Contingency fund deficit picture “distorted”: CWB

“Selective use” of figures from the Canadian Wheat Board’s recent annual report has misled the public about the board’s financial performance for Prairie farmers, the board’s CEO said Tuesday.

While not naming any person or group, Ian White said in a release that “certain individuals and groups have made selective use of figures from the CWB annual report to publicize misleading information about CWB financial performance for western Canadian producers,” some of which is “untrue and damaging to the commercial reputation of this organization.”

For example, he said, “it is not true that a $130 million loss exists that has been repaid directly from farmers’ pockets. This is a distortion of the impact of losses over the past two years in the CWB’s producer payment option (PPO) programs.”

While not named in White’s statement, Agriculture Minister Gerry Ritz, in calling last week for a federal audit of the CWB, claimed that “despite record prices in the marketplace, the CWB lost nearly $130 million in farmers’ money over the past two years. That’s money that comes directly out of farmers’ pockets.”

The losses to which Ritz refers are listed in the CWB’s 2007-08 annual report as an $89.51 million loss in fiscal 2008 and a $39.93 million loss in fiscal 2007 on the operations of the CWB’s Fixed Price Contract (FPC) program, for a total of $129.44 million.

But Prairie grain growers who took part in the PPO programs “received exactly the amount they contracted,” White said.

Program losses were instead sustained by a contingency fund, resulting in a $28.9 million fund deficit as of July 31 last year, White said.

“The fund balance fluctuates each year, depending on market conditions,” the CWB said. “For example, in 2005, the programs had generated a surplus above $50 million, which was the fund’s maximum limit at that time.”

The contingency fund was set up in 2000-01 to manage risks associated with PPOs such as the FPC, the Basis Price Contract, FlexPro and the Early Payment Option, and to deal with market-related “contingencies” that occur in the course of operating the PPO programs.

The fund, between 2001 and 2007, posted surpluses ranging from as low as $345,000 in 2001 to as high as $48.6 million in 2005, when the actual surplus resulting from PPO risk-hedging wound up above the federally-legislated fund cap of $50 million, the CWB said.

That in turn led to a $7.5 million transfer into the CWB’s pool accounts, and led the government to increase the fund cap to $60 million, the board said.

Surplus earnings from risk-hedging activities are deposited into the fund and become a cushion against potential hedging losses in other years. For example, when a producer locks in a fixed price under the PPOs, the CWB takes an equivalent futures position to hedge that risk, which it later buys back.

“Sometimes this hedging results in earnings for the fund and sometimes it entails losses,” the CWB said, and in early 2008, “unprecedented market volatility” rendered the CWB’s hedging strategy ineffective and the resulting program losses put the contingency fund into deficit.

“Corrective action” followed to resolve the issues with the CWB’s risk-management approach, the board said, and it reviewed and revised its strategy starting in February last year.

The report from a risk management and pricing review by Calgary commodity market research firm Gibson Capital “was shared with the federal government at the end of 2008,” the CWB said.

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