Wednesday, October 6, 2010

The Contingency Fund

The Contingency Fund was established to underwrite the Producer Pricing Option programs to ensure that program operating gains or losses will not impact the pool accounts.

The way it was meant to work: when the CWB determines the prices for Fixed Price Contracts and other PPOs, it always includes a discount for risk.  It takes a little protection.  So if all goes well, it has some money left over after paying farmers the contract price.  That something extra goes into the Contingency Fund.  If the CWB loses money – even after the discount for risk – the losses are covered by the Contingency Fund.  This flow between the PPOs and the Contingency Fund is what was envisioned.

But the Contingency Fund of today looks very different than what was conceived back in 2000.

The largest “contributor” to the Fund is “cash trading” in feed barley with a total so far of $22.2 million.  About $20 million from feed barley trading went into the Fund in 2007-08 alone.

The second largest source of money is interest revenue from the feed barley pool account.  Starting in 2001-02, the CWB said it did it to “avoid distorting the price relationship between feed and designated barley.”  The CWB moves feed barley interest into the Contingency Fund almost every year now, the total so far is $19 million.

Even though the purpose of the Fund was to ensure that PPOs would not impact the pool accounts, in practice the pool accounts have been hit a few times by transfers to and from the Fund.  In 2004-05, $7.5 million was transferred from the Fund to the pool accounts. In 2007-08, the CWB moved $25.5 million from the pool accounts into the Fund and $18.0 million back into the pool accounts in the following year.

Perhaps most notable is the fact that the PPOs have been a drain on the Fund to the tune of $72.1 million since it started. 

If it wasn’t for barley – both pool interest and cash trading – the CWB would’ve been forced to find some other source of revenue to prop up the Fund.  Barley (in one form or another) has contributed about $48 million while wheat and durum have drawn the Fund down by about $42 million.

Doesn’t it make you wonder?  When the CWB discounts the prices it pays farmers in the PPOs as a form of protection, why has the CWB lost so much money over the years in PPOs?  So much in fact that it has had to subsidize the Contingency Fund over and over again with other sources of revenue.  Even from the pool accounts.

There’s got to be a better way.

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