News that Prairie farmers earned a record $7.2 billion through the Canadian Wheat Board last year was buried last week beneath allegations that the board had mismanaged the Producer Payments Options program (PPO).
Conservative MP David Anderson charged the board lost $130 million of farmers’ money, an allegation CWB chair Larry Hill says is untrue and unfairly impugns the board’s reputation.
“We don’t want customers thinking we’re doing things that aren’t proper,” Hill said from his Swift Current-area farm Feb. 13, because it could cost farmers money. “I am disappointed that we can’t separate the business from politics.”
In turbulent economic times world businesses are seeking to partner with the CWB because of its solid reputation and stability. “That’s a very important part of the wheat board’s capital and ability to add value to farmers.”
In a news releasen Anderson “expressed outrage that the CWB lost $130 million of farmers’ money… (and) is playing fast and loose with farmers’ money.” The figure is based on contingency fund deficits in 2007-08 ($89.5 million) and 2006-07 ($39.9 million). The fund is used to underwrite the PPOs farmers use to price CWB grains outside the pools. It’s designed to break even over time but can have surpluses or deficits.
CWB minister Gerry Ritz also criticized the CWB while tabling the CWB’s annual report in the House of Commons.
“Clearly, the board has not learned from these mistakes and has compounded the problem, continuing on with the same risk management practices,” Ritz said.
The Grain Growers of Canada is calling for an independent review of the CWB’s risk management practices.
Hill said contingency fund losses have cost farmers $18 million and only temporarily. The money – interest earnings taken from the pool accounts, (not earnings from grain sales) – was used to reduce the deficit, currently at $28.9 million. The money will be repaid to the pools when the contingency fund regains a surplus, he said.
“Farmers have not lost $130 million due to contingency fund losses,” Hill said. “That is just not correct. This is a fund balance that goes up and down over time and is designed to be revenue neutral.”
Farmers who used the PPOs also didn’t lose money and received the prices they locked in.
The CWB is unhappy that it had to borrow from the pools as the pools are not to be put at risk by the PPOs, said spokeswoman Maureen Fitzhenry.
That $18 million is equivalent to two cents a bushel on wheat marketed last crop year or one-quarter of one per cent of the total revenue the CWB returned to farmers.
Anderson accused the CWB of trying to hide the figures.
“There’s a full accounting of that in the financial statement,” Hill countered. “It’s all there (on pages 78, 91 and 92 of the CWB’s annual report available at www.cwb.ca).Nothing is being hidden.”
The contingency fund recorded a net deficit of $86.4 million when the 2007-08 crop year ended last July 31. The CWB might not have borrowed money from the pool accounts at all had the federal government approved the CWB’s request to increase the current $60 million fund cap to $100 million.
In 2005, the fund exceeded the cap and the CWB was forced to transfer $7.5 million to the pool accounts, which has now been clawed back.
Unprecedented market volatility caused the fund deficit, Hill said.
“What happens is we cannot hedge the basis and the basis goes up and down,” Hill said. “In 2007-08 the volatility had a huge disconnect between the cash and the futures. That was the key thing.”
The Western Canadian Wheat Growers Association, which, like the federal government wants to kill single-desk selling, accused the CWB of “being asleep at the switch.”
Fargo-North Dakota-based market analyst Mike Krueger told the Manitoba Special Crops Symposium last week in Winnipeg when prices peaked the basis (difference between the elevator and futures price) for spring wheat was $4 to $5 over the futures price.
“It was stupid crazy for a period of six to eight weeks there,” he said.
“The margin requirements for positions in these markets were incredibly high – $10,000 for a spring wheat contract.”
Krueger said just one small elevator he worked with had more than $35 million out in margin calls.
Several large American ethanol plants went bankrupt and the North Dakota Mill and Elevator lost five years of profits by not properly managing the volatility.
During those huge market swings the CWB reviewed and revised its risk management strategy. A consultant the CWB later hired approved them, Hill said. Still, it’s impossible to eliminate all risk and nobody can predict the future.
“That’s why this is called a contingency fund,” he said. “It’s for unforeseen situations.”
The real story, Hill maintains, is pool returns last crop year were up 57 per cent. Wheat revenue was up 47 per cent and durum and designated barley returns went up 94 per cent.
The CWB beat its competitors’ returns on wheat and durum by $13.81 and $48.84 a tonne, respectively. It exceeded the competition in designated barley by $29.47 a tonne.
Still, Anderson said the pool returns were much lower than the peak prices. Very little grain was sold at those prices, Hill said. That’s why the price was high. The CWB sold more than 21 million tonnes of grain last crop year and it couldn’t all be done the day prices peaked.
“I think the proof is in the bank balance,” Hill said. “Producers got very good cheques for their crop.” [email protected]