New defense from CWB

[Zaphod]

Here's the latest from the CWB about the contingency fund:

"CWB sets record straight on contingency fund deficit"
http://www.cwb.ca/public/en/newsroom/releases/2009/030209.jsp

One quote in particular caught my attention:
"Overall, the CWB had one of its best years ever in 2007-08. Net revenue for farmers was $7.2 billion - up $3 billion, or 57 per cent, from the year before."

It took a while, but after digging through StatsCan price and delivery info, it turns out that in 2007/08, revenue from canola was higher by 61%, oats was up by 59% and peas were higher by 70% compared to 2006/07.

And the value of the CWB is ???

[Fransisco]

Very valid point Zaphod! And some nice homework there.

[Fransisco]

I get a kick out of this part

"As its name suggests, the fund is designed to deal with market-related "contingencies" that occur in the course of operating these alternative pricing and payment programs. <b>Surplus earnings from risk-hedging</b> activities are deposited into the fund. This becomes a cushion against <b>potential hedging losses</b> in other years. The fund balance will therefore rise and fall."

It looks like the board has changed the definition of "hedging". Since when is hedging a way to make or lose money? It's supposed to lock in a price, and that's it. Hedging itself is supposed to be revenue neutral.

[Fransisco]

Here's another knee slapper...

"Resulting program losses put the contingency fund into a deficit, which
necessitated a transfer of funds from <b>other CWB revenue sources.</b>"

"Other" CWB revenue sources? What would those be? According to the annual report it was of course <b>THE BLOODY POOLS!</b>It was farmers money!

[Fransisco]

"An external consultant, Gibson Capital, was retained last fall to review the new approach and ensure it was appropriate."

Oh ya, with two of the three people who make up Gibson Capital being former wheat board employees. How very interesting, what better way to get the result that you want.

[charliep]

Will comment that it is hard to comment on a report that no one has seen except for internal CWB people. Why the CWB mention the report when it is not public.

Know the people at Gibson Capital (actually friends) and will note they have done many international consulting projects on risk management in their career path. Will note they also developed the Cattle Price Insurance Program (price insurance product developed by Alberta Beef Producers under the federal governments private sector risk management partnership) that Alberta Financial Services Corporation will offering this summer. Also a have developed an feed pea pricing progam using other feeds as a proxy to determine their value (also a PSRMP project sponsored by Pulse Canada). Don't know what the terms of reference were in the study or the results.

Perhaps the best strategy is to go after the study using access to imformation. Anything that is highlighted to the public in the manner the CWB did should be fair game.

Sorry for taking off topic Zaphod. CWB spin has been in full action mode on the annual report.

[Fransisco]

Do these Einstein's even look at their own annual reports or do they just make it up as they go along? Here they say...

"For example, in 2005, the programs had generated a surplus above <b>$50 million,</b> which was the fund's maximum limit at that time."

but in the annual report

http://www.cwb.ca/public/en/about/investor/annual/pdf/05-06/2005-06_annual-report.pdf

When you add it all up it's just a hair over $40 million!

They're out by over $10 million!

[charliep]

Actually read the press release. I have always though of my bank account (similar to the contingency fund) has having money in it (positive balance) or having negative balance (overdraft). I have never thought of my balances as being surplus (perhaps implying I have too much money) or deficit. I have a surplus when I make more money than I spend and a deficit whem I spend more than I earn.

I also don't understand how a business can make or loose money on a hedge account other than the inability to manage basis risk exactly. The annual report says there were no basis losses implying farmer who used the PPO programs paid their way.

[TOM4CWB]

Dear Charlie;

Until the CWB can isolate PPO hedges from grainsales and pool risk management... to where a grower will be accounted with a profit and loss position on each hedge... I don't trust anything the CWB spin doctors say.

This who CWB system is designed to pad the pools... at the expense of the PPO products... and never once have I been denied this simple fact... just the statement that I should instead use the CWB pool instead if I didn't like how PPO's were managed.

[charliep]

Agree with your comment on the money shell game. Perhaps frustration from an old life with a grain company but everyday the organization printed out a statement of risk poistion and this document formed the backbone of their risk management strategy. The objective was to stay risk neutral - i.e. hedged.

The CWB has all the confusion (at least from the outside) of running risk programs across multiple futures months (implying spread risk) in the their attempt to obtain an average price based on their assumed sales pace. This may have them a speculator at different times (long futures).

This exists along side the PPO programs where they are also trying to manage risk (knowing FPC products are priced against individual futures months) across a whole pooling year (with spread risk).

My guess this fall they would have been short futures to offset farmer commitments on the FPC (own inventory outside the pooling system or long cash). Their customers including domestic millers would have wanted to forward book as much as possible in the fall in the face of a rising market. If the sales got ahead of the planned activity, the CWB would effectively be short (sold something they didn't want to yet) and therefore long futures to offset their risk position.

So in managing risk, they have actual sales at any point in time, they have a sales plan for contracted inventory, they have a futures position that manages this to their planned sales pace and another risk management activity around the PPO program. They do this across a whole bunch of futures months (spread risk) in volatile market. A very complex strategy to accomplish a very simple task.

[charliep]

should have said the fall of 2007 instead of this fall.

[Fransisco]

Oop's looks like I didn't get it quite right on this the first time either.

"For example, in 2005, the programs had generated a surplus above $50 million, which was the fund's maximum limit at that time."

When I look at this report (which I should have done in the first place)

http://www.cwb.ca/public/en/about/investor/annual/pdf/2004-05_annual-report.pdf

on page 46 it talks about a "$35 million surplus from the PPO programs" It's only when you add this to what was already in the kitty that you get over $50 million.

The point being though that they didn't generate an extra $50 million it was $35 million. A $15 million dollar error.

Oh well, it's only farmers money, who cares if the math ain't right.

[chaffmeister]

Net CWB revenue is dominated by market prices/returns of which the CWB cannot take credit. CWB performance should not be measured in market value terms, rather in terms that reflect how well the CWB <b>captured</b> what the market was providing. In 2007-08, the CWB’s final pool price for #1 CWRS 13.5 (in Sask) was $1.70/bu below the average US street price for similar wheat. In 2006-07, the CWB final was $1.17/bu below. And in 2005-06 the CWB fell short of the US average street price by about $0.70/bu.

By this measurement, 2007-08 was the CWB’s worst year in the last three.

And I don't like the look of the trend either.

One last thing - not that I care to defend Minister Ritz - but he's been criticized in the media for ignoring the record returns of the CWB and focusing on the <b>relatively smaller losses.</b> When looking at the pros/cons of the CWB Ritz is right to ignore the market returns and focus on what the CWB did or didn't do.

Using the logic that we should be applauding the CWB for $7 billion in sales, what sales number in 2007-08 would have been considered a failure on the CWB's part?

This organization is a master of spin - and any farmer that isn't incensed at being manipulated in that way, deserves what he/she gets.

[TOM4CWB]

Chaff;

I COULDN'T HAVE SAID IT BETTER MYSELF.

THANKS FOR TAKING THE TIME TO POINT THESE ISSUES OUT.

THE ONLY WAY WE IMPROVE AND CHANGE... IS IF WE ARE FORCED.