CWB in the market for some white wash

[Fransisco]

CWB welcomes further review of risk management practice
February 17, 2009

Winnipeg – Larry Hill, chair of the CWB’s farmer-controlled board of directors, today released the following statement welcoming further review of the CWB’s risk management practices, following comments made by Gerry Ritz, the Minister responsible for the CWB, and Parliamentary Secretary David Anderson, questioning losses in the CWB’s 2007-08 Contingency Fund.

“The 2007-08 crop year was unlike any seen in the history of grain markets. Volatility was so extreme that on some days, the markets moved more in a few hours than they had in the previous year. During these unprecedented months, the CWB remained committed to offering farmers pricing and payment options, even when many other industry players withdrew their programs.

"Recognizing the need for rigorous practices in such a volatile environment, in February 2008, the board instructed management to undertake a comprehensive review of the risks associated with the Contingency Fund. This review resulted in changes to our risk management practices. The CWB then engaged Gibson Capital to conduct an external risk management and pricing review of the Producer Payment Options.

“Comments made by government MPs, however, suggest that we did not take appropriate measures. I would like to stress that we acted quickly and responsibly and kept Minister Ritz informed throughout this review process. However, in order to remove any shadow of doubt, today I wrote Minister Ritz and extended an invitation to him to review this process with his officials along with officials from the Department of Finance. I further suggested that in the spirit of ensuring the measures we have taken are consistent with corporate accountability best practices, we would also welcome a review of the process by the Office of the Auditor General of Canada.

“The CWB’s board of directors believes it is imperative that farmers have confidence in their grain marketing agency. We know the importance of direct accountability to all producers and commit to sharing the results of this further review process with farmers in the weeks and months ahead.”

[Fransisco]

Sorry, but I have no confidence in the CWB, and another endless round of committees, reviews and navel gazing isn't going to change my mind.

Last years performance was terrible and the annual report speaks for itself.

I want my grain back. Period. Give me the same deal you gave the organic guys and let me get on with running my farm.

[silverback]

I don't see them agreeing to an independent auditor to look things over.

[TOM4CWB]

Fransisco,

These CWB Directors are really this clueless?

There are 101 risk management problems with PPO programs. From the way they are traded... to the accounting of the derivatives... to the basis system and lack of back to back sales.

On top... the sales of grain... at the highest prices by 2-3X historical levels... being held off the market by the CWB directors... then they mismanaged by buying back nearby futures that the CWB... themselves... forced growers to sell into in the first place...

It is so foolish to try to create a independent CWB 'cash' market... and then sell the CWB cash grain through a CWB pool.

Of course there was bound to be problems!

To blame grain growers who took a massive hit on the cash basis... for CWB mis-management... is unforgivable.

I object Chairman Hill. Your Arrogance is only exceeded by the sordid management team you represent.

[Fransisco]

All the auditor general would tell us is whether or not the numbers add up. Nothing about performance, nothing about trading, nothing about marketing. I can see why the board wants the AG.

[chaffmeister]

Kevin Libin: The Wheat Board's risky business

National Post February 18, 2009

The Canadian Wheat Board’s just-released annual report shows that despite its monopoly on western wheat sales, and a windfall year for crop prices, the board’s central planners still managed to lose roughly $90 million last year on commodity trades. What went wrong, as influential U.S. investor Dennis Gartman pointed out in a recent newsletter, is that the Wheat Board appears to have taken massive losses in commodity speculation trades, by betting the wrong way on grain prices. “There is no possible explanation for this loss other than the management took speculative positions in wheat that clearly went massively against them, and those losses were averaged into, making them worse as the losses increased, eventually becoming large enough to force the fund to liquidate it positions” deep in the red, Gartman writes. One series of trades, he reports, amounted to a loss of nearly a quarter billion dollars.

Placing bets on commodity markets, particularly those as unpredictable as we’ve seen recently, is a risky proposition, particularly for a federally controlled co-operative like the Wheat Board. But the board apparently feels it has to play the market to survive: that’s because as Western farmers became increasingly doubtful of the benefits of selling their grain through the monopolistic board in recent years, the CWB rolled out pricing programs to try and keep producers happier. Farmers can now lock in sales to the wheat board at certain prices over the course of the year. In order for the wheat board to make that work, though, it must then hedge its futures in the global commodity market. Trouble is, the board seems to be not particularly good at it: last year was the third year in a row the CWB took a haircut on its speculative trades.

“The loss is all the more shocking in that the Wheat Board buys wheat from Canada’s farmers at rather material discounts to the spot price and then ‘markets’ that wheat through its pooling activities,” Gartman writes. “Thus, it is one thing to lose money trading speculatively; it is quite another to lose a sum this large when one has a huge lead on every ‘trade’ from the outset.”

After a number of grain-grower associations (generally not fans of the CWB’s monopoly) demanded Ottawa investigate why the board is losing so much of farmers’ money, Agriculture Minister Gerry Ritz said yesterday that the government must review the CWB’s risk management practices. The CWB says it “welcomes” a review—though it wants the auditor general to do it (who will likely be limited to checking only that the CWB is properly accounting for its losses according to GAAP). Though, it still insisted that it wasn’t the board’s fault for losing so much money:

"The 2007-08 crop year was unlike any seen in the history of grain markets,” said the CWB chairman. “Volatility was so extreme that on some days, the markets moved more in a few hours than they had in the previous year. During these unprecedented months, the CWB remained committed to offering farmers pricing and payment options, even when many other industry players withdrew their programs.”

Actually, what Hill forgets—or omits—is that the CWB did reportedly suspend producer payment options last year, at least for a few days, enraging many farmers. And while board pricing programs, when active, surely earned some extra money for farmers who timed the market right, the losses the Board suffered as a result will have to be made up for somewhere—and that means every producer gets less money down the road. Besides, those “other industry players” Mr. Hill refers to are not state-run monopolies, but private grain companies or voluntary grain pools: if participating farmers don’t like the way they’re run, they can opt out. And if the private operators lose money, that's their problem, not their suppliers'.

Those facts alone is probably all most farmers need as far as a “risk management review” goes: being captive to the wheat board, Western grain growers know that even with something like the pricing option program—a pale imitation of a free market arrangement—in the end, they all end up paying for losses in CWB managers’ decisions in setting prices, marketing and commodity speculation. With so much red ink on the CWB’s books this year, that may be a risk more farmers are unhappy to bear.

[Zaphod]

A couple of minor points. First, it's a lie that the CWB honoured their commitments. Doesn't Larry Hill remember that the CWB yanked their pricing options when the market was flailing around? Oh, and they also pulled the DPC, but I guess that doesn't count.

Also, a little birdie told me that the guy running Gibson Capital is a former CWB employee. But I'm sure that had no impact on the findings.

[TOM4CWB]

Dear Charlie,

It is interesting that the CWB 'made' about $20million on cash barley sales... of less than 2mmt?

So the CWB CAN sell cash grain... back to back... without loosing money and getting all tangled up in futures losses.

Shouldn't that tell us something?

[Fransisco]

Wasn't that the barley that the private trade sold and then the board took over?

[Ron]

i cant say anything civil.

the board does a (*&(*(&(*& job at speculating just like it does of selling the grain it confiscates.

SCREW THE CWB (anybody know how to market non-registered varieties?)

[parsley]

And if you read the email post from McBain on Parslsey's Notebook,...... delivering grain to the pooling accounts could become, er, a bit worrisome? Pars

[charliep]

Where should the money come from to cover these hedging losses (an oxymoron given a hedge account should never make or loss money) to cover the futures losses on the producer payment options? When the CWB has a loss on a hedge account (realizing they manage risk across a whole pooling year), what does a futures trading loss represent? Is it a real loss or a CWB accounting practice?

Note again the losses were from futures trading and not basis - annual report.

Use of FPC, BPC and DPC/Flexpro were about 4 MMT in 2007/08 and about 2 MMT in 2008/009 (see Ian Whites presentation crop production days - slide 9 - http://www.cropweek.com/presentations/2009/2009-jan16-cwb-white.pdf). Assuming an average use of 3 MMT and an average $10/tonne to pay off the PPO liability, it will take 3 years to pay off the $90 mln.

[charliep]

Perhaps the point is that somehow, the loss on the PPO should be a business loss and not a farmer one. Farmer needs and decision making should be separated from that of the CWB entity. Should be lots of questions about where the $20 mln cash trading profits came from but leaving alone for the moment, I note CWB business profits were allocated directly to the PPO contingency fund. Hence my suggestion in another thread for the need for business equity to absorb losses or grow with CWB activities.

[charliep]

I also highlight page 46 of the annual report (wheat ex durum) - the table as a result of increased reporting requirements around derivatives in financial statements.

Bottom of the page 46 - 5.1 mln tonnes of wheat ex durum was priced using PPO products out of a pool size of 13.4 mln tonnes or about 40 %. Half way down the page - the average price of pool sales - $366.65 versus ppo of $363.61. Put another way, the contingency fund loss brought the PPO values into line with the total payments. What isn't clear is how the fit between the losses on discretionary trading allocated to the whole pricing pool (including PPO products) and the $90 mln allocated to the contingency fund. I think someone else asked this question.

[charliep]

4 times in row but some stuff too interesting. You can compare the level of information provided in the 2006/07 annual report to the current year. The PPO information is a major component of the reporting for the overall pool results.