The Rise and Fall of United Grain Growers: Cooperatives, Market Regulation, and Free Enterprise

by Paul D Earl

For much of the twentieth century, United Grain Growers was one of the major forces in Canadian agriculture. Founded in 1906, for much of its history UGG worked to give western farmers a “third way” between the competing poles of cooperatives like the Saskatchewan Wheat Pool and the private sector. At its peak, more than 800 UGG elevators dotted the Canadian prairies and the company had become a part of western Canada’s cultural psyche. By 2001, then known as Agricore United, it was the largest grain company on the Prairies. The UGG’s history illuminates many of the intense debates over policy and philosophy that dominated the grain industry. After the Second World War, it would be a key player as the western Canadian grain industry expanded into new international markets. Through the rest of the century, it played an important role in resolving major disputes over regulation and grain transportation policy. Despite its many innovations, the company’s final decade and eventual demise illustrated the tensions at the heart of the grain industry. In 1997, to finance the rebuilding of its grain elevator network, UGG went public and entered equity markets. While successful at first, this strategy also weakened the company’s cooperative structure. In 2007, it was purchased by Saskatchewan Pool in a hostile takeover. The disappearance of Agricore United marked the end of a century of voluntary farmer-control of the grain business in western Canada. Paul Earl’s history reveals UGG’s central role in the growth and transformation of the western grain industry at a critical period. With meticulous research supplemented by interviews with many of the key players, he also delves into the details and the debates over the company’s demise.

Genres: History

368 pages, Paperback

Published October 18, 2019

Reviews

[Taveri · Rating 4 out of 5]

"The Rise and Fall of the United Grain Growers" was a fascinating well written, well researched account in three parts is probably mainly of interest to Canadians and mostly western Canadians. Although there are lessons for other nations wanting to subsidize industries. The first part is around the price of wheat and trying to control supply in the misplaced hope of raising the price; the second part revolves around the Crow’s Nest Pass Rate and how it held back efficiency in Canada’s grain marketing & shipping, and the last part on the collapse of the United Grain Growers. The book goes into quite a bit of detail on the individuals involved, which this review refrains from mentioning.

There was a rise and fall of the four prairie grain cooperatives: Alberta Wheat Pool, Saskatchewan Wheat Pool and United Grain Growers (UGG). The book is mostly about the UGG but the fates of the four were interwoven. It came down to those who favoured management by state and cooperative organizations wanting market forces to be tempered by regulation and those who favoured free enterprise with a minimum of regulation. Was it true that financial of shareholders would trump all other interests? Why was it that other factors could not carry more weight and were not the Company’s unique features of value and preserving them override short-term monetary interests (Page xi)? The two economic philosophies were well thought out and very complete with a blend of extremism and moderation with blindness and insight.

The book explores these issues in a case study fashion trying to make sense of the intricacies and complexities of the growing and shipping grain to market. The Company’s story stands a case study of some of the issues now faced by free enterprise economies throughout the world (Page xiv). I have farmed wheat (and have friends that still do) and also worked for one of the railways decades ago, when there was a move to unit trains in all commodities. So I was familiar with the issues but not the extent revealed into this well researched book.

Part I > The origin of the wheat pools stemmed from farmers being dissatisfied with the way that free enterprise operated a century ago (1906) and their sense that the commercial enterprises responsible for the handling, transportation and marketing of grain were not operating in their interests. A farmers’ movement was for doing the things a farmer wishes to have done to improve his lot.

In Canada the industry became highly regulated and centralized, in contrast to the American, which was more governed by market forces. Both the United States and Australia posed stiff competition for immigrants. From 1879 to 1899 a mere 1.5 million arrived in Canada compared with 2.5 million going to Australia and 5.5 million entering the United States. Production expanded accordingly, from about 6 million bushels at the start of the period to 25 million by 1900 (page 14). The 1901 crop turned out a record 63 million bushels. It was quite beyond the capabilities of the transportation system to move it all to market. Much of the crop was lost to spoilage (page 16). 1902 was another bumper crop and the CPR (Canadian Pacific Railway) was ignoring the Manitoba Grain Act legislation regarding allocating railway cars. In addition farmers thought that speculators were manipulating market prices. These aspects of free enterprise were seen as abuses of the system where government tariffs permitted injustices to continue (page 19).

Due to World War I both the US and Canada were prepared to control wheat prices to be sure the farmers received a fair income. It was thought that setting a price for the rest of the world to purchase they could optimize sales and revenues. For instance in 1929 there was talk of $2 (a bushel) wheat. This optimism created an unduly large price spread between Winnipeg and Liverpool, causing British millers to cut back purchases of Canadian wheat. The cutback was attributed to low prices for Argentinian wheat, which was in good supply due to a large crop in that country, and there was belief the price would rally, but it declined steadily averaging only 95 cents a bushel (page 46). Wheat became involved in a complex system, in which gambling is a prominent feature, over the difference between a farmer holding wheat for a price increase and a speculator holding a short position. To the farmers the wheat was real and had been produced by their sweat (page 48).
The spread between Argentinian and Canadian wheat widened considerably. They both competed in the British market, with the Canadian product normally commanding a premium of two to four cents per bushel. However in 1934 the spread widened to as much as 12 cents. Canada’s share of world wheat trade dropped from 35 to 31%, even though its production remained unchanged, while Argentinian share rose from 27 to 34%. It seemed the program cost Canada in terms of a decreased market share (page 52). Canada ended up with a surplus of wheat, which would depress prices the following year. Seems like market forces at work: price goes up, sales go down (for Canada); prices lower in Argentina, sales go up.
A 1938 report endorsed the open market as the more effective way to market grain. However it was characterized as “… not a system of intelligent merchandizing; it is merely an example of irresponsible mob blundering with a tendency toward instability” (page 59). Individual farmers were quoted, in the Winnipeg Free Press, as “wanting the freedom to sell their wheat as they please and a chance to guess the markets” (page 61).
World production was increasing and the world would soon experience a surplus of wheat. Prices declined to 60 cents a bushel. [Similar to recent world oil prices falling as fracking yielded more production.] The crisis in farm income had not come to an end and some protections would be needed (page 62). Support for public sector initiatives was strong in the postwar period, including support for centralized marketing of western gain. Prices did rise and there was expectation that Britain would recognize, and pay for, any price changes proved to be naïve. Britain ended up getting Canadian wheat at bargain prices (page 64).
The flood of grain to market at harvest was accompanied by the activities of speculators who were able, farmers thought, to depress the price by flooding the market with sales on futures contracts. It was believed these ‘wind bushels’ or ‘paper wheat’ abrogated the laws of supply and demand (page 73). Transportation was to become the major policy issue for the remainder of the 20th century.

Part II Addresses the degree to which Market Forces should be allowed to govern national economies. The key issues in the transportation debate varied over time; whereas the debate over marketing centred on the Canadian Wheat Board (CWB). In 1897, the CPR and the government of Canada entered the Crow’s Nest Pass Agreement. The CPR would receive $11,000 per mile of new line built (up to $3.6 million) to access minerals being mined in the Kootenay area of BC in exchange for guaranteeing a low rate to move grain from the prairies to ports. The railways were also to move settler’s effects at a discounted rate (to encourage settling the prairies) – goods that might be needed to construct and furnish a home and to start farming (pages 86-87). The agreement was taken to mean “in perpetuity” which led to grief in later decades for the railway and the farmers. The economic boom at the time perhaps led the CPR to infer rates would continue to fall and a few cents drop did not look onerous.

The Crow Rates took on mythic proportions in the minds of many farmers and politicians in the west. “There was a long-standing belief that the Crow was sacred and whoever laid his hands upon the Ark of the Covenant of 1897 would be struck dead politically.” The devastation of the Depression and the Second World War eclipsed any concern about the Crow for two decades (page 88). The predominant view was that if the tolls were not compensatory, then a subsidy should be paid to the railways. There were other transportation ‘subsidies’ such as toll-free canals in Central Canada, The Maritime Freight Rates Act in the Atlantic Region and the competitive transcontinental railway rates to the Pacific coast.

The railways claimed that hauling grain at 1899 rates had become a losing proposition. They had emerged from the war with urgent need of renewal of plant and equipment that could not be met without an increase in revenue. In addition truck competition was taking away profitable business (page 90). A counter argument by the farmers was that the producers of western Canada were persuaded by the government and railways to undertake the growing of grain for export, all the more prevailing when farmers were struggling with low prices and restricted movement (page 91).
The CWB philosophy of ‘holding out for the very last cent’ was not helpful - “if we can’t get the right price now, they will come to us one of these days.” Well intentioned though the policy was, withholding grain from the market actually lowered returns for farmers, as it kept revenue away from farmers and led to accumulated stocks that kept the prices low in subsequent years. That led to more storage facilities being built and country elevator storage charges being raised more quickly than handling tariffs. Storage costs were less obvious to farmers than handling tariffs.
Farmers had the choice of which grain elevator they could take their grain. Allocation of railway cars was an issue – the CWB formula was never fully understood and the recommendation to allocate shipping to different elevator companies be on the basis of current business was applied. That worked reasonably well until the huge CWB sales to the USSR in 1963 and 1965. The matter of car allocation and the Wheat Boards control of transportation continued to be contentious issue until beyond the end of the century (page 96). A period of stagnation that lasted decades began that saw decline in grain elevator companies.
Low use branch lines had to be abandoned if the railways were to move grain efficiently and economically. It didn’t make sense to send a locomotive to an isolated grain elevator to leave one or two grain cars and then return for them another time when that same locomotive could position and move fifty cars for the same cost at a more central well designed location. One room schools consolidated into larger centrally located facilities. Post offices were disappearing. Small towns began to shrink with little left behind besides obsolescent grain elevators and underused railway branch lines (page 108).
Why didn’t the industry modernize? Existing elevators were nearing their economic life; technology was changing; roads and highways were being built; railways were switching to diesel-electric from steam locomotives; rail cars were resigned to be more efficient; farming was being mechanized; all indicating larger grain elevators built along main railway lines using modern hopper cars would have reduced costs dramatically. If a company tried to replace its aging elevators with a large centralized facility it faced a loss of revenue as farmers didn’t want the extra expense of taking their grain further. In theory the grain companies could have got the railways to offer reduced shipping rates through realization for more efficiencies but the [Crow] rates were too low already. Without access to those savings companies were not able to offer incentives to farmers to haul their grain any extra distance (page 109).
The rail companies had come to view grain traffic as a burden. Farmers clung to local facilities for lack of economic incentives and out of loyalty to their local communities and a strong sense of ownership of their grain elevators (page 111).
As of 1970 Company elevators, configured for horses and wagons (not modern trucks) were past due retirement. Companies began to switch elevators, so one company owned all four in one community rather than four companies owning one each (page 121). Unless rates were going to change to reflect actual costs of transportation a renewed more efficient system was not going to emerge (page 127). Through the upcoming decades, changes in the federal government led to starts and stops towards improving the system. Efforts to obtain consensus from the stakeholders was labourious and time consuming, sometimes dissolving shortly after agreement reached. Opponents, both within and outside government tried to delay, change, and oppose the legislation. For a bill’s first reading the opposition Conservatives refused to show up to vote. The Pools, having won the battle over method of payment, immediately lobbied to have the variable rates removed. Liberal MPs wondered why if the legislation was good for the west why were the Pools opposing it? The Western Grain Transportation Act (WGTA) went into effect on August first, 1984. Although it was the end of the Crow it did not mean the end of regulation. It did end the railways’ losses on grain (page 138).
With half the cost of transporting, storing and handling grain from farm to ship devoted to the rail haul, it made sense to focus on the rail portion of the supply chain to maximize efficiency. Around 1970 the average country elevator was handling 4,000 tonnes annually (80 tonnes per week, the carrying capacity of one new hopper car). The average grain elevator would take two years to fill 100 cars of a unit train. By 1990 the average manager was handling 4 hopper cars per week (360 tonnes). Facilities in towns did not have rail sidings for even ten cars never mind 100. A hypothetical comparison, 300 country elevators would have been sufficient to handle 30 million tonnes annually if each shipped 2000 tonnes weekly. This was the amount of grain shipments necessary to achieve freight rate savings. It would take fifty years to reach this at 3% consolidation annually (page 140). The three Pools and UGG were unable to respond effectively. There was a steady decline in the health of all four companies. The status quo was not sustainable. The failure of the Pools to merge at this time was seen as missed opportunity (page 141). The Companies diligently protected market shares, as they traded elevators, but barely moved towards a modern effective and efficient elevator system (page 142). By the late 1980s modest incentive rates began to come into play. There were rate reductions of $1.80 a tonne at terminals capable of loading 18 rail cars in a designated period and $1/tonne on CPR lines for elevators that could load 25,000 tonnes annually up to 125 saving if over 30,000 tonnes/annually. In 1990 a large facility was built in Olds, Alberta with a capacity for 8,000 tonnes that could handle 80,000 tonnes in a year and could load a hopper car in 8 min.