«Volume 23 2009 Page 1-19 The Restructuring of the Saskatchewan Wheat Pool: Overconﬁdence and Agency Murray E. Fulton∗ Kathy A. Larson† ∗ ...»
Journal of Cooperatives
Volume 23 2009 Page 1-19
The Restructuring of the Saskatchewan Wheat Pool:
Overconﬁdence and Agency
Murray E. Fulton∗ Kathy A. Larson†
∗ University of Saskatchewan, firstname.lastname@example.org
† Knowledge Impact in Society, University of Saskatchewan, email@example.com
The Restructuring of the Saskatchewan Wheat Pool:
Overconﬁdence and Agency Murray E. Fulton and Kathy A. Larson This paper examines how agency problems combined with overconﬁdence and hubris by coop management lead to ﬁnancial failure in the Saskatchewan Wheat Pool. As a consequence of both of these problems, the Pool made poor investment decisions and ended up in severe ﬁnancial difﬁculties. These problems were exacerbated by three additional factors: (1) ownership and control were separated via an A-B share structure, leading to a situation where neither farmer members nor investors had an incentive to monitor management activities; (2) the sheer volume of investment activity undertaken made it virtually impossible for the board to stay on top of what was happening; and (3) as a result of the change ﬁnancial structure, senior management had available a large amount of debt capital that it could spend.
Introduction On 30 August 2007, the Saskatchewan Wheat Pool (SWP or Pool) ofﬁcially became known as Viterra, thereby formally severing all links to its cooperative roots.
The real loss of its cooperative structure, however, occurred earlier. A number of dates vie for the honor: April 1996, when Pool shares began trading on the Toronto Stock Exchange, making the cooperative at that time one of but a handful in the world with publicly traded shares; January 2003, when, as part of a massive C$405 million debt restructuring plan, the number of farmer-member directors was reduced from twelve to eight and four independent directors were added, one of whom was designated as the lead director with responsibility for managing the board; or February 2005, when the SWP’s board of directors approved a recapitalization plan that transformed the Pool from a cooperative to a business corporation.
During the period marked by the dates above, the Pool went through a number of major transformations. In the early 1990s, the Pool was the dominant player in the grain handling business in Western Canada, with a market share in its home province of nearly 60 percent and a major voice in Canadian agricultural policy.
Through the 1990s, the Pool diversiﬁed, investing heavily offshore and in the doMurray E. Fulton and Kathy A. Larson are respectively professor, Johnson-Shoyama Graduate School of Public Policy, University of Saskatchewan, and project coordinator, Knowledge Impact in Society project, University of Saskatchewan.
2 Journal of Cooperatives mestic grain processing and hog industries, all the while undertaking a massive restructuring of its grain elevator system. By the late 1990s, the Pool had lost a large percentage of its market share, major ﬁnancial losses were being incurred, and debt was rapidly mounting. In 2000, a new CEO was hired and the company began selling off assets in an effort to stay solvent. After narrowly escaping bankruptcy in January 2003, the company began to turn its ﬁnancial position around. In late 2006, the Pool announced a takeover bid for Agricore United. The bid was successful and the Pool once again became the dominant player in the Canadian grain-handling industry. In 2009 Viterra moved to become more multinational in scope with a takeover bid for Australia’s ABB Grain Ltd.
The purpose of this article is to examine the factors behind the events at SWP in the 1990s. During this period, the Pool’s dramatic loss of market share and accumulation of debt placed it on a trajectory that resulted in it eventually losing its cooperative structure. Although the events after this period are fascinating and worthy of study, they are not examined because they are the result of a different set of dynamics driven by the Pool’s attempts to deal with problems created during the 1990s. While many forces contributed to the decisions made during the 1990s, this article concentrates on two key factors: the hubris and over-conﬁdence of senior management and a lack of effective oversight by the board of directors.
The rest of this article is structured as follows. The next section provides a brief history of the Canadian grain handling system and the Pool’s role within it. The section following that provides details on the Pool’s market and ﬁnancial performance during the mid-1980s to early 2000s timeframe. The article then presents the two conceptual frameworks used in the case study—cognitive theory and agency theory. These frameworks are followed by the presentation of evidence from personal interviews conducted with Pool senior management and elected ofﬁcials to support the hypothesis that hubris among senior management and a lack of oversight by the board led to poor investment decisions at the Pool. The article concludes with a brief summary and discussion.
Overview of SWP and the Canadian Grain Handling System Saskatchewan Wheat Pool was one of three “wheat pool” co-ops that formed in the 1920s in Manitoba, Saskatchewan and Alberta to collectively market wheat on behalf of their farmer-members through a jointly owned Central Selling Agency (CSA).1 Through pooling accounts, each farmer received the same price regardless of the time of year they sold their grain.
The Pools were successful for several years until a poor quality wheat crop in 1928 and falling grain prices beginning in 1929 (which resulted in an overpayment to farmers and mounting margin calls) led the federal government to step in and disVol. 23 3 solve the CSA (Fowke 1957, p. 248–251). After the dissolution of the CSA, farmers pressured the government to continue grain pooling through a state enterprise, the Canadian Wheat Board (CWB).
With the CWB marketing wheat, the Pools (along with the United Grain Growers (UGG)) operated as farmer-owned grain handling companies. (For further information on the Alberta and Manitoba Pools, and UGG, see Earl 2009.) Although SWP’s core business activity was grain handling, it was diversiﬁed in other agribusiness areas. By the 1990s, the Pool’s ﬁve operating divisions were: grain handling and marketing; agri-products; agri-food processing; livestock production and marketing; and publishing and other.
Rail deregulation, trade liberalization and challenges to the CWB prompted a major restructuring of the Canadian grain industry in the 1990s (for more details, see Lang 2006). In 1995, the long-standing subsidy on grain transportation—the Crow Rate—was removed due, in part, to the World Trade Organization (WTO) agreement and a move to cut federal government spending. The railways were allowed to set their freight rates (subject to a revenue cap) and to close branch lines.
In reaction to a more liberalized trading environment created by both the WTO agreement and NAFTA, as well as a belief that the CWB might disappear, a number of the multinational grain companies entered the Western Canadian market. In response, the Pools and UGG consolidated their grain handling operations, built large inland terminals on the main lines, and modernized their grain handling systems. The SWP, in particular, began to diversify its operations towards value-added activities.
The Share Conversion and Subsequent Events As early as the mid-1980s, it was apparent that the Pool was facing a major ﬁnancial hurdle. With nearly half its membership approaching retirement, the Pool required more than C$100 million to make patronage equity payouts (Saskatchewan Wheat Pool [SWP] Equity Conversion 1995).2 That hurdle, coupled with declining net earnings (see ﬁgure 1) and the co-op’s desire to rebuild its elevator network and to diversity its operations, drove the Pool to consider new ﬁnancing options.
In 1994, delegates approved a dual A-B share structure under which the B shares would trade on the Toronto Stock Exchange.
In the A-B share structure, the Pool used the A shares to leave control in the hands of the farmer membership, and converted retained member equity into tradable B shares. The B shares were viewed as a permanent source of equity (in comparison, traditional member equity is typically considered by banks as debt because it must be repaid to members upon their retirement or exit from farming). With the new ﬁnancial structure, the problem of redeeming member equity was solved and 4 Journal of Cooperatives Figure 1. SWP Net Earnings and Grain Handling Market Share in Saskatchewan, 1974–2005
Source: Saskatchewan Wheat Pool Annual Reports ﬁnancial institutions greatly expanded the money that they were willing to lend to the Pool for its elevator rebuilding and business expansion programs.
Under the conversion, farmer-members each received one A share worth C$25.
This share gave each farmer-member the right to one vote when electing delegates and the right to participate in Pool committees. The remainder of a farmer’s equity was converted to B shares at a rate of C$12 per share; these shares could then be bought and sold on the Toronto Stock Exchange.3 Investors were able to purchase B shares up to a maximum of 10 percent of the total issued and outstanding shares, a limit that was intended to keep ownership of the Pool diffuse. An amendment in 2002 allowed for a higher ownership limit to be granted in special circumstances.
The ownership limit was removed in 2005 when the Pool became a business corporation.
Trading started on 2 April 1996 with shares opening at C$12.00. They rose quickly, peaking at C$24.20 in November 1997, and then steadily declined (see Vol. 23 5 Figure 2. Price of Saskatchewan Wheat Pool B Shares on the TSE, 1996–2004
Source: CFMRC TSE Database
ﬁgure 2). The share price fell below C$12.00 in late September 1998 and reached a low of C$0.18 per share in March 2003.
Although the share conversion did not immediately provide the Pool with access to any more equity capital (a subsequent share offering in 1998 added C$110 million in equity), the new ﬁnancial structure meant that ﬁnancial institutions were willing to make available a signiﬁcant amount of additional debt capital that the Pool used to pursue new business lines and rebuild its elevator system. Based on the increase in long-term debt that occurred, the Pool likely had access to at least C$400 million in extra credit.
In 1997, the Pool announced both Project Horizon and its ﬁrst foreign direct investments. Project Horizon was the Pool’s elevator rebuilding initiative, which entailed building twenty-two facilities at a cost of C$270 million at locations across Saskatchewan, Manitoba, and Alberta. The foreign direct investments included terminal construction in Poland and Mexico, ownership in an England-based trading company, and a joint venture terminal with General Mills in North Dakota.
The Pool also made other investments and acquired other operations. Included among these investments and acquisitions were an oats processing facility, a hog 6 Journal of Cooperatives Figure 3. SWP Long-Term Debt and Acquisitions by Decade, 1974–2003
Source: Saskatchewan Wheat Pool Annual Reports
processing facility, a farm input supply business, a number of hog production units, and several food processing businesses. As a result of an unparalleled number of acquisitions and investments (see list of acquisitions by decade in ﬁgure 3), longterm debt rose from C$97.4 million in 1996 to more than C$539.9 million in 1999 (all ﬁgures in 2005$C) (see ﬁgure 3).
In addition to a rising debt, both market share and net income declined sharply (see ﬁgure 1). Net losses began in the 1998–99 crop year, the Pool’s 75th year of operation, and persisted for the next six crop years. From 1993 to 2003, the SWP’s grain handling market share in Saskatchewan fell from 61 percent to 33 percent. As a result of the poor ﬁnancial showing, both Chief Executive Ofﬁcer Don Loewen and Chief Operating Ofﬁcer Bruce Johnson were asked to resign in 1999. A new CEO, Mayo Schmidt, was hired in 2000. Schmidt’s efforts to slash debt through massive divestment were unsuccessful. In early 2003, the Pool was forced into a C$405 million debt restructuring plan and further divestment of major assets.
Vol. 23 7 As the Pool’s ﬁnancial problems grew, it began shedding its co-op identity. The ownership limit on shares was revised in 2002, which opened the door for companies to buy a major position in the Pool. The board makeup went through a series of changes. The ﬁrst change was the addition of two outside advisors in 1998. The board size was then decreased from sixteen to twelve members in 2000, with two of the twelve board members being external. As part of the 2003 reﬁnancing obligations, the number of external members was increased to four, leaving eight farmer board members. Two years later the Pool became a federal corporation under the Canada Business Corporations Act, which altered the board makeup to seven appointed directors, four elected farmer-board members and the CEO. Legally, the Pool was no longer a co-op. The shares were re-evaluated and traded under the symbol SWP.4 As a corporation, the Pool further pared its elevator network to 44 primary elevators in 2006. In late 2006, the Pool entered a bidding war with James Richardson International (JRI) for Agricore United. SWP won the bidding war, with Agricore United accepting the takeover bid in early 2007.5 The amalgamated company, known as Viterra, is the largest grain handler in Canada, with 30 percent of the primary elevators, 39 percent of the port terminal capacity, and 36 percent of the licensed storage capacity (Canadian Grain Commission 2007).6 In May 2009, Viterra announced a proposal to purchase ABB Grain Ltd of Australia.