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

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.

Attached Spreadsheet B

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”

1. 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. 
     
2. 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.
     
3. 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?
     
4. 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.
     
5. There should be a separation of banking, government and marketing in the CWB accounting system.
     
6. 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.)
     
7. 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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