A little-known and rarely publicized aspect of the Canadian Wheat Board’s business has received its 15 minutes of fame.
The board’s contingency fund, which is designed to underwrite the operations of the agency’s producer payment options (PPOs) and cash trading activities, usually attracts little attention.
That all changed when the CWB’s annual report for 2007-08 was released, showing an $89.5 million loss charged against the fund.
The board’s critics accused it of inadequate risk management.
“It appears as if the CWB was asleep at the switch and got caught on the wrong side of the markets,” said Western Canadian Wheat Growers Association vice-president Rolf Penner.
Read Also
Alta. potato farm family relish their time on TV
Chris Perry’s farm at Coaldale, Alta., is featured in a new television commercial emphasizing the Canadian content in FritoLaypotato chips.
The issue was also the subject of heated debate in the House of Commons.
The CWB attributed the loss to unpredictable and highly volatile grain markets during the year.
Futures and basis values were erratic and there was a wide disparity between U.S. futures market values and the actual prices in markets into which the CWB makes sales.
The board mitigated the loss by transferring funds from sources other than sales revenue into the contingency fund.
That included $20 million from cash trading activity, $2.1 million from interest earnings on feed barley, $7.5 million that had been paid into the contingency fund in 2005 when the fund exceeded its $60 million ceiling, and $18 million of non-sales revenue such as interest from credit sales from pool accounts.
As a result of all that, the fund ended the year with a net deficit of $28.9 million.
The board also reported $226 million in lost potential earnings due to “discretionary commodity trading activity.”
Here’s what that means.
The board’s usual pricing strategy is to make sales on a regular schedule throughout the year to reduce risk.
Sales managers have the discretion to vary from that schedule, and some did so in the fall of 2007, when prices had risen to relatively high levels.
“Like everyone else at the time, we thought these were great prices for farmers,” said CWB spokesperson Maureen Fitzhenry.
However, prices continued to rise, reaching historically high levels in January and February, and the board was unable to take full advantage of that because of the earlier sales.
The estimated foregone revenue was $226 million.
“It was a lost opportunity,” Fitzhenry acknowledged, but she said it didn’t represent an actual out-of-pocket cash loss for producers.
The only real loss was the transfer of $18 million in interest earnings from the pool account to the contingency fund.
“Yes, the fund lost money, but it’s not as if individual farmers lost money, other than the $18 million,” she said.
“None of the rest of it is money that would have gone to farmers anyway.”
She added the board will repay that amount into the pool, so in the long run there will be no direct loss to producers.
Fitzhenry said that in retrospect the agency would have done things differently, but added that it wasn’t the only one to feel the wrath of the market.
“In hindsight you can always identify things that you could have done differently,” she said.
“We were caught unawares by the change in market dynamics just like all other players were. This is not unique to the board.”
WCWGA president Kevin Bender took issue with the transfer of money from the pool accounts to the contingency fund, saying the board was improperly “redistributing wealth” among farmers by using pool revenue to, in effect, subsidize the PPOs.
The association said the 2007-08 results indicate the CWB’s risk management program is inadequate.
Fitzhenry said when the board realized what was happening last spring, it launched a review of its risk management strategy. That strategy had worked well for years but had proved incapable of dealing with the highly volatile markets that seem to have become the norm.
“This was a situation no one would ever have expected, so a new approach was needed for risk managers here and everywhere else.”
A new process was set up and an outside consultant was hired to review the new strategy and ensure it was appropriate for the times.
“So we feel a lot more confident about our ability to face the future in this new market environment,” said Fitzhenry.
