Taking Control
Summary
My
report deals with important issues that need to be addressed by both the
Federal Government and the Canadian Wheat Board. The CWB issue deals with
the fundamental right of equality in our country. To force producers in
one area of Canada to deal with the CWB if they wish to export their wheat
and malt barley, while allowing producers in other areas of Canada their
freedom, is not right. There is also a great deal of controversy on the
issue of who actually runs the CWB: the board of directors or the Federal
Government. The 2001 Public Accounts of Canada states, while
discussing Enterprise Crown Corporations; “There is also a number of
self sustaining government business enterprises that are not
considered Crown Corporations within the meaning of the Financial
Administration Act, but which are owned or controlled by the
Government and ultimately accountable to Parliament through a Minister of
the Crown for the conduct of their affairs. These are referred to as
“other government business enterprises” and includes the Canadian
Wheat Board and the various Port Authorities.”….. The federal
government plays a much larger role in the activities of the CWB than most
people are aware of. I hope that the farming community will benefit from
the information put forward in this report and that they follow up on the
issues by using the sources that I have made available to them.
Taking
Control of Your Future
For
the past few years farming has been less than rewarding and trying to find
the answers to many of the problems we face is extremely difficult.
Talking to and lobbying the government for assistance is fine as far as it
goes but we seem to have come to a stalemate with no solutions on the
horizon. With this in mind I have decided to take it onto myself to find
some new information to work with and to share with others. My goal
is to put out a series of articles concerning the farm economy, with the
first being the CWB. I have spent the better part of a year researching
the CWB annual reports, the Treasury Board Estimates, Public Accounts of
Canada and the Reports of the Auditor General of Canada. Most of the
information that I have put in this report comes from these sources. My
articles will be meant to educate, but mostly to show you where to find
the information that you need to make your own informed decisions on all
of the important issues. Every fact that I present to you will be backed
up with the opportunity to check for yourself the validity of my work. I
think this is incredibly important in this day and age where people report
news that is less than accurate! I have also included some of my own
opinions and conclusions but you would be advised to use your own judgment
on these issues. I hope that after people read my report that they follow
up on this information.
The
Canadian Wheat Board (CWB) receives grain from Canadian farmers, pays them
an initial price on delivery and sells the grain on the world market.
Under the CWB Act, any profit on operations is distributed to farmers,
with any loss being absorbed by the government. The terms of sales
generally specify cash on delivery. However, credit sales are also
made, but only with the concurrence of the government and within
guidelines it, (the Government) has established. This area of my
report will deal mainly with credit grain sales of the CWB, the role that
the government plays in the credit sales, CWB accounting practices and the
impact that the Paris Club reschedulings have on the farmers and the
Canadian Taxpayer.
Canada
extends credit to individual sovereign states for many reasons: to promote
development, to support foreign policy objectives and to facilitate export
trade. When the Canadian Wheat Board makes a credit sale it borrows the
money for the sale and puts that money into the appropriate pool accounts
for the farmers. For the most part the objective of the CWB is
straightforward and easy to understand but when you dig deeper into the
accounting practices it gets confusing. This is how it is done. To work
out the net interest that is returned to the farmers, the CWB takes the
total amount of interest due from the credit grain sales (as opposed to
what is actually received), subtracts the total interest paid on the
borrowings and comes up with a positive amount which is paid into
the pooled accounts. Interest that is due from the Credit Grain Sales
program is shown in the Canadian Wheat Board books as paid, even when
payments are not received. The Board assumes that because the
money is government guaranteed that they (the CWB) can consider it paid
even though payment may not be received for years or possibly not at all.
This method is a definite advantage to farmers but unfortunately it
also distorts the reality of what is happening with our credit grain
sales. The benefit to farmers from this accounting practice of the CWB
only amounts to a small amount per farmer per year (about $500) but the
burden on taxpayers (which the farmers are as well) is in the billions and
will go considerably higher if policy continues as it has in the past.
Shortfalls of principal and interest are charged back to the debtor
country and added to their existing line of credit. This credit can
then be extended to accommodate the increase in debt, rescheduled
over a longer period of time or eventually forgiven by the Canadian
Government. This system can go on indefinitely.
Another
accounting practice that has to be looked into is the way the numbers are
handled in the Statement of Operations of the Pool Accounts. This
again involves netted out numbers that do not show the real picture. This
confusion is compounded by the placement of revenue into operating
costs to make the operating costs look smaller. Actual
interest earnings from Credit Grain Sales, Government Guarantees,
Investments, Despatch earnings and positive freight rate changes belong in
revenue not as a netted out number in Operating Costs. As most
people know, the way numbers are handled in your bookkeeping can vastly
change the way things appear as an end product. I have included with
this report a spreadsheet showing how the operating costs per bushel
of grain can vary dramatically when numbers are manipulated by
different accounting practices. (A) is the way the CWB handles it. (B) is
done with actual amounts (not netted out numbers) given to each
entry, and with revenue placed where it belongs. The difference
it makes in the operating cost per bushel of grain will surprise
you!
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 repayment of loans to the corporation. Because the
CWB has no other significant assets, repayment of its
borrowings depends entirely on receipt of payment for its credit sales. This
last statement is significant because as of the early 1980’s, countries
that the credit sales were made to, were starting to have trouble keeping
up the payments on their debts. This is why you do not see the borrowings
decreasing. On the 31 of March 1988, the CWB was owed approximately
$3.2 billion in accounts receivable from countries experiencing
difficulties in repaying their debts. Included in this figure is about
$1.3 billion of interest that CWB has charged the countries.
More than one half of this accrued interest had been converted
to new principal by the CWB at the direction of the government.
In 1989 the Auditor Generals report said “ The Wheat Board's receivables
and the accrued interest on them have grown over the years to a very large
sum that continues to grow at a rate of several hundred million dollars a
year.” In the 1999-2000 annual report the borrowings to accommodate
these receivables reached 7.2 billion dollars and will go even higher next
year. How high will it be allowed to go before farmers and taxpayers
say enough? Remember, any money paid by the Canadian Government on
behalf of other countries as debt reduction or forgiveness is ultimately
paid for by the Canadian taxpayer. The accounting policy of the
Canadian Government stated that if borrowings exceeded a corporations
ability to repay, a liability is recorded by the government. The purpose
of this policy is to recognize borrowings that the government will likely
have to repay. However application of this accounting policy does not
permit the risks associated with the CWB borrowings to be recognized,
because the countries that owe money to the CWB have not formally
repudiated their debts.
This
means that each time a sovereign debt is deemed non-performing the
principal and interest can be rescheduled and no payment has to be paid by
the government of Canada to the CWB until the particular country admits to
default. Unfortunately formal repudiation of debts by debtor countries
very seldom happens because why would they repudiate their debts when
a rescheduling agreement can be obtained that spreads out loan payments
over an extended period and sometimes includes a grace period of several
years. The CWB and the Export Development Corporation (EDC) are the two
main corporations used by the Canadian government to provide the credit
debt relief agreed to at the
Paris Club.
Now
I would like to give you some background on the Paris Club. When a
country finds itself in financial difficulty, it can seek to have its
debts to sovereign states rescheduled through the Paris Club, the forum
for rescheduling (restructuring) sovereign debt. The Paris Club, of which
Canada is a member, is the group of creditor countries involved in these
reschedulings. The Paris Club's policies are often influenced by the Group
of Seven (G-7) industrialized countries
(U.S., Japan, U.K., Germany, France, Italy and Canada). Before a
country can apply for debt rescheduling, the Paris Club requires that a
country have in place an economic reform program that is supported by the
International Monetary Fund. Since it started in 1956, the Paris Club has
always sought to preserve the value of sovereign loans when it reschedules
them. Most reschedulings offer a grace period on principal repayments,
with interest at market rates, thereby maintaining the present value of
the loan. It was assumed that deferring repayment helps a debtor country
by allowing time for development activities and for economic programs
supported by the International Monetary Fund to bring the country back to
a point where it can again service its debt.
In
1990 the government, anticipating debt relief initiatives, voluntarily set
up an allowance in its financial statements "... in respect of
potential debt relief or debt service relief measures for financially
troubled countries under multilateral agreements." The Report of the
Auditor General states; “In our view, the establishment of this
allowance was, in effect, a recognition by the government that there are
risks and potential reductions in the value of certain loans.” This
meant that the government knew early on that some of the countries
involved were a bad risk and set up a contingent liability fund in its
financial statements to cover the possibility of default.
Rescheduling
the debts owed to Canada by Poland and Egypt
According
to the Department of Finance, in 1991, for geopolitical (as opposed to
financial) reasons, the international creditor community through the
Paris Club decided to embark on a process of voluntary debt relief for
Poland and Egypt. The Department also advised them that this was an
exceptional case. As its share of the undertaking, the Canadian government
agreed to provide 50 percent debt relief on a present-value basis to
Poland and Egypt, provided those countries meet the International Monetary
Fund's targets for economic reform. Poland owed the Export Development
Corporation and the Canadian Wheat Board approximately $3.5 billion, of
which over $2 billion was unpaid interest; Egypt owed them $540 million.
In addition, debt relief involving relatively small amounts had previously
been offered to the world's poorest countries. The report goes on to say,
that debt relief to Poland and Egypt could cost Canadians over $3 billion
in the next two decades. On behalf of Poland and Egypt, the
Canadian government was paying EDC and the Canadian Wheat Board a
portion of the interest payments due from those countries. This
would reduce Poland’s and Egypt's debts by half of their present value.
Specifically, the government would pay a portion of the interest
payments due for the 18 years of the agreement with Poland, and for 25
years in the case of Egypt. The Department of Finance had estimated that
this would cost the government about $800 million over the first three
years beginning in 1991, and $3.1 billion in total. Shortly after that the
Department of Finance decided to switch from debt service relief to
debt relief (forgiveness of principal and interest) for Poland and
Egypt and certain other debtors. This took place starting in 1991
and has continued up to the present day. The government has paid the CWB
in combined principal and interest payments:
- 1991
$108,693,789.58
- 1992
$179,807,434.74
- 1993
$137,890,570.15
- 1994
$ 61,910,971.09
- 1995
$347,470,682.14
- 1996
$236,155,481.58
- 1997
$172,710,284.02
- 1998
$170,613,253.03
- 1999
$174,947,343.52
- 2000
$176,471,310.63
These
numbers show the amounts paid by the Government of Canada to the CWB
in the calendar years from 1991-2000 in respect of Paris Club and/or
Canadian Debt Initiative debt reduction. Please note that these
payments are only a small part of the interest and principal due to the
CWB for the credit sales. The numbers shown in the annual reports
represents net interest on borrowings and credit grain sales, which
has a tendency to disguise the actual facts. What farmers need to see is
the total cost of the borrowings of the CWB as well as the actual
(as apposed to the fictional) cost of the interest received
from its credit grain sales. The interesting thing to point out here is
that the Credit Grain Sales Program only makes up about 5-15% of the
CWB’s yearly business sales but it accounts for most of its borrowings.
This definitely has to be looked into. In the 2000 annual report of the
CWB they list their borrowings at $7,264,209,000 and their credit grain
sales at $7,206,991,000 which is scary considering that a great
deal of their “assets” are really bad debts. A person has to
wonder if it is time for the CWB to cut its losses and simplify the
operation by eliminating the Credit Sales Programs and going to a cash
basis. This would cut back on approximately 10% of the yearly grain sales
through the board but it would eliminate further credit debt. In
1995 the CWB started doing credit sales outside of the
Credit Grains Sales Program. This new program is called the Agri-Food
Credit Facility. The borrowings for Agri-Food Credit sales are
starting to increase. These sales hold considerably more risk for the CWB
because they are only backed to 98% by the government. Two
percent may seem small at
first glance, but if the Agri-Food Credit Sales increase at the
same rate as the Credit Grain Sales Program, the CWB would be responsible
for millions of dollars in interest that will come directly out of the
pool accounts if default took place. A good portion of countries
involved with the credit grain sales of the CWB are countries that have
been to the Paris Club to have their debts rescheduled. Please check out
the Paris Club website (www.clubdeparis.org)
for a complete list of countries
involved in the Paris Club reschedulings. The decision to extend credit to
a country is complex and entails consideration of a number of factors,
including those related to foreign and domestic policy, such as the
promotion of Canadian agriculture. The extension of credit to the former
Soviet Union, and the subsequent decision to temporarily halt grain
shipments to Russia, illustrates the range of issues and the complexity
associated with such decisions. Credit limits for the Canadian Wheat Board
are set by the government, after taking into account the advice provided
by the Department of Finance and others. Credit limits to certain
debtors have, on occasion, been increased by the government, not due to
increased creditworthiness of the country but to accommodate accumulating
unpaid interest. Please note that it is the government
that makes these important financial decisions. This makes a person
wonder if the Government is using their best judgment in these particular
business matters. The CWB should not be used as a government tool for
foreign affairs. This is bound to increase administration costs to
the Board.
I
have come across interesting and somewhat confusing information in the
Public Accounts of Canada that I questioned immediately. It was “the
borrowings from other sources” by the CWB that was stated in the
Public Accounts. The amounts were incredible! Yearly borrowings went from
$184 Billion in 1997-98; down to $48 Billion in 1998-99; and back up to
$85 Billion in 1999-2000. This is quite a variation per year and
also a great deal of money for a corporation whose average sales total
$4.3 billion per year for the three year period. Credit Grain Sales only
account for 5-15% of the total yearly sales, so why would their borrowings
need to be that high? A director of the CWB stated in a letter to the
editor of our local paper that “This amount simply reflects the
numerous rollovers of funds required to meet the Canadian Wheat Board’s
short term cash needs as well as to capitalize on opportunities to
maximize farmers returns”. In 1991 the total borrowings of
the CWB shown in the Public Accounts were $21 billion, they were handling
31,197,242 tonnes of grain with a sales value of $3.5 billion dollars. In
2000 the total borrowings were $85 billion, they were handling 23,628,850
tonnes of grain with a sales value of $4.5 billion. When I look at 1991
and see that it only took $21 billion dollars in rolled over funds
to meet the CWB’s short term cash needs and capitalize on the
opportunities to maximize farmers returns when they handled 31,197,242
tonnes of grain and yet in 2000 it took $85 billion dollars
to do the same job when they only handled 23,628,850 tonnes of grain.
I have to wonder why the “short term cash needs of the CWB”
that the Wheat Board director refers to, have risen so drastically over
the years. Does this reflect a dramatic increase in operating costs or
other expenses of the CWB? If not, what is the need for this increase in
short term funding? Sales of grain on credit only amount to approximately
5-15% of all grain marketed by the CWB on a yearly basis but in 1991
credit grain sales accounted for a whopping 30% of total sales. In
spite of this the borrowings in 1991 remained low. More believable answers
are needed in this area.
In
a report put out by the Federal Government, it stated that in the fall of
1998 Canada became a leading voice in calling for HIPC (Heavily
Indebted Poor Countries) reforms. On March 25 1999, Prime Minister
Jean Chretien announced the Canadian proposals to enhance debt relief and,
in so doing, Canada emerged as a leader among the G-7 on the debt issue.
Moreover Canada pledged to provide 100-per-cent debt relief to the
poorest countries. The February 2000 budget expanded the 100-per-cent debt
forgiveness to all eligible HIPCs that are making a real effort to improve
the well being of their citizens. On January 1 2001, Canada stopped
collecting debt payments from 11 reforming countries and pledged to put in
place a debt moratorium for the remaining six countries once they are
committed to the principles of peace and good governance. Most of
Canada’s credit debt forgiveness is given through the Export Development
Corporation (EDC) and the Canadian Wheat Board. Remember that the
Canadian Wheat Board is not
a voluntary organization. It seems to me that the Government of
Canada, through the CWB, is keeping a guaranteed supply of credit grain
sales to offer up to the G-7 as proof of their commitment to reduce
poverty and satisfy their obligations to the Enhanced HIPC Debt
Initiative.
To
achieve their mandate, which is to market Western Canadian grain, the CWB
cannot be involved with the politics of the Government of Canada. Debt
reduction and poverty commitments to foreign countries are not the
responsibility of the CWB or the individual Western Canadian farmers. The
Federal Government seems to have a deep pocket where foreign aid is
concerned but the plight of the Canadian family farm is all but ignored.
If the government has the money to reduce and/or forgive billions
of dollars in debt to other countries perhaps it should be trying a little
harder to help the farmers at home. As long as Canadian farmers have
nowhere to turn to make a decent living, they will look for someone to
blame for their problems. Unfortunately the Canadian Wheat Board bears the
brunt of the anger and mistrust. The federal government has the
resources and plenty of room in their domestic subsidies commitment
levels, under the Uruguay Round Agreement on Agriculture to vastly improve
safety net programs without penalty. The only thing missing is the resolve.
I
hope this will provide “food for thought” and the tools for
everyone to access the information necessary to keep you current on the
issues important to you. Being more informed and taking an active role
in molding our future is the only positive way we will be able to influence
what is taking place around us. Please feel free to e-mail me with any
questions or if you need help accessing information.
Sources:
Websites:
Please note that the figures in red represent netted out
figures (positive earnings) that belong in revenue. These positive
earnings are placed in the CWB operating costs to make their operating
expenses seem smaller. Rate per tonne is worked out by dividing $
amounts by receipts from producers in tonnes e.g. $181,224,000.00 divided
by 23,628,850 = $7.67 per tonne. This is converted to cost per
bushel by dividing $7.67 (cost per tonne) by 36.744 (conversion for wheat)
which equals $0.21.
Please
note that these are not actual figures. The positive $ values are
kept true, but the $ amounts given to the items with the * beside them are
hypothetical. I have asked for the breakdown amounts from the CWB
but I have not yet received them. This comparison was done to show
how easily the figures can be manipulated depending on where they are
placed, and if they show actual costs or just netted out values.
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