“The CWB can’t hedge the basis (difference between cash and futures prices) so that’s what the contingency fund is for.”
– Larry Hill
Canadian Wheat Board chair Larry Hill is so confident in the way the CWB managed its contingency fund and resulting deficit he’s inviting federal Auditor General Sheila Fraser and Agriculture Minister Gerry Ritz to review the books and make the findings public.
“I think the Auditor General would assure producers that everything is fine,” Hill said in an interview, adding that the CWB’s external auditors, Deloitte and Touche, gave the CWB “a clean audit statement,” last crop year.
“I think the vast majority of our directors (including those appointed by the government) are solidly behind this. I can’t say unanimous because I just can’t recall the vote.”
The CWB is under fire for ending the 2007-08 crop year with an $86.4 million deficit in the contingency fund backstopping the producer payment options (PPOs) used by farmers to price grain outside the CWB’s pool accounts.
The CWB made changes to its risk management policy a year ago at the height of grain market volatility and later brought in Gibson Capital to conduct an external risk management and pricing review.
Farm groups opposed to the CWB’s single desk marketing mandate accuse the CWB of mismanagement and futures market speculation. The CWB is also being criticized for reducing the contingency fund deficit in part by borrowing $18 million in ancillary
earnings that would normally have been distributed to farmers through the pool accounts.
The $18 million was mainly interest from credit sales made years ago. The CWB’s board has the authority to use the money how it sees fit, but traditionally it’s distributed to farmers through the pools. Had it gone to the pools it would’ve increased the return for wheat by two cents a bushel. Hill stressed none of the $18 million came from the proceeds of pooled grain sales.
When the CWB introduced PPOs in 2001 the CWB assured farmers the pools would not be put at risk.
“The pools are not put at risk here, there is no question of that and this money was always discretionary,” Hill said. “We intend to replace it when we can.”
There’s no restriction on how far the fund can go into the red, so why borrow $18 million from the pools? Hill said not doing it was an option, but in the end directors agreed reducing the deficit would send a positive signal to the business world.
“It’s hard to know exactly know how a larger deficit would be interpreted but our board of directors felt that keeping the deficit at this level was prudent,” Hill said.
Maintaining the CWB’s good reputation is important to farmers who only use the CWB’s pools and not its pricing options, he added.
The CWB does not speculate on futures markets, he said. Losses stemmed from hedging farmers’ sales under fixed price contracts. Hill said it was impossible to hedge the basis (difference between cash and futures) in the rising market through much of last year.
“In a falling market, when you have a hedge on in advance, you always make money,” he said.
That’s partly why the contingency fund surplus exceeded its $60 million cap in 2005 and the CWB was forced to transfer $7.5 million from the fund to the pool accounts. That money was taken from the 2007-08 pool accounts and used to reduce the deficit.
Hill said allegations that the CWB has lost farmers’ money are incorrect, since the fund is constantly having money added and removed. Just like a mutual fund, what’s lost or gained only becomes a fact when the fund is cashed – or, in the case of the contingency fund, it ceases to operate.
The Western Barley Growers Association (WBGA) says the contingency fund was not “actuarially sound,” which Hill also denied.
“Our board of directors is completely confident the changes that we have made (to the fund) are effective,” he said. “We have been monitoring the fund and it’s fine.”
Hill was also critical of the WBGA for issuing a news release that he says wrongly attributes $169 million loss from other revenue sources with losses in the contingency fund. The two are not connected, he said.
The CWB recorded in its annual report the $169 million loss was due to $226 million lost in discretionary commodity trading tied to marketings through the pools.
“It’s related to a pricing pace and discretionary selling, selling slightly ahead of the market at very good prices, but in a continually rising market,” he said.
“In hindsight, if you had waited a week, you would’ve made more money. It’s just an opportunity cost, not a real money loss.”
Ideally, all the grain would’ve been sold the day prices peaked, but that’s impossible since nobody knows that day until after the fact.
The CWB held a conference call Feb. 18 with farm groups, including the WBGA, to explain how it dealt with the contingency fund and answer other questions about the CWB’s annual report.
Agriculture Minister Gerry Ritz and his officials have been kept up to date throughout the process, Hill said. [email protected]