The Canadian Wheat Board, The Free Market, And Viterra's Acquisition

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 |  Includes: BHP, GLCNF, POT, VTRAF
by: Samuel Zeifman

It seems interesting that mere months after the Canadian government announced the dismantling of the Canadian Wheat Board (CWB), Viterra (NYSEARCA:VT), formally known as Saskatchewan Wheat Pool, is now in play. Glencore International Plc (OTCPK:GLCNF) has made a $5.49 billion dollar bid for the business. Viterra has a market share of 45% CEO Mayo Schmidt said in an interview on March 8. This makes them a sizable player in a politically sensitive market which was just unregulated.

This takeover comes at a very curious time. Considering that this was a regulated industry under the CWB, and the adjustments of this change haven't yet taken into full affect, combined with BHP Billiton (NYSE:BHP) failing to take over Potash Corp. (NYSE:POT) raises some questions about the timing.

This chart shows the last 5 years for Viterra:

Click to enlarge

The question that many are pondering is if this deal is in the best interests of Canada. Under the Investment Canada Act, foreign acquisitions of companies with assets over $312 million are put through the net benefits test. The Harper government blocked the BHP bid for Potash, thus I could foresee them stepping in here as well. Potash and Viterra are in sensitive industries politically and one could argue that grain is even more sensitive than potash.

The Canadian government will now find themselves in a political bedeviling situation. If they do not block this deal under the net benefits test to Canada, it could be a costly political mistake for the conservative party. It is under the conservative initiative in their majority government to dismantle the CWB. The opposition complained and CWB has taken its issue to the courts.

If inflation or worse food prices increase (which isn't included in the CPI, along with fuel), Canadians will start to add up unnecessary spending on jets and submarines on conservative initiatives. Now the conservatives will have banned the wheat board and allowed a foreign company to gain control of this once regulated market while doing nothing to stop it, but stopping BHP a year ago over Potash.

If the conservatives block the deal, they run the risk that the international business market, views Canada as having a protectionist government. Foreign companies may feel that the increased risks of coming into Canada outweigh the benefits and that is a costly political image to be faced with.

The conservatives will probably do nothing because of the precarious situation that they are in. Their argument for dismantling the CWB was that it would be good for farmers. If they really believe in that premise than a change of ownership in Viterra should have no affect on prices or the farmer. If they block this bid, the argument could be made that the original initiative to dismantle the CWB was a mistake, or else no government intervention would be necessary.

It seems almost ironic that a government should push for deregulation of a market and then regulate a foreign take-over of that market months later. That is why this government will allow the takeover to happen in my opinion. If they don't then they must really know something about the impact in putting Canada's largest grain handler (who deregulation was customer tailored for,) into foreign control.

What the CWB guaranteed small farmers was demand. Small Canadian wheat growers didn't have to worry about finding large US customers to export their wheat/grain to. The CWB did all of that for them. By dismantling the CWB, large companies like Viterra are bound to prosper because they can negotiate lower prices and have economies of scale in their operations on the cost side.

This industry will have gone from government regulation to your biggest customer being a foreign buyer no matter what the Canadian government does or doesn't do at this point.

As an advocate for free markets, I believe this deal should go through, and the government should not get involved. However, If the government becomes worried about the loss of control of over 45% of the wheat in this country, they should have never dismantled the CWB!

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:VTRAF over the next 72 hours.