Quarterly Financial Report for the quarter ended June 30, 2024

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.

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 handling in Canada and to establish and maintain science based standards for Canadian grain. The Commission regulates the handling of 21 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 Plan, 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

The CGC’s 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 re-spending of fees collected. The voted authority is Vote 1 – Appropriation, including ad hoc which includes annual appropriation authority and any one-time ad hoc appropriation authority for the fiscal year. The CGC funds approximately 90% of its operating budget through service and licence fees, with the balance coming through parliamentary appropriation.

The CGC’s revenue is mainly based on grain volumes handled, which can fluctuate from year-to-year due to external factors as described in 3.1 Revenue Uncertainty. The CGC accumulates surplus funds (shown as unused authority carried forward in Public Accounts of Canada) in years with higher-than-average grain volumes and draws down on accumulated surplus funds in years with lower-than-average volumes.

The baseline for existing service and licence fees was established and implemented in 2017-18 based on a $62.490 million budget and annual average official inspection and weighing volumes of 34.4 million metric tonnes. From fiscal years 2018-19 through 2020-21, the CGC continued to accumulate surplus funds due to increases in Canadian grain production that resulted in higher-than-anticipated grain volumes at export position.

On August 1, 2021, to limit further accumulation of surplus, the CGC adjusted its grain volume forecasts upwards from 34.4 to 48.1 million metric tonnes and reduced major fees by 29%. Subsequently, the CGC faced challenging financial conditions from lower-than-anticipated grain volumes due to unpredicted drought conditions in fiscal years 2020-21 to 2021-22 and higher cost pressures following a series of renewed collective agreements in 2023-24. This, in addition to planned strategic investment framework spending, resulted in a draw on accumulated surplus for fiscal years 2021-22 through 2023-24.

The CGC is currently finalizing a review of its revenues, costs, grain volume forecasting model, and service standards. The purpose of the review is to ensure fees remain aligned with the cost of providing services into the future and that service standards continue to meet the grain sector’s needs.

The CGC’s revenue projections for fiscal year 2024-25 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 July 2021. Since fiscal year 2019-20, the CGC has adjusted fees annually for inflation on April 1. Fiscal year 2024-25 fee adjustment is based on the April All-Items Consumer Index for Canada of 4.4%. Current fee amounts are located on the grainscanada.gc.ca.

Planned revenue projections and full-time equivalents (FTEs) for fiscal year 2024-25 and beyond are available in the CGC’s 2024-25 Departmental Plan.

2.1 Authority Available Analysis

As reflected in the Statement of Budgetary Authorities, the department’s total budgetary authority available for use (net of revolving fund revenue) in the fiscal year as at June 30, 2024, is $12.170 million, as compared to $8.823 million as at June 30, 2023. The change of $3.347 million in total budgetary authority available is primarily due to planned spending on strategic initiatives funded by the Investment Framework.

2.2 Authority Used Analysis

As reflected in the Departmental Budgetary Expenditures by Standard Object, the department’s total net budgetary expenditures used during the quarter ended June 30, 2024, is $4.981 million, as compared to $1.220 million as at the quarter ended June 30, 2023. The change of $3.761 million in total net budgetary expenditures used can be attributed to the following:

• The decrease of $1.181 million in revolving fund revenues received is primarily due to higher accounts receivable balances resulting from higher grain volumes billed in June 2024.
• The overall increase of $2.580 million in gross budgetary expenditures is primarily due to higher salaries as a result of collective agreement settlements throughout prior fiscal year.

3.1 Revenue Uncertainty

A significant risk to the CGC’s financial plan is revenue uncertainty due to grain volumes which can fluctuate from year-to-year due to external factors. Variances can arise between projected and actual revenues since grain handling volumes are estimated based on historical averages while operational costs are relatively fixed.

Climate change and extreme weather events, such as droughts, floods, or forest fires, can significantly impact grain production and consequently increase the CGC’s revenue risk. The Canadian grain sector can also face export volume uncertainty regarding access to international markets due to market sensitivity to actual or perceived grain quality and food-safety issues.

Drought conditions across most of the western Canadian grain production area in 2021 significantly decreased grain production yields. This resulted in lower-than-anticipated grain volumes at export position of 32.6 million metric tonnes in fiscal year 2021-22, while the forecasted volume was 48.1 million metric tonnes. While grain production returned to expected levels in 2022, the volume of grain inspected and weighed by the CGC, in fiscal years 2022-23 and 2023-24, remained lower-than-anticipated at 38.0 and 38.8 million metric tonnes, respectively. This, coupled with lower fees that came into effect on August 1, 2021, and increased salary costs due to renewed collective agreements through fiscal year 2023-24, contributed to the CGC using its position as a revolving fund to draw down on accumulated surplus to cover the revenue shortfalls over the past three fiscal years.

Assuming a return to trend yields in fiscal year 2024-25, production and supply for most crops are expected to increase with total principal field crop production returning to normal levels of 94.4 million metric tonnes. This represents a 5% and 4% increase over the 5-year and 10-year averages^{Footnote 2}.

Despite forecasted grain production increases, the CGC continues to inspect and weigh lower-than-anticipated grain volumes compared to the forecasted volume of 48.1 million metric tonnes that was used to adjust fees in 2021. This will likely result in drawing on the CGC’s accumulated surplus in fiscal year 2024-25.

The CGC’s 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% variance in forecasted grain volumes. The CGC will continue to monitor and assess impacts and uncertainties associated with grain volumes and the potential impact on fiscal year 2024-25 revenues.

The Canadian Grain Commission is currently finalizing a comprehensive review of its grain volumes forecast, revenues, and costs to ensure alignment with the costs of service provision. The purpose of the review is to ensure fees remain aligned with the cost of providing services into the future and that service standards continue to meet the grain sector’s needs. The Canadian Grain Commission is planning to communicate the outcomes of the fees review and next steps in fall 2024.

3.2 Surplus and Canada Grain Act Review

From fiscal years 2013-14 through 2017-18, unprecedented increases in Canadian grain production and relatively stable operating costs led to an accumulated revolving fund surplus of approximately $130.677 million by March 31, 2018.

In 2018, the CGC established an Investment Framework focused on strategic investments in 3 key areas:

• strengthening safeguards for producers,
• investing in grain quality assurance, and
• enhancing grain quality science and innovation.

The Investment Framework committed approximately $40 million of the accumulated surplus for a contingency operating reserve to mitigate risks associated with declines in revenues, and $90 million for strategic investments. When the Investment Framework was announced in 2018, the CGC envisioned rolling out investments over a 2-year timeframe. However, this timeline was subsequently delayed because of Budget 2019’s announcement of the Canada Grain Act review to ensure alignment between the 2 processes.

From fiscal years 2017-18 through 2020-21, Canadian grain export volumes continued to grow and some of the factors leading to recent increases were not anticipated by the current grain forecasting model. Combined with relatively stable operating costs, this led to further surplus growth in fiscal years 2017-18 through 2020-21, the majority of which occurred in fiscal year 2020-21 due to extraordinary grain export volumes. Prior to this, the CGC experienced relatively small surpluses which are typical in a revolving fund environment. The CGC addressed this situation and mitigated the risk of further surplus growth through updates to its annual grain volumes and revenue projections model and the August 1, 2021, fee adjustments as described in 1.3 CGC Financial Structure.

After being paused for much of fiscal year 2020-21 due to the COVID-19 pandemic, Agriculture and Agri-Food Canada formally relaunched the Canada Grain Act 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 CGC provided technical and policy support to Agriculture and Agri-Food Canada through evidence-based analysis and advice for a modernized regulatory framework. Potential impacts of the Canada Grain Act review on the CGC’s funding model and accumulated surplus are unknown at this time. Going forward, the CGC will consider investment initiatives within the broader context of the CGC’s strategic plan, modernization initiatives, and the Canada Grain Act review outcomes and any impacts of grain volumes on fee revenue.

The CGC continues to position itself as a global leader in grain science and has developed options for investments that will ensure organizational capacity to provide innovative and science-based programs and services. The CGC has developed a 5-year investment plan to make required improvements to maintain and improve research capacity.

To date, the CGC has allocated Investment Framework funding to the following projects:

• enhancements to the Harvest Sample Program;
• Grain Research Laboratory renewal, upgrades, and maintenance of infrastructure to deliver science programming essential to CGC’s mandate; and
• the MyCGC e-services platform, a suite of integrated program delivery systems to provide seamless digital service to CGC clients.