Quarterly Financial Report for the quarter ended September 30, 2021

1.1 Authority, Mandate and Program Activities

The CGC was established in 1912 and is the federal government department responsible for administering the provisions of the Canada Grain Act (CGA).

The CGC’s mandate as set out in the act is to, “in the interests of the grain producers, establish and maintain standards of quality for Canadian grain and regulate grain handling in Canada, to ensure a dependable commodity for domestic and export markets”.

The CGC’s vision is “To be a world class, science-based quality assurance provider”. The Minister of Agriculture and Agri-Food is responsible for the CGC.

The CGC’s Core Responsibility is Grain Regulation, or, to regulate grain handing in Canada and to establish and maintain science based standards for Canadian grain. The Commission regulates the handing of 20 grains^{Footnote 1} grown in Canada to protect producer rights and to ensure the integrity of grain transactions.

The CGC’s Departmental Results are that domestic and international markets regard Canadian grain as dependable and safe, and that farmers are fairly compensated for their grain. The CGC has three programs: Grain Quality, Grain Research and Safeguards for Grain Farmers. Internal Services supports these programs.

Further details on the CGC’s authority, mandate, and programs may be found in the Departmental Plan, the Departmental Results Report, and the Main Estimates.

1.2 Basis of Presentation

This quarterly report has been prepared by management using an expenditure basis of accounting (modified cash) and a special purpose financial reporting framework designed to meet financial information needs with respect to the use of spending authorities. The accompanying Statement of Budgetary Authorities compares the department’s spending authorities granted by Parliament to those used by the department. Information in the Statement of Authorities is consistent with that in the Main Estimates and Supplementary Estimates.

The authority of Parliament is required before moneys can be spent by the Government. Approvals are given in the form of annually approved limits through Appropriations Acts or through legislation in the form of statutory spending for specific purposes.

As part of the Parliamentary business of supply, the Main Estimates must be tabled in Parliament on or before March 1 preceding the new fiscal year.

The CGC uses the full accrual method of accounting to prepare and present its annual departmental financial statements included in the Departmental Results Report. However, the spending authorities voted by Parliament are on an expenditure basis (modified cash) of accounting.

1.3 Canadian Grain Commission Financial Structure

CGC programs and activities are funded through a combination of revolving fund (based on service fees) and appropriation sources. Approximately 90 percent of CGC costs are funded through its service fees. The CGC funding structure is based on budgetary authorities that are comprised of both statutory and voted (non-statutory) authorities. The statutory authorities include employee benefit plan authority for appropriation-funded personnel costs and CGC revolving fund authority, which allows the CGC to re-spend fees that it has collected. The voted authority is Vote 1 – Program Expenditures, which includes annual appropriation authority and any one-time ad hoc appropriation authority for the fiscal year.

The baseline for existing service and licence fees was established in 2017-18 for the five-year period ending March 2023 and was based on a $62.5 million budget and an annual average official inspection and weighing volume of 34.4 million metric tonnes (MMT). The expenditures for inspection services can vary from year to year according to the quality and volume of the crop. Since fees were implemented in 2017-18, costs have remained relatively stable, but unprecedented increases in grain production and export volumes, and major private sector infrastructure investments in the grain handling system, have resulted in increased revenue and continued accumulation of revolving fund surplus.

To address this, the CGC updated its model for forecasting the volume of grain that it expects to officially inspect and weigh upon discharge from terminal elevators and is projecting a level of approximately 48.1 MMT annually for the next three fiscal years (2021-22 to 2023-24). In May 2021, the CGC proposed a realignment of four fees for official inspection and official weighing services with the adjusted grain volume forecast. These fee reductions of 29% were effective August 1, 2021. Under the current five-year cycle, all fees were to be reviewed and amended, as required on April 1, 2023. However, this comprehensive review is now targeted for April 2025 to allow for the Canada Grain Act review process to advance and inform future work.

The CGC’s revenue projections for 2021-22 and beyond are based on the funding model identified in the 2017 User Fees Consultation and Pre-Proposal Notification, fees published in the Canada Gazette, Part II in March 2018, and updated fees published in the Canada Gazette, Part II in July 2021. This includes a revised annual grain volume projection of 48.1 MMT and fees as set out in Schedule I of the Canada Grain Regulations. Beginning in 2019-20, the CGC started adjusting fees annually for inflation each year on April 1 to be consistent with the Service Fees Act (SFA) and to limit the need for fee amendments going forward. The 2021-22 adjustment is based on the April All-Items Consumer Index for Canada of negative 0.2 percent. Current fee amounts are located on the CGC website.

Planned revenue projections and full time equivalents (FTEs) for 2021-22 and beyond are available in the CGC’s 2021-22 Departmental Plan.

2.1 Authority Available Analysis

As reflected in the Statement of Budgetary Authorities, the department’s total authority available for use (net of Revolving Fund revenue) in the fiscal year as at September 30, 2021 is $6.970 million, as compared to $6.790 million as at September 30, 2020. The increase in authority of $0.180 million is primarily the result of additional operating budget carryforward.

2.2 Authority Used Analysis

As reflected in the Departmental Budgetary Expenditures by Standard Object, the department’s total budgetary authority used in the quarter ended September 30, 2021 is $1.097 million, as compared to ($5.435 million) as at the quarter ended September 30, 2020. The change of $6,532 million in total budgetary authority used can be attributed to:

1. The overall decrease of $5.260 million in revenues received in the quarter ended September 30, 2021 primarily due to a significant decrease in grain volumes handled as a result of drought and the decrease to inspection and weighing fees that was effective August 1.
2. The overall increase of $1.272 million in expenditures, primarily a result of the following variances:
   1. Personnel expenditures increased by $1.283 million as compared to the same quarter last year, primarily due to the addition of FTEs. These FTEs were hired to maintain grain inspector capacity and for supporting strategic initiatives such as the Mobile Device Strategy, MyCGC Portal and the Future of Work.
   2. Professional and special services expenditures increased by $0.278 million as compared to the same period last year, primarily due to the timing of billing from other government departments for services provided and the addition of consulting services for the MyCGC Portal initiative.

The total budgetary authority used in the year to September 30, 2021 is $0.375 million compared to ($6.935 million) for the same period last year. The change of $7.310 million in budgetary authority used can be attributed to:

1. The overall decrease of $3.440 million in revenues received in the period ended September 30, 2021, was primarily due to a significant decrease in grain volumes handled as a result of drought and the decrease to inspection and weighing fees that was effective August 1.
2. The overall increase of $3.870 million in expenditures, primarily a result of the following variances:
   1. Personnel expenditures increased by $3.068 million as compared to the same period last year, primarily due to the addition of FTEs and retroactive payouts during the first quarter of 2021-22. The additional FTEs were hired to maintain grain inspector capacity and for supporting strategic initiatives such as the Mobile Device Strategy, MyCGC Portal and the Future of Work.
   2. Professional and special services expenditures increased by $0.514 million as compared to the same period last year, primarily due to the timing of billing from other government departments for services provided.
   3. Acquisition of machinery and equipment expenditures increased by $0.289 million as compared to the same period last year, primarily due to the timing of payments on purchases that were not received by year-end.

3.1 COVID-19 and the Future of Work

In 2020-21, in response to the COVID-19 pandemic, CGC resources were focused primarily on the critical areas of inspection and licensing, supporting producers through the Harvest Sample Program, adapting the workplace to support remote work, and implementing new approaches to provide mandated services while ensuring the safety of employees.

However, as provinces announced plans to reopen and gradually lift public health restrictions, the CGC continued to undertake the necessary steps to transition towards a work environment that meets current operational needs and delivers on its strategic priorities and program commitments. To date, most grain export inspection and weighing services have now returned to regular pre-pandemic service levels, with additional safety measures in place. Similarly, most activities that were temporarily suspended, such as GRL research work and voluntary sample testing, have resumed while ensuring the health and safety of employees, grain sector colleagues, and the general public.

Moving forward, the CGC will continue to draw on the innovative practices adopted during the pandemic and integrate these into the CGC’s post-pandemic operating environment and vision for the future of work. The CGC will continue to support employees to effectively complete their assigned tasks in the remote workplace, laboratory, or licensed terminal elevators through strategies designed to ensure the health and safety of all employees.

3.2 Surplus and Canada Grain Act Review

In 2018 the CGC established an Investment Framework focused on strategic investments in three key areas: strengthening safeguards for producers, investing in grain quality assurance, and enhancing grain quality science and innovation. To date, the CGC has allocated $4 million to fund ongoing enhancements to the Harvest Sample Program over five years. In addition, an investment was made in a voluntary testing program for small-lot pulse exports. Initial plans were for this program to be administered for a two-year period, but it has been extended to July 2022 to account for lost time associated with the temporary suspension due to the COVID-19 pandemic.

All other spending initiatives under the Investment Framework have been on hold since the Budget 2019 announcement of the AAFC-led Canada Grain Act (CGA) Review to ensure alignment between the two processes. After being paused for much of 2020-21 due to the COVID-19 pandemic, AAFC formally relaunched the CGA Review in January 2021 with public consultations closing on April 30, 2021. A resulting “What We Heard” report was published in August 2021 detailing consultation feedback.

The feedback included three themes: CGC administration, grading and oversight, and producer safeguards. Topics raised regarding the administration of the CGC included its governance, mandate, and funding model, the role of the CGC in Eastern Canada, and introduction of a scheduled CGA review clause. Grading and oversight discussions focused on delivery of mandatory outward weighing and inspection services, oversight and enforcement of the CGA at inland delivery points, standards committees, wheat class modernization, and standardization of licensee equipment and grading processes. Producer safeguards feedback discussed licensing, producer payment protection, access to binding determination, CGC data collection and publication, issues regarding contracts, itemization of deductions on cash purchase tickets, and the provision of producer cars. Overall, respondents indicated that the CGC should continue to have a strong role in setting and maintaining a world-class grain quality assurance system, through regulation and oversight of the grain sector. However, opinions on the roles that the CGC should adopt going forward were mixed. In the coming months, the CGC will work with AAFC to analyse the various options presented through the consultation and determine how best to move forward with the modernization of the Canadian grain regulatory framework to ensure it meets the needs of the evolving grain sector. Any future initiatives under the Investment Framework will be informed by, and align with, the outcomes of this process.

3.3 Revenue Uncertainty

The CGC receives funding through voted appropriations and fees related to programs and licences it provides to the grain sector. Fee revenue is largely based on grain volumes, which fluctuate from year to year. In addition, grain volumes are not fully known prior to commencement of the fiscal year. This can result in significant variances between CGC projected revenues and actual revenues. Because actual grain volumes vary from year to year, in years with higher-than-average grain volumes, revenues may exceed costs and the CGC could accumulate surpluses (shown as unused authority carried forward in Public Accounts). In years with lower-than-average grain volumes, revenues could be less than costs and the CGC would be required to draw on its surpluses.

The CGC’s revenue risk is reduced when above average grain volumes result in revolving fund surplus. However, the increasing extreme weather events such as droughts and floods can significantly decrease grain production, and consequently increase the CGC’s revenue risk. In addition, the Canadian grain sector continually faces export volume uncertainty regarding access to international markets due to market sensitivity to actual or perceived grain quality and food-safety issues. Restricted market access has the potential to result in lower-than-expected grain volumes and revenues. The CGC annual budget is reviewed throughout the year to accommodate shifting needs and priorities, including risk mitigation strategies that enable the CGC to accommodate up to a 20 percent variance in forecasted grain volumes.

As noted in Section 1.3, since fees were amended and implemented in 2017-18, operating costs have remained relatively stable, but the CGC has consistently inspected and weighed higher-than-forecast grain volumes resulting in increased revenue and additional in-year surplus accumulation. Although the 2017-18 changes significantly reduced surplus accumulation, in-year surplus growth has continued. For fiscal year 2020-21, the CGC had an in-year surplus of $18.64 million. This is in addition to the approximately $15.51 million in surplus accumulated from fiscal years 2017-18 to 2019-20.

The last several years have seen a continued growth in grain export volumes, with record tonnages reported by CN and CP railways and port authorities in 2020-21. To date, overall exports are about 30% higher than the same time last year. Although local and global circumstances stemming from the COVID-19 pandemic since March 2020 have contributed to the increased grain movement, recent expansion in the grain handling sector along with improved farming techniques and grain variety development will continue to sustain these higher volumes and the potential for further surplus accumulation.

However, excessively hot and dry growing conditions across most of the western Canadian grain production area in 2021 is resulting in significantly decreased yields. This will in turn result in reduced grain volumes inspected and weighed by the CGC in the 2021-22 fiscal year, reduced revenues, and the necessity to draw down on surplus revenue from previous years. Crop production estimates from AAFC and Statistics Canada released on August 30, 2021, indicate a significant reduction across all major grains and oilseeds. Specifically, the production estimates for grains certified by the CGC showed an overall 27% reduction. Based on this revised production estimate, an estimated impact of reduced production on export reduction, and considering the known actual volumes for the first quarter, the CGC is expecting to inspect and weigh only 31.19 MMT in fiscal year 2021-22. Based on analysis performed at the start of the new crop year, this would result in an estimated $12.07 million revenue shortfall compared to budget. Nevertheless, given that Canadian production of grains and oilseeds has been showing an overall increasing trend over the past 15 years, this trend will likely continue even with the anticipated reduction in 2021 production.

To address this situation and mitigate the risk of further surplus growth, the CGC has updated its model for forecasting annual grain volumes and revenue projections. Effective August 1, 2021, the four fees for official inspection and weighing that generate most of the surplus were reduced by 29% and realigned with the adjusted grain volume forecast of 48.10 MMT. As a result, the CGC operating budget for fiscal 2021-22 to 2023-24 is based on the expectation of average fiscal year grain volumes of 34.41 MMT from April to July 2021, and 48.10 MMT from August 2021 to March 2024. The intention is to generate no material surpluses or deficits.