat Statistics (London: International Wheat Council, . . 1968), Table 9. 1959, . eAverage of 1946/47—1966/67 data, adjusted for decrease in total imPorts for that region, assuming constant market shares. In developing these estimates, three assumptions are implied. First, it assumes that there will be no major domestic or international Policy changes which would seriously alter the present trade patterns. Second, import demand requirements are based on average yields. Wheat production in most countries, however, is heavily subject to fluctuations. Third, the market shares are based on historical data“ These shares may 84 adjust as a result of changes in the level of a country's imports and/or the effects of production conditions in competing exporting countries. Since wheat is a non-homogeneous commodity, the relative quantity of the different types of wheat imported (e.g. soft or hard) may shift as domestic production changes or as consumption patterns for a type of wheat change. The estimated total wheat exports for Canada in 1975 of 235 to 284 million bushels (Table III:28) is a considerable dr0p from the post— war annual average of 338.0 million bushels (1946/47 to 1966/67). Assuming domestic demand remains at approximately its post—war annual average of 150 million bushels,l and production per acre continues to increase at its historical rate of 0.1 bushels per year, then acreage required for wheat production in 1975 will be 18.6 to 21.0 million acres. Consequently, a shift of some 9 to 11 million acres, or one—third of production,wi11 be required. There are no production controls to facilitate this shift in wheat acreage, but the Canadian producer has two strong economic incentives to adjust to new supply—demand developments. First, the price the producer receives is the world price, which moves inversely to world supply conditions. Second, the producer is required to provide storage for surplus wheat production (above elevator capacity), in addition to absorbing the effects of reduced cash income from an unsaleable commo— dity. If this analysis is accurate, that the world wheat market will continue to face a persistant surplus which will induce a substantial decline in Canadian wheat production, then the ensuing consequences 1This estimate is derived from projected seed utilization for this acreage of 28 to 31 million bushels, food consumption of 58 to 62 million bushels and feed consumption of 55 to 65 million bushels. 85 should be a matter of concern for government policy—makers. Nearly one—quarter of the Canadian farm income is contributed by wheat, and if farmers must produce alternative lower—valued crops, farm income will show a sizable decline. In addition, the producer may find that the value of certain assets will decrease and that surpluses will accumulate in other commodities, depressing their price. Profits in the farm input supply industry (fertilizer, machinery, et.) and many other Western Canadian industries will also be adversely affected. On the international level, decreases in wheat exports of the magnitude projected will seriously lower Canada's balance of trade and could increase the pressure on the stability of the Canadian dollar. Summary In the major wheat exporting countries, with the exception of the US and Canada, the trend is for exportable supplies of wheat to increase during the next decade. Wheat production is being encouraged in Argentina. Its market share of world wheat trade can be expected to increase from its present 8 percent to 12 percent. Its main markets are in Latin America, the UK, the EEC and China. Australia has increased its production and exports of wheat substantially, in recent years. High guaranteed prices and a soft wool market have been two of the major factors causing this increase. These effects, however, may have reached their peaks. Major markets for Australian wheat are China, the UK, and Japan. The US has reduced acreage allotments by 13 percent in both 1968/69 and 1969/70 in order to adjust its supply to the current domestic and export demand. Changes in its farm policy in 1964, from support 86 prices to direct payments, have allowed it to be more aggressive on world markets. The price floor on the IGA has prevented it (and others) from reducing wheat prices below current levels. Tw0*thirds of US wheat exports are shipped under PL 480. The major destinations of these subsi- dized shipments have been India and Pakistan. In 1966, amendments added to PL 480 of: (l) phasing out soft currency sales, (2) shipping 50 percent of the wheat in more eXpensive US vessels, and (3) emphasizing improvements in domestic production and marketing facilities, will probably redirect the demand for food aid shipments. As a result, US will be competing more vigorously in the commercial markets of Japan, the UK and the EEC. The US does not trade with China and restrictive shipping practices severely reduce trade with the USSR and East European countries. France and the USSR are the largest fringe exporters, which accounts for 13 to 29 percent of total world trade. French production and exports of wheat have been rising rapidly as a result of the adop- tion of new technology and increased wheat prices. Substantial resources are being devoted to increase the productivity of USSR agriculture. With the continuance of this policy and with average weather conditions, the USSR should be able to return to the world wheat market as a sub- stantial exporter. In most wheat importing countries, domestic production is expanding considerably faster than consumption, thus decreasing the demand for imports. The major exception to this generalization is Japan. As a result of changing tastes, rising population, and a stagnant or declining domestic wheat economy, Japan has increased wheat imports. The US and Canada supply 90 percent of this market which is rigidly supervised. By 87 1975, Japan could be the largest importer of Canadian wheat, depending on such factors as (l) the total level of Canadian—Japanese trade, (2) the ability of other exporters to increase their share of the Japanese market, and (3) its relative needs for a hard wheat for baking purposes. The UK, the largest market for Canadian wheat (except for crop years 1963, 1965 and 1966), has rapidly increased its domestic produc— tion, and is expected to continue to do so. This trend will proceed even more swiftly if the UK is admitted to the EEC. Moreover, Canada will lose its Commonwealth exemption for the UK's 10 percent ad_valorem duty for flour. The EEC, although a net exporter of wheat, still imports hard wheat to mix with its soft wheat for breadmaking, especially in the northern countries. Imports of hard wheat may fall as low as one metric ton, annually. This will depend on the diversion of soft wheat for feed and the willingness of the Northern EEC to consume soft wheat. Imports to the USSR—East European Countries will depend on the recovery and progress of USSR wheat production. Although Canada has an advantage over the US in these countries because of Canada's credit terms and the restrictive US shipping requirements, this total market will probably decrease to very low levels. China is expected to maintain imports at the same level as during the past few years. Canada has supplied nearly one-half of this market since 1958/59. Strong competi- tion, mainly from Australia, has substantially reduced Canada's market share. Less Developed Countries need additional wheat. Encouragement is being given to domestic production rather than imports~—commercial or concessional. Substantial increases in production in the past year, as a result of new wheat varieties and favorable weather conditions, have 88 given encouragement to the goal of self-sufficiency for these countries. This goal may be irrational in terms of classical comparative advantage, but with problems of: (l) scarce foreign exchange, (2) slow growth in demand, (3) growth of substitute products, and (4) numerous trade barriers for LDC's exports, the reasons for this goal become more obvious. Food aid shipments of wheat to LDCs, however, may increase as the size of carryover stocks increase in the developed countries. As the result of the increasing competition and decreasing demand in the world wheat market, a substantial decline in exports of Canadian wheat is projected for 1975. The estimated level of exports is 234.8 to 284.7 million bushels (versus 334.9 in 1967/68). This, in turn, means a reduction to 18.6 to 21.0 million acres required for wheat production, or 9 to 11 million acres less than the 1966 acreage. This large shift in acreage can have strong economic implications for the wheat economy as well as for prices of other agricultural commodities, the farm input supply industry, and Canada's balance of trade. CHAPTER IV THE CONSTRUCTION AND ANALYSIS OF THE MODEL This chapter describes methods employed in formulating the economic model and in analyzing the model in terms of the four basic objectives stated in Chapter I. This chapter is divided into two main sections. In the first section, the theoretical framework is given for each equation or set of equations in the model. In the second section, there is a description of the procedures used to analyze the model. In addition, this section establishes the struc- ture for the four subsequent chapters (V to VIII) which contain the results of the analysis. Rationale of the Model Any model involves certain value judgments during the formula— tion process in the selection of the relevant variables, the theoretical basis underlying the model, and the functional form of the equations. This section is designed to provide the reasons for each of the decisions involved in the process of formulating and statistically estimating the econometric model. The section is divided into four parts: (1) Supply Response, (2) Canadian Wheat Board Selling Price, (3) Demand for Exports, and (4) Canadian Domestic Demand. The model consists of nine stochastic equa- tions and three identities. 89 90 1) Supply Response Supply of wheat is the function of acreage harvested and produc- tion per acre. The latter variable is strongly affected by climatic conditions,and to a lesser degree, by changes in quantity and type of man—controlled inputs. This study is most concerned with the reasons for producers' decisions to adjust wheat acreages, and therefore, the normalizing variable for this equation is acreage harvested. Observa~ tions for this variable in the post-war period range from 20.8 to 29.8 million acres. The CWB does not, in name, practice wheat acreage control. Nevertheless, when producer quotas are a low percentage of production, creating large farm-stored stocks, it reduces acreage planted to wheat the following year. Even though wheat is the most profitable crop, producers must market sufficient quantities to generate cash flows for the purchase of non-farm inputs. Moreover, the Prairie Grains Advance Payments Act (1957), designed to alleviate this problem through interest— free cash advances for farm—stored grain, has a maximum of only $3,000 per farm. As a result, as farm—stored wheat stocks increase, wheat acreage is diverted into alternate salable crops of barley, oats, flax, rapeseed, forage (for livestock) or increased summerfallow. Another important determinant of wheat acreage is price. Prices, both of wheat and of major competing crops such as barley, oats or flax, are assumed to affect wheat acreage. Since final payments are made by the CWB to producers almost two years after the crop is planted, the farm price of the previous crop is not known at planting time. There- fore, a price expectation is used which assumes that farmer's expected price is based on the CWB selling price just prior to planting time .. .. --I-II-I III-.. 91 (JanuaryeMarch prices). Barley is assumed to be the main competing crop to wheat. Farmers' decisions to plant wheat may also depend on the market outlook for the coming season. It is assumed that the major variable influencing wheat market conditions is last period's exports. Producers may be adjusting their acreage of wheat over time (either increasing or decreasing). On the other hand, if a time varia- ble is statistically significant, it may indicate that there are omitted variables which are strongly correlated with time and also influence wheat acreages. The following equation represents the important variables assumed to influence wheat acreage: (1) AAC = f[Pws_ (T)PWS_ ll 1’ ppw, PPB, TX_1, T] where: AAC is acreage of wheat harvested in the prairie provinces, in million acres. PWS is farm—stored stocks of wheat in the prairie provinces at end of the period (July 31), in million bushels. PPW is average selling price of #2,3 Northern wheat, quoted by the CWB during January—March of the previous crop year at the Lakehead, in (Canadian) cents per bushel. PPB is average selling price of #1 Canadian West Barley, quoted by the CWB during January-March of the previous crOp year at the Lakehead, in (Canadian) cents per bushel. TX is total exports of Canadian wheat in million bushels. T is the time in years, 1946 = 46, . . . . 92 2) Canadian Wheat Board Selling Price The CWB establishes daily prices for all classes of wheat, based on the judgment of its Commissioners. If these prices were established on a "free market" basis, it would be the result of the sellers and buyers estimate of world supply and demand conditions. In addition, the Canadian prices would have to be competitive with those of other exporters. The CWB price, however, is not established on a "free market" basis. It is established by a monopoly exporter in a world of im— perfect competition, both on the demand and (especially) the supply sides. However, certain simplifications of the problem are required in order to conduct any meaningful analysis of the problem. Neverthe- less, once the realization is made that the model does not perfectly simulate the actual market, the next step is to assess the deviations between the model and the actual market, and the implications of this for the results obtained. The CWB operates a "buffer stock“ storage function in order to stabilize wheat prices. Therefore, the annual average CWB prices will not vary as much from year to year as changes in world supply and demand would indicate. This stabilization function of the CWB is accounted for in equation (2) by introducing a lagged CWB price. Prices established in a free market situation assume inde— pendence or lack of collusion among price setters. It has been hypothesized, and events have been documented which suggest that during the 1956—64 period, the CWB acted as a barometric price leader and the Us as a price follower in world wheat pricing.l During this lMcCalla, JFE (August 1966) , pp. 711—27. 93 period, the two prices moved reasonably close together,1 with the US export subsidy allegedly reflecting the difference between the Canadian and US domestic price. However, similarity in the movements of these two prices, regardless of the hypothesized relationship between these two markets is not an unrealistic phenomenon. An important question is, given that the CWB was the barometric price leader, how much lati- tude did the CWB have in setting prices? Undoubtedly, there was a limited range of prices in which the US would follow the CWB lead. This range, presumably, did not deviate too far from a range dictated by world supply and demand conditions, since during this period the US maintained considerable surplus stocks which it wished to move onto world markets. The next question is what were the circumstances which allowed Canada to perform this role, since it was a much smaller producer and exporter than the US? The US, during this period, had a farm program of high (parity) domestic prices with export subsidies to keep commodities competitive on world markets. Although at the same time, production was restrained by acreage allotments, the use of export subsidies was highly controversial on the international scene. Other exporters argued that they had to compete with the powerful US treasury. Therefore, it was politically advantageous for the US to follow the price leadership of the CWB. The US farm policies forced them into this situation and their desire to promote stability in international commodity trade had allowed Canada's role to continue. On the other hand, although the CWB was probably a price leader on a daily basis, the implications of this hypothesis for annual price data lSimple correlation coefficient between these two variables was 0.50. 94 is debatable. Since 1964, the US farm policy has made a major reversal. Domestic prices have a much lower support level and direct payments ‘ are made to farmers. McCalla now contends that the Us is assuming a role which is more dominant in world trade.1 Therefore, it appears that the era of CWB price leadership has ended, since it has now become politically acceptable for the US to assume the role of a price leader. One of the important implications which this study wishes to explore is the effect of a drop in world wheat prices as a result of failure of the International Grains Arrangement (1968) to maintain the agreed upon price range. If this situation does not occur, and if it can be assumed that the US is the new price leader, then the model must have some means of analyzing the effect in the Canadian market of a change in US prices. Therefore, the model is developed with CWB prices dependent on US prices. A third factor which could cause wheat prices to deviate from estimated supply and demand factors in a free market situation is the International Wheat Agreement (now the International Grains Arrange— ment), which establishes a price range within which member countries must export and import a percentage of their wheat. CWB prices have fluctuated within these limits from 1953/54 to 1967/68. During l949/50~ 1952/53, free world prices were higher than the upper limit set by the Agreement. In 1968/69, prices are pushing on the lower limits set by the new International Grains Arrangement (IGA). Therefore, present prices are probably influenced by the limits set by the IGA. During lMcCalla, JFE (December 1967), pp. 1038—50. 95 periods in which prices were within the IWA limits, the effects on CWB prices were probably minimal. If residuals during the suggested periods indicate that the Agreement did influence prices in the hypothesized manner, a dummy variable could be introduced to account for this factor. Having established the reasons for deviations from free market conditions, the remaining variables which affect CWB price should only be those which would influence the free market prices—-normally world supply and demand conditions. The supply conditions which are assumed to influence CWB prices are the magnitude of the exportable surpluses of wheat in Argentina and Australia. Since stocks of US wheat do not reflect its supply of wheat available for export, only its price level is assumed to influence Canadian prices. The volume of the Canadian exports to communist countries is assumed to positively influence CWB prices. In addition, demand and supply of Canadian wheat, indicated by total Canadian wheat exports, total domestic wheat consumption, and prairie stocks——all endogenous variables-—are assumed to move inversely with CWB prices. The following equation incorporates the important variables which are assumed to influence CWB price levels: (2) CWBP = f[cwsp_l, TX, DCT, PWS, PAW, xsc, CPE] where: PWS, TX are as defined in (l) CWBP is the simple annual average price of #2, and #3 Northern as quoted by the CWB at the Lakehead, in (US) cents per bushel. PAW is the annual US price for #2 hard winter wheat, f.o.b. Gulf, in (US) cents per bushel. 96 DCT is total Canadian domestic consumption in million bushels. XSC is total stocks in Argentina on January 1 and in Australia on December 1 in million bushels. CPE is Canadian wheat exports to communist countries in million-bushels. 3) Demand for Exports To formulate the demand for Canadian wheat exports, a partial equilibrium model was the theoretical framework on which the model was constructed. The graphical analysis of the parital equilibrium model is depicted below in Figure IV:1. The world wheat market is divided into two sectors-—importers and exporters. In graph (a), the domestic demand (Dm) and the domestic supply (Sm) of wheat is derived from the h aggregation of all importing countries. In graph (G), a similar aggregation is made to produce a domestic demand (Dx) and domestic supply (Sx) of wheat for all exporting countries. In graph (b), the export demand (ED) is obtained from the excess of domestic demand over domestic supply of the importing countries, whereas export supply (ES) is obtained from the excess of domestic supply over domestic demand of the exporting countries, at various price levels. The demand and supply curves are derived under the usual constraints of the classi- cal competitive conditions. In the importing countries, graph (a), quantity Qp is produced domestically, at the equilibrium price, Pe, leaving quantity Qm to be imported to satisfy demand. In the exporting countries, graph (G), quantity Qc is consumed domestically, leaving Qm to be exported. This graph illustrates the volume of trade under assumed conditions of no transportation costs or barriers to trade. % r- 97 Effects of the introduction of transport costs, fixed tariffs and domestic support prices on prices and quantities have been adequately l illustrated in many other references. (a) (b) (C) Price of Wheat QC Qc+Qm Figure IV:1.—~Parital Equilibrium Model of the Supply and Demand for Wheat in the Importing Countries (a), World (b), and Exporting Countries (c) markets. The elasticity of export supply (ES), is the sum of the elas- ticities of the domestic supply (Sx) a§d_demand (Dx) curves. Moreover, the elasticity of the export demand curve facing any individual exporting country is more elastic than the export demand curve for all countries, depending in part on the number of competing exporters. lExamples may be found in (1) Martin E. Abel, "Price Discrimina— tion in World Trade of Agricultural Commodities," Journal of Farm EconomiCS, XLVIII (May 1966), pp. 194-208; (2) Timothy E. Josling, The UK Grains Agreement (1964): An Economic Analysis (Unpublished Ph.D. thesis, Department of Agricultural Economics, Michigan State University, 1967); (3) Chalres P. Kindleberger, International Economics (Illinois: Richard D. Irwin, Inc., 1963), Chapter 9, pp. 152-177. 98 Also, the price elasticity of demand for food is higher in the low income than in the high income countries. Therefore, prices and wheat supplies of competitors are a very important determinant of the quantity of Canadian wheat imported by other countries. The US is the only competing exporter holding stocks to maintain price levels. Therefore, it is assumed that importers consider the level of Canadian prices relative to US prices in determining whether or not to import wheat from Canada. On the other hand, Argentina and Australia generally price their wheat at a level to dispose of their entire crop.l 43 Therefore, the level of stocks in these two major exporters adequately reflects their competitive position with Canadian wheat. In addition, the supply of Canadian wheat available for export indicates its potential to export. Surplus wheat is reflected by changes in the level 0f stocks on prairie farms. Therefore, this variable is used to express Canada's export potential. Import demand fluctuates mainly as a result of variations in wheat production in the importing country. Therefore, import demand for Canadian wheat is assumed to be a function of the importing country's level of production. Another factor which is very important in world wheat marketing, especially for Canada, is the fact that wheat is 22E a homogeneous commodity. This important factor is overlooked in many projection studies, making results of some of these studies of little relevance for Canada. There are quality differences in wheat, making it suitable 1A correlation coefficient of —O.6l results when changes in Australian stocks are taken in relation to changes in the yearly average Australian price," McCalla, JFE (August 1966), P. 723. 99 for different product uses. Although at present, surpluses of soft wheat exist in many countries (a prime example being France), hard wheat is still imported to mix with the soft wheat to improve baking qualities. The protein content of wheat is known to be associated with gluten. Gluten gives wheat flour the required strength for the mass production commercial baking process.1 Thus, Canada's high protein, hard spring wheat gives it a quality advantage on the world market. Improved technology in the baking industry, however, has allowed an increased substitution of soft wheats for breadmaking.2‘ This is one of the reasons for the decline in the percentage of hard wheat in world trade. Moreover, because of this technological advance, wheat prices in competing export markets and the magnitude of world wheat production are increasingly important factors influencing the volume of Canadian exports. The substitution of soft for hard wheat, however, is not a linear relationship. This substitution process is illustrated in Figure IV:2. The line aa' represents the substitution of soft wheat (Ps) produced in the importing country for hard wheats (MH) imported by that country. If no substitution was possible, aa‘ would be a straight, vertical line. Their appear to be two factors occurring simultaneously which affect the hard wheat imports. Technology is allowing more soft wheat to be substituted for hard wheat in the baking process,or line aa' is shifting to the left (example ba‘) and in most countries, wheat 1C. R. Harston, Marketing High Protein Wheat in the Northern Great Plains (Bozeman: Montana State College, Bulletin 527, 1957), pp. 79—81. 2The continuous dough process of many large bakeries allows them to use a lower grade of wheat if substitutes like milk solids are added. The result is a lower quality product (according to bread connoisseurs). lOO production is increasing (example from cc' to dd'). These two factors combine to reduce the quantity imported from oe' to of‘. The position of aa' may also be affected by changes in tastes, income and population. In the equations for the demand for Canadian wheat exports, the effect of technology and changes in taste in lowering imports, is assumed to follow a linear time trend. Time, however, is highly correlated with income and population. The population variable is the one selected to be included in the model, but its coefficient will be biased since it includes the effects of time and income. PS \b a Domestic \ Production \ of Soft \ Wheat d -—--—--——-r; ——-'-‘-- d' c . \‘ C. | I \ I a' I l 0 Imports of Hard Wheat f' e‘ MH Figure IV:2.——Substitution of Domestic Production of Soft Wheat for Imports of Hard Wheat In the econometric model, only Canadian wheat exports to non~ communist countries are considered endogenous. Exports to communist countries receive important consideration in the model, but only as an exogenous variable. The rationale for this division is that: (1) Wheat exports to communist countries are not based on the same criteria as are the exports to other countries, and (2) the US does not fully participate in these markets. 101 Exports to non—communist markets have experienced a slight decline since 1944/45, averaging 277 million bushels annually. The destinations of these exports have become more diversified.l As shown in Table II:3, the distribution of wheat exports during 1964/65 to 1966/67, in percentages are UK 15.4, Japan 11.5, EEC 10.7, communist countries 45.3, and all Other Countries (approximately 75) 17.1. Since each of these non-communist regions has particular production or import policies, and in order to generate more useful results, the volume of exports to four of these regions—-UK, EEC, Japan, and all Other Countries, will be examined individually. This level of aggrega- tion should allow an improved understanding of the shifts occurring in export demand. In certain countries, the events following World War II interrupted international trade during the late 1940's. To account for this trade interruption, a dummy variable is included. The introduction of the EEC's Common Agricultural Policy in 1964 may have influenced the amount of wheat imported into the EEC. This event is introduced through the use of a dummy variable. The above descrip- tion gives the general format and rationale for an export demand equation. The individual country equations below, (3)—(6), give the precise variables which are felt to be the most important determinants of exports to the individual areas. (3) XUK = f[CWBP/PAW, PWS, PUK, NUK, CPE, FORT] (4) XEEC = f[CWBP/PAW, PWS, PEEC, NEEC, FORT, CAP] 1In 1948/49, exports made were to 70 countries with 6 of these taking 81 percent, whereas in 1959/60, exports were to 88 countries with 8 of these taking 75 percent, Anderson, p. 55. 102 (5) XJAP = f[CWBP/PAW, PWS, PJAP, NJAP, CPE] (6) XOTH = f[CWBP/PAW, PWS, USS, XSC, POTH, CPE, FORT, AID] where: CWBP, PWS, CPE, PAW, XSC, are as in (l) and (2) XUK is Canadian wheat exports to the UK, in million bushels. PUK is wheat production in the UK, in million bushels. NUK is population of the UK, in millions FORT is 1 if t = 1946, . . . 1949 crop years, or 0 if t = 1959, . . . crop years. XEEC is Canadian wheat exports to the EEC, in million bushels. NEEC is population of the EEC, in millions. PEEC is wheat production in the EEC, in million metric tons. CAP is 0 before the introduction of the EEC's Common Agri— cultural Policy, and 1 after the introduction of the EEC's Common Agricultural Policy (1964). XJAP is Canadian wheat exports to Japan, in million bushels. PJAP is production of wheat in Japan, in million metric tons. NJAP is population in Japan, in millions. XOTH is Canadian wheat exports to all other non-communist countries (other than UK, BBC and Japan), in million bushels. USS is total wheat stocks in the US, end of period (July 1), in million bushels. POTH is production of wheat, in other countries, in thousand metric tons. AID is the exports of Canadian wheat under food aid programs, in million bushels. 4) Canadian Domestic Demand There are three main channels of domestic consumption—~human food, animal feed, and seed. Industrial requirements (mainly distilling) are very small. In 1965/66, wheat was consumed in these three channels in the following percentages: food 39, feed (including waste and dockage) 31, and seed 27. The total domestic consumption was 156.9 million bushels. Domestic consumption has been relatively stable in the post- war period. Variations have been from a low of 128.0 million bushels in 1948 to a high of 168.0 million in 1952. Largest variations occurred in quantities of wheat fed to livestock. Factors influenceing the consumption of food wheat are assumed to be: (1) the retail price of wheat products, (2) personal disposable income, and (3) population. Since data are only available for the whole— sale price of wheat (CWBP), the retail price of wheat products is esti- mated to be a linear function of the wholesale price and the wages of industrial workers, a proxy for marketing margins. The quantity of wheat used for feed grain purposes is assumed to be influenced by the amount of prairie farm-stored wheat stocks (wheat is sold through livestock), the prices of competitive feed grains, and the number of hogs on farms. The amount of wheat required for seed is influenced by the acreage of wheat planted the following year. In order to estimate the expected acreage to be planted the next year, a distributed lag " . . . . l antic1pation“ model 15 used. Arthur S. Goldberger, Econometric Theory (Madison, Wisconsin: JOhn Wiley & Sons, Inc., 1964), pp. 274-78. 104 The following three equations include the important variables influencing domestic consumption for food, feed and seed: (7) DCH = f[CWBP/ER, WFM, Y] (8) DCA = f[PWS, CWBP/ER, POAT, NHOG, T] (9) DCS = f[DCS AAC] -1! where: CWBP, PWS, AAC are the same as in Equations (1) to (6). DCH is domestic food wheat consumption, per capita, in bushels. DCA is domestic feed wheat consumption, in million bushels. DCS is domestic seed wheat consumption, in million bushels. ER is the exchange rate of Canadian dollars to US dollars WFM is hourly wages of industrial workers in the food and beverage industry in Canada (annual average), in (Can.) dollars. Y is personal disposable income in Canada in million (Can.) dollars. POAT is the simple average price of oats, #2 Canadian wheat, in (Can.) cents per bushel. NHOG is the number of hogs on farms, on December 1 survey, in millions. Three identities are added to complete the model. (10) DCT = (N)DCH + DCA + DCS + d (11) TX = XUK + XEEC + XJAP + XOTH + CPE (12) PWS = PWS_ + P(AAC) - TX - TDC + NPWS + E l where: DCT, DCH, DCA, DCS, TX, XUK, XEEC, XJAP, XOTH, CPE, PWS are the same as in equations (1) to (9). P is production per harvested acre in the prairie provinces, in bushels. 105 E is total wheat production in non-prairie provinces, in million bushels. NPWS is change in non—prairie fann stocks from the previous periods, in million bushels. d is the industrial use for wheat, and handling and drying losses in million bushels. Procedure for Analysis The linear system of equations is fitted by Three Stage Least Squares (3SLS). This method gives consistent and asymptotically efficient estimates. Data used for the estimation are from 1946/47 to 1967/67. The assumptions made concerning the model for estimation purposes are that: (l) the disturbance terms have a zero mean, (2) the variance of disturbance term is constant throughout all time periods (homoskedasticity), (3) the disturbance terms are independent over all time periods (no autocorrelation), and (4) the exogenous variables are nonstochastic. After the equations have been estimated, the model can then be employed to assist in completing the four objectives specified in Chapter I. This section describes the procedures used to analyze the model. There are four parts in this section: (1) Economic Interrela~ tionships, (2) Domestic Policy Issues, (3) Projections in the Wheat Market, and (4) Forecasting in the Wheat Market. In each part a brief outline of the contents of one of the four succeeding chapters is given. 106 1) Economic Interrelationships In Chapter V, the economic interrelationships in the wheat market, as given by the econometric model, are examined. The results of the statistical estimation are presented, with standard errors and correlation coefficients. From these data, various implications, interpretations and comparisons can be made. This chapter contains an evaluation of the influence of both domestic and foreign exogenous variables on the Canadian wheat market. One of the four objectives of the study was to establish the importance of the foreign influence on Canadian wheat marketing. This objective will be evaluated in both Chapters V and VII. In addition, in Chapter III there was an extensive examination of wheat policies, production and consumption trends, and trade patterns during the past decade, of major wheat exporters and Canadian wheat importers, with implications for present and future Canadian wheat trade. This background, and the constructed econometric model provide sufficient tools to analyze any potential changes or continuing trends in production, trade patterns or government policy for their possible effects to the Canadian wheat market. In order to determine the effect to endogenous variables of a unit change in one of the exogenous variables, or to determine elastici- ties, one of two procedures can be used. If the model is in the form shown earlier, with jointly dependent variables in one or more equations, the first derivative of an exogenous variable (which is simply the coefficient of the variable) can be called the "direct effect." An important assumption when taking this derivative is that all other explanatory variables in the equation are held constant. This may be a 107 difficult assumption if the exogenous variable in question is also an explanatory variable for another endogenous variable which is included in the equation. In the second case, the model is in its “reduced form", i.e., all endogenous variables are functions of only predetermined (exogenous and lagged endogenous) variables, and the derivatives, which are the coefficient of the variable, include 9923 the "direct“ and "indirect" effects. In Chapter V, only the "direct" effects are given in analyzing the model. 2) Domestic Policy Issues Although this study emphasizes the demand for Canadian wheat and, in particular, the role of foreign demand, the constructed model can be utilized to analyze the effects of certain domestic policy issues involving marketing and production of wheat. Some of these policy proposals examined in Chapter VI are: A two—price system——Under this system, domestic wheat prices would be higher than export wheat prices. An analysis is made of the increased returns to wheat producers and the decreased consumption of wheat under such a policy. Parital parity prices for producers——This involves guaranteeing a three percent per year increase in wheat prices. The three percent represents the portion of an estimated average 4.5 percent yearly in- crease in the wheat farmer's production costs not accounted for by increased productivity. The model is used to estimate the effect that this policy would have on wheat production. Acreage diversion schemes—~There are strong indications that during the next few years there will be large wheat surpluses. If this 108 is true, the price mechanism could be utilized to shift acreage from wheat to another crop. Barley, for example, could be the alternate crop. The model is used to estimate the changes in price necessary to divert the desired level of acreage. Other policy proposals-—Other domestic policies analyzed are government purchase and storage of grain and introduction of new varieties of wheat. 3) Projections in the Wheat Market One of the most important analyses of any econometric model should be the projection of future values. An analysis of a dynamic model enables the determination of long—run changes in the market to be traced over time, and the cumulative effect of these changes to be established. The method of this mathematical analysis of a dynamic model will briefly be presented below, in matrix notation and in deterministic form. Equation (i) is the model as outlined in the first section. (1) AY(t) = BY(t-l) + cz(t) where: A, B are 12 x 12 matrices. C is a 12 x 25 matrix. Y is a column Vector of 12 endogenous variables. Z is a column vector of 25 exogenous variables. The reduced form of this system of equations can be obtained by pre—multiplying throughout by the inverse of the A matrix, (A—l), and rearranging the equations. The reduced form is thus: (ii) Y(t) = D1Y(t-l) + DZZ(t) where: D = A- B. l D2=A C. 109 The matrices D1, D2 are known as the "multiplier matrices" or the matrices which give the direct and indirect effects of a change as discussed in part 1) of this section. In order to observe the time path of changes in the endogenous variables Y(t) from changes in the exogenous variable, successive substitutes of (ii) are required as shown below: (iii) Y(t+l) = DlY(t) + D22(t+l) Y(t+2) = D1Y(t+l) + D2Z(t+2) Y(t+k) = DlY(t+k-l) + Dzz(t+k) This procedure is complicated by the selected structure of the model in which certain elements in the matrices D1 and D2 are not con— stant over time. This, hOWever, involves programming a change in the computer routine, once the assumptions concerning the manner in which these matrices change have been established. Since Y(t), D1’ D2 are known (or can be calculated), then making appropriate assumptions for Z(t+r), where r = O, l . . . k, the values 0f Y(t+r) can be calculated. There are two different types of assump- tions for the exogenous variables. These are: (l) causal system, or (2) historical system. In the causal system, there is sufficient material, given the initial facts, to predict what will happen several years later. In this method, "stationary state" conditions are assumed; that is, there is a once and for all sustained change in the exogenous variables: Z(t+l) = Z(t+l) = . . . =z(t+k) = Z* 110 In the historical system, the exogenous variables do change during the projected period. A common example used in this study is an autoregressive system: Z(t+1) = Eo + Elz(t) + EZT where: E0, E1, E2 are constants and T is time. By making different assumptions as to the magnitude of the variables in Z(t), this procedure provides a means to evaluate the consequences (over time) of alternative policies or expected and hypothetical changes in the wheat market. There are numerous changes, combinations of changes, and variations in the levels of changes that can be evaluated. These are specified and some of the more interesting ones are tested in Chapter VII. 4) Forecasting in the Wheat Market Forecasting is a very similar procedure to the projection analysis described in the preceding part. The differences lie in the objectives and assumptions concerning the vector of the exogenous variables. The objective is to obtain the most accurate future estimate of the level of the endogenous variables. The magnitude of the exogenous variables is selected as an estimate of the future values of these variables. Both the causal and historical system assumptions are made for these variables. In Chapter VIII, short (1968/69), intermediate (1975) and long- run (1980) forecasts are constructed for the endogenous variables in the Canadian wheat market. CHAPTER V ECONOMIC FORCES IN THE CANADIAN WHEAT ECONOMY This chapter is designed to provide a perspective of the economic forces in the Canadian wheat market and thus, an improved concept of how it functions. This is accomplished by analyzing the results obtained in the statistical estimation of the model as formulated in Chapter IV. This chapter includes the results of the 3SLS estimation of the econometric model, with standard errors of the coefficients, correlation coefficients and Durbin—Watson statistics. Several cri- teria are also introduced to measure the performance of the model. In addition, an evaluation of the individual equations is given to explain (1) the important results obtained, (2) the implications, interpreta- tions and comparisons with expectations, and (3) the shortcomings and weaknesses of the results obtained in the study. After this analysis of the model, some ex_p9§t suggestions regarding future improvements are proposed. The Estimated Model The results of the 3SLS estimation of the econometric model are shown in Table V:l. The variables shown in this Table are as they were defined in Chapter IV. The procedure used to calculate the R2 (the percentage of the variation in the endogenous variable explained by independent variables) for each equation is the same procedure that 111 112 Amon.mc xwmss.oc nemmo.oe axon ammo.mv I mac memH.mH I came Hemm.H I Asm.mv nomse.os AeHmo.os AmmHs.smc Amssw.omc we. ommz eHmo.H + was vsmo.o + sem\emso seem.¢H + seem.v0HI I owns a AsmOH.se xsvmo.oc emom mMMH.mm + new ammo.o + Asm.ms Ammoo.ov Aemmm.mv Amsmo.ov Amosm.mmc AHmom.sHHv om. see mmoo.o I ssz emHm.e I was HMHo.o I sam\emso emHe.em I OHee.msm I sax m Amoeo.oc xaseo.oc ASNNH.oc mac cmmo.o I omx NeHo.o I sea memo-o + ism-ms HI AoOMH.oc AHHmo.oc MommH.oc “memo.oc Ammmm.ovv we. mmso mmom.o + was omHo.o + eon soao.o I xe ammo-o + emsH.msH I emso N immmo.oc HI AmHoo.ov B NmHH.O + x9 whee-o + Amm.Hc Aowoo.ov AHOHo.ov HI Amoco.os HI Amomo.ov Amsmw.mc mm. men 38.0 I 3.5 $8.0 + msa 300.02; + was $36 I «some I 92 H x.umum-s.av nmmHanum> snouMCMmem cam mHanHm> :oHumswm NM Amusmfloflmwwou wo mHOHHm puppcmwmv memucmflowwwwou unopcmmwo .proz mflu :H MCOflumswm acnsuosnum ecu mo mmucsflumm kumsdnmmll.au> magma .>H kummnu as cw>Hm we moahMeHMb may we cofiUstwan .moocam Hmafiowp usom ou HGMOfiMHcmHm mam mucowofimmmou HHm uozm Awa.mv HI Ammam.oy Ammom.ov Aowmm.vv NP. moo mwmo.o + Odd om0H.H + mmwm.m I won 0 Ammmm.ov B mmHm.o I Amv.mv Ammmm.mv Aomwa.ov Anamo.ov AVMHH.OV Avam.mNV we. womz mmmm.v + esom ovea.o + mzm homo.o + mM\mmBO moon-o I mmmh.maa H moo w AeH.NV newOH.oV Advoo.ov Ammoo.ov Ammhm.ov or. 2m: mmam.o I w mmoo.o I mM\mmBO Haoo.o I momm.v n moo h Ammmm.ov Asmvm.vav Amamo.ov Ahmao.ov QHm Hmmm.o I Hmom nomm.mw I mmo mmoo.o I mm: momo.0 I ASH-NV Aaomo.ov Asooo.ov Amoco.ov Ammao.omv Aoomm.mmv mo. omx ommH.o I meow mooo.o I was moao.o I 3mm\mm30 Hoom.MHH + worm.vm n msox o Ammmo.ov mmu same-o + Awe-av Awmma.nv Ammam.ov AHNNo.oV Anmmm.mmv Amusm.mmv mm. mane mHHH.ma + mmbz oamm.m + mam momo.o + s¢m\mmsu Hmom.mv I moom.meI n mmhx m A.umum.3.ov Qmoancflnm> wuoumccamxm cam . waflmflum> COflDMSWM mm Amuc®H0mewou mo muounm cumtcmumv m.mucwflofimmwou unmpcmmwo emssHucooII . H 5 mHone 114 is used in the Ordinary Least Squares estimation method. Consequently, these values are not strictly valid for BSLS, but they are presented in the table for evaluation and comparative purposes. Durbin Watson sta— tistics (D. W. Stat.) are presented in Table V:l for each equation. These statistics are not valid for a simultaneous system of equations, and therefore, no strong conclusion concerning serial correlation can be drawn. Assuming that it was a system of independent equations, all of the Durbin Watson statistics are either within an acceptable range or fall in the inconclusive range. It is difficult to evaluate the performance of the model, and no single criterion can adequately provide this evaluation. There are three commonly used measures and their combined results may give a reasonably reliable indication of the model's performance. These measures are: (1) size of the calculated R2 for each equation, (2) statistical significance of the coefficients of the variablesused in the model, and (3) conformity to economic theory in terms of the signs, the magnitude, and perhaps the statistical significance of the variable's coefficients. Using the first criterion, the model has relatively good results for all of the equations. The values of R2 vary from 0.68 to 0.95. Equation (7), the domestic food consumption equation, R2 of 0.70, and equation (2), the price equation, R2 of 0.68, were the poorest performers and consequently, indicate some additional refinement may be advisable. The Performance of the model in terms of the second criterion, the signifi— cance of coefficients, can be evaluated by calculating the ratio of the coefficient to its standard error from the values shown in Table Vzl. It is questionable (especially to non—quantitative economists), however, to use this method, the significance of the coefficients, as the 115 criterion for the selection of those variables to be included in the equation. There are certain variables which economic theory maintains must be included in the model, regardless of their statistical signifi— cance. It may, however, provide a guide for the selection of non-crucial variables to include in the model. The performance of the model in terms of the third criterion, conforming to the expectations of economic theory, is discussed in the following section in which individual equations are evaluated and analyzed. Evaluation and Analysis of Individual Equations In this section, the coefficients of the variables in each equation are analyzed in terms of certain of the following factors: significance, sign, magnitude, elasticity, standard error, expected value, implications, and interpretations. This procedure is used for each of the nine stochastic or behavior equations. The model is evaluated in the structural form as shown in Table V:l. Therefore, the coefficients illustrate only the direct effects. 1) Supply Response (AAC) The calculated R2 for the equation (1) is 0.95. An increase in the prairie farm wheat stocks (PWS) is associated with a decrease in wheat acreage. The magnitude, however, of this coefficient is decreasing yearly. For 1967/68, a one million bushel increase in farm—stored stocks (at the end of 1966/67) is associated with a reduction in wheat acreage of 0.010 million acres (versus 0.015 million acres in 1947/48).1 The reason for the declining value of this 1In all of the similar calculations which involve the estimation of a derivative, the implicit assumption is that all other explanatory Variables in the equation are held constant. 116 coefficient may be that producers are willing to store increasing quantities of wheat without reducing their wheat acreage, or perhaps once storage facilities have been constructed, producers are willing to store at least this quantity of wheat without adjusting production plans. A one cent per bushel increase in the expected price of wheat (PPW), or decrease in the expected price of barley (PPB), is associated with an increase in wheat acreage of 0.077 or 0.027 million acres, respectively. The policy implications of this substitution effect, as a result of changing relative prices, are examined in Chapter VI. The elasticity of production (at the means) is 0.546 and the cross elasticity of production, with respect to barley, is —O.l36. An increase of one million bushels of the past year's total wheat exports (TX), which is assumed to be the indicator of market out- look for the crop year, is associated with an increase of 0.007 million acres of wheat. Producers are increasing acreage by a yearly trend (T) of 0.1118 million acres. An alternative theory is that there may be other non—included variables which influence wheat acreage, but are correlated with time. 2) Canadian Wheat Board Selling Price The calculated R2 for equation (2) was 0.68. The quantity of Canadian wheat demanded, which is separated into two endogenous variables-—domestic consumption (DCT) and exports (TX)--would be expected to move inversely with price (i.e., negative coefficients for these variables). This hypothesis does hold for domestic consumption, but it does not hold for exports. The reason for 117 this phenomenon can be attributed to the difference in the nature of demand in these two markets as explained in Chapter IV. Domestic demand is more inelastic than export demand. Therefore, changes in quantity demanded--shifts along the demand curve—~are associated with larger changes in price in the domestic market than in the foreign market. On the other hand, changes in demand——shifts of the demand curve——are more important in the export market, largely because of the number of close substitutes for Canadian wheat. As a result, an increase in exports could be associated with an increase in price because of this specification problem. Another apparent inconsistency occurs with the prairie farm wheat stocks (PWS), which are assumed to indicate the potential of the Canadian wheat available for export. In theory, an increase in these stocks, in a free market situation would result in a price decline (i.e., a negative coefficient for this variable). The CWB, however, employs a buffer stock technique to stabilize wheat prices and thus, allows farm stocks to fluctuate instead of wheat prices. Accounting for this factor, the coefficient of the prairie farm stocks variable would be expected to be small, yet still negative. In addition, however, prices are partially stabilized and are not allowed to adjust quickly to the level that supply and demand conditions warrant. Thus, farm stocks and prices could be moving in similar directions over several periods. An alternate interpretation of the coefficient of this variable is that the CWB is, in fact, unable to vary its selling price in accordance with domestic supply conditions (i.e., a price taker). This interpreta— tion provides a rebuttal to the hypothesis that the CWB established world wheat prices. Both of these interpretations are consistent with 118 the interpretation of quantity demanded, given in the preceding para— graph. A unit increase in US wheat prices (PAW) or a unit decrease in the level of Australian and Argentine carryover wheat stocks (XSC) is associated with a .738 cent and a .014 cent increase, respectively in CWB prices. The signs of these coefficients are the expected ones, since on the world market, the CWB price must remain competitive with US wheat prices and with the prices of Australian and Argentine wheat which move inversely with the size of their stocks. These countries compete in most wheat markets with Canada. The coefficient of the variable for Canadian wheat exports to Centrally Planned Economies (CPE) was expected to be positive, rather than the estimated negative value. The confidence interval, however, which will include the true value of the parameter 67 percent of the time, is + 0.022 to —0.064. In addition, another explanation may be that this variable is highly correlated with an omitted variable which depresses wheat prices. An example may be the general trend in increas— ing world wheat production that is difficult to fully account for in the model. 3) Wheat Exports to the United Kingdom (XUK) The calculated R2 for equation (3) is 0.80. As a_priori anticipated, the coefficient of the CWB to US wheat prices (CWBP/PAW) is negative. Also from this equation, a million bushel increase in prairie farm wheat stocks (PWS) is associated with a .013 million bushel decrease in exports to the UK. This is probably the effect of the magnitude of the UK market for Canadian wheat exports, resulting in 119 significant increases in prairie farm wheat stocks for any decrease in UK purchases. A unit increase in the UK population (NUK) is associated with a decrease of 4.916 million bushels of exports to the UK, contrary to expectations. One of the reasons for this factor probably arises from the high correlation between growth in the UK population and time.1 Wheat exports to the UK have been falling over the observation period and thus, the population coefficient may include the effect of time. A second reason arises from the changing tastes, negative income elasticity for wheat and rising incomes in the UK, which are all correlated with population, thus biasing its coefficient downward. The UK wheat produc— tion (PUK) coefficient is negative, as expected. Its economic signifi— cance, however, is relatively small since a million bushel decrease in UK wheat production is associated with an increase of only .029 million bushels in Canadian wheat exports to the UK, compared with 50 percent of the UK market which Canada holds. This may indicate that UK wheat is not a good substitute for Canadian wheat. The coefficient for Canadian exports to Centrally Planned Economies (CPE) is positive, contrary to expectations. The reason may be that substitution of Canadian for USSR wheat occurred during periods when USSR imports were high and exports Were low.2 The magnitude of the effect of the Anglo—Canadian Wheat Agreement is illustrated by the large positive coefficient of the dummy variable (FORT) for the period Of the Agreement. 1The simple correlation coefficient is 0.965. 2Table III:16 includes data which supports this interpretation. 120 4) Wheat Exports to the European Economic Community The calculated R2 for equation (4) was 0.78. The c0efficient for the ratio of CWB to US wheat prices (CWBP/PAW)is positive. This is probably the result of a situation similar to the specification problem explained in the CWB selling price equation-—equation (2). A unit increase in prairie farm wheat stocks (PWS) is associated with an increase of 0.037 million bushels of wheat exports to the EEC. The reason for the positive sign for this coefficient, rather than negative as in the case of the UK, is that the EEC import demand may fluctuate more in response to available supplies of Canadian wheat than does the ‘fg UK. Alternatively, it may simply indicate that the EEC market is i I sufficiently small for Canada (in comparison with the UK) that changes in the level of its imports from Canada are not a significant factor affecting the level of farm stocks. The coefficient for population in the EEC (NEEC) is positive and the coefficient for EEC wheat production (PEEC) is negative, as expected. The coefficient of the dummy variable (CAP) introduced to test the influence on Canadian wheat imports of the adoption of the EEC's Common Agricultural Policy in 1964, is large and negative. This variable may also include some of the effects of the dramatic production increase in the EEC in recent years, or a shift during this period in the use of soft wheat rather than imported hard wheat. The coefficient for the 1940's period (FORT) is large and negative, illustrating the trade disruption of this era. 5) Wheat Exports to Japan (XJAP) The calculated R2 of equation (5) is 0.89. The coefficient of the ratio of CWB to US wheat prices (CWBP/PAW) is negative, as 121 expected. A million bushel increase in prairie farm—stored wheat stocks (PWS) is associated with an increase of .030 million bushels in Canadian exports of wheat to Japan. The explanation for the positive coefficient for this variable may be similar to that cited for the EEC, and in addi- tion, both farm stocks and exports to Japan are correlated with time. The coefficient of the Japanese population variable (NJAP) is positive. Contrary to expectations, the coefficient for the productiOn of wheat in Japan (PJAP) is positive. This may be accounted for by the fact that both of these variables are correlated with time, but more important, Japan produces a soft wheat and domestic production is only a small percentage of its total wheat consumption.l Therefore, changes in its level of wheat production may not affect the volume of Canadian wheat imports very greatly. The coefficient of the variable for Canadian exports to communist countries (CPE) is positive, indicating that Canada was increasing imports to both regions simultaneously, and not neglecting the Japanese market. 6) Wheat Exports to Other Free World Countries (XOTH) The calculated R2 for equation (6) is 0.69. The coefficient of the ratio of CWB to Us wheat prices (CWBP/PAW) is positive. Similarly, this phenomenon may be the result of the specification problems as explained for equation (2). In addition, the exports to other countries include food aid shipments which are not price responsive. A million bushel increase in prairie farm wheat stocks (PWS) is associated with a decrease in exports to these countries of .016 million bushels. Because of its large standard error, however, the confidence interval Which 1In 1966/67 domestic production accounted for only 19 percent of total consumption. 122 includes the true value of this parameter, 67 percent of the time, is +0.0502 to -0.0828. The coefficients for the variables of production of wheat in these Other Countries (POTH), stocks of wheat in the US (USS), and stocks of wheat in Argentina and Austalia (XSC) are negative, as expected. An increase of one million bushels of Canadian wheat exports to communist countries (CPE) is associated with a decrease in exports to Other Coun- tries of 0.025 million bushels. This variable, hOWever, is only significant at a high level (coefficient/standard error is -.049). This may indicate, however, that some of the smaller countries have suffered from diversion of Canadian wheat exports to the communist countries. The coefficient of the dummy variable for the 1940's (FORT) is negative and large, emphasizing the problem of international trade in this period and the effects of the Anglo—Canadian Wheat Agreement Contrary to expectations, a million bushel increase in food aid shipments of wheat (AID) is associated with a decrease of 0.22 million bushels of wheat in exports to Other Countries. This apparent inconsis— tency may have occurred for one of several reasons. The coefficient of this variable is significant only at a high level. The confidence interval which includes the true value of the parameter 67 percent of the time is —0.563 to +0.116. In addition, it is only since 1964/65 that Canadian food aid shipments of wheat have reached substantial proportions. Consequently, this period will largely dominate the results. During this period, large sales were made to the Centrally Planned Economies. Therefore, there may be additional evidence that Other Countries' markets were neglected as a result of these large sales. The majority of Canada's food aid wheat shipments went to one country-- 123 India (78 percent in 1966/67). 7) Domestic Food Consumption Per Capita (DCH) The calculated R2 of equation 7 is 0.70. The wholesale price elasticity for food wheat (at the means) is —0.058, or quite inelastic. The income elasticity at the means is —0.029, or an inferior good. A wage increase of one dollar per hour for workers in the food and beverage industry (WFM), a proxy for marketing margins, is associated with a decrease of 0.52 bushels of wheat consumed per capita. Since this variable is rather large, it may include the effects of a time trend. 8) Domestic Feed Consumption (DCA) The calculated R2 for equation (8) is 0.74. The price elasticity of feed wheat is —O.769 at the means. Thus, the elasticity for feed wheat is much higher than for food wheat. The cross elasticity of demand for oats (POAT), at the means, is 0.197. An increase in the hog production (NHOG) of one million is associated with increased feed wheat consumption of 4.85 million bushels. Utilization of feed wheat is decreasing at the rate of 0.92 million bushels per year (T),or about 1.5 percent of average domestic feed wheat utilization. 9) Domestic Seed Consumption (DCS) The calculated R2 for equation (9) is 0.72. The demand for seed wheat is based on a distributed lag "expectations“ model,1 since the demand for seed in the current year (t) depends on the acreage planted in the following year (t+l)- lGoldberger, p. 276. 124 The anticipated wheat acreage in the year (t+1) is designated AAC*t, and seed consumption in the year (t) is DCSt. Demand for seed wheat is shown in equation (A). (A) DCSt = a AAC*t If the anticipated acreage is formed recursively, then it can be written as in equation (B). (B) AAC* = AAC* + d(AAC — AAC* ) t t t-1 t-l In equation (B), d is the 'coefficient of expectations' and its value is restricted to the range from zero to one. Equation (B) can be substituted into equation (A), giving equation (C). 3% (C) DCS = a (l — d) AAC*t_l + a d AAC t (C') Dcst = (l—d) DCSt_ t + a d AAC 1 t Equation (C') was estimated by 3SLS. The value for d is 0.901 and for a is 1.224. Therefore, the demand for seed wheat can be written as in equation (D). (D) cost = 0.099 DCSt_l + 1.103 AACt Refinements in the Model After analyzing the model in the previous section, certain changes may improve the performance of individual equations. The proposed changes are: 1) In the acreage response equation, the farm stocks variable may enter the equation in a ratchet effect, that is, this variable may not affect wheat acreage unless it is above the previous high for this variable. Other modifications along similar assumptions may also be tested. 2) In the price equation, changes in demand by importers may 125 be more accurately reflected by taking account of variations in world wheat production or variations in major Canadian wheat importers' pro— duction. 3) In the equation of exports to the UK and Japan, the omission of a time and an income variable to avoid the multicollinearity problem may have biased other coefficients of included variables with which time and income is correlated. The time and income variables may be added, ignoring their standard errors. 4) The domestic food demand equation needs additional variables to more adequately reflect changes in quantities demanded. This may be partly a result of the problem of an inadequate proxy for marketing margins. Also, time appears to be an explanatory variable, but its high correlation with income creates problems of multicollinearity. A method similar to that in (3) may be utilized in this case. 5) The domestic feed demand equation may need some improvements to its theoretical structure. More information concerning channels of utilization and substitute products are needed. 6) In certain cases, the coefficients for the variables are obviously contrary to economic theory or to expectations. Therefore, a reassignment of a new value for these coefficients may improve the model's performance. Summary and Conclusions An analysis of the Canadian wheat market, as presented in this chapter, provides a means of improving our understanding of how this market functions. As additional data is acquired and the knowledge of this area increases, it (1) avoids problems of proposing or introducing 126 irrational public policies, (2) aids in defining priorities to estab~ lish further research projects to study identified market limitations, (3) improves the evaluation of changes which are and will occur in the wheat market, and (4) enables an improved forecast of market supply and demand conditions. The performance of the model, using the criterion of the size of correlation coefficient is reasonably satisfactory. There are some reservations, mentioned in the previous two sections, concerning the signs and significance of certain variables in terms of the theoretical framework established in Chapter IV. Additional refinements are needed in the model to improve it in terms of both performance criteria and the ability to make accurate market forecasts. The suggestions for refinements in the previous section may or may not improve the model in the above two areas. CHAPTER VI EVALUATION OF PROPOSED POLICIES AFFECTING DOMESTIC PRODUCTION AND MARKETING OF CANADIAN WHEAT Traditionally, in periods of distress, agricultural producers, because of their size and from habit, have turned to politicians and policymakers for a solution to their dilemma. The prairie wheat farmer, due to his political power in the west, has generally found a sympathetic ear. Moreover, the wheat farmer has not been without problems—-problems that have resulted from technological change, the organization of the market, and the weather. Many of the marketing and production problems have been introduced earlier (Chapter II), but will be reiterated at this time for the sake of completeness. These problems include: 1) The necessity of providing on-farm storage for surplus wheat pro- ducts; 2) The burden of adjusting a highly variable output to fluctuating export demand; 3) The rising cost of non—farm inputs; 4) The static wheat prices; and 5) The very slow increases in productivity. In 1935, the Canadian government created the CWB. Its establish— ment and the subsequent decision to make deliveries of wheat to the Board compulsory in 1943, were the last major policy changes introduced 127 128 by the federal government affecting the structure of the Western Canadian wheat market. The CWB establishes the level of domestic and export prices, which must be competitive on the world markets. Generally, this is the price, minus marketing costs, that the farmer receives. Subsidies to stabilize income and prices to wheat producers, although numerous, have been minor and none have proved to be very costly.1 The low cost of subsidies to wheat producers has been out of necessity, since wheat forms such a large part of Canada's farm income and export earnings. More important, however, is the fact that few of these subsidies have been very helpful in alleviating many of the basic problems of the wheat industry. The federal government's domestic policy role has been a rather passive one, with the exception of its support of the CWB's activities. Despite the federal government attitude, there has been no lack of policy proposals. In this chapter, an examination will be made of those proposed policies which can be evaluated with the assistance of the constructed econometric model. The ones included are: (l) a two—price system, (2) parity prices for producers, (3) stimulated acreage diversion schemes, (4) responsibility of storing grain totally assumed by the federal government, and (5) rapid introduction of a hy- brid wheat. A Two-Price System In order to increase income to wheat producers, a form of price discrimination, commonly referred to as a twoéprice system, has been 1An outline of subsidies to stabilize income and prices to wheat producers is given in Chapter II, pp 11-16. 129 proposed. Under this scheme, domestic consumers of food wheat would be charged a higher price than foreign or domestic non—food purchasers. In general, successful price discrimination can be accomplished if: (1) the market can be segmented for different consumers, and (2) elasticities of demand are different in each of these market segments. Given the present marketing structure for wheat, dominated by the monopoly CWB and the present restriction on imports, segmenting the domestic and foreign markets is already accomplished. In the domestic market, the food segment can be differentiated by requiring millers to pay a tax on all wheat that is milled into domestically consumed flour. In Chapter IV, it was shown that the elasticity of foreign demand is considerably higher than the domestic demand for wheat. To restate the argument in simple terms, the demand schedule in the export market is the summation of both the importers' domestic supply and_demand curves. In addition, more substitute products for Canadian wheat are available in the export market (e.g., US, Australian and Argentine wheat), than in the domestic market. In Figure VI:1, the rationale for a discriminating monopolist (the CWB) to charge a different price in each market is depicted graphi- cally. By equating marginal revenue (MR) in each of the markets, the maximum total revenue can be obtained from wheat sales. The equal marginal revenue level is obtained in the total market graph by equating marginal cost (MCT) to marginal revenue (MRT). Since supply (S) is completely inelastic, then MCT is identical to S. The resultant indi— vidual market prices are PX in the export market and PD in the domestic food market. 130 \ \DT L—. NP»- Qd Qx Qd+Qx Canadian Domestic Canadian Wheat Export Total Canadian Wheat Market Market Wheat Market Figure VI:l.-Optimal Price Level in the Domestic and Foreign Wheat Markets to Maximize Total Revenue. In practice, the major shortcomings of this proposal are that the actual demand curves are (l) difficult to derive, and (2) shifting with changing supply and demand conditions in the world wheat market. Crude estimates of the elasticities can be calculated and thus, some approximations can be constructed. It is known that the domestic price should be higher than the export price, but the question of the optimal price differential is difficult, if not impossible to answer. There— fore, the optimal level may be substituted for an operational price differential between these two markets. If, for example, domestic Purchasers of food wheat must pay one dollar per bushel more than the CWB export price, what would be the result?1 Using the model, in 1967/68 the implementation of such a levy would have increased income from wheat _‘ lApprOXimatelY the price differential charged in the US wheat market. .1. . 131 sales by 60.83 million dollars and decreased domestic consumption by 2.16 million bushels of wheat. The pooled price to wheat producers, as a result of the levy, would have been $0.12 per bushel for all domestically consumed and exported wheat.l Since only 3 to 4 cents of the retail price of a loaf of bread is returned to the wheat pro- ducer, a 50 percent rise in the wholesale price of wheat would only increase bread prices by 1.5 to 2 cents per loaf. The policy raises some rather interesting political and economic considerations. For example, this is a regressive form of taxation and consequently, may be politically unpalatable. In addi- tion, there may be some international political implications to take into account. One result may be lessened bargaining power for Canada in any reorganization of the International Grains Arrangement, because of its price differential between domestic and export wheat. The two—price system would probably increase wheat output, unless there is accompanying acreage or other forms of marketing restrictions. More- over, there may be a tendency to capitalize part of this price increase into land values, thus making returns to labor very little improved. The level of the increase in the pooled price as a result of the two-price system, depends on the ratio of exports to domestic food consumption of wheat. In high export years, the increase in the pooled price per bushel would be relatively lower. For example, the difference in the pooled price between 1966/67, a high export year, and 1967/68, a low export year, was 4 cents per bushel. Therefore, if Canadian wheat exports continue to decline, as suggested in Chapter III, then the _ 1This is the short-run, direct effect. The method of analyzing the long—run effects will be illustrated in Chapter VII. 132 increase in the pooled price resulting from the two—price system will be larger on those bushels of wheat that are marketed. Although this policy appears to be a solution to the problem of low returns to resources in the production of wheat, it may have some rather undesirable side effects. The major one is that it may stimulate increased production. Theoretically, a subsidy on only a portion of production does not stimulate output. This, however, assumes that the producer equates costs and revenues at the margin. With the introduc- tion of such factors as indivisibilities, economies of scale, fixed assets, tradition and habits, it is unlikely that this assumption holds. Parity Prices for Producers In a recent study of Canadian wheat marketing, one of the recom— mendations was that wheat producers receive a guaranteed annual price increase of three percent per year.1 The purpose of the price rise was to cover two-thirds of the annual increase in producer's costs with the additional one—third arising from increased productivity. The CWB selling price would be set independently of the producer price. This is a slight deviation from the usual concept of parity producer prices, in the fact that it does account for productivity increases. Using the econometric model, the lgwer_limit of the effect on acreage, as a result of this policy, could be calculated. In the model, the expected price on which farmers base planting decisions is assumed to be the January to March CWB selling price. If this expected price is increased at the rate of three percent per year, the annual increases lHedlin, Menzies Ltd., Canadian Wheat: Problems and Prospects (Saskatchewan: The Wheat Pools, 1968), PP. 29—32. > 133 in acreage can be predicted, assuming other factors remain constant. The reason that the model gives only the lower limit of the increase in acreage is that price uncertainty to the producer is removed, since this is a guaranteed price, whereas in the model, behavior is based on eXpected prices. In 1967/68, the model shows that a three percent price rise would have caused an increase of at least 0.48 million acres or a 1.62 percent increase in acreage. This policy tool is meant to alleviate the problem of low returns to resources in the production of wheat. It is a very popular. ‘concept because of the cost—price squeeze on many of the producers. It would, however, be a stimulus to production, which is not desirable .during periods of surplus production. Moreover, with the present organization of wheat marketing, regardless of the price that the pro- ducer is offered for wheat, he must be able to deliver his output to the CWB to receive that price. Therefore, price increases by themselves are not sufficient. There needs to be, in addition, control on produc- tion and a market for any wheat produced. Acreage Diversion Schemes During periods of apparent excess supply, policymakers may wish to adopt stronger measures than those currently used to stimulate producers to shift from wheat production to alternate crops. One method would be to employ the price system, that is, artificially raise the price of a competitive crOp relative to wheat. Since barley is an alternative crOp which involves very limited transitional costs, this may be an appropriate substitute. The model indicates the extent that acreage would be shifted from wheat production by a specified 134 increase in barley prices. A one cent per bushel increase in barley prices is associated with a decrease of 0.027 million acres of wheat. The magnitude of the barley price increase will be indicated by the extent of the desired acreage diversion. It is important to evaluate a diversion scheme in terms of whether or not the stimulated crop is an appropriate one in which to increase production. In certain cases, acreage diversions may merely accentuate a surplus stock of barley. On the other hand, barley's price elasticity may allow the CWB to lower barley prices and sell larger quantities than would result from a similar reduction in the price of wheat. Although barley may yield a lower gross income per acre than wheat, the reduced storage costs and increased certainty of marketing output may increase efficiency and lower costs to the extent that net profit in barley production would be as high as in wheat production. The present model is limited to testing diversion from wheat by increasing barley prices. The model could be formulated to test other relevant alternatives such as flax or rape production. This policy is designed to alleviate part of the producer's costs for storing surplus wheat production. If the producers could be stimulated into adjusting quickly to alternative crops rather than accumulating farm~stored surplus stocks for several consecutive periods before making these adjustments, farm storage costs would be lower. Before instituting a policy of this type, policymakers should be aware of market conditions and production responses for that crop. In addition, some concept of the future market demand for wheat is 135 required to make satisfactory recommendations for the amount of acreage to be shifted out of wheat production. Federal Storage of Grain To relieve producers of the burden of providing storage for surplus wheat and from the consequences associated with not selling their output, the federal government may institute a policy of standing prepared to purchase all wheat produced, using a method of payment similar to the present one. The advantages of this policy, in addi- tion to alleviating the two problems cited above, would be to increase the certainty of income to producers. As a result, the fluctuations in the Western Canadian farm and non-farm economies would be reduced and the production efficiency of the wheat economy would be increased, since non—farm inputs would be purchased in quantities closer to the optimal level. Under this policy, wheat acreage would be higher during periods of low export demand than under the present system. Using the model, in 1967/68, this policy would have accounted for an estimated increase of 1.67 million acres. As a result, other means of production or marketing controls for producers would probably have to be instituted so that government storage costs would not become too immense. The question then arises as to whether or not a new type of production or marketing control is more efficient, equitable or conducive to industry growth than the existing system. To answer these questions involves an analysis of the effects of the existing quota system and the expected consequences of any new prOposed marketing system. This type of analysis is beyond the scope of this study. In general, however, a marketing 136 system where producers are taxed to limit production rather than limited by a quota usually results in a more efficient industry. This type of a system is not always feasible (both politically and practically) and consequently, a form of a quota system may be the only alternative.1 New Varieties of Wheat Crop science researchers are working on the development of new varieties of wheat. Significant achievements can be eXpected in the near future in the development and adoption of new varieties which will probably take one of two forms. The first type could be a hybrid hard wheat, similar in quality to current varieties, but with considerably improved yields. The second type might be a variety of wheat which has more desirable qualities for feed utiliza— tion and considerably higher yields than the present hard spring varieties. The effect on the wheat economy of a new hybrid hard wheat can be demonstrated with the econometric model by increasing the production per acre variable (P) in equation (12), and projecting this increased level over several years. The adoption process is also an important factor in the Canadian wheat market. This analysis assumes that the Board of Grain Commissioners will allow a rapid introduction of a new hybrid variety.2 A new hybrid would bring the l . . . . . . . , This issue has some important implications in terms of effi— ciency and growth in the wheat economy and should receive high priority of research.resources in wheat marketing. 2Normally there is an approximate four year testing period before new varieties can be licensed. If varieties are not licensed, then there is a price differential between those and the licensed varieties. 137 greatly desired increase in productivity to the Canadian wheat economy, thus allowing the CWB to lower selling prices (if possible) and consequently, increase the size of the Canadian wheat market. This increase could result from cheaper exports forcing importing countries' domestic wheat protection programs to become more costly which may cause some adjustment in proportion of their market for imports. Alternatively, Canada might increase its market share of world wheat trade at the expense of other exporters. The introduction of a feed wheat would probably reduce the pro— duction and domestic consumption of hard spring wheat. A viable alternative to hard wheat production during periods of low export demand is sought by producers and a less expensive substitute for hard wheat could expand the consumption of feed grain produced in Canada. The livestock industry might be the greatest benefactor from such a development. The implicit assumption in this conclusion is that the much larger US livestock market would hold Canadian livestock prices near current levels. The livestock industry would also provide addi- tional alternatives to wheat production. It does not appear rational for a country with a large grain producing region and often large grain stocks to have such a low balance of trade in the export of live- stock and meat. Although policymakers cannot directly influence these events, they should evaluate the need for research funds and the means for rapid introduction of any significantly improved varieties, in the interests of maintaining and promoting an efficient Wheat industry. This chapter does not exhaust all proposed or all types of public policies. Several of the more important ones have been 138 illustrated which could be evaluated (or partially evaluated) by the study's econometric model. Because the problems that the wheat industry face are not simple, it is not expected that a simple policy tool would suffice. Consequently, none of the policy tools examined in this chapter appeared to be an adequate solution. A combination of policy tools would be required which: (1) increase returns to resources in the production of wheat, (2) control production to meet demand, and (3) stimulate efficiency and growth in the wheat economy. CHAPTER VII TESTING LONG-RUN CHANGES IN THE CANADIAN WHEAT MARKET In the two preceding chapters, the emphasis in the analysis was placed almost entirely on the estimation of the short-run consequences of change in the wheat market. The purpose of this chapter is to demonstrate the usefulness of the econometric model for deriving long- term projections of the values of the endogenous variables in the wheat market. By using a long-run analysis rather than a short-run approach, it allows the various lagged and indirect effects to work through the market. This chapter and the succeeding one have considerable method— ology in common-—both deal with projection analysis. The latter, Chapter VIII, is concerned with the problem of formulating forecasts of future values of the endogenous variables, in order to improve planning in the wheat market. This chapter is concerned with the means of isolating the long-run effects of a change in a single exogenous variable. As a result, it is possible to establish and illustrate the importance of a change (at various levels) in any of the exogenous variables to the wheat economy. One important use of this analysis would be to test implications, over time, of instituting a policy change and to evaluate its long—run effects at several possible levels at which the policy may be instituted. The results obtained from analyzing the long—run effects of various actual or anticipated changes occurring in the wheat economy should be important for any agricultural 139 140 policy plans or forecasts of the situation of the Canadian economy. In the following section, a brief review of the procedures used to construct the projections and a list of possible changes which can be evaluated are given. The remaining sections of the chapter illustrate the results of the projected changes in the wheat market. Procedures Used in Developing Projections In Chapter IV, the procedures used to construct projections of future values of the endogenous variables in the Canadian wheat market were outlined in matrix notation.l To briefly review this method, the procedure used is: (1) obtain the reduced form of the matrix equation for the 1968/69 crop year, (2) assume that the exogenous variables, Z(tL remain at their 1967/68 levels, which then enables the calculations of the endogenous variables for 1968/69, (3) use these calculated values of the endogenous variables, assume that the exogenous variables remain at the 1967/68 values, and modify the A and B matrices,2 which then enables the calculation of the 1969/70 values of the endogenous variables, and (4) repeat a similar approach as in (3) to obtain 1970/71, 1971/72, . . . 1980/81. There are numerous changes of the exogenous variables which can be evaluated as to their potential effects on the endogenous variables in the Canadian wheat market. A list of these possible changes is shown below. In addition, there can be various combinations 1It may be useful to reread Chapter IV, pp. 108—11. 2Matrices A and B change each year as a result of increased Canadian population and wheat production per acre.. The method used to estimate their annual change is shown in Appendix B. 141 and various levels at which these variables may change. Consequently, it is not feasible (or desirable) to examine all possible alternatives. The possible changes are: 1) Variations in the level of Canadian wheat exports to Centrally Planned Economies; 2) Variations in the level of wheat production in any of the four importing regions--the UK, the EEC, Japan or Other Countries; 3) Variations in the level of Canadian food aid shipments of wheat to LDCs; 4) Variations in the level of carryover wheat stocks in Australia and Argentina; 5) Increases in the production per acre of Canadian wheat through the development of a new hybrid spring wheat; 6) Variations in the level of US (world) wheat prices; 7) Changes in the population levels of any of the importing regions; 8) Variations in the level of personal disposable income in Canada; 9) Increases in the marketing margins for domestic food wheat consumption; 10) Variations in feed grain prices in Canada (oats and/or barley); 11) Changes in the level of Canadian foreign exchange rate; 12) Variations in the numbers of hogs in Canada; and 13) Changes in the level of wheat production in Eastern Canada. 142 From this list, six of the most important and interesting changes have been selected for evaluation. In the following sections, (1) through (6) of the above will be analyzed with four levels of change. It is advisable, at this time, to re—emphasize the interpreta— tion of these projections. They are ngt_forecasts, i.e. best possible estimates of the future values of the endogenous variables. These projections are solely used to illustrate a means of isolating the long— run effects of a change in a single variable, while holding all other variables constant. In a dynamic model,1 as opposed to a static model, long—run effects are not equal to the short—run effects. The short- “he... A-.. 3135'..- run effect is observed in a dynamic model as the projected change in the first year. The projected changes observed in the second and subsequent years of a dynamic model are the results of lagged variables in the model. Wheat Exports to Centrally Planned Economies The impact to the Canadian wheat economy from the effects of four sustained levels of Canadian wheat exports to the Centrally Planned Economies are projected for a period of l, 5 and 10 years. The four levels of export volume are 0, 100, 200 and 300 million bushels annually. All other exogenous variables are assumed to remain at their 1967/68 values. The projected levels of the 12 endogenous variables for the l, 5 and 10 year periods, as a result of the four levels of exports, are shown in Table VII:1. 1“A system is dynamic if its behavior over time is determined by functional equations in a way in which variables at different points in time are involved in an essential way," Paul A. Samuelson, Foundations Of Economic Analysis (New York: Atheneum, 1965), p. 314. 143 111n:IatinI:1:::::::r:c:r::r:xr:::. 0.0mm s.OvH 0.0n m.vnm O.Hmm m.msH s.nOO m.mmO e. . . Anzac Ohm m HOHH m mam O.som mxooum e5..."H 0.0sm m.msm m.msm 0.0ne O.ssv O.msv m.msm O.msm . . . . xxso O mom m mam H vnm s NON manomxm Hmuos m.OOH O.mOH e.seH e.OOH m.OsH m.mmH e. . . . . . loose OHN s vOH m OOH m smm m OHm H HsH mm: oHummeoo «.me m.ee m.ov O.mm 0.0v m.Oe O.mm O.sm m.O . . . Amoco v m mm m «m m ow wmb nwmm 0.00 e.em m.ne H.mm O.ms m.mm N.OHH . . . . . “aooo H am 0 mm m NMH m 00H m on mmD wam m.m m.m O.m O.m m.m O.~ O.m m.m O.m O.m O.m O.m wmmomwom H.mm m.mm O.NOH m.sO 0.00 H.vm 0.0m e.mm O.mm m.mm N.Om H.ss mpuomwmemwwuo . . . . . . . . . Amanxv O «O a am e mm e ms H OO O mm O mm m as m Om m.OO O.mm O.OO muuomxm scams . . . . . . Aommxv m.©m m.mm m cm 0 mm m 00 m mm m mm v we 0.0m v.mm v.0h O.mm muuomxm 0mm . . . . . rmOxO m.ms m.ms s.Hs s on O OO O OO O so m so m.sO H.mO s.vO m.mO musomxm MO Ammsov m.eOH e.ssH O.mOH m.OeH m.eOH m.OsH O.OMH m.HmH O.msH e.mHH H.OmH O.OOH moHum roams v.Om m.Hm m.mm e.sm m.mm m.mm m.em m.mm m.mm m.Hm H.mm m.wm mmmmuoa OH O H OH O H OH m H OH O H now» now» How» Mmmw .sm .HHz OOm .sm .HHz OON .sm .HHz OOH .sm .HHz O mHannm> cmHOmamo ho mHmsmsm :oHHHHz OOm Ocm .mumwm OH paw .m rH Mom pmuowhoum ~mmHEocoom Umccmam >HHmnucmo mzu ou manomxm among .OON .OOH .O mo umxumz pawns amemcmo map so pommmmuu.HnHH> mHnme 144 If wheat exports from Canada to Centrally Planned Economies fell to zero and remained at that level for a period of years, it is projected that wheat acreages and CWB selling price would drop sub— stantially between the first and tenth year. It is estimated that prairie farm-stored wheat stocks would rise over 300 percent and feed use of wheat would rise over 185 percent, during the ten year period. Exports of wheat to the EEC and Japan would rise sharply while exports to Other Countries would fall to less than one-half of their first year value by the tenth year. As the volume of annual wheat exports from Canada to the Centrally Planned Economies is increased from a sustained level of zero to 300 million bushels, some of the trends observed at the zero level over the ten year period are intensified and others are reversed. The decline projected in wheat acreage is reversed. The decline in CWB prices is estimated to be considerably reduced. Wheat eXports to the UK are projected to increase slightly. Wheat exports to the EEC and to Japan are projected to increase, but the size of increase diminishes as the level of exports to the Centrally Planned Economies increases. The projected volume of wheat exports to Other Countries indicates a substantially larger short-run increase (first year projected change) as eXports to the Communist Countries increase. The volume of eXports, however, still declines over the projected 10 year period, but at a lower absolute amount. Conversely, the projected feed use of wheat indicates a smaller short-run increase (first year projected Change) as the volume of exports to Centrally Planned Economies rises, but the absolute increase in feed wheat use during the ten year period declines. The projected level of total Canadian wheat exports increases 145 in the short-run by an amount greater than the increase in exports to the Centrally Planned Economies. By the tenth period, however, the projected increase is almost equal to the increase in exports to the Centrally Planned Economies. Both the short and long—run effects create a decline in the projected prairie farm stocks of wheat as exports to the Centrally Planned Economies increase. As expected, with these large changes in the levels of exports, the magnitude of Canadian wheat exports to the Centrally Planned Economies has a very strong influence on the future of the Canadian wheat market. Large sales can be expected to stimulate wheat acreage, support wheat prices, and hold farm-stored stocks at respectable levels. Because of their important influence, it would be ideal to be aware of the approximate magnitude of these future sales. The variability and magnitude of the USSR wheat production, however, does not allow very accurate estimates of future import demand. The analysis in this section is for a sustained, constant import demand. The USSR import demand, in the past, has not followed this pattern. Therefore, it is difficult to generalize on policy implications much further than the fact that the Centrally Planned Economy market can be a very important asset to the Canadian wheat market. It does appear, however, from estimates of supply and demand conditions in the USSR, that the proba- bility of annual exports to these countries exceeding 150 million bushels is relatively low. Consequently, the Centrally Planned Economies cannot be expected to provide the demand necessary to main— tain present production levels. Wheat Production in the UK In order to analyze the effect of increased wheat production in the major importing countries, the UK is selected as the country for which to make this test. This selection is based on the importance of the UK market for Canada and the distinct possibility of increased wheat produc- tion in the UK. Four possible levels of annual wheat production in the UK are selected. These are: 100, 150, 200 and 250 million bushels. The 1967/68 level was 143.6 million bushels. All other exogenous variables in the model are assumed to remain at their 1967/68 level. The projected values of the 12 endogenous variables in the Canadian wheat market for a sustained level of UK wheat production of 100, 150, 200 and 250 million bushels for periods of l, 5, and 10 years are shown in Table VII:2. If UK wheat production remains at a level of 100 million bushels, then the projected impact on the Canadian wheat market between the first and the tenth year would be (1) a large increase in wheat exports to the EEC and Japan, feed use of wheat, and farm stocks, (2) a slight increase in wheat exports to the UK, total wheat exports, and in Canadian per capita food wheat consumption, and (3) a substantial decline in wheat exports to Other Countries, CWB prices, and wheat acreage. If the UK wheat production increased from 100 to 250 million bushels per year, then the projected long-run impact on the Canadian wheat market would be Virtually nil. The reason for this phenomenon may be that the UK produces a different quality of wheat (a soft wheat) than it imports from Canada (a hard wheat), and regardless of its domestic production (within a certain range), it still must import hard wheat for its baking industry. Any increase in its domestic wheat 147 H.0hh m.mmm o.wmm m.NH¢ v.00v m.mov O.NHN ©.me 0.00H m.wMH m.mmH m.vna m.o>h m.mmm H.mmm h.NHv N.mov m.Nov H.NHN m.mma 0.00H m.mma m.mmH m.¢ha M.Hhh ®.Mmm $.0hh ®.mmm m.wMN . .Now w.NH¢ H.00v ®.Nov v.NHv m wow m I n H. 5.0ma ®.O®H H.NHN h mwa m om H.NHN H.hm b.mm m.og H.hm h.mm m.ow m.NOH H.mm m.om m.NoH H.mw m.O® m.m m.N w.m o.m m.N ®.N m.mm v.0h v.ww w.mm v.0b v.ww v.mw h.ah ¢.hm «.mw h.Hb v.hm mpHomxm H0390 Amanxv omxm smash Aommxv muuodxm 0mm Asoxv mpuomxm MD Ammsov ooaum “Dado mmmmuom me «.mm s.Om m.mm e.mm s.ON m.mm e.mm s.ON m.mm e.mm s.Om m.mm OH HM H OH m H OH m H OH O H mm Hmmw meow meow .sm .HHz Omm .sm .HHs OOm .sm .HHz omH .sm .HHz OOH 393.23, .mnmmw OH was .m .H How Uwpoonoum .Coflponpoum pawns M o m O u Harmsm aoHHHHz Omm saw .OON .OmH .OOH no serum: paws: amHOmcao may no poouumx-.muHH> «Hams 148 production may be used mainly for livestock feed. Therefore, the substi— tution ratio, shown in Figure IV:2 (page 100), would almost be a vertical line. The conclusion which can be drawn is that factors, other than domestic wheat production, must influence the volume of imports of Canadian wheat into the UK. If the preceding conclusion is correct, then this is fortunate for Canada, since the UK has been its most important market and wheat production in the UK is projected to increase substantially. This conclusion, however, does not appear to be relevant for other major importing areas (e.g., the EEC and Other Countries), and consequently, wheat production in importing countries is of major concern to the Canadian wheat economy. Carryover Stocks in Australia and Argentina The effect on the Canadian wheat market of four sustained levels of carryover stocks of wheat in Australia and Argentina are projected for a period of 1, 5, and 10 years. The four levels of stocks selected are 50, 100, 200 and 400 million bushels. The 1946/47—1967/68 average was 88.85 million bushels. All other exogenous variables are assumed to remain at their 1967/68 levels. The values of the 12 endogenous variables in the Canadian wheat market projected for l, 5, and 10 years, as a result of the four levels of carryover stocks, are illustrated in Table VII :3 . If carryover stocks of wheat in Argentina and Australia fell to 50 million bushels and remained at that level for a period of years, then the projected impact on the Canadian wheat market between the first and tenth year would be: (1) a substantial decline in wheat acreage, 149 Hmsmv mxooum sums . . . . O.HON O smm O.HOO O.OON m.OOO O.NOO 0.00N 0.0ss m.Omm O OON O OO» O ONO xxeo QNM HMUOB . . . . .OHO muse m Omm q.Ovm O.OOO e.OOO s.OOm H.OOO m.OHv 0.000 e OOO O ONO O OHO O noose on . . . . . H mmO oaumws H sNN O.NON v.5OH m.sHN 0.00H H.OOH O.NHN H.OOH O OOH N OHN O OOH O OO “moot . . mmD Mummm O.mm 0.00 m.oe O.Om 0.00 m.OO H.sm 0.0m m.oe v.sm O mm O OO “some . . QMD Ummrm e.OHH 0.00 O.sO O.OOH N.OO O.NO 0.00H O.mO s.OO O.OOH O OO a Om Amoco . . . mmD woos O N O.N O.N . . . . . . O.N O N O N O N O N O N O N O N O N Ameoxv . 0 a m O ON: n.sl N.OH v.sN O.Nv O.mO O.mm s.sO m.mO O.mO N OO N so muuomxm u zoo Amaexv O.mm H.HO O.HO N.OO O.ms O.OO s.NO O.Ns O.sm O.HO O.Os O.OO mpsomxm cOdOO Aommxv 0.0s N.OO O.Om H.es O.sO O.OO s.Ns 0.00 s.mm O.Ns «.mO m.mm munomxm omm Amoxv O.Hs O.Os O.OO O.OO H.OO s.OO O.OO N.OO N.OO m.OO O.KO O.>O muuomxm MO Ammzov O OHH m.emH s.mOH O.OOH O.OeH O.OsH H.OOH O.emH e.esH s.HeH H.OmH N.OsH moHum . roses a ON H ON m ON 0.0N H.ON 0.0N 0.0N 0.0N m.ON s.ON 0.0N m.ON ommmuoa OH . “was H OH O H OH O H OH O H Hmww Hmww “mow .sm .HHz OOO .sm . H . . H.2 OON sm HHs OOH .sm .HHz Om OHQOHuO> .mHmww OH tam .m .H mom owuuonoum .m . stmom coaHHaz cow was . . . OCH . . o .ucmomm tam OHHmHumsm ca mxooum paws: um>o>numo mo nexus: umosz COHcMGMUomspomM wwwwwm . 11.muHH> wadB 150 seed use, CWB prices, and wheat exports to Other Countries; (2) a small increase in exports to the UK, Canadian per capita food wheat consumption, and total wheat exports; and (3) a large increase in wheat exports to Japan and the EEC, feed wheat use, prairie farm-stored wheat stocks, and total domestic wheat consumption. If carryover wheat stock in Australia and Argentina increased to 100, 200, and 400 million bushels per year, the trends identified in the previous paragraph are intensified. The projected impact on the Canadian wheat market by the tenth year, as a result of sustained carryover stocks of 400 million bushels as opposed to 50 million bushels is: a decrease in wheat acreage of 2.0 million acres (7.8 percent), a decrease in wheat prices of 25.4 cents (17.9 percent), an increase in wheat exports to the UK of 3.0 million bushels (4.4 percent), an increase in BBC exports of 4.9 million bushels (6.8 percent), an increase in exports to Japan of 12.0 million bushels (14.8 percent), a decrease in exports to Other Countries of 89.6 million bushels (136.2 percent),l an increase in feed utilization of wheat of 18.6 million bushels (18.5 percent), a decrease in seed utilization of 2.4 million bushels (6.4 percent), an increase in total domestic consumption of 16.9 million bushels (8.0 perm cent), a decrease in total exports of 69.8 million bushels (16.6 percent), and an increase in prairie farm—stored wheat stocks of 187.8 million bushels (25.0 percent). As the magnitude of the carryover wheat stocks in Australia and Argentina increased, both the decrease in the short-run effect (the projected change in the first year) and the absolute decline in the 1This assumes a negative export of wheat to other countries, which under present conditions is an impossible situation. 151 long—run effect became larger for wheat exports to Other Countries. For total wheat exports, however, only the short—run effect declined as carryover stocks increased. This particular analysis is quite relevant because of the present situation in which world wheat prices are restricted from falling below present levels by the 1968 International Grain's Arrangement. This restriction may curtail Australian and Argentine exports (if they cannot lower export prices), thereby building up their carryover stocks of wheat, especially in Australia. Some of the inherent assumptions in this analysis are unrealistic in terms of present economic and institu- tional restrictions and thus these results should not be accepted at face value. Nevertheless, this procedure does provide a means of isolating and illustrating the individual influences of Australian and Argentine carryover wheat stocks on the Canadian wheat market, and it is useful to identify the area(s) where the largest impact will occur. The analysis in this section illustrates the strong negative influence on the Canadian wheat market of the increasing magnitude of carryover stocks in Australia and Argentina. The most significant effect is the large loss in wheat exports to Other Countries. Canada should be aware of the implications of increased stocks in Australia and Argentina and the policies which may promote these situations. Food Aid Shipments To illustrate the long—run impact on the Canadian wheat economy of different levels of wheat food aid shipments to Other Countries, projections are made for l, 5, and 10 years of four sustained levels of food aid shipments. These levels are 0, 25, 50 and 100 million bushels 152 (average for 1962/63—1966/67 was 20 million bushels). All other exo- genous variables were assumed to remain at their 1967/68 levels. The values of the 12 endogenous variables in the Canadian wheat market projected for 1, 5, and 10 years, for the four sustained levels of food aid are illustrated in Table VII:4. If the level of food aid shipments of wheat Were at a zero level for a period of years, then the projected impact on the Canadian wheat market between the first and the tenth year would be: (1) a substantial decline in wheat acreage, seed use, CWB prices, and wheat exports to Other Countries; (2) a small increase in exports to the UK, per capita food wheat consumption, and total wheat exports; and (3) a large increase in wheat exports to Japan and the EEC, feed wheat use, prairie farm- stored wheat stocks, and total domestic wheat consumption. If food aid shipments of wheat increased to 25, 50 and 100 million bushels per year, then the trends identified in the preceding paragraph are intensified. The projected impact on the Canadian wheat economy by the tenth year, as a result of sustained level of food aid shipments of 100 million bushels as opposed to a zero level of food aid is: a decrease in wheat acreage of 0.6 million acres (2.3 percent), a decrease in wheat prices of 4.3 cents (3.1 percent), an increase in the wheat exports to the UK of 0.1 million bushels (0.1 percent), an increase in wheat exports to the EEC of 2.0 million bushels (2.8 percent), an increase in wheat exports to Japan of 3.0 million bushels (3.7 percent), a decrease in wheat exports to Other Countries of 26.2 million bushels (42.0 percent), an increase in feed wheat utilization of 4.9 million bushels (4.8 percent), a decrease in seed wheat utilization of 0.7 million bushels (1.9 percent), an increase in total domestic 153 Amado . . . Em 0.0HO e.HOm m.mmN N.OOs N.OOO «.meN O.Oss 0.0mm 0.00N 5 mm» H Hem N OON mxooum a A x3 . . . O 0.000 O.NOO 0.000 N.sOO s.moe H.smm O.NHe H.OOO O.Noe O sHe a OHO H OOe manomxwommw a 0.0HN O.NOH O.NOH N.OHN m.OOH H.HOH H.NHN s.OOH O.OOH O.HHN O.OOH N.OOH OOO UMWWMWOQ 0.00 N.OO m.oe O.sm O.Om 0.00 H.sm s.Om m.Oe O.sm O.OO m.OO OMmOMwwm 0.00H N.OO O.HO H.OOH H.OO O.OO O.NOH H.mO m.OO s.HOH O.eO O.OO mmeMwwm O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N OOO Ooom Ameoxo N.OO H.HO a.os 0.0e O.OO O.NO O.mm e.Os 0.00 e.NO 0.0s v.em mphdem umsuo AmanO O.eO 0.0s m.Om H.mO O.N» s.sm O.NO s.Hs O.sm O.HO H.Hs N.sm muuomxm OOQOO Aommxv O.es O.sO H.Om 0.0s N.OO O.mm O.Ns 0.00 O.mm O.Ns «.mO m.mm muuomxm omm HMOxV 0.00 0.00 0.00 0.00 N.OO N.OO 0.00 H.OO H.OO O.OO O.OO H.OO muuomxm MO Hamsov O.mmH s.NOH m.msH O.smH m.emH 0.0sH 0.00H 0.00H O.esH 0.00H 0.00H m.msH OOHMO Aoaav 0.0N 0.0N N.ON N.ON 0.0N O.ON e.ON s.ON 0.0N 0.0N 0.0N 0.0N mmmwuoa OH O H OH O H OH O H OH O H Hmmw new» Hmmw Hmww .sm .HHs OOH ,.sm .HHz OO .sm .HHz ON .sm .HHs O anmHum> .mumms OH Ocm .m .H new Omuumfloua .ummas mo mHmrmsm goHHHHs OOH paw .om .mm .0 mo muqmemflsm pfifi toom cmfitmsmo mo uwxumz umosz cmfltmcmo orb co uommeI|.vnHH> magma 154 utilization of wheat of 4.3 million bushels (2.0 percent), a decrease in total wheat exports of 21.2 million bushels (5.1 percent), and an increase in prairie farm—stored stocks of 60.9 million bushels (8.1 percent). In the analysis of the direct short—run effects discussed in Chapter V, the sign of the coefficient for the food aid variable was considered to be opposite (negative) to the expected one. At that time there were several reasons given for this inconsistency: (l) the coefficient was significant only at a high level; (2) the confi— dence interval which included the true value of the parameter 67 per- cent of the time was —0.563 to +0.116; (3) the largest food aid ship- ments of wheat were made during the period of large sales to Centrally Planned Economies and hence, exports may have been diverted from Other Countries; and (4) the majority of food aid went to India, whose market is dominated by US concessional shipments. Therefore, the results of this analysis should not be accepted without further evalua— tion. Increased Wheat Yields The effect on the Canadian wheat market of four sustained levels of increased yields in wheat production per acre (e.g., as the result of the introduction of a hybrid wheat) are projected for a period of l, 5, and 10 years. The four levels of production per acre are 20, 30, 40, and 50 bushels. The 1967 level was 19.4 bushels. All other exogenous variables are assumed to remain at their 1967/68 levels. The values of the 12 endogenous variables in the Canadian wheat market projected for l, 5, and 10 years as a result of the four levels of yield are illustrated in Table VII:5. 155 w.OOHN 0.0mma ®.mNOH m.MNhH N.mmVH m.wmh m.®hHH h.mmm O.HHm ®.mmm o.mam h.mmN Amado mxooum Show Axed O.HOO O.Ove m.sNe s.Ove O.sme N.OHe O.ONO O.NNO N.HHe 0.000 s.HOO H.OOO muuomxw Hmwoe one O.NON O.OON O.eHN O.OON O.OON O.OOH O.OON O.OHN H.OsH O.OOH H.OsH s.HOH mmO umumwwoo mom O.vN H.ON 0.00 O.ON O.ON O.Oe N.OO H.OO O.OO O.Oe s.OO O.Oe mmO Owom Amoco 0.00H H.OaH O.OHH s.OOH O.OOH N.OO O.HOH 0.0HH 0.0s O.ms s.OO O.HO mwO mem Amoco O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N OOO Ooom Ameoxv s.s H.ON N.OO O.HN O.sm e.Hs H.HO O.OO s.ms O.Hs O.Os O.sO muuoaxm Hague AmmOxv O.NOH O.OHH O.OO H.OHH O.OOH O.Os O.sm N.OO N.sO H.OO O.NO O.OO muuomxm cmmOO Aommxv O.OHH O.HHH O.mO s.OOH O.OO e.vs s.OO e.HO O.OO O.sO O.sO N.OO manomxm omm AMOxO O.OO a.OO O.HO O.NO O.HO O.OO H.OO O.OO O.OO O.Hk O.OO O.OO muuoaxm MO Ammzov H.OO O.OHH N.OOH O.OHH O.ONH O.NOH O.ONH N.OeH O.OOH O.HOH O.HOH O.OsH OOHHO Romeo O.OH O.OH O.ON N.OH s.OH O.ON O.NN O.NN m.ON O.ON O.ON O.ON mmmwuoa OH O H OH O H OH O H OH O H meow meow Hmmw Hmow .Om OO .Om Os .Om Om .Om ON OHOOHMO> .mnmww CA was .m .H How pwuownonm .wuom Mom mawgmzm om paw .ov .OM .om mo mpamflw nuHB umwsz pflufl>m m mo coauos©0HucH o£u mo umxumz noon: swepmcmo ecu co uoommmll.mnHH> wants 156 If production per acre of wheat in Canada remained at a constant 20 bushels for several years, then the projected impact on the Canadian wheat market between the first and tenth year would be: (1) a large decline in CWB prices and exports to Other Countries, (2) a small decline in total exports, (3) a slight increase in wheat acreage, seed wheat use, and exports to the UK, EEC and Japan, and (4) a substantial increase in feed wheat use, total domestic wheat consumption and prairie farm—stored wheat stocks. If production per acre increased to 30, 40, and 50 bushels per year, the trends identified in the above paragraph are intensified. The projected impact on the Canadian wheat market by the tenth year, as a result of a substantial level of production per acre of 50 bushels as opposed to 20 bushels is: a decrease in wheat acreage of 13.1 million acres (46.0 percent), a decrease in CWB prices of 52.4 cents (34.6 percent), a decrease in wheat exports to the UK of 11.9 million bushels (16.6 percent), an increase in wheat exports to the EEC of 66.1 million bushels (107.5 percent), an increase in wheat exports to Japan of 66.2 million bushels (100.2 percent), a decrease in wheat exports to Other Countries of 63.6 million bushels (89.2 percent), an increase in per capita food wheat consumption of 0.1 bushels (3.6 percent), an increase in feed wheat utilization of 121.8 million bushels (166.8 percent), a decrease in seed wheat utilization of 16.0 million bushels (39.2 percent), an increase of 107.3 million bushels in total domestic consumption (57.8 percent), an increase in total wheat exports of 52.2 million bushels (13.1 percent), and an increase in farm-stored stocks of 1764.2 million bushels (524.1 percent). In Table VII:5, the'substantial changes in the short—run effects (projected change in the first year) can be 157 observed in most of the variables (except acreage, seed and food wheat use), as production per acre increases. The results obtained in this analysis are not unexpected. If more wheat is produced on each acre, then without a corresponding expansion in demand, less acreage is required to produce wheat. It is interesting to observe the magnitude of changes that do result and especially since this range of production may be well within the capa— bilities of Western Canadian wheat farmers. The type of transformation in productivity would require substantial modifications of the present quota system for deliveries of wheat to the CWB in order to allow the i most efficient producers to expand their wheat production. Change in US Wheat Prices This section is an analysis of the impact on the Canadian wheat market of a sustained change in US wheat prices, assuming that the US establishes the world wheat price level. This assumption would require that the International Grain's Arrangement either has established a new price range or has discontinued restricting the price of wheat in international trade. The four levels of Us wheat prices are 180, 165, 160 and 150 cents per bushel (1967/68 average was 171 cents per bushel).1 All other exogenous variables are held constant in this analysis, at their 1967/68 levels. The results of these four prices for US wheat, in terms of their effect on the 12 endogenous variables of the model pro— jected for l, 5, and 10 years, are shown in Table VII:6. If US wheat prices rose to 180 cents per bushel and remained there for serveral periods, the projected effect on the wheat economy 1#2 hard wheat, f.o.b. Gulf. 158 “memo H.OO» 0.000 O.HON O.NOs H.OOO, H.OON O.OOs s.OaO O.OON N.Nss N.OOO O.OeN mroouwxMme 0.0HO 0.0HO 0.000 0.0HO O.HHO O.OOO O.OHO N.OHO N.OOO N.HHe O.OOO 0.000 manomxw Hmwos OOH O.NHN O.OOH O.OOH O.NHN O.OOH O.OOH N.NHN O.OOH s.OOH O.HHN O OOH O OOH mmO UHOOOWOO “mom O.NO O.OO 0.00 N.sO O.OO O.OO N.OO O.OO O.OO H.OO O.OO O.OO omO comm Aaoov O.NOH H.OO O.OO O.NOH H.OO O.OO O.NOH H.OO O.OO O.NOH O.OO O.OO OOO Owes Amoov O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N O.N OmO woos Ameoxv O.OO O.NO O.OOH O.HO O.OO O.OO O.OO O.Os O.NO O.NO H.OO H.OO musedxm umrpo Amaexv 0.0s O.OO s.HO N.OO O.OO O.OO O.HO O.Os O.OO O.OO O.Os O.OO muuomxm Omens Aommxv N.OO s.OO O.sO O.Ns N.OO O.OO s.Ns O.OO O.OO O.Ns O.OO O.OO manomxm omm AMOxV s.OO 0.00 O.OO O.OO O.OO O.OO H.OO N.sO O.OO O.OO O.OO O.OO mnuoaxm MO Emsov 0.00H N.NOH O.OsH O.sOH O.OOH O.OsH O.sOH 0.00H O.OFH O.OOH O.sOH O.OsH OUHMO floa .mumww OH pus .m .H How Owuomnonm .Hmtmdm “we mucmo OOH cam .OOH .OOH .OOH um OOOHQO amass OO O0 “areas Omens OOHOOOOO may no powOOm--.OnHH> mHnms 159 between the first and tenth year would be (1) a large decline in CWB prices, and wheat exports to Other Countries, (2) a smaller decline in wheat acreage and seed wheat use, (3) a large increase in wheat exports to Japan and the EEC, feed wheat use, total domestic consump- tion, and farm-stored stocks, and (4) a smaller increase in wheat exports to the UK and in total wheat exports. If the US wheat prices dropped to 165, 160 and 150 cents per bushel, the trends identified above are increased. The projected effect to the Canadian wheat economy by the tenth year, as a result of US wheat prices at 150 as opposed to 180 cents per bushel is: a decrease in acreage of 0.2 million acres (0.8 percent), a decrease in CWB price of 4.9 cents per bushel (3.5 percent), a decrease in wheat exports to the UK of 4.2 million bushels (6.0 percent), an increase in wheat exports to the EEC of 0.9 million bushels (1.2 percent), a decrease in exports to Japan of 5.9 million bushels (7.0 percent), an increase in wheat exports to Other Countries of 14.4 million bushels (29.9 percent), no change in food or feed use of wheat, an increase of 0.2 million bushels in seed wheat use (0.5 percent), an increase of 0.4 million bushels in total consumption (0.2 percent), an increase of 5.2 million bushels in total wheat exports (1.3 percent), and a decrease in farm stocks of 23.1 million bushels (3.0 percent). From these projections, it is shown that CWB prices are not held at the same level as US prices. In actual practice, this discrepancy in prices has not occurred. A projected drop in US wheat prices of 30 cents per bushel had little effect on either the projected short—run or long— run changes in CWB prices and in addition, little effect on other vari- ables in the Canadian wheat market. Therefore, either US wheat prices 160 have limited effect on CWB prices or the model does not fully account for the influence of the US price on CWB price because of close move- ments of these two prices in the past. A refinement might be included in the model to hold these two prices near the same level. Summary and Conclusions The intent of this chapter was to outline and illustrate a method for a dynamic model, which enables short and long—run effects to the Canadian wheat market to be projected over a number of years, resulting from a change in one of the exogenous variables in the market. This analysis is made holding all other exogenous variables constant in order that the effect of the one variable might be isolated. This method was illustrated for changes in the level of: (1) Canadian wheat exports to Centrally Planned Economies, (2) wheat production in the UK, (3) carryover wheat stocks in Australia and Argentina, (4) food aid shipments of wheat to LDCs, (5) production per acre of prairie wheat producers, and (6) US wheat prices. Tables VIII: 1, 2, . . . 6 illustrate the short—run (the projected change in the first year—-l968) and the long—run values of the endogenous variables after 5 and 10 years. The weakness of this method is that it contains certain unreal- istic assumptions, such as: (1) holding all other exogenous Variables constant, (2) allowing CWB prices to assume any level, and (3) allowing wheat imports. Therefore, the estimated value in the fifth and tenth year are not the best estimates for those years.- The strength of this model is that it indicates where the long—run impact of a change in an exogenous variable will be the greatest. CHAPTER VIII FORECASTING IN THE CANADIAN WHEAT MARKET "A forecast or prediction is generally defined as a statement concerning unknown, in particular future, events."1 Restricting the focus to only quantitative economic forecasts, the procedures which are used to construct these forecasts can vary from quite simple to very complex techniques. Increased knowledge of the market processes permits construction of more "scientific" quantitative economic fore- casts. Applying the term scientific implies that certain requirements concerning the forecast have been met. These are:2 l) The forecast can be empirically verified; 2) The basis used for the generation of the forecast is given so the experiment can be duplicated; and 3) The purpose of the forecast, especially in terms of its influence on the behavior of individuals,is known. In Chapter V, the basic economic relationships in the Canadian wheat market were established. With this basis, a method of forecasting is developed to generate quantitative economic values of the future levels of endogenous variables in the wheat market. lH. Theil, Economic Forecasts and Policy (second revised edition; Amsterdam, Holland: North Holland Publishing Company, 1961), p. l. 2Ibid., p. 15. 162 In the remainder of this chapter, the following subjects are examined: (1) the need for and the importance of improvements in fore— casting techniques, (2) the procedure used in this study to calculate short, intermediate, and long-run forecasts, (3) the problems associated with the construction and interpretation of these forecasts, and (4) the empirical results. The methodology employed and the results shown in this chapter and any future usage of these may be the most useful aspects of this study to the Canadian wheat market. Needs and Importance of Improved Forecasting Techniques Before 1943, prices in the wheat market communicated the market conditions to all participants. Thus, planning and resource allocation were based on prices or anticipated prices. After 1943, deliveries of wheat to the CWB became compulsory. As a result, market prices for pro— ducers are stabilized by the operation of the CWB's "buffer stock" marketing program. In addition, because of the CWB‘s method of deferred payment, farm prices are not known until planting time of the crop two years later. Therefore, the regular channel of market communication is distorted, but market participants are still assumed to be able to adjust readily to new market conditions. More important, however, is the fact that the use of the price system alone may not be the best method of obtaining the desired results in the market. Other methods of trans— mitting information to improve planning may be superior. The need for improved planning is the consequence of the increased complexity and interdependence of sectors in the wheat economy. This has mainly resulted from the advances in mechanization and the adoption of new technology. Producers, therefore, require a larger commitment 163 of capital, for longer terms. In addition, they have increased their use of non-farm inputs requiring an adequate supply of working capital. As a result of these changes, producers need to devote more resources to planning, since management errors are becoming more costly. If producers do not have adequate information of market condi— tions, and hence cannot plan output to balance with demand, then they must bear costs of excess supply conditions. The organization of the wheat market forces individual producers to make supply adjustments. This is the result of the CWB establishing selling prices for wheat which may or may not clear the market of all wheat produced. If the surplus stocks exceed elevator capacity, then producers are restricted in the quantity of wheat which can be delivered to the CWB and must provide on-farm storage for the surplus. Because of his size, the individual producer does not have sufficient resources to invest in obtaining information concerning market conditions in adequate detail to allow him to plan effectively in either the short or long—run. Consequently, inadequate market information increases production costs for the producer, lowers efficiency of produc- tion and thus slows growth in the wheat economy. The amount that these costs can be reduced will indicate the resources which should be devoted to improved forecasting and other research to alleviate these planning problems. These problems include: 1) Wheat producers must provide farm storage for surplus wheat production; 2) Wheat producers suffer a loss in cash income from an unsalable commodity, causing two side effects. First, if this situation is extreme, the producer may be placed in a precarious financial position. Second, 164 the uncertainty of the occurrence or the magnitude of the situation may cause producers to maintain excessive insurance to guard against the first effect; 3) Wheat production may be at low levels of efficiency resulting from a misallocation of resources. This may occur because of the inability (or uncertainty of ability) of the producer to purchase the optimal quantities of non-farm inputs, such as fertilizers, herbicides, machinery, etc. 4) Level of output of wheat may be above the optimal level as a result of assets becoming fixed in the production of wheat through im— perfect information regarding long—run market prospects. This situation tends to aggravate a surplus supply problem; 5) Other firms that are directly or indirectly dependent on the production of wheat in Western Canada may suffer similar adjustment problems and associated costs from changes in the level of production and marketing of wheat. Many of these firms find it equally or even more difficult to quickly adjust to new situations.1 A major obstacle in any attempt to plan effectively in the wheat market is a problem that wheat production in most wheat producing countries is highly variable from year to year. This results in substantial varia~ tions in the supply of Canadian wheat available for export and also in the demand for Canadian wheat imports by other countries. In addition, Canada must maintain adequate stocks in order to meet long—term contracts and demands of regular customers, should production be limited by poor weather. On the other hand, long—term forecasting may indicate that 1See John Kenneth Galbraith, The New Industrial State (Boston: Houghton Mifflin Company, 1967), especially Chapter III, "The Nature of Industrial Planning", p. 22-34. 165 changes in demand are simply short—term variations and should not create long—term production commitments. It is very inefficient for individual producers to gather their own market information in the detail required for adequate planning, since all producers would be obtaining essentially the same information. It is more appropriate for a single agency to obtain and analyze the relevant data and spread the cost of this function over all users. Since the benefactors of this service are a larger set than just the producers, a publicly—supported agency would be most desirable. The CWB is the dominant agency in Western Canadian wheat marketing. Therefore, it would be the appropriate agency to establish 1, 5, and 10 year guidelines to expected market conditions. These guidelines could be announced annually, sometime prior to planting time, after considering all the relevant information available at that time. The guidelines may simply take the form of a total expected volume of trade or go so far as to indicate the size of the acreage quota for each producer for the coming year. This would enable the producer to adjust his acreage more accurately to balance supply with demand. The beneficial effects of improved forecasting of market sales potential in both the short and long—run, are rather sizable. Short-run forecasts of expected exports, domestic consumption and farm stocks could reduce part of the uncertainty about marketing the current and the succeeding crop and in addition, probably would reduce the volume of farm stocks. Consequently, a more optimal quantity of non—farm inputs would be used, thereby increasing productivity. Moreover, with decreased farm stocks, production costs are lower. In addition, producers may be able to use lower cost measures to insure stability of income. Long-run 166 market forecasts on a five to ten year basis would be important guides in the purchase of durable assets. These forecasts could reduce errors of over—commitment and facilitate shifting from wheat to alternate enterprises. Consequently, the oversupply problems could be eased since this would reduce some of the possibility for asset fixation in production. Method of Constructing a Forecast In Chapter IV, the method used to construct a market forecast was outlined. The major differences between forecasting and the pro- jection analysis of Chapter VII, are simply the objectives and the assumptions concerning the vector of the exogenous variables. The objectives and their purpose were presented in the preceding section. The estimates of the values for the exogenous variables for 1968, 1969, 1975 and 1980 are presented in Table VIII:l. Comments on the rationale for the selection of each of these values will be made later in this section. Brieflyl, the procedure used in the construction of the fore— cast is: (l) obtain the reduced form of the model for 1968/69; (2) insert the values for the exogenous variables for 1968/69; (3) from these data, the 1968/69 values of the endogenous variable can be calcu— lated; (4) use these results, modifying the A and B matrices, then insert the 1969/70 values of exogenous variables to obtain the 1969/70 'values of the endogenous variables; (5) repeating the previous step for the following year as many times as required will generate the predicted values for as many years as desired. l . . . . . . A more detailed description 15 given in Chapter IV, pp. 108-11. .OmH .m .m prswmmm :H ccsom mum mmsHm> mums» OHMHSUHOO on www: mmHDSMom w . Os.ON ON.HN s0.0N MM.MM Os.vN OO.ON OO.NN me MMHumHzmom amHOmamu o o O O O szmzv mxooum Omens wHuHmsm Mme soHuodcoum O,.NN OO.NN _ OO.NN . . Ozcoz an mamas: mv.NN q.N O.N O.N Hwy COHUOUUOHQ paws; wauamsm s o O.N 0 Any amass mo mwmmoq tam . . 1 oz . . . Haas O.O O O O O 0.0 roomzc msmzmo ca mam. nmssaH o.mm O.m0 O.mw 0 mm Hfidomv wuw nfidz mom HO.N OO.N NNHN sHHN lasso squOOaH ommuw>wm saw woom mm wwwum HN.mm NH.mv H0.mm mH.mwm Hwy OEOUGH OHQMwOQmHQ HMSOMme CWHCMSMS 0.0m 0 0m 0 0m 0 0m AQHQV muswfimapw H. O 0.000 0.000 0.000 . 0.¢ boom 0.000 . . AOMDV mxooum pawns mD wh.mmvmb H0.MNOM> Nm v00m0 0v mwwm0 Amfioxv MOHHUCDOU H0300 SH Goduozvoum UMOQB mm.O WOaH HHunm 50.4.. Aghmc HHMQMU EH GOHHUDUOHQ UMMHE mm.HHH ON.OOH om HOH om OOH Hmmbzv GMQMO CH soHuMHsmom 7 H H H H Hmfivv >OHHOQ OHSUHSUHHOO EOEEOU m 0mm 6 . OO.OO HH.NO OO.HO no cow _ 1 HM OW . . Mummy .UUDWOHQ HMWOE W.Umm OH.OON OO.eOH ON OOH ON OOH xommzc aoHumHOmom O.OOO O O O O Aemomc OHanHms Osage . O.OOOH OO.OOH OO.ONH ON.OHH OO.eNH AMDOO coHuuavoum umwrs MO mm.mm mm.0m vm.mm HH.mm AMDZV MD wsu SH SOHuMHsmom 0.00H 0.00H 0.00H 0.00H Ammov wwHEOGOOm GOGCMHA >HHMHOCOU Ou mpuomxm O.OOH 0.00H 0.00H 0.00H Homxv msHucomnd 0cm OHHmemsd CH mxooum Omens 0.0sH O.OOH 0.00H 0.0nH reams OOOHMO Omens OO OO Os OO OO rec hams 0.0NH 0.0NH 0.0NH 0.0NH Hmmmv >mHHmm wo OUHHm pwuommxm 0.00H 0.00H 0.00H 0.00H Hzmmv paws: mo OOHum cwuowmxm ommH mhmH 00mH w0OH m.uwthz ummnz wan :H mummownom OOHxOs OH OOOO .OOOH cam .OOOH .OOOH .OOOH How menOHua> mzoammoxm may now mwOHm> Omssmm «Hams 168 The assumed values of the exogenous variables are given in Table VIII:1. The expected price of wheat is assumed to follow the CWB selling price (but expressed in Canadian dollars), lagged one year. The expected price of barley and the price of oats are assumed to remain near their 1946/47-1967/68 mean. This is below recent market prices, but lower US feed grain prices will probably depress their price levels. The US wheat price is assumed to remain near its present level because of the IGA floor price. The carryover wheat stocks in Australia and Argentina are assumed to be 20 percent higher than their post—war mean value because of their recent increased production and inability to lower prices, and consequently, this value may be too low. Canadian wheat exports to Centrally Planned Economies are assumed to be 100 million bushels. This is split into 70 million bushels for China (20 million bushels above 1967/68), and 30 million bushels to USSR and Eastern Europe (33 million bushels less than 1967/68). In the next one to three years, the latter value may be an underestimate. The population variables and the produc— tion variables for each importing country (UK, EEC, Japan, Other Countries), and wages of manufacturing workers in the food and beverage industry variable are assumed to follow an autoregressive time trend. Canadian disposable income is assumed to follow a linear trend. The industrial use, distilling, and handling loss variable and the non—prairie wheat output variable are assumed to remain at their post—war mean level. Food aid is assumed to be approximately 600 million bushels per year. Produc- tion per acre and Canadian population are assumed to increase by an auto— regressive time trend. This implies that average production and weather conditions are assumed for each year. The model also implicitly assumes that the rate of inflation in 169 the Canadian economy will remain at the level which occurred during the 1946/47 to 1967/68 period. Any sharp deviations from that level must be taken into account and the predicted values adjusted accordingly. Shortcomings of Forecasting Models Theil and Klein1 present some shortcomings of forecasting tech— niques which must be taken into account and may reduce the creditability of a forecaster's estimates. First, the coefficients of the variables obtained from the 3SLS estimation procedure, which comprise the A, B, and C matrices, are assumed to remain constant over time. This implies that market participants will continue to behave in the same fashion as in the past two decades. Second, "prediction according to such a [econometric] system requires, in general, a preliminary prediction of exogenous changes (i.e., a set of higher order forecasts)".2 The arbitrary selection of the values of the exogenous variable (Zt) strongly influences the values of the endogenous variables, as was illustrated in Chapter VII. Third, forecasts implicitly assume that market participants will not react to the forecast. If a reaction does occur, hOWever, it can be accounted for in the forecast by introducing a reaction factor. To evaluate the pre— dictive performance of the endogenous variables within the range of the observed values, the calculated R2 is usually used. This, however, is a relative measure rather than an absolute measure and perfect (positive) . 3 . . correlation does not imply perfect forecasting. Theil introduces an 1Lawrence R. Klein, An Introduction to Econometrics (Englewood Cliffs, New York: Prentice-Hall, 1965), pp. 244—45. 2Theil, p. 51. 31bid., pp. 31-2 F———_——— 170 inequality coefficient, U, as a means of analyzing the accuracy of (large sample) forecasts.1 The U measure varies between the zero and one, with lowest values indicating most accurate predictions. In Table VIII:2, the calculated U values, indicating the past predictive accuracy, for all of the 12 endogenous variables are given. Table VIII:2.—-Thiel U Measure of Past Predictive Accuracy for the Endogenous Variables between 1946/47 and 1967/68. Endogenous Variable Theil - U Measure Wheat Acreage (AAC) 0.0111 Wheat Price (CWBP) 0.0158 UK Wheat Exports (XUK) 0.0450 EEC Wheat Exports (XEEC) 0.0878 Japan Wheat Exports (XJAP) 0.0805 Other Countries' Wheat Exports (XOTH) 0.1179 Domestic Food Consumption (DCH) 0.0226 Domestic Feed Consumption (DCA) 0.0455 Domestic Seed Consumption (DCS) 0.0240 All computed values of the U measure lie between 0.0111 and 0.1179, with the acreage and prices equation having the most accurate predictive accuracy during the sample period. Most models are reasonably reliable in predicting a continuing trend. The most important asset of a model, however, is its ability to predict a turning point. Klein emphasizes several problems of any where Yt is observed value and Yt is predicted value 171 econometric model that are crucial when the model is used for prediction. These problems are omissions of relevant variables, errors in coeffi- cient magnitude due to measurement or sampling errors, improper functional form, etc. On the other hand, forecasts from econometric models, imperfect as they may be, precisely define the "logic of the argument" and clearly lay out all of the assumptions required to obtain the estimates. This is a failure of many "verbal" forecasts. Forecasted Values of the Endogenous Variables In Table VIII:3, the forecasts of the 12 endogenous variables for the 1968, 1969, 1975, and 1980 crop years are shown. These are the results obtained from the model using the method outlined earlier in this chapter. Table VIII:3.——Forecasted Values of the Endogenous Variables for the 1968, 1969, 1975, and 1980 Crop Years. Variable 1968 1969 1975 1980 Acreage (AAC) 26.4 26.5 24.0 23.7 Price (CWBP) 176.3 174.0 174.0 174.0 UK Exports (XUK) 66.3 64.5 52.4 42.8 EEC Exports (XEEC) 56.5 59.7 77.8 90.5 Japan Exports (XJAP) 60.2 67.2 94.0 113.3 Other Country Exports (XOTH) 73.9 68.9 57.5 50.8 Food Consumption (DCH) 2.8 2.8 2.5 2.4 Feed Consumption (DCA) 58.2 64.9 84.5 95.9 Seed Consumption (DCS) 38.5 38.4 35.4 35.0 Total Consumption (DCT) 155.9 164.4 182.7 193.9 Total Exports (TX) 356.9 360.3 381.8 397.3 Farm Stocks (PWS) 255.6 363.9 759.3 1014.8 172 In 1968/69, total wheat exports are projected to increase 22.1 million bushels over the 1967/68 level. This increase is the result of a predicted rise in wheat exports to the UK of 1.4 million bushels, to the EEC of 12.9 million bushels and to Japan of 4.5 million bushels. Total domestic wheat consumption is expected to drop slightly in, 1968/69 from the previous year, because of a drop in food wheat consump— tion of 0.3 bushels per capita, in feed wheat use of 4.8 million bushels and in seed wheat use of 1.5 million bushels. Prairie farm wheat stocks are expected to rise 22 million bushels, since projected total disappearance is below production, even though acreage is expected to decline 3.2 million acres. As anticipated, there is a continued down- ward pressure on price and the model projects that CWB prices will be 1.3 cents below the 1967/68 level. The forecast for the 1969 crop year indicates that, from the previous year, wheat acreage is virtually unchanged, while total wheat exports have increased only 3.4 million bushels and domestic consump- tion has increased only 8.5 million bushels, creating a 108.3 million bushel increase in farm stocks. Wheat exports to the UK and Other Countries are expected to drop slightly below the predicted 1968/69 level, while exports to the EEC and Japan are expected to increase slightly. Estimated feed wheat utilization is up 6.7 million bushels over the previous year. Wheat prices have been artificially supported at 174 cents per bushel. Because of the method used for forecasting, this restriction on price only affects the other endogenous variables through lagged prices (CWBP_1), not through the current prices. The rationale for this restriction on price is that US wheat prices, and prices of other feed grains, are being held constant and thus, it is 173 unrealistic to allow Canadian wheat prices to fall below this level. In addition, this is approximately the lower limit of the price range for the IGA. By the 1975 crop year, wheat acreage is projected to drop 2.5 million acres below the 1969/70 level. Total wheat exports are expected to rise 21.5 million bushels and total domestic consumption is expected to rise 18.3 million bushels between the 1969 and 1975 crop years. Total wheat utilization is sufficiently below production during this period that prairie farm stocks are projected to increase 396.4 million bushels. During this same period, decreases in exports to the UK and Other Countries are expected, while increases in exports to the EEC and Japan are expected. Based on other predictive studies,1 the level of exports to the EEC and Japan appear to be substantially overestimated. These overestimates may be the result of trends built into these equations and the failure of the model to sufficiently account for recent changes in these markets. These changes are (l) a large increase in production in the EEC, (2) a decline in the rate of increase in per capita consump- tion in Japan, and (3) a reduction in Canada's share of the Japanese market in recent years. In addition, the restriction placed on CWB prices of 174 cents per bushel is only effective on the lagged price. The price in the current year is actually much lower and hence, this stimulates exports to these two regions. By crop year 1980, the trends identified in 1975 are intensified, i.e., a further decline in acreage, increases in domestic consumption and total exports, and a massive increase in prairie farm wheat stocks. 1See Table III:28, p. 83. """" 174 , It is probably unrealistic for farm stocks to reach these projected proportions, and undoubtedly, the model does not sufficiently account for the depressing effect of farm stocks on acreage planted. Summary and Conclusions As a result of wheat producers facing problems of: (1) a distortion of the normal channel of market communication (i.e. the price mechanism) by the CWB price stabilization program, (2) an increase in the interdependence of sectors in the economic system, creating a need for longer range planning by both farm and non-farm firms, and (3) an increase in the costs of errors from improper planning (storage costs, marketing uncertainty, etc.), it was recommended that a new means of transmitting market signals or information be instituted. This new means would be announced market forecasts, and guidelines for produc— tion on a total market or an individual producer basis. The market forecasts could be obtained from the econometric model developed in this study. This method is not without its inherent problems and its results must reflect: (1) possible changes in coefficients of behavioral equations in the future, (2) weaknesses of assumptions for exogenous variables, (3) reactions of market participants to forecasts, (4) predictability of the model, (5) ability of the model to predict turning points, and (6) errors of various types (i.e. omission of variables, errors of measure— ment improper functional form, etc.) inherent in most econometric models. isely define all assumptions used to construct the It does, however, prec forecast. 175 The results of the forecast indicate that over the next decade: (1) wheat acreage will decline, (2) total exports will rise as a result of increased exports to Japan and the EEC and decreased exports to the UK and Other Countries, (3) total domestic consumption will rise as a result of substantially increased feed use with a small decline in food and seed wheat use, (4) production will substantially exceed consumption, resulting in increased farm stocks, and (5) wheat prices will receive strong downward pressure. CHAPTER IX SUMMARY AND CONCLUSIONS This chapter is organized into three main sections. In the first section, the highlights of the methods used and the results obtained are summarized. The second section contains an evaluation of the analysis of this study. The final section presents the policy implications which arise from this analysis. 5 Summary of Study Several recent events affecting Canada's position in the inter- national wheat market and a concern over the present organization of the Canadian wheat market stimulated this research study. The objec- tive was to construct a system of demand and supply equations for the Canadian wheat economy in order to examine economic relationships, to test policy alternatives and to develop projections. The setting for the study was provided by establishing an historical and a current perspective of domestic and foreign institutions, production-marketing problems, channels of production and distribution, and public policies in the Canadian wheat market (Chapter II). Canada's dependence on a thriving export market prompted a comprehensive review of major importing and exporting countries’ wheat production, consumption, and trading patterns, and the policies influencing these variables (Chapter III). This review showed that 176 177 the major wheat exporters, except for Canada and the US, namely Australia, Argentina, and France have been steadily increasing pro— duction and exports of wheat. In North America, decreased Us acreage allotments and increased levels of Canadian farm wheat stocks have been the major influence in depressing wheat acreages. In most developed countries, domestic wheat production has been increasing faster than consumption. Consequently, the demand for wheat imports has been considerably reduced. One exception is Japan which, as a result of increased per capita consumption and a stagnant domestic output, has become the world's largest wheat importer. L The USSR and East European Countries are expected to considerably reduce wheat imports as a result of substantially improved production in the USSR wheat economy. Chinese wheat imports are projected to remain near present levels. The LDCs may be able to considerably reduce their wheat imports as the result of remarkable improvements in yields from the use of new varieties and other production practices. Their long—run demand for wheat imports will depend on the effects of population control measures and the use of means other than wheat to meet food requirements. A synthesis of supply and demand projections in the world wheat market indicates that exporters will be forced to contract their pro- duction. Constructing a market outlook for Canadian wheat exports in 1975, it is projected that a decrease in acreage of one-third from the 1966 levels will be required to balance supply and demand (Table III:28). In order to specify the supply and demand for Canadian wheat in more detail, an aggregate econometric model of the Canadian wheat economy was developed (Chapter IV). The model, a simultaneous system 178 of 12 linear equations, encompasses economic relationships which influence domestic supply, selling price, exports to the UK, EEC, Japan, and all other free world countries, domestic food, feed and seed consumption, and prairie farm stocks of wheat. The model was estimated by a Three stage Least Squares technique from a sample period of 1946/47 to 1967/68. The evaluation of the econometric model's performance, in terms of three criteria: (1) size of the calculated Rz's, (2) significance of coefficients, and (3) conformity to economic theory, produced encouraging results for this initial attempt. From the results of the statistically estimated model, many important economic interrelationships in the Canadian wheat market were quantified (Chapter V). To briefly identify these economic relation- ships, the nine behavioral equations of the model are outlined in their functional form: 1) The level of wheat acreage in the prairies is a function of the expected price for wheat, the expected price for barley, prairie farm—stored wheat stocks, last period's wheat exports, and unmeasured variables included in a time trend; 2) The level of the Canadian Wheat Board price is a function of US wheat price, the level of carryover wheat stocks in Australia and Argentina, the size of wheat exports to Centrally Planned Economies, the volume of prairie farm-stored wheat stocks, domestic wheat consump— tion, total wheat exports, and last period's price; 3) The level of Canadian wheat exports to (a) the UK, (b) the EEC, (c) Japan, and (d) all other free world countries is a function of Canadian Wheat Board prices relative to Us wheat prices, wheat stocks in 179 Canada, population in the importing countries, level of wheat produc- tion in the importing countries, events immediately after World War II (a dummy variable), and introduction of the EEC's Common Agricultural Policy (a dummy variable); 4) The level of domestic food wheat consumption is a function of the wholesale wheat price, personal disposable income, and marketing margins;l 5) The level of domestic feed wheat consumption is a function of wheat price, size of prairie farm-stored wheat stocks, price of cats, number of hogs on farms, and unmeasured variables included in a time trend; 6) The level of domestic seed wheat consumption is a function of acreage to be planted the following year. Important elasticities calculated were: (1) the elasticity of production (percentage change in wheat acreage associated with a one percent change in expected price)—~O.546, (2) the wholesale food wheat price elasticity—-0.058, (3) the income elasticity of food wheat-— —0.029, (4) the price elasticity of demand for feed wheat-- -0.869, and (5) the cross elasticity of demand for feed wheat with respect to cats (percentage change in quantity associated with a one percent change in oat prices)——O.197. The long—run projected impact on the Canadian wheat market, resulting from a change in one of the exogenous variables (while holding all other exogenous variables constant) was calculated for six variables. For each of the six variables, four different levels of change were evaluated as to their impact on the wheat market. First, 180 an increase in Canadian wheat exports to Centrally Planned Economies, from O to 300 million bushels, stimulated an increase in wheat acreage, CWB prices, and wheat exports to the EEC, UK and Japan. On the other hand, wheat exports to Other Countries and prairie wheat stocks were decreased. Second, an increase in the level of UK wheat production did not have any significant long—run impact on the Canadian wheat market. Third, the long-run impact of an increase in the level of carryover wheat stocks in Australia and Argentina was a large decrease in the level of CWB prices and wheat exports to Other Countries, but a large increase in farm—stored wheat stocks. Fourth, contrary to expectations, the major long—run effect of increased food aid shipments was a reduction in the total level of wheat exports to Other Countries. This result may have been a statistical error or the influence of a diversion of wheat exports to the USSR and China. Fifth, the long-run effect of the development of a hybrid food wheat in the prairies,which significantly increases production per acre,was to decrease wheat acreage, CWB prices, and wheat exports to Other Countries, but substantially increase wheat exports to the UK, EEC, and Japan, feed wheat use, and farm-stored stocks. Sixth, the long—run impact on the Canadian wheat market of a decrease in US wheat prices was very minor. This may be the result of the two prices moving very closely together throughout the sample period (1946—1967), and thus, once outside the observed range, the accuracy of the projec~ tions was considerably lower. A need exists to improve market forecasts of supply and demand conditions in the Canadian wheat economy for three important reasons: (1) the Canadian Wheat Board stabilizes wheat prices, thereby distorting 181 the normal channel of market communication; (2) the increased commer- cialization of agriculture requires additional certainty of costs, prices¥ and volume of wheat sales; and (3) errors in management are becoming more costly and hence, more resources need to be devoted to planning. The econometric model, formulated in this study, was used to construct short, intermediate, and long—run forecasts of future supply and demand conditions in the Canadian wheat market. Assumptions were made for the exogenous variables, and values for the endogenous variables were generated for the crop years 1968, 1969, 1975, and 1980. The results indicate that: (l) wheat acreage will decline, but yields will increase, (2) total exports will increase with larger shipments going to the EEC and Japan and smaller shipments going to the UK and Other Countries, (3) domestic consumption will rise with substantial increases in feed wheat use, but a decline in food and seed wheat use, (4) over—production and increases in farm stocks will continue, and (5) wheat prices will be depressed. Evaluation of the Analyses Two different procedures were developed in this study for fore- casting the volume of Canadian wheat exports, by regions, in 1975. The first procedure used estimates from several published studies of the total imports of wheat by five regions in 1975, and calculations of the historic shares of these markets for Canada. Combining these gave the estimated exports of Canadian wheat to each of these regions in 1975 (Chapter III). The second procedure utilized the econometric model developed in this study. After making estimates for the exogenous variables, forecasts of Canadian wheat exports to each region in 1975 ' fiw KI... » 182 were calculated (Chapter VIII). The results of these two procedures are reproduced in Table IX:l. Table IX:1.—-The Estimated Volume of Canadian Wheat Exports to Various Regions in 1975, in Million Bushels. Synthesized from Forecasted by the Region Published Studiesa Econometric Model UK 42.5 52.4 EEC 11.4—34.9 77.8 Japan 44.1—70.5 94.0 Other Importers 30.9 57.5 Communist Countries 103.3 100.0 Total 234.8—284.7 381.8 aFrom Table III:28, p. 83. bFrom Table VIII:3, p. 171. The forecasts of the total Canadian wheat exports constructed from the econometric model were 97.1 to 147.0 million bushels larger than the forecasts synthesized from published studies. This discrepancy may be the effect of one of the problems involved in developing a model based on historical data. Such a model may have certain built-in trends and may not accurately reflect turning points which occur in the market. The econometric model appears to have a significant upward bias in estimating total wheat exports, mainly as a result of wheat exports to the EEC and Japan. In the case of the EEC, this discrepancy might be attributed to a population coefficient (NEEC) which is too large, 183 and a wheat production coefficient (PEEC) which is too small. The population coefficient includes the effect of changes in income, tastes and other unmeasured variables correlated with time. These effects have probably decreased during the period. The production coefficient probably does not take into account recent technological advances allowing additional soft wheat to be substituted for hard wheat in the baking industry. In the case of Japan, there has been a very rapid rise in the per capita consumption of wheat. This rate of increase has probably decreased, but the trend is built into the model creating an upward bias in the production (PJAP) and population (NJAP) coefficients. Moreover, Canada's share of this market may be declining (Table III:14)'- a factor which is not adequately reflected in the model (and hence the forecast). If the value for wheat exports to the EEC and Japan is, in fact, an overestimate, then a logical readjustment should be made. Based on historical data and current trends, the maximum wheat exports from Canada in 1975 are highly unlikely to exceed 60.0 million bushels for the EEC and 80.0 million bushels for Japan. This readjustment reduces the estimate from the econometric model for total Canadian wheat exports in 1975 to 350.0 million bushels. After making this adjustment, the discrepancy between the two estimating procedures is 65.3 to 115.2 million bushels. Both procedures, however, indicate the same conclusion. Wheat acreage must decline in order to balance supply with demand. The difference between the two estimating procedures is only a matter of degree——to what extent should acreage be reduced. 184 This comparison has demonstrated two independent methods of arriving at an estimate of the future demand for Canadian wheat. The results obtained from a model built from historical data often need to be adjusted for the effects of turning points in a market. Policy Implications Several policies affecting the marketing of wheat in Western Canada were evaluated in this study (Chapter VI). Most of these policies were designed to increase the net income or increase the certainty of both wheat marketings and prices for the prairie wheat producer. These policies were evaluated in terms of their success in achieving their stated goal and any undesirable consequences resulting from their introduction. The introduction of a two-price system in 1967/68, by increas— ing the domestic food wheat price one dollar per bushel, would have increased pooled wheat prices for all domestically consumed and exported wheat by an estimated 12 cents per bushel. This policy, how— ever, raises some interesting domestic and international political implications. In addition, a two-price system would probably stimulate producers to increase wheat acreage. A policy to guarantee wheat producers a minimum three percent annual price increase, regardless of the Canadian Wheat Board prices, would have stimulated an increase in wheat acreage of an estimated minimum 0.48 million acres in 1967/68. If changes in producer costs, prices, and productivity continue at the same rate as in the past, this policy should allow the wheat economy to maintain the same level of income per acre as in the past. 185 Adjustments in the price ratios, for various crops relative to wheat, were investigated as alternative means for diverting acreage from wheat to other crops (i.e., using prices as incentives). It was found that wheat producers were responsive to relative price changes and that CWB manipulation of grain prices probably would have the desired effect in shifting acreages from one crop to another (in this case, wheat to barley). This type of incentive could be used to facilitate shifts in acreage more quickly than might otherwise occur, to either alleviate short—term oversupply conditions or stimulate long— run production adjustments. Although this may prove to be a very satisfactory means of shifting acreage, there are several problems which should be anticipated. If it is to be used for short—term adjustments and producers react, instead, to these price manipulations with long- term production commitments, then assets may be fixed in uneconomical enterprises. On the other hand, if producers recognize these incentives as short-term, then the rate of shift from one enterprise to another may be less than projected, unless transfer costs are very low. If this method is to be used for long-term production adjustments and producers view them as short—term, then the rate of adjustment may be less than expected. In addition, it may not be desirable to increase output of oflmrcnms A policy for the federal government to guarantee to purchase and store all wheat produced would reduce the costs to producers of storing surplus wheat and the problems currently associated with uncer— tainty of wheat marketing. It would, however, stimulate producers to increase wheat acreage. In order to avoid massive stock accumulations in government storage, some new form of control on wheat production 186 would be required. Additional analysis is needed in order to evaluate whether or not a new method of controlling wheat production is superior to the present system. The development of either a food or feed wheat hybrid will divert productive resources from the present non-hybrid varieties. A hybrid food wheat could lower production costs while maintaining the same quality hard wheat. This would allow producers to either increase income or lower wheat prices. The latter could have the impact of increasing domestic and foreign demand for Canadian wheat. The develop- ment of a hybrid feed wheat would probably divert resources from present food wheat production to the production of both feed wheat and livestock production. To fully evaluate all of the resulting direct and indirect benefits to the livestock industry would require the calculations of the potential for, and economic consequences of, increased livestock production. The development of either of these types of hybrids would be an important asset to wheat producers currently suffering from slow productivity increases and surplus conditions in the world wheat market. Those policies stimulating producers to increase wheat acreage are undesirable methods to increase producer incomes and increase certainty of wheat marketings and prices in the current situation of surplus supplies in the world wheat market. Such policies must be accompanied by some form of production control. The implications for the prairie wheat producer, from the estimates of the demand for Canadian wheat exports in 1975, using either of the two methods of forecasting presented in this study, are a substantial decline in Canadian wheat acreage required to balance 187 supply with demand. As producers reduce wheat acreage and shift to alternate crops, Canadian farm income will probably experience a decline. More important to Canada will be the substantial loss in foreign exchange earnings as a result of the decline in wheat exports. with a large change in production patterns, it would be desirable to maintain the most efficient producers in the production of wheat. The quota system, however, does not allow the most efficient producers to increase their marketings relative to less efficient producers. In the process of reducing wheat acreage, a large volume of farm stocks will undoubtedly be accumulated. This is the result of a lack of alternate means to communicate a change in market demand to producers under the present marketing structure. Wheat prices cannot communicate the necessary change if the CWB initial price remains static and if the CWB selling price is prevented from declining any further by the IGA price floor. The author contends that it is not an optimal procedure (in terms of efficiency) to allow producers to make planting decisions for wheat, based on the present means of market communication. This study presents a means to improve market communications which would reduce the cost of production through reduced costs of wheat storage and costs associated with producers' uncertainty of marketings. The improved means of market communication is the use of short and long- run forecasting techniques to indicate future supply and demand conditions. From these forecasts, announced market guidelines of production (or acreage) levels can be given to producers on a total market basis. 188 The forecasting model, in the form presented in this study, is not the final model. Additional refinements and other changes may be desirable before it is implemented as an operational procedure. BIBLIOGRAPHY BIBLIOGRAPHY Books Agricultural Economics Research Council of Canada. Conference on International Trade and Canadian Agriculture. Banff, Canada: Queen's Printer, 1966. Drummond, W. M., and MacKenzie, W. Progress and Prospects of Canadian Agriculture. Royal Commission on Canada's Economic Prospects, Ottawa, Canada: Queen's Printer, 1958. Fowke, V. C. National Policy and the Wheat Economy. Toronto, Canada: University of Toronto Press, 1957. Goldberger, Arthur S. Impact Multipliers and Dynamic Properties of the Klein—Goldberger Model. Amsterdam, Holland: North Holland Publishing Company, 1959. Harsany, Peter. 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"A Duopoly Model of World Wheat Pricing," Journal \‘ of Farm Economics, XLVIII (August 1966), pp. 711—27. . "Implications for Canada of US Farm Policies," Journal of Farm Economics, XLVIX (December 1967), pp. 1038—50. Meinken, Kenneth W. The Demand and Price Structure for Wheat. Washing— ton, D.C.: USDA, Technical Bulletin #1136, 1955. Menzies, M. "Wheat Prices and Policies Since 1930," Canadian Journal of Agricultural Economics (1955), pp. 32—36. Mo, William Y. An Economic Analysis of the Dynamics of the United States Wheat Sector. Washington, D.C.: Economic Research Service, USDA, Technical Bulletin #1395, 1968. Reutlinger, Shlomo. "Analysis of a Dynamic Model, with Particular Emphasis on Long Run Projections," Journal of Farm Economics, XLVIII (February 1966) , pp. 88—106. Rossmiller, George E. The Grain—Livestock Economy of West Germany with Projections to 1970 and 1975. East Lansing: Michigan State University, Institute of International Agriculture, 1968. Schmitz, Andrew. 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Winnipeg, Canada: 1965. 192 Statistical Sources Board of Grain Commissioners for Canada. Canadian Grain Exports-— Crop Years 1946/47 to 1965/66, 1966/67, 1967/68. Ottawa: Queen's Printer. Canadian Wheat Board. 1966—67 Annual Repprt of the Canadian Wheat Board. Winnipeg, Canada: 1968. Dominion Bureau of Statistics. Grain Trade of Canada. Ottawa: Queen's Printer, Various Issues. Handbook of Agricultural Statistics: Part I—-Fie1d Crops 1908-1963. Ottawa: Queen's Printer, 1964. Quarterly Bulletin of Agricultural Statistics. Ottawa: Queen's Printer, Various Issues. International Wheat Council. Review of the World Wheat Situation. London, England: Various Issues. World Wheat Statistics. London, England: Various Issues. US Department of Agriculture. Food Grain Statistics. Washington, D.C.: Economic Research Service. Statistical Bulletin #423, April 1968. Wheat Situation. Washington, D.C.: Service, Various Issues. Economic Research Unpublished Material Gibbings, Charles W. "Wheat, Canada and the World," speech prepared for the Canadian Wheat Symposium, Saskatoon, Canada, Spring 1967. Josling, Timothy E. "The United Kingdom Grains Agreement (1964): An Economic Analysis." Unpublished Ph.D. thesis, Department of Agricultural Economics, Michigan State University, 1967. Kerr, T. C. "Canadian Agriculture in the 1970's," paper presented to the Centennial Convention of the Canadian Feed Manufacturers Association, June 1967. Runciman, A. M. "What's Wrong with Canadian Wheat Markets?—-A Farmer's Viewpoint,“ speech presented to the Regina Chamber of Commerce, Farm Forum, Regina, Saskatchewan, March 5, 1968. Schmitz, Andrew. "An Economic Analysis of the World Wheat Economy." Un— published Ph.D. thesis, Dept. of Economics, U. of Wisconsin, 1968. APPENDICES .HmosmmH msOHMm> .HmusHHm m.smmdd "MBMHUOV mwmcmo 00 Omaha CHMHO .mOHumemum MO Downsm .EOD p . 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OOH OO0.0H OO0.00 HO OOH OO OOOHO OOO.H OOO.OH OOOH NO0.0 0.000 0.00 OOH ONO.OH OOO.OO OO OOH HO OOOOO OOO.H OHO.OH OOOH ONO.O O.OOH O.HO OOH OOO.NH NOO.OO OO NOH OO OONOO HOO.H NOO.OH OOOH OOO.O O.OO O.OO ONN ONO.NH NON.HO OO OOH OO OOOOO OOO.O OHO.O OOOH ONO.O H.OOH N.OOH OOH OON.NH OON.NO OO HOH OO OOOON OHO.O OON.OH OOOH Omao H.OOO poms seam Oz UMOO oHMOz bommz OOOOO OOOOO OOOOO OOOOO COO» O.Hmtoz UHHOOEOCoom OCH CH Owns OOHQOHMO> OCOComoxmxl.mua anmH 195 .H000H .030 "meHCCHBV Osmom pawns COHUMCOO emu 00 #00000 HOSCCm 50\000H .UHuom pews: COHCOCMOH .AmmdmmH .Hm> .MEH ".U.Q .HmmsmmH msoHHm> .MOHCHHm O.Cwmna ”msmuuov .CoumCHCmmzv OOHumHumpm HOHOCOCHm HOCoHuOCkuCH .pCsm humumCoz HMCOHHMCHOHCH m.Cm®5@ a “MSOUHOV 30H>mm HOOHUOHHMHO COHOMCMO .OOHumHumpm 00 Cmmnsm COHCHEOQ0 .HmwommH mooHHm> .MOHCHHm OOHumHumpm HOHsuHCOHume mo CHumHHCm OHHOHMOCO .OOHpmHumum wo smwuom COHCHEoom 50 H 0 0.00 0000 H00.0 v.0H 0N0.0H 0N0.0 NH.N 005Hv 5.0MH 0.000 500H 00 H 0 H.m0 0050 MN0.0 5.5m 0mm.0N mmm.0 v0.H 50000 N.OOH 0.500 000H 00 H 0 H.Om 00H0 000.0 5.NN NHO.5H 0m0.0 00.H 00000 H.5MH 0.00H 000H #0 H 0 0.HH 0500 500.0 0.0H 0N5.NN HM0.0 05.H 005Hm 0.00H 0.00H v00H m0 0 0 5.0 0vm0 005.0 0.00 000.00 0N0.0 00.H 00000 0.5MH 5.000 m00H N0 0 0 5.H 000v 000.0 0.00 000.0N 0N0.0 «0.H 00000 0.00H 0.v0H NO0H H0 0 0 0.H 0MHO 500.0 0.0H 000.0N 000.0 H0.H 00000 0.50H 0.00H HO0H 00 0 0 0.5 0000 000.0 0.0m 05m.ON 000.H 50.H H0000 5.0HH 0.NOH 000H 00 0 0 5.5 5Hv0 5H0.0 0.5H 550.0H 000.H m0.H 000mm 0.NHH 0.00H 000H 00 0 0 m.0H 0000 005.0 m.5H 550.0N 5mo.H mv.H 00000 0.0HH 0.00H 000H 50 0 0 5.NH 00H0 505.0 0.5H 0H5.HN 0H0.H 00.H O5NHN 0.0NH 0.00H 500H 00 0 0 v.0 H00v dm0.0 0.0m 0v0.NN Nv0.H Hm.H mmHom N.5HH m.NOH 000H 00 0 0 V.H H000 V00.0 0.00 05H.NN 000.H 00.H 0000H 0.00H 5.00H 000H O0 0 0 0.0 0Nv0 500.0 m.NH H00.0N 000.H HN.H V000H 0.0HH 0.00H «00H m0 0 0 N.m H050 MM5.0 5.MN OO0.0M 000.H 0H.H @000H 5.0MH 0.55H 000H N0 0 0 0.0 5mm0 HH0.0 5.0m 050.0N 000.H 0H.0 N500H 0.00H 0.m5H 000H H0 0 0 0.0 00v0 0H0.0 5.HN 050.MN m00.0 00.0 v05VH 0.00H N.55H HO0H 00 0 0 0.0 0va 050.0 0:0H 000.50 000.0 00.0 000NH 0.00H 0.00H 000H 0v 0 H 0.0 Mva H05.0 0.NH 0N0.0N 500.0 00.0 0v0HH 0.HNH O.NON 0O0H 00 0 H 0.0 0000 005.0 0.0H MHv.0N 000.0 00.0 050HH H.00H 0H.0N 0¢0H 5w 0 H 0.0 N0m0 000.0 5.0H 000.0H 000.0 H5.0 V000 0.00 v.00H 5v0H 0w 0 H 0.0 00v0 Hmm.o 0.0H H00.0H 000.0 00.0 0000 0.00 0.HOH 000H 9 000 9000 HQH< 00002 09000 H0 00 £00 0203 0» 0000 0300 MOON OOOOHHOOOIIN "e OHQHOH. 196 Table B:l.——Formulae Used to Calculate the Values of the Exogenous Variables for Forecasting Purposes.a Coefficients, (Standard Errors), Variable and Variables R NUK = 27.896 + 0.243 NUK l + 0.204 T 0.93 (8.452) (0.230) (0.064) PUK = 4.004 — 0.063 PUK_1 + 1.783 T 0.12 (73.898) (0.568) (2.067) NEEC = 49.920 + 0.306 NEEC_ »+ 1.145 T 0.98 (19.153) (0.246) (0.376) PEEC = —25.975 - 0.295 PEEC_ + 0.974 T 0.81 (6.676) (0.226) (0.188) NJAP = 13.545 + 0.662 NJAP_ + 0.311 T 1.00 (1.961) (0.068) (0.075) PJAP = 1.089 + 0.510 PJAP_ — 0.008 T 0.31 (0.500) (0.180) - (0.009) POTH = -5360.26 + 0.46 POTH_l + 611.47 T 0.83 (12281.71) (0.20) (370.23) WFM = —0.56 + 0.74 WFM_ + 0.02 T 0.99 (0 54) (0.24) (0.02) N = —2.36 + 0.59 N_ + 0.16 T 1.00 (1.20) (0.18) (0.07) p = 3.08 + 0.07 p_ + 0.27 T 0.14 (9.90) (0.24) (0.19) aVariables and units as defined in Chapter IV.