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Review Of CWB Pricing Options Warranted

For once, critics of the Canadian Wheat Board are advancing a reasonable suggestion.

The Grain Growers of Canada is calling for an independent review of risk management strategies at the CWB. Grain Growers of Canada is decidedly not a CWB supporter. However, unlike much of the anti-CWB rhetoric, their call for an independent review has merit.

The CWB lost nearly $90 million in its pricing options programs in the last crop year. While 2008 was a wild time in grain markets, the CWB also had smaller losses in previous years.

The Grain Growers correctly acknowledges that producers want a choice of pricing tools within the CWB, but they say it’s critical to identify the failures in risk management and then identify future solutions.

Producer Pricing Options (PPOs) include tools such as the Fixed Price Contract, the Basis Price Contract and the Early Payment Option. These are tools by which producers can get paid for their wheat, durum, designated barley and export feed barley without relying on the pooled prices.

In the 2007-08 crop year, some producers used PPOs to lock in wheat prices as high as $20 a bushel. The programs have become a popular way to manage risk, get paid more of your money sooner and to lock in favourable prices. Unfortunately, the extreme volatility of futures and basis values created risk management issues.

One of the PPOs, the Daily Price Contract, was discontinued at the end of 2007-08. It had additional problems because it was based on U. S. elevator prices. The CWB says those bids were dramatically out of line with pricing in the rest of the world because little grain was available for sale at U. S. elevators.

After three years of losses, the Daily Price Contract was replaced with a new program called FlexPro that offers a daily cash price for wheat. Producers must commit tonnage to the program prior to the start of a new crop year.

The CWB established a contingency fund that underwrites the risk associated with the PPOs and cash trading. While the loss in the 2007-08 crop year was nearly $90 million, the CWB made a number of adjustments to bring the contingency fund deficit down to just under $29 million. Those measures included about $20 million that was moved from the regular pool accounts into the contingency fund.

In other words, producers who didn’t use the PPOs and stayed in the CWB’s pool accounts ended up cross-subsidizing the producers using the various pricing options.

PPOs are supposed to operate independently of the pool. The CWB says it will uphold that principle by repaying the funds once the contingency fund is in a positive balance.

That, however, will happen in a subsequent crop year and the producers who lost out in 2007-08 may not be the ones who are ultimately compensated. At best, it will be rough justice.

With total sales of wheat, durum and barley at a record $7.2 billion last crop year, $20 million or even $90 million is a relatively small amount, but the numbers are still worrisome.

The CWB says it has engaged an external consultant to validate its pricing and hedging adjustments. The proposal by Grain Growers of Canada for an independent, transparent review is a superior idea.

It would be good optics for the CWB to have a qualified, independent auditor/analyst examine the issue. In fact, the best choice for maximum credibility might be the auditor general.

Kevin Hursh is a consulting agrologist and farmer based in

Saskatoon. He can be reached at [email protected]

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