CWB president and CEO Ian White today responded to recent misleading public comments about losses caused by risk-management difficulties in last year’s volatile commodity market.
“Unfortunately, certain individuals and groups have made selective use of figures from the CWB annual report to publicize misleading information about CWB financial performance for western Canadian producers,” White said. “Many of these comments are untrue and damaging to the commercial reputation of this organization.
“It is not true that a $130-million loss exists that has been repaid directly from farmers’ pockets. This is a distortion of the impact of losses over the past two years in the CWB’s Producer Payment Option programs.”
In reality, producers who participated in the programs received exactly the amount they contracted, White said. Program losses were instead sustained by a contingency fund, resulting in a $29-million fund deficit as of July 31, 2008. The fund balance fluctuates each year, depending on market conditions. For example, in 2005, the programs had generated a surplus above $50 million, which was the fund’s maximum limit at that time.
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.
The contingency fund was established in 2000-01 as a risk-management tool for the operation of newly created CWB Producer Payment Options (PPOs). These currently include the Fixed Price Contract, Basis Price Contract, FlexPro and Early Payment Option.
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. Surplus earnings from risk-hedging activities are deposited into the fund. This becomes a cushion against potential hedging losses in other years. The fund balance will therefore rise and fall.
For example, when a producer locks in a fixed price under the PPOs, the CWB takes an equivalent futures position to hedge that risk, which it later buys back. Sometimes this hedging results in earnings for the fund and sometimes it entails losses.
In early 2008, however, unprecedented market volatility created serious challenges for most grain-industry players. The CWB’s hedging strategy at the time was not effective in the face of this volatility. Resulting program losses put the contingency fund into a deficit, which necessitated a transfer of funds from other CWB revenue sources.
Corrective action was immediately taken to resolve the issues with the CWB’s risk-management approach. Beginning in February 2008, the strategy was reviewed and revised. An external consultant, Gibson Capital, was retained last fall to review the new approach and ensure it was appropriate. Its report made further recommendations to strengthen CWB risk management. The report was shared with the federal government at the end of 2008.
The CWB welcomes any further scrutiny of these measures. Elected CWB directors are also discussing the issue directly with farmers this week as part of “Farmer Forum” accountability sessions across Western Canada. The following page contains more information about the contingency fund and its balances.
