The
Canadian Wheat Board
Past…….
Present……
Questionable Future??
Forward
My
research into the Canadian Wheat Board has been a long and arduous
journey. For more than three years I have traveled through CWB annual
reports dating back to the 1940s, public accounts back to the early
eighties, auditor general reports, treasury board information and
countless government websites. I have talked to the Auditor General of
Canada; the Department of Finance concerning Paris Club reschedulings and
debt reduction given to Poland and Egypt; and to the department head of
Public Accounts regarding the enormous amount of cumulative borrowings of
the CWB. I was invited to meet with the CWB Corporate Treasurer and Ken
Ritter and I did so on one occasion in 2002. I have talked to many senior
management & staff members of the CWB and have contacted all of the
directors at one time or another. My first report called “Taking Control
of Your Future” was presented to the House of Commons Standing Committee
on Agriculture & Agri-Food, members of the Senate, and to Ag Ministers
of every province in Canada.
To
fully understand where the CWB is heading you have to first find out where
the corporation has been. To accomplish this, I have put together a
ten-year history from several important aspects of the corporation’s
financial transactions. From these spreadsheets we begin to see a pattern
emerging of the Canadian Wheat Boards operations.
The
information that I am presenting to you will be a continuation of my
original work called “Taking Control of Your Future” which can be
found by clicking here.
Due
to the complexity of this report I am presenting the information in two
parts and will be releasing them separately. This will give people time to
digest the contents of each section without the fear of becoming
overwhelmed with details. I believe the information in this report should
have a great impact on the future decisions made by the CWB directors and
the farmers that deal with the Board.
Last
year, Jim Chatenay (the director from District 2) on behalf of his
constituents, presented the CWB with a list of 21
Questions. Earlier this year the CWB did a marvelous job of
researching the answers to these questions and briefing the directors with
their responses. I have discussed the questions in length with some of the
directors and have received honest, open and very detailed responses
to my inquiries. I commend the Board for their commitment to
accountability and the opportunity this gives me to share my findings with
fellow farmers. After
compiling the numbers that were received directly from the CWB I have
filled in some of the blanks that were left open in my original report.
The information will be presented in two parts and will include multiple
spreadsheets that show CWB activities from 1991-2001. At the end of each
section there will be a summary done in point form. As always, my
facts will be backed up with the opportunity for you to check for yourself
the validity of my work.
Spreadsheets
Spreadsheet
“A” is made up of the actual amounts of money
paid to the CWB by the Government of Canada in respect of Paris Club
and/or Canadian Debt Initiative debt reduction for Poland & Egypt. The
total is broken down into principal and interest
for the ten years. These numbers came from
the Dept of Finance and the CWB.
Spreadsheet
“B” is made from the 1998-1999 Combined Pool Accounts
– Statement of Operations of the Canadian Wheat Board. This spreadsheet
differs from the one in the CWB Annual Report in that all the netted out
numbers are replaced with actual gross
amounts received from the CWB, and all income is
placed in Revenue instead of being netted out in Operating
Costs. This of course gives a more accurate picture of the costs
associated with marketing the grain.
Spreadsheet
“I” is made up of the cumulative borrowings
of the CWB as shown in the Public Accounts of Canada for the years from
1991-2001. These
numbers come directly from the Public Accounts of Canada.
The
Canadian Wheat Board
Past….Present…. Questionable Future!
Section
I
Spreadsheets A, B, & I
The
CWB finances their credit export sales to sovereign states by borrowing
domestically and internationally using the government of Canada as
guarantor. As the government guarantees this borrowing, in effect it
assumes the risks and the resultant cost if a sovereign state is unable to
pay or if it delays payment of loans to the corporation. This seems like a
no lose situation until you look further into the system. Application
of this accounting policy does not permit the risks associated with the
CWB borrowings to be recognized unless the countries that owe money to the
Canadian Wheat Board have formally repudiated their debts.
To date there has not been a country that has
formally repudiated their debts and gone into default. This means that
each time a sovereign debt is deemed non-performing a rescheduling
agreement can be obtained that spreads out loan payments over an extended
period and sometimes includes a grace period of several years.
This has happened to a great many of the countries that the CWB
deals with in regards to credit grain sales. My previous report (Taking
Control of Your Future) explains in detail the reschedulings through
the Paris Club. The fact that there has never been a country that
has formally repudiated their debts leads me to wonder why the Federal
Government felt the need in 1991 to forgive $1.8 billion dollars of
debt to Poland and Egypt and several million dollars per year in debt
to other countries through the CWB credit sales. If there was no legal
reason to force the government to pay off these debts then why was in
done? I still firmly believe that the Federal Government through the
Canadian Wheat Board, is keeping a guaranteed supply of credit grain sales
to offer up as proof of their commitment to reduce poverty and satisfy
their obligations to the Enhanced HIPC Debt Initiative.
This
theory is proved out in the United Nations – General Assembly document
A/50/379 titled Macroeconomic Policy Questions: External Debt Crisis
and Development. It explains that debt forgiveness was done
through the Paris Club for Poland and Egypt for “Political Reasons”.
The
repayment also serves as a yearly $175-$200 million dollar subsidy to the
CWB to help service the interest on their borrowings.
Spreadsheet
A shows the breakdown of principal and interest paid in
1991-2001 by the Canadian Government to the CWB in respect of Paris Club
and/or Canadian Debt initiative debt reduction for mainly Poland &
Egypt but also includes a small amount for three other countries. The
original amount of the debt forgiveness to Poland and Egypt in 1991 was in
the range of $1.8 Billion dollars. In ten years there has been only a
small amount paid by the Government on the principal of this debt
forgiveness but there has been $1.7 Billion dollars paid to the CWB in
interest. Now that almost all the interest has been paid, the money
paid by the Government to the CWB will be mostly principal. This
will bring the grand total to approximately $3.5 Billion dollars of
taxpayers money when this portion of the forgiveness is finally complete.
If
you look in Spreadsheet
A at the yearly amounts of interest paid to the CWB
by the Canadian Government in respect of Paris Club and/or Canadian debt
initiative debt reduction, you will see that the total for 1999 is about
$174,000,000. This source of income has made up about 30-60
percent of the interest earnings paid to offset the interest costs
paid by the CWB on its borrowings for the last 11 years. This is about
to dry up and the small amount of repayment of principal each year
will make very little difference to the enormous amount of borrowing going
on annually. In the not too distant future the CWB will not be able to
generate enough money to pay the interest costs of its enormous amount of
borrowings without restructuring its debt. Since no countries
that owe money to the CWB for credit grain sales have ever formally
repudiated their debts, the government of Canada is not likely to
forgive any other debts of this magnitude any time soon on behalf of
countries unable to fulfill their obligations unless it is done to make
political brownie points. This
will result in an enormous reduction in interest earnings for the CWB!
Rescheduling
of credit grain sales takes place regularly at the CWB. This process
allows countries to be considered “current” in their debt
payments but does not generate a great deal of interest earnings or
principal repayment for the corporation. When the CWB works out the
interest due on credit grain sales, they base the interest rate for debtor
countries on the rate agreed to at the Paris Club. This rate is little
more than 1% above what Canada pays for borrowing money. This is
considerably lower than what the rate would normally be for countries with
less than desirable credit ratings. The normal interest rates for the
majority of the countries dealing with the CWB range from 6-17% on the
Moody’s rating list that was worked out in 2000 when the worlds interest
rates were fairly low. In the 1980’s, when countries dealing with the
Board started having trouble servicing their debts, the interest rates
were sky high. The ability to have the interest rates slashed to minimal
levels helped the debtor countries but cost the CWB hundreds of millions
of dollars in lost interest revenue over the last two decades. To make
things worse, the Paris Club and the Canadian Government also rescheduled
loans that rolled both principal and interest into new long term
loans. This method of doing business was designed to go on indefinitely
with the results being reduction of regular principal payments on the
loans.
If
you look at the Direct Interest Revenue in Spreadsheet
B you will see $415,717,000 of which about $174,000,000 is
interest received from the Government for Poland & Egypt debt
forgiveness. This leaves only $241,717,000 for interest received on the
remaining credit receivables of about $5 Billion Dollars.
Interest
paid or accrued on borrowings in 1999 totaled $376,942,860.
Included in these figures are $82 million dollars in accrued interest
due on investments that were simply rolled into borrowings. So where
is the money going to come from to pay the interest on borrowings in the
future? The 2002 annual report gives us a few clues. The answer is fairly
clear. They will restructure their debt and simply borrow more money. They
will pay credit with credit. Here
is a sample of what is happening with the restructuring of the debt of the
CWB. Since 1998 the CWB has restructured $1.5 Billion dollars of short-term
debt into long-term debt.
LONG
TERM DEBT OVER FIVE YEARS
| 1998
& Before |
$66,866,000 |
| 1999 |
$124,185,000 |
| 2000 |
$204,541,000 |
| 2001 |
$176,902,000 |
| 2002 |
$944,534,000 |
| Total |
$1,517,028,000 |
As
we see from these numbers, the strain of trying to cover the yearly
interest on the borrowings is already starting to take its toll.
Surprisingly
enough each year the CWB annual report also shows a surplus of $60-$70
million in interest income to be distributed to the Combined Pool
Accounts. How can this be? Lets examine 1999. The Corporation borrows
$82 million to pay interest costs on investments but they distribute $72.5
million in excess interest earnings to the pool accounts…….
Something does not add up. The corporation is only sustained, for the
moment, by access to an enormous amount of borrowings (Spreadsheet
I). The Borrowings associated with the CWB as shown in the
Public Accounts of Canada portrays this visibly. Spreadsheet
I shows the cumulative borrowings of the CWB from
1991-2001. As many large corporations have found out recently, being
heavily in debt is not a good thing. Borrowing heavily and then
restructuring loans is only a short-term solution to what is
building into a major crisis.
Gross
Versus Net
The
Auditor General of Canada, Sheila Fraser, made a perceptive suggestion on
page 3 of the Special Audit Report that was presented to the Directors of
the CWB in February 2002. It states “we did note a number of revenues
and costs that are netted or grouped in the presentation of the final
results of operations by pool account. To improve accountability and
transparency, the CWB should provide details in its financial statements
of all the significant revenues and costs associated with its operation of
the pool accounts.” This is something that farmers have been asking
the CWB to rectify in the annual report for many years. With the backing
of the Auditor General this will hopefully be accomplished.
From
the breakdown of revenue and operating costs received from the CWB, I have
put together a spreadsheet showing the difference it makes to CWB
operating costs when numbers are presented in gross amounts and when
revenue is not netted out in expenses to make the operating costs look
lower. Keep in mind that my spreadsheet does NOT contain freight
costs or any handling charges that are taken off initial payments when
the grain is hauled to the elevator. My spreadsheet DOES contain Dollar
amounts for Freight Adjustment Factors that are recovered at
the elevator and returned to the pool accounts from producers that are in
the Thunder Bay Catchment Area.
To
my knowledge this is the first time that the CWB has broken down netted
out numbers in the Combined Pool Accounts – Statement of Operations and
for that I commend the Board and its directors. With access to these
numbers we can see the total $ amount of costs associated with dealing
with the Board and areas where there could be changes made to improve
efficiency and accountability.
The
numbers in the spreadsheet are from the 1998-99 Combined Pool
Accounts, Statement of Operations.
Placing
all Gross Income in Revenue &
all Gross Expenses in
Operating
Costs
Total
operating Costs (1999)
- $646,237,572
or $32.94 per tonne or
$.90 per bushel
Compare
this to the Annual Report 1998-99
Combined Pool Accounts, Statement of Operations.
When
you net out $512 million dollars of revenue into operating
costs the 1999 Operating Costs look like this:
Netted
Version
Total
operating costs (1999)
- $133,506,000
or $6.81 per tonne or
$.19 per bushel
Please
keep in mind that this does not change the bottom line in any way as far
as the Earnings Distributed to Farmers are concerned. The numbers that the
CWB present in their Annual Reports are correct but their ability to place
revenue in operating costs to make the operating costs appear smaller
tends to distort the realistic picture of costs associated with running
the marketing area of the organization. The CWB will have to decide
which direction it wants to go in the future, will it focus on its mandate
as a Western Canadian marketing organization or will its financial
difficulties force it to concentrate on being a government backed banking
and investing business. It can’t have it both ways. The fact that the
CWB has access to millions of dollars in interest earnings from government
debt forgiveness programs and the ability to borrow large amounts of cash
to invest in derivatives trading does not necessarily make it an efficient
grain marketing agency. The proof of a corporations’ efficiency lies in
its marketing ability and the ability to keep operating costs low so as to
pay its own way.
I
feel that we should clearly revisit most of the reports done by the CWB
that have used netted CWB costs as the basis for their studies. In the May
2000 report prepared by the Quorum Corporation for Transport Canada &
Agriculture and Agri-Food Canada they discussed the methodology for the
calculation of Producer Netback Measures. The authors used the netted out
number of $5.40 per tonne to represent CWB costs. Since this is a cost
comparison study of marketing grain, interest revenue received
from the government for debt forgiveness and revenues earned from
derivative trading should not be included in the calculations.
One has to take a hard look at the possibility of separating the
marketing and banking operations of the CWB as a first step to a more
efficient and accountable operation.
Let
us look now into the Operating Costs area of Spreadsheet “B”.
Of the $646 million dollars in total operating costs, $377 million
dollars is associated with Interest Paid or Accrued on Borrowings.
This amounts to about 58% of the total costs associated with operating the
corporation on a year to year basis.
Now
look at the Direct Interest Revenue earned on credit grain sales
and receivable assets in Spreadsheet “B”, the amount is $416 million
dollars. Of this money $175 million is given to the CWB by the Government
of Canada in respect of Paris Club and/or Canadian Debt Initiative Debt
Reduction for Poland and Egypt. This amounts to about 42% of the total.
Considering the fact that the debt forgiveness given by Canada to Poland
and Egypt was done for purely political reasons, the $175 million is
clearly a subsidy. The other problem this presents is the fact that as of
2002 most of the interest involved in the debt forgiveness to
Poland and Egypt will be paid and only principal will be forthcoming. As
you can see, if you take $175 million dollars away from the total amount
of Direct Interest Revenue of $416 million, the $241 million left would
not cover the $377 million in Interest Paid or Accrued on CWB
Borrowings. This will have a major impact in CWB interest earnings in
the near future!! We must
separate the government banking issues and the marketing mandate so that
we can see if the CWB can be a viable stand alone organization.
Part
II of my report will detail Canadian Wheat Board credit sales history for
the years between 1991-2001. I will deal with Credit Grain
Sales–Borrowings and some Credit Grain Sales-Receivables. This report
will show that unless it is corrected the direction the Canadian Wheat
Board is heading can only lead to a possible financial crisis in the not
too distant future.
Summary
of Important Points from Spreadsheets “A, B & I”
- Of
the $415,717,000 dollars of Direct Interest Revenue received by the
CWB in 1999, approx $174 million dollars in interest comes from debt
forgiveness to Poland & Egypt. Forgiveness was done for purely
“Political Reasons” because there has never been a country that
has owed money to the CWB for Credit Grain Sales that has formally
repudiated their debts and gone into default. This is the only reason
for compulsory debt forgiveness by Canada. The payment serves as a
yearly $175-$200 million dollar subsidy to the CWB to help service the
interest on their borrowings.
- Of
the $376,942,860 of Interest Paid or Accrued on Borrowings in
Spreadsheet “B”, there includes $82 million dollars of accrued
interest on investments that was rolled back into borrowings. I find
it difficult to understand how the pool accounts can enjoy a surplus
of $72.5 million in interest earnings when the corporation had to
borrow $82 million to pay their investment interest debt. This has
been the case for several years.
- The
Canadian government has paid the CWB close to $1.7 Billion dollars
in interest for their debt forgiveness to Poland &
Egypt. They will now start on the principal of approx $1.8 billion.
This amounts to $3.5 Billion dollars. The interest part of the
debt forgiveness will all but dry up for the CWB and that will create
a huge problem. For the last eleven years the interest paid to the CWB
for debt forgiveness by the Canadian Government has made up approx
30-60% of the interest paid on borrowings by the CWB. As I pointed
out, for the last several years the CWB has also been borrowing money
to pay some of the investment interest debt so where is the money
going to come from to pay the interest on borrowings in the future?
- Over
the last two decades, rescheduling of loans done by the Government of
Canada has cost the Canadian Wheat Board Pooling Accounts, hundreds of
millions of dollars in interest earnings and losses of regular
principal payments due to interest rate reduction and loan extensions.
- There
should be a separation of banking, government and marketing in the CWB
accounting system.
- Numbers
should not be netted in the Combined Pool Accounts – Statement of
Operations because that method of accounting gives a distorted and
misleading view of company operations. (eg. CWB Gross Operating
Costs are actually $.90 bushel versus $.19 bushel when netted.)
- Some
of the reports & studies done by the CWB should be revisited (such
as the Quorum Report that discussed the calculation of producer
netback measures) and the interest earnings from Canadian debt
forgiveness and other investment earnings should not be allowed to be
netted out in calculations to make the expenses of the corporation
seem smaller.
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