Contingency Fund

[chaffmeister]

The Contingency Fund was set up in April of 2000 to back stop the PPOs WITHOUT touching the pool accounts.

In the 1999-2000 Annual Report:

“The CWB also established a contingency fund for each of the producer payment option programs. This ensures that the costs and risks associated with individual payment options are separately identified and accounted for independently of pool account operations.”

[chaffmeister]

In the 2000-01 Annual Report:

“…a contingency fund has been established to underwrite the programs to ensure that program operating gains or losses will not impact the pool accounts.”

[chaffmeister]

In the 2001-02 Annual Report:

“While the PPO offer farmers unprecedented opportunities to exercise control over the marketing of their wheat and barley, they are structured so that the viability and the integrity of the CWB pool accounts are maintained.”

It was in 2001-02 that the CWB first transferred money from the feed barley pool into the contingency fund - $7.1 million. “This was done to avoid distorting the price relationship between feed and designated barley.”

For the first time, the contingency fund is described as follows: “The contingency fund can be populated through a variety of mechanisms such as the results of the operation of the producer payment options or other sources of revenue received in the course of operations.”

But it also states “The surplus or deficit arising from the operation of these programs (PPOs) is transferred to a contingency fund so that net operating results will not impact the pool accounts.”

[chaffmeister]

In the 2002-03 Annual Report:

“While the PPOs offer farmers opportunities to exercise control over the marketing of their wheat, durum and barley, they are structured so that the viability and the integrity of the CWB pool accounts are maintained.” It also states: “The surplus or deficit arising from the operation of these programs (PPOs) is transferred to a contingency fund so that net operating results will not impact the pool accounts.”

Interest earnings of $5.077 million from the feed barley pool was transferred into the contingency fund. According to the Annual Report: “The transfer amount is based on a specific formula approved by the board of directors. The formula ensures that a fair amount of interest earnings, on a per-tonne basis, are allocated to the barley pool and the distorting effect of certain fixed costs in years when pool volume is unusually low, is mitigated.”

Transfers from pool accounts now total $12.2 million (all from the feed barley pool).

[chaffmeister]

In the 2003-04 Annual Report:

“Producer Payment Options, like the Fixed Price (FPC) and Basis Payment (BPC) Contracts, are designed to operate independently of the pool and therefore do not impact the pool’s net results.”

And “While the PPOs offer farmers unprecedented opportunities to exercise control over the marketing of their wheat and barley, they are structured so that the viability and the integrity of the CWB pool accounts are maintained.”

Also: “The contingency fund was established to cover deficits or surpluses that may occur as a result of the operation of the PPO programs. The fund ensures that the PPO programs will have no influence on the return that farmers receive from price pooling. While in a surplus position now, the PPO contingency fund is expected to break even over the long term. In any particular year, the fund may operate in either a surplus or deficit position, depending on the market conditions.”

Transfers from pool accounts still total $12.2 million (all from the feed barley pool).

[chaffmeister]

In the 2004-05 Annual Report:

“Producer Payment Options, like the Fixed Price (FPC) and Basis Payment (BPC) Contracts, are designed to operate independently of the pool and therefore do not impact the pool’s net results.”

And “While the PPOs offer farmers unprecedented opportunities to exercise control over the marketing of their wheat and barley, they are structured so that the viability and the integrity of the CWB pool accounts are maintained.”

And: “The contingency fund can be populated through a variety of mechanisms, including the results of operations of the Producer Payment Options (PPO) program or other sources of revenue received in the course of operations.” “One of the purposes of the fund is to cover deficits or surpluses that may occur as a result of the operation of the PPO programs. The Act also requires that all revenue generated, less the costs of operations, be distributed through the pool accounts.”

To comply with the maximum limit requirement of $50 million (in the contingency fund), “$7.5 million was transferred to pool results to be distributed to pool participants”.
In 2004-05, $2.3 million came out of the feed barley pools to the contingency fund and $7.5 million went from the contingency fund to the pools:

Wheat $7.354 million
Durum $60,000
Des Barley $47,000
Feed Barley $39,000

So by this point, there has been a net transfer FROM the feed barley pools INTO the contingency fund of $14.5 million and a transfer INTO the wheat pool FROM the contingency fund of $7.354 million.

[chaffmeister]

In the 2005-06 Annual Report:

“PPOs, like FPCs and BPCs, are designed to operate independently of the pool and therefore do not impact the pool’s net results.”

And: “The contingency fund can be populated through a variety of mechanisms, including the results of operations of the Producer Payment Options (PPO) program or other sources of revenue received in the course of operations.” “One of the purposes of the fund is to cover deficits or surpluses that may occur as a result of the operation of the PPO programs. The Act also requires that all revenue generated, less the costs of operations, be distributed through the pool accounts.”

And: “The surplus or deficit arising from these programs (PPOs) is transferred to the contingency fund, so that net operating results will not affect the pool accounts.”

In 2005-06, the PPOs lost $6.7 million and $789,000 was transferred into the contingency fund from the feed barley pool.

Transfers between pool accounts and the contingency fund now sit at:

INTO wheat pool: $7.354 million
INTO durum pool: $60,000
INTO des barley pool: $47,000
OUT OF feed barley pool: $15.3 million

[chaffmeister]

In the 2006-07 Annual Report:

“Deliveries made under these programs are outside the pool accounts…”

And: “the contingency fund is used to cover deficits or retain surpluses that may occur as a result of the operation of the PPO programs. It is also the repository for excess interest earnings from the barley pool. The amount that is transferred to the contingency fund is based on a formula, approved by the board of directors, that ensures that a fair amount of interest earnings is allocated to the barley pool and which mitigates the distorting effects of certain costs in years when pool volume is unusually low.”

In 2006-07, the PPOs lost $37.0 million and $1.9 million was transferred into the contingency fund from the feed barley pool.

Transfers between pool accounts and the contingency fund now sit at:

INTO wheat pool: $7.354 million
INTO durum pool: $60,000
INTO des barley pool: $47,000
OUT OF feed barley pool: $17.2 million

[chaffmeister]

In the 2007-08 Annual Report:

“The contingency fund can be populated through a variety of mechanisms, including the results of operations of the Producer Payment Options (PPO) program or other sources of revenue received in the course of operations.” “One of the purposes of the fund is to cover deficits or surpluses that may occur as a result of the operation of the PPO programs.”

Missing from previous years’ statements: “The Act also requires that all revenue generated, less the costs of operations, be distributed through the pool accounts.”

Added for the first time: “Pursuant to the Act, the fund balance can be negative; there is no limit specified.”
Also: “As at July 31, 2008, the board of directors approved an allocation of $25.5 million of earnings from the pool accounts deemed to be ancillary to grain sales activities and to repatriate funds allocated from the contingency fund to the pool accounts in 2005.”

And: “…to uphold the principle communicated to farmers that the PPO programs will operate independently of the pool, the board of directors also approved a policy that provides for the repatriation of funds between the pools and PPO programs. The policy states that the funds will be repatriated as soon as possible, providing that the contingency fund balance does not fall below zero.”

Transfers between pool accounts and the contingency fund now sit at:

OUT OF the wheat pool: $14.0 million
OUT OF the durum pool: $3.04 million
OUT OF the des barley pool: $633,000
OUT OF feed barley pool: $19.7 million



Total taken out of the pool accounts: $37.4 million.

[chaffmeister]

So what started as a totally separate program from the pool is now integrated into the pools - even though the CWB says "the PPOs will operate independently of the pools".

The contingency fund has no negative balance limit.

So why in the world did the CWB take $27 million out of the pool accounts to put into the contingency fund when (1) it still remained in the red and (2) it doesn't matter that its in the red?


Here's the punch line:

"This action was taken as recapitalization of the contingency fund is prudent risk management for the programs that it underwrites."

Risk of what?


I'll have to remember that one when I tell my wife why I transferred $50,000 out of our joint savings account to put into my commodity trading account.

[LWeber]

Good work Chaff.

So if the Act wasn't changed, the CWB is not operating within the Act ... twice.

In your example and closing the Malt pool.

When do you think the Minister will approve an increase to the initial payments when the CWB is operating outside of the Act?

Short answer... he won't.

[charliep]

Will also note that some programs (i.e. the early payment option have contributed to the contingency fund every year. Durum (exception this year) and barley have also contributed positively to the contingency - none of these are backed by futures.

[LWeber]

Should the Minister of Agriculture send in the Auditor General to review the 2007/08 CWB financial reports?

Go vote:

http://fertilizerbuddy.blogspot.com/

[TOM4CWB]

Charlie,

I note the $20M from cash trading barley as another income source.

There is a real problem here.

THE BASIS.

I believe you will find the basis benefit from volumes traded through PPO contracts... are going through the pool instead of as part of PPO contracts. The CWB clearly admits the basis gains were notable... because we are required to lock in a basis... that is created out of thin air... and has been very profitable for the CWB.

Where is the accounting for the basis gains the CWB gets from PPO contracts?

If the CWB 'gives' away basis value... to grain purchasers... in a manner that is not competitive to export from the US... of DNS that is of the same intrinsic value... this needs to be resolved.

We should also know the total value of futures traded... to see just how active the CWB is... what % of the exchange trade they command... and benchmark performance.

It is a package deal... and transparency if key to understanding what is going on.

How much of the 'discretionary losses' were attributable to PPO contracts?

Does anyone have a clue?

Why exactly should PPO contractors pay for CWB 'discretionary losses'?

I wouldn't trust the CWB to be fair or equitable for a millisecond... on the proper risk management and basis accounting on these systems.

The CWB theory... of 'single desk' premiums... takes basis gains for the pools... because they believe the whole North American wheat market is at a premium BECAUSE of the CWB 'single desk'.

[Fransisco]

<b>BUSTED!!</b>