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 last week, 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 – charges Hill said are false.
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.
“This was not an easy decision,” Hill said.
“INTEND TO REPLACE”
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.”
The repayment will be in a different crop year, but so too were the credit sales that earned the interest in the first place.
There’s no restriction on how far the fund can go into the red, so why borrow $18 million from the pools? 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 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, which allows farmers to lock in prices outside the pools, while not eroding the value of single-desk selling.
“The CWB can’t hedge the basis (difference between cash and futures prices) so that’s what the contingency fund is for,” he said. Ironically the run-up in grain prices that resulted in farmers earning record pooled returns in 2007-08 contributed to the contingency fund deficit.
“That’s usually how the basis works,” Hill said. “In a falling market, when you have a hedge on in advance, you always make money.”
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.
Allegations that the CWB has lost farmers’ money are incorrect, according to Hill, 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.
For three-times-daily market reports from Don Bousquet and RNI, visit “ICE Futures Canada updates” at www.manitobacooperator.ca
Grain and oilseed f u ture s at ICE Futures Canada in Winnipeg closed the week ended Feb. 20 lower. The markets were undermined by the dismal economic outlook, weakness in the U. S. futures markets and good levels of farmer selling. Canola posted moderate losses, but actually held up quite well in the face of the large declines in the U. S. markets. Pricing of sales to China and talk of Pakistan being interested in canola helped to keep the canola losses much smaller than the U. S. market. Exporters and crushers were the best buyers while speculators and elevator companies were the biggest sellers. Cash bids across the Prairies actually held up quite well as falling futures were offset by firmness in basis levels. Western barley posted small losses as weakness in U. S. corn was not as big as U. S. soybean losses. Also, a slower pace to farmer selling of barley than in January helped to limit the decline. End-user demand gave support.
Chicago soybean and corn futures posted losses as a strong U. S. dollar weighed on values. Soybeans were undermined by the arrival of beneficial moisture for the Argentine soybean crop. While things have improved for the crop, drought has definitely cut production. The increasingly gloomy U. S. and global economies also weighed on markets, particularly soybeans. Export demand for U. S. beans remained strong, but the fear that demand will fade as the world economy softens pressured the bean market down. U. S. corn losses were much smaller than soybeans. The weakness in soybeans, the small U. S. cattle herd, falling ethanol demand and the overall slow export pace for corn weighed on values. However, keeping the corn losses small was the lack of farmer selling and ideas that corn has already seen the bulk of its decline.
U. S. wheat futures saw moderate losses as the weakness in export demand undermined the market. More large sales of non-U. S. wheat in the export market prompted ideas that U. S. wheat is still overvalued. Limiting the price slide were the concerns about crop problems for both the Chinese and the U. S. winter wheat crops. With global wheat production falling, the world does not have much of a cushion to protect it from a wheat crop failure.
GOT ANY CANOLA?
There does seem to be a building tightness in supply in the canola market. Much of the available supply is on-farm while supplies at the West Coast are below the levels needed to meet the record canola export demand in February and March. This has prompted grain companies to aggressively place premiums on canola in the country in order to attract supply out of farmers’ hands. This situation is likely to continue well into spring and should offer producers reasonably strong cash prices into the April period.
Cash grain traders say part of the problem for the grain companies is competition from the Canadian Wheat Board for rail cars, as CWB wheat sales programs are increasing and putting some strain on the transportation system, despite the fact that demand for rail space is slow due to the poor economy.
In spite of the signing of the U. S. economic stimulus package by President Barack Obama last week, the mood toward the global economic outlook turned increasingly bearish and economic doomsday theories once again appeared to dominate the global economic situation. As we have never really seen this type of financial turmoil in the past, no one can really know who will be correct in their forecasts for the global economy.
The negative case suggests that the U. S. economic stimulus is still not big enough to get the economy going and that attitude is what drove down the stock market to near 11-year lows and caused crude oil to drop 10 per cent. Another part of the negative case notes that, to date, the U. S. government has spent over US$9 trillion to solve the problems in an economy whose annual gross national product in total is about US$13 trillion. Ultimately, the stimulus will fail, say the naysayers, and the U. S. will be harnessed with a huge debt that will drag the U. S. economy and the U. S. dollar lower, with little chance of significant recovery for years, as money will be needed to pay off the debt.
The positive case is a bit more simplistic. It says that the stimulus works and Americans become more confident and start buying things again and the booming economy pays enough taxes to pay off the U. S. debt. This does have a fairy-tale glow to it… but it might work.
However, if the negative case proves true, what will this mean for grains? We do know that even in very bad times, the two things that households don’t cut back on are food and products to maintain health. So that demand should remain strong, although that demand is likely to shift away from meat and more into grains.
Something else that the negative case suggests is that within one to two years, we will see a return of aggressive inflation, which always helps out grain prices. It also suggests there will be a collapse of the U. S. dollar as speculators flee the U. S. dollar and its treasury bills as the economy spirals downward. A falling U. S. dollar also supports grain prices.
So where will the global economic strength be? Judging by the current situation, China looks like it will be the global economic winner. Even now its growth is expected to be five per cent annually. Demand from China has started to lift ocean freight rates and China is acquiring stable supplies of energy. China is also the only place in the world where the credit markets are expanding rather than contracting.
With Chinese food demand expected to increase, this also suggests that grain demand will be brisk in the future, as China has almost maxed out its ability to produce more food.
Regardless of whether the negative or the positive outlook prevails in global finances, the grain and oilseed markets are likely to outperform the rest of the global market. I really do feel agriculture and its supporting services will be the place to be in the coming years.
– Don Bousquet is a well-known market analyst
and president of Resource News International (RNI), a Winnipeg company specializing in grain and commodity market reporting.