Monday, November 21, 2011

The contingency fund as political football

An account on the CWB’s books meant to back-stop the Producer Pricing Options (PPOs) has become a political football.

To offer farmers the Producer Pricing Options (PPOs), the CWB needs the ability to weather some risk.  The contingency fund is a separate internal account of the CWB where gains and losses in these programs are accounted for separately so they don’t impact on the pool accounts.  According to the CWB, “Surplus earnings from risk-hedging activities are deposited into the fund.  This becomes a cushion against potential hedging losses in other years.”

However, the contingency fund has limitations; at each year end, it cannot exceed a pre-set maximum balance.  In the event that non-pool activities of the CWB – things like PPOs, cash trading, and so on – leads to a greater year-end balance than the maximum, the CWB must distribute the excess funds to farmers – either those participating in the PPOs or the pool accounts.  This has only happened once; in 2005, income from the PPO programs (after paying farmers what they had contracted for) would have put the contingency fund over the $50 million limit.  That year, to comply with the limit, the CWB moved over $5 million to PPO participants and $7.5 million to the pool accounts, taking the balance down to $48.6 million, just under the $50 million limit.  Following that event, the Fund limit was raised to $60 million – until recently. 

In March of this year the CWB board asked Ottawa to raise the limit once again; the PPO program was quite large and the market has been quite volatile, leading CWB management to take a larger risk discount from the prices paid to farmers than usual (making prices to farmers lower than they otherwise would be), which, in turn has led to a growing forecast of the balance in the contingency fund.  Ottawa agreed and in early November raised the limit to $100 million.  Since then, it’s reported the limit will be raised to $200 million.

And this is where the mayhem begins.

In the Globe and Mail, Stewart Wells, a farmer-elected CWB director, said “They are expropriating money from farmers to use to float the grain company that Gerry Ritz is creating”, he said.  (Is it just me, or does it seem hypocritical for the CWB board to request increases in the limit and then criticize the government for increasing the limit - for giving them what they asked for?) 

Messrs. Goodale and Easter took the argument to Twitter where I had the following “conversation” with them (not all dialogue shown):

De Pape:  Why don’t you guys mention that it was the CWB directors that asked to increase the Fund limit?

Goodale:  They asked months ago for $100M, not $200M, and for mkt security reasons, not to pay for killing the single desk.

Easter:  Not to $200 million.  Ritz did that all on his own.  He loves playing with farmers money to protect his friends.

De Pape:  What makes you think the 2nd $100M is to kill it? 

Goodale:  Actually, government hiked the amount by 100pct, took control over the fund and thus diverted farmers money to fund killing the single desk.

De Pape:  CWB asks for $100 limit, but needs even hier limit – Ritz makes it $200.  What’s the right nbr?

Easter:  Farmer elected directors abiding by oath have a responsibility to farmers.  Who is Ritz working for?

De Pape:  Stop being a politician for a moment – don’t change the subject.  What should Ritz have done?  What’s the right nbr?

Goodale:  There is no “right number”.  CWB’s contingency fund should not be misappropriated to pay for killing the single desk.

De Pape:  “Misappropriate” is the same as “steal”.  Ritz retracted.  Will you? 
(At this point, Mr. Goodale stopped “conversing”.)

Easter:  In my view, none of the CF (contingency fund) should be transferred (to the new CWB).  Was set up under the old board for new options.  Old system should pay out.

De Pape:  Who do you pay it out to then?  Fund was established to provide value to all farmers – should continue to provide value to all farmers.

Easter:  Should be paid out across the pool accounts that were at risk.

De Pape:  Pool accounts were never at risk.  The Fund was set up so gains & losses in PPOs wouldn’t impact on the pool accounts.  Try again.

Easter:  I recognize that but pay it across the pool accounts.

De Pape:  What would you suggest if the Fund was in deficit?  Should losses be covered by pool accounts?

Easter:  It’s great we don’t need to worry about that because the current wheat board did such a great job.

De Pape:  3 yrs running (06 to 08) CF (contingency fund) had yr end deficits.  Bad enough that $25 million was “borrowed” from the pools.  Net on (PPO) operations by 2008 was $100 million loss.

Easter:  Your figures don’t make sense.

De Pape: My figures come straight from CWB annual reports.

And that was it (so far).  Goodale’s “misappropriation” shot at Minister Ritz is still out there – unretracted – and Mr. Easter has yet to make sense of the actual PPO results. 

Additionally, Mr. Goodale’s blog states:  “Rather than distributing that money to farmers, where it belongs, the Conservatives quietly passed regulations this fall giving themselves effective control over that cash.”

I called Minister Ritz’s office to see if I missed this new regulation.  Turns out Mr. Goodale is wrong; there was no regulation passed this fall regarding the contingency fund.  Perhaps he was thinking about the Oct 18th Order In Council which directs the CWB to ensure profits or gains from non-pool activities are credited to the contingency fund.  Although Mr. Goodale suggest this gives the government control over the funds, in reality it just removes any discretion the board may have had over the funds.

Now put that together with Minister Ritz’s comments in Question Period: “Mr. Oberg continues to waste millions of dollars of farmers’ money on his own personal political agenda.  Since it is unclear what additional liabilities he will leave behind with his scorched earth policy, we have taken this prudent step.”

It seems Mr. Ritz is concerned how the board of directors is spending farmers’ money.

Reality check

In March, the board of directors asked for an increase to the fund’s upper limit; a prudent move.  In October, the government issues a directive to the CWB to ensure the money that should go to the contingency fund actually goes there.  They follow that with an increase to the upper limit of the fund beyond what was requested to effectively “make room” for the money being generated.  The eight elected directors realize that means they don’t have full discretion over the loose change of the CWB anymore and screams injustice. 

Why the liberals are opposing this is no mystery.  To them this is just politics.  If they can make the government of the day look suspect and dangerous, it serves their purposes much more than it serves farmers.  And that’s a shame.

Regardless of what you think the ultimate distribution of the funds should be, it is clear that the government acted prudently to reign in the current board of directors, which has stated that it will use “all resources at its disposal” to stop the government.  Looking at what they’ve spent already, there’s no telling what they would have done with access to the contingency fund money. 

The dollars being argued about – the $100 million or the $200 million - are just the upper limits of the contingency fund.  Even though the liberals talk as though they are hard numbers – real cash - the actual balance at the end of July 2012 could be much smaller (even a deficit, although I highly doubt it).

The CWB board asked for an increase to the upper limit, and then changed their minds.  We need to ask why.
If the board wanted any excess income in the contingency fund to go to farmers (as they are saying), they wouldn’t need to increase the limit.  They only need to increase the limit to keep the money in the contingency fund.  Why did they change their minds? 

1 comment:

  1. Where do I find information that clearly explains where the millions of dollars in the contingency fund actually comes from?

    As far as I understand, if I sell my wheat with a fixed price contract, then the CWB pays me $2/bushel (or worse) less than what I could get if I was allowed to sell on an open market. Then, they put the "excess" in the contingency fund. If that's correct, then I'm sitting here thinking that they just ripped me off by $2/bushel. I thought they make farmers "$500 million/year extra" that we could not get ourselves. If they pay me LESS, put the money in the contingency fund and use it for Lord only knows what, then how is that paying me more?

    If I just sell my wheat in the pool, THEN does it work out to more? Take into account the time value of money, and the fact that they slowly dole out money over the year. I just got an interim payment the other day, but the wheat has been gone for months.

    Plus, how is it that they are making millions of dollars extra, and it isn't being paid to farmers? Is the whole idea to skim enough from the farmers to max out the contingency fund before you pay anything to the people who worked so hard to grow it?

    Thanks for any insight, because I just don't understand.