CWB & the government guarantees

[chaffmeister]

I’m hearing that some farmers are getting concerned about the impact of the global credit crisis on Western Canadian grain sales. In a nutshell, some single deskers are saying that voting for choice means getting rid of the security that the CWB’s government guarantee provides - and why would you do anything to take that away at a time like this?

Let’s clarify some things.


From the CWB website (paraphrased)
http://www.cwb.ca/public/en/hot/trade/issues/

There are three federal government guarantees currently provided to western Canadian farmers through the CWB:

1. The initial payment guarantee: if the final sales return turns out to be below the initial payment, the government will cover the shortfall.

2. The borrowing guarantee: this allows the CWB to borrow money at government rates.

3. The credit sales guarantee: the federal government guarantees wheat and barley export sales that are made on credit, protecting farmers from repayment defaults.


The first two have absolutely nothing to do with credit risk and do nothing to protect farmers from potential international defaults. The third only applies to credit sales made under two seldom-used government programs.


From the CWB’s 2006-07 Annual Report:

Page 62: “The Corporation (CWB) is exposed to credit risk on non-guaranteed credit sales accounts receivable, as well as credit risk on investments and over-the-counter derivative transactions used to manage market risks.”

Page 62: “The CWB sells grain under two government-guaranteed export credit programs: the CGSP (Credit Grain Sales Program) and the ACF (Agri-Food Credit Facility). Under the ACF, the CWB assumes a portion of the credit risk.”


So the only government guarantee is on sales made in two hardly-used programs. Actually, I don’t think the CGSP is even used anymore (there is nothing “current” in the Annual report) and the ACF is used little ($58.6 million “current” in the Annual Report).

The vast majority of CWB sales are of the “non-guaranteed credit sales” type. Typically, vessels are not released until the buyer comes up with an irrevocable letter of credit – just the same as the non-CWB trade.

<b>Don’t be fooled into thinking that the CWB is some sort of commercial sanctuary in these times of tight credit. Cuz its not.</b>

In fact, quite the opposite. If someone defaults on Viterra or Cargill, those companies take the hit – not farmers. If someone defaults on the CWB (on a non-guaranteed sale), the CWB takes the hit – right out of the pool accounts. Gee, I guess that means you take the hit.

[agstar77]

Don't be fooled if someone defaults to Cargill or Viterra , Farmers will take the hit!

[chaffmeister]

How so?

When was the last time you got a bill from a grain company for:

1. An offshore buyer defaulting on a sale
2. Demurrage on a vessel
3. Bad trades - sold too cheap
4. Oops - no FX hedge
5. Big oops - long ocean freight at $80/tonne and now its $15/tonne.

At the CWB, every one of these would mean you pay right out of the pool accounts. At commercial grain companies, they do their utmost to avoid these because it hurts. They can't charge you for incompetence, bad management or simple bad luck. It's called competition.

[agstar77]

They will raise basis to spread the risk , if you think you will not be affected you are not living in the real world. If they don't they won't be in business.

[chaffmeister]

I used to be one of those guys setting the basis.

Not once was I ever told to widen the basis because we just took a hit somewhere. Even if I was the one who made a dumb trade, I couldn't change my basis on future business to compensate. I just had to work harder to get it back by being smarter and trading better.

Widening the basis on future business to counter a loss on past business simply puts you out of the market (uncompetitive) which leads to handling less grain (because your price is worse than the other guy's).

A business heavily burdened with fixed costs can't afford to handle less.

In your world, there wouldn't be any business failures - or a need for CGC bonding. Companies finding themselves on the wrong side of a bad trade would simply charge farmers for their mistakes.

Oh yeah - that's what the CWB does. As you're a staunch CWB supporter, I can see why you're confused.

Welcome to the real world of competition.

[charliep]

Perhaps a point to be made is that open market prices/basis has to be competitive with the competition to keep deliveries flowing. My observation over time is that grain companies observe each other pain at certain times and can be extra competitive on things like basis (particularly when they have needs for product) to capture market share.

I also note that CWB basis also reflects risk/previous hedging strategies - the CWB has the ability to widen this basis outside world of competition. Perhaps this makes the CWB no different than a grain company.

[chaffmeister]

Perhaps a topic for a different thread, but what goes into the CWB basis is worthy of analysis.

PPOs are "back-stopped" by the Contingency Fund - that was the purpose of the fund in the first place.

But the fund has been "populated" by interest revenue that used to go into the pools.

Starting at zero at the beginning of 01-02, the Contingency Fund had a balance of $9.226 million at the end of 06-07.

From the pool accounts (interest): plus $17.137 million.

Interest earned within the fund: plus $3.913 million.

From PPO accounts: minus $11.824 million.


Without the interest revenue taken from the pool accounts, the Contingency Fund would be about $12 million in the hole at the end of 06-07.

On their own, the PPOs lose money. They're not sustainable. They're either mismanaged or poorly designed. Take your pick.


Questions we need to ask:

Since the CWB subsidizes the Contingency Fund with interest revenue that should go to the pool accounts, are the PPO prices/discounts subsidized as well?

If there are losses in the PPO such that the Contingency Fund goes in the red, would PPO prices & discounts be set in a way so that the CWB can "repopulate" the Contingency Fund?

Using Agstar's theory of padding the basis (lowering the price to farmers) to cover losses and charlie's thoughts that the CWB operates in a competitive vacuum (so it can get away with it), the answer would be "yes".

Unfortunately.

[GrainBeetle]

Chaff:

How is the campaign going? Do you think "your candidate" will win? Have you heard from Franny lately?

[furrowtickler]

With CWB grains there is no other option to basis levels, Canola today, march basis - Cargil $50, NWT(Unity) is at $16. It is called competition and freedom to sell to the highest bidder, usually when someone is short on a contract.

[Fransisco]

Sounds like you've been missing me. I'm touched.