The CWB now has PROFITS and LOSSES!!!

[TOM4CWB]

Now that the contingency fund is operational, the CWB is in business to make a profit!

My experience in the grain industry has been that good risk management has been the biggest positive, or if done badly, has the most disastrous effect, on and for a marketing entity.

The biggest problem the CWB has now is risk management.

How does the CWB appropriately manage this marketing risk now?

I asked for the CWB nicely for Contingency Fund Balances for the Camrose meeting, and big surprise the CWB said they would not tell us what the contingency fund balance was. They said that we must wait till the whole marketing year is over, and then we can read about it in the Annual Report next year.

This is like me telling my bank manager to shove off, you have no right to know my assets and liabilities currently, when I apply for a bank loan!

If I refuse to divulge this information, then would the bank manager be doing due diligence if he loaned me money? I don't think so.

Tom Halpenny told us in Camrose yesterday that after I deliver a PPO contract, the CWB does not have to flatten their futures positions, but the CWB does many times hold on to these futures positions as part of their overall marketing strategy.

My questions now are:

1. If the CWB did back to back cash purchases and sales, wouldn't these transactions involve the least risk, therefore be better for the pooling system as they would avoid risk?

2. If the CWB does not take off previous futures positions that were put on to cover PPO sales, how exactly does the CWB determine when the contingency fund should take a loss, or when the pool should take a loss? How can we be sure the proper account gets the benefit or loss?

3. If the CWB would have held these futures positions that are held by PPO's anyway, then how do we really spit the two pooling and contingency fund operations?

What protocol is used to assure me that either too much or too little risk and reward is in fact appropriately designated to the contingency or the pooling account?

How can we trust the CWB when they are publicly so blatantly biased towards the pooling accounts?

Won’t the CWB simply cross transfer any surplus back over to the pooling accounts?

If the CWB really messes up, to avoid blame, won’t they just take a little money from the pooling accounts and add it back to the contingency fund?

Why should their be any problem disclosing the contingency fund balances at any time for wheat and barley, if the CWB is straight, is doing a good job, and has nothing to hide?

[Braveheart]

Tom4CWB, you have asked some very pertinent questions re the contingency fund. I don't have many answers for them though.

There would be very little risk if the CWB offset the PPO positions in a back to back fashion (except for some currency risk?).

I believe your questions should be answered by the CWB. There is no commercial sensitivity in knowing what the balances are. I think this issue should be brought to the attention of the Auditor General. I believe that office is still "negotiating", yes, negotiating, what can or should be looked at. The contingency fund, it's uses, possible cross subsidization, losses, retained profits, all should be scrutinized.

Braveheart

[bbrindle]

Excellent questions Tom4CWB. The Auditor General should definitely be examining this and making recommendations, and farmers should keep a close eye on this one. Under the regulations the contingency fund may build to $50 million.

A bit of background in case some readers may not have heard of a contingency fund:
The passing of the Act to amend the Canadian Wheat Board Act in 1998 authorized the CWB to create a contingency fund. The purpose of the contingency fund is to provide financial backing in the event of potential losses from the use of three new pricing and marketing tools provided for in the recent amendments to the Act. The regulations are very short so I've included them here:
2. (1) Subject to subsections (2) and (3), the Corporation may deduct an amount from any amount it receives in the course of its operations under the Act and credit the amount so deducted to the contingency fund established under paragraph 6(1)(c.3) of the Act, including
(a) any amount referred to in subsection 8(1) or section 33.01 of the Act;
(note: 8 deals with investment of money and payment of expenses and losses)
(b) payments received from grain sold during a pool period;
(c) interest that accrues in respect of sales of grain on credit; and
(d) gains from the activities of the Corporation under section 39.1 of the Act.
(note: 39 deals with transfer of undistributed balances such as cheques not cashed after 6 years)
(2) The Corporation may not make a deduction of an amount referred to in subsection (1) if, as a result of the deduction, a loss would be paid out of moneys provided by Parliament under subsection 7(3) of the Act.
(3) The Corporation may not deduct an amount referred to in subsection (1) and credit it to the contingency fund if, as a result of the credit, the balance of the fund would exceed $50,000,000.

Tom4CWB says the CWB indicated that farmers must wait until the whole marketing year is over, and then read about it in the Annual Report next year. Absolutely this should be clearly laid out in the Annual Report but I don't think that's enough. It must also be included in the "Financial Highlights" that farmers now receive in "Grain Matters". (I hope everyone closely examined the 1999-2000 Financial Highlights in their Jan/Feb 2001 issue of "Grain Matters".)

The contingency fund regulations were passed in February 2000 in order to backstop things like the producer pricing options. You won't get any report until you see your "Grain Matters" in Jan/Feb 2002!

There are some things I don't understand. Last year's March 2000 News Release said "A Contingency Fund will be established for the operation of the Fixed Price Contract. Farmers who use the payment options pay all costs of operating the programs." So is there a separate contingency fund for only that purpose? If there is, and if there is a "profit" in the fund in 2000- 2001 would that be owned by only those producers that used the fixed and basis contracts in 2000-01? If it was only used in that year why do farmers have to wait for the pooling accounts to close (as indicated by Mr. Ritter before the House of Commons Standing Committee")? Are there funds set up for anything else, or are there going to be? Will the day come when the CWB might have 5 or 10 different funds? Who knows?

As Tom4CWB says, "How can we be sure the proper account gets the benefit or loss?" "What protocol is used to assure me that either too much or too little risk and reward is in fact appropriately designated to the contingency or the pooling account?"

[bbrindle]

The contingency funds will have a full accounting at the end of the crop year, when all positions are finalized and known.

The goal is to have the fund backstop and account for any gain or any loss that may occur with the pricing options. The CWB takes an deduction of the risks and administration for these pricing options to ensure that the programs have no impact on the four pool accounts. Any variance, over or above actual costs, will be covered by the contingency fund. Over time, the funds are intended to be break even.

Concerning the back to back sales suggestions in this and other threads, the Board of Directors implicitly said that there must be no impact on the non-users of the programs. By specifying a specific time frame for delivery, that has the potential to impact the pool accounts. For example, if 5 million tonnes were signed up of Dec futures, representing approximatley 20% of the wheat pool, those deliveries will have an impact on the final per tonne returns on the pool account, depending on who was buying in the market, and what effect it had on the market by selling in that fashion.

The way it is structured now, it is designed to have no impact as the CWB sales plan is not affected by these pricing programs. The grain is called forward when needed to meet sales, as opposed to potentially the other way around.

Tom

[ianben]

I must admit this looks like the CWB is trying to have its cake and eat it.
How do they expect to break even over time?
How can one form of selling not effect another?
In this global market what happens anywhere in the world has an immediate effect on prices
Take that suspected case of FMD in US for example.

Regards Ian

[ianben]

ianben, there is no question that the actions of the CWB may have an impact on markets. The point is that in operating a pool account that is a result of all sales to all markets over a 12-15 month period, if the sales program gets heavily weighted in one period for example, there are high value markets that will be serviced by grain deliveries 'outside the pool', and consequently this will impact the overall pool returns.

As it stands, the CWB takes hedge positions on grain and currency to cover any fluctuations in the value a farmer locks in, but the CWB still determines who to sell to and when.

This program is geared to have a neutral impact on farmers who don't want to use them and want a pooled price.

Tom

[ianben]

Hi Tom
Still can't see how this will work.
Unless fixed prices are set to be unatractive, so have few takers, thus making breaking even easier.
Is this the way to get the best price for wheat?
With one eye always on those fixed price contracts selling when they break even!!!

Regards Ian

[charliep]

Ian

Just a note as to why farm managers would use the fixed price contracts (or a forward price contract on canola). The objective of a farm manager should be to run a long term profitable business with acceptable levels of risk in it. Most farm managers have a good handle on the cost side (how much does it cost to grow the crop)and cashflow needs (when do I need my money to pay bills/loans). Price and yield/quality are the unknowns.

Forward pricing allows a farmer to plan/manage their risk in the following areas:

1) Assuming the FPC moves to $3.75/bu for prairie spring wheat and $5.00/bu for hard red spring 13.5 % protein, can a farm manager make money based on reasonable yield and quality assumptions (this will will vary from farm to farm)? If these price cover costs plus margin/profit, then there should be incentive to lock in a price.

2) The fixed price contracts allow a farm to paid the full amount for their wheat versus an initial payment and then waiting for adjustment/interim/final payments during the next year. One of the main issues facing farmers here is getting enough crop moved in the fall to pay bills/loans.

3) Your review of the market says there is potential CWB prices/total payments will be lower than the price you are locking in. An interesting of part the contract is that it can be separated into 3 parts - basis risk (we need to do more work as to what a good basis is), currency risk (risk the loonie will start moving higher) and MGE wheat futures risk (risk wheat prices will come down).

Others thoughts?

[TOM4CWB]

Charlie,

At Camrose it was clear no one was happy with last years Fixed Price Contracts, and as the biggest user in the room certainly not me.

I work like the market maker in Winnipeg, I use it so I can experience the pain, hopefully learn something so everyone can gain!

I knew last winter that a basis under $20/t over Minneapolis was a bad deal, and would put big money into the Contingency fund.

What was the result of the program?

As the folks at Camrose said clearly, the best with 20/20 hindsite (a perfect marketing job picking the exact top of the market)a person could do would be to get the average PRO.

They were right to say that there is a big problem.

Now, with the KVD falling # problem will the CWB be able to deliver on the PRO?

This is the only possibility that could make a difference this year, if CWB and Canadian system screw ups cost more than $10.00/t, then the perfect manager might have a benefit.

But on average, which the CWB pool is supposed to be, the Fixed Price is actually about another $10/t out of kilter, which would be the perfect no cross effect pool fixed price contact equal price.

I hope you can see that I know that I will loose big money, but this is market development, and I am working to improve the CWB!

Tom Halpenny, and CWB staff know this deep down inside, but are not big enough to admit their own shortcommings.

Tom, please don't burn your bridges, you know I do have feelings, and do want the best for everyone in western Canada.

Can we try to work together Tom, and do honest soul searching to make this thing work better?

As for this years PPO contracts they are a big improvement, but because last year was so bad, I don't know how many farmers will trust the CWB enough to even try them!

Trust is what the grain business is all about, Tom, Trust and Honesty, RIGHT TOM?

[ianben]

Hi Charlie
I understand why a farmer would want a fixed price contract and payment on the day.
It is the CWB part in this which puzzles me.
If they are trying to break even on these deals how will that give farmers a better price?
Isn't the CWB always going to favor the pooling system in these deals?
Sorry this looks like a poor attempt at competeing with the open market to me.

Regards Ian

[TOM4CWB]

Ianben,

The whole purpose of an organisation like the CWB should be that they work for the farmers who want it's services.

The problem is that the CWB is fighting the farmers who are the long term viable productive progressive grain producers.

If I didn't care about my marketing, then I would be a hero in the CWB's mind essentially.

Really, this means that those farmers who are leaving farming in 5-10 years are the ones most likely to be blind wheat board lovers.

As we shift into the next generation of Farmers, the CWB must be prepaired to be non-biased, and if needed cash buy wheat every day of the year.

Cash flows require these options when costs are so close to revenues and payments for equipment and land have to be secured.

In 10 years the farmer who owns everything free and clear will be the exception instead of the rule, especially in the next generation of farmers.

The CWB must, I say again must facilitate and provide for the needs of cash flow for the next generation, as smaller margins mean even more careful use of our financial resources is required.

If the CWB gets a handle on this, then we will go a very long distance to regenerating and updating this institution!