2015–2016 Livestock Financial Protection Board annual report

Chair's messages

August 5, 2016

The Honourable Jeff Leal
Minister, Agriculture, Food and Rural Affairs
77 Grenville St.11th Floor,
Toronto, Ontario M7A 1B3

Dear minister,

Pursuant to section 6(1) of the Farm Products Payment Act, I am pleased to submit a report describing the work of the Livestock Financial Protection Board for the year ending March 31, 2016, for tabling in the legislature. This report has been prepared in compliance with the Agencies & Appointments Directive.

As a board, we continue to focus on administering the fund for livestock producers; adjudicating claims; granting or refusing the payment of all claims and recovering any money to which the board is entitled. As fund administrator, one of our goals is to ensure long-term sustainability of the fund. Once again the fund's investment strategy performed well and helped the fund maintain both a healthy and stable funding ratio. In December 2014, industry stakeholders, because of record high cattle prices, wrote a letter to the ministry requesting that the check-off fee be increased from 5 cents per head to 10 cents per head. In response to this request the board undertook an actuarial study in mid-2015 and the final report was approved by the board in September 2015. With the support of the actuarial study the fee increase from 5 cents per head to 10 cents per head was approved and became effective in February 2016.

The following are some highlights for the 2015/16 fiscal:

• The fund remained actuarially sound with a balance of $7.1 million ($1.8 million above the actuarial target of $5.30 million).
• Investment income of $241,410.
• Rate of return on investment of 3.63%.
• Debt recovery rate 33.2%, 3.2% higher than our target rate.

In the 2015/16 fiscal the board received 13 claims for compensation from livestock sellers as a result of the failure of four livestock dealers. The payout for these claims was $409,006. The board was able to adjudicate the claims in a timely manner: it took 48 days to reach a decision; 12 days less than the stated goal to process the claims.

Respectfully submitted,

Larry Witzel
Chair, Livestock Financial Protection Board

1. Overview/mandate

The Ontario Beef Cattle Financial Protection Program (program) was established in 1982 and provides compensation to sellers^{footnote 1[1]} in the event that a buyer (packing plant operators, abattoir operators, auction market operators, country dealers and cooperatives) defaults on a payment^{footnote 2[2]}.

The program has two components: the annual licensing of dealers under the Livestock and Livestock Products Act (LLPA) and the administration of the compensation fund established under the Farm Products Payment Act (FPPA).

The Ministry of Agriculture, Food and Rural Affairs is responsible for the licensing of dealers. The Livestock Financial Protection Board's (board) primary role is to administer the fund for livestock producers (fund). The board is established under the authority of section 3 of O. Reg. 560/93 — Fund for Livestock Producers, made under the FPPA. It is also classified as a board-governed provincial agency (trust) under the Agencies & Appointments Directive (AAD). Trust agencies administer funds and/or other assets for beneficiaries named under statute.

The functions of the board are outlined in section 4(1) of the FPPA as follows:

1. to administer its funds
2. to investigate all claims made to it under the FPPA and to determine the extent of their validity
3. to grant or refuse the payment of all claims or any part thereof and determine the amounts and manner of payment
4. to recover any money to which it is entitled under the FPPA by suit in a court of competent jurisdiction or otherwise

There are 182 licensed dealers and approximately 19,000 beef farmers (including milk producers who market veal calves, bulls, and culled dairy cattle for slaughter purposes) subject to the FPPA and the LLPA.

The fund for livestock producers

All money to which the board is entitled is paid into the fund. Contribution to the fund is based on a fixed rate per head of livestock in a transaction. Under O. Reg. 321/11, a fee of ten cents per head sold is payable to the board, unless the sale is on consignment, in which case the ten cent fee is owed by each of the consignee and consignor.

Fees are remitted by the buying dealer on behalf of the producer when the sale is made directly by a producer, by the selling dealer when the sale is by a dealer, and by the consignee on behalf of the consignor and on their own behalf, where the sale is on consignment. Fees are payable on or before the 15^th day of the month following the month of sale unless less than 1,000 head are sold or purchased annually, in which case the fee is payable annually.

The fund is used to:

1. Provide compensation to qualified sellers in the event that certain buyers default on payment.
2. Offset the cost of determining financial responsibility of dealers as part of the licensing component of the program.
3. Pay board expenses (other than for the remuneration of those of its employees who are public servants employed under Part 111 of the Public Service of Ontario Act, 2006)^{footnote 3[3]}.
4. Pay for professional, technical or other assistance to or on behalf of the board.

A claim may be made if a seller hasn't been paid according to the timelines in the regulations, if the buyer has ceased operation, or if the buyer's assets have been placed in the hands of a receiver or trustee.

O. Reg. 560/93 lays out discretionary grounds under which a claim may be denied. Examples of grounds for refusing payment include the claimant extending credit to the buyer; the Director under the LLPA not being notified promptly where payment was not received on time, and the claim not being submitted on time.

The program provides

Protection for producers

If the board decides that a claim from a producer made in respect of a dealer is valid, the board pays 95% of the portion of the claim that it recognizes as valid.

Protection for licensed dealers

Where an approved claim relates to a licensed dealer selling to a producer or feeder cattle finance co-operative who defaults on payment, compensation is 85% of the portion of the claim that the board recognizes as valid, up to a maximum of $125,000. In these cases, there is no compensation for claims of less than $5,000. Where an approved claim relates to a licensed dealer selling to another licensed dealer, the board pays 95% of the portion of the claim that it recognizes as valid.

2. Board appointments

Section 4(1) of O. Reg. 560/93 requires that the board be composed of at least five members consisting of one member each from Beef Farmers of Ontario (BFO), Canadian Meat Council (CMC) and the operators of community sales under the Livestock Community Sales Act, together with such other members as the minister considers advisable.

The regulation also requires the minister to appoint a chair and a vice chair from among its members. The board operates at arm's length from the government but is accountable to the government in exercising its mandate. The members of the board are appointed by the minister. These individuals, in addition to administering the fund, draw upon their expertise in the livestock industry in hearing and adjudicating cases before them. The board may also call upon technical experts and professionals to provide assistance.

As at March 31, 2016, there were seven board members which included a chair and vice chair. The CMC position has been vacant since 2008, and while the board has been in contact with the CMC with regard to having a member appointed, to date the CMC has not submitted any candidates.

The table below shows the names of appointees for fiscal 2015/16 and the term of their appointments.

Five members of the board constitute a quorum for transacting the board's business. The board is made up of industry representatives from a wide range of livestock industry sectors. This broad industry knowledge is important in understanding the clientele and the claim files.

Board staff and key activities

In the 2015/16 fiscal year the ministry undertook a competitive procurement process to secure a delivery agent to provide the:

• Ministry with assistance in administering the licensing component of the Ontario Beef Cattle Financial Protection Program.
• Board with fund investment, administrative and adjudication support.

Beef Cattle Financial Protection Program Inc. (BCFPPI) was ultimately the successful proponent. The tripartite contract entered into between the ministry, the board and BCFPPI is for a three year term with an additional two year optional term. BCFPPI is a not-for profit corporation governed by a board of directors. The board of BCFPPI has representatives from the Beef Farmers of Ontario, Ontario Livestock Dealers Association, and Ontario Livestock Auction Markets Association. The contract will end December 31, 2020.

BCFPPI acts as the board's administrator and is responsible for assisting the board in preparing its annual report, business plan and other documentation required for compliance with the Memorandum of Understanding (MOU) and the Agencies & Appointments Directive. The board has delegated day to day management of the fund to BCFPPI. This includes receiving and depositing check-off fees; preparing monthly, quarterly and annual financial statements, preparing documentation for annual audits and investment of the fund. The fund is invested according to guidelines set out in the MOU.

The board has continued its arrangement for the provision of secretariat support with BCFPPI. In addition BCFPPI supplies adjudication support behind an ethical fire wall, with its only task being drafting decision letters as directed by the board.

Counsel

The Ministry of the Attorney General provides legal services to the board. The lawyer assigned to the board provides the board with advice, opinions, and other legal assistance in judicial reviews, claim adjudication and recovering monies owed to the board, and also contributes to the continuing education of board members.

Investigator

The Ministry of Agriculture, Food and Rural Affairs Regulatory Compliance Unit provided investigative support. There were 13 claims involving four dealers in the 2015/16 fiscal.

3. Description of activities over the year

The board's activities are geared towards fulfilling its mandate. The board has two types of meetings: regular meetings and adjudicatory meetings and hearings.

1. Regular meetings are held to do training, approve the business plan, annual report, and year-end financial statements and for general fund administration. These are held annually.
2. Adjudicatory meetings and hearings are held to consider applications for payments from the fund. These are ad hoc and depend on whether or not there is a claim on the fund.

There were three board meetings in the 2015/16 fiscal year and three conference call meetings. Claims were considered at all the meetings held. Additionally, one hearing was held and the business plan, annual report and audited financial statements were approved.

Fund management/administration

The board is responsible for the overall governance of the fund. The primary purpose of the fund is to compensate sellers in the event of a default by a buyer. The board's main objective when managing investment capital is to safeguard its ability to remain as a going concern so that it can continue to deliver financial protection to livestock sellers. As such, the board's investment policy focuses on ensuring security, liquidity and maximization of investment income. In addition, there are restrictions in place so that only authorized investments are undertaken (the fund can only be invested in instruments permitted by the MOU).

In order to ensure liquidity and manage interest rate risk, the fund's investments mature at various points in time. Currently the fund is invested in short, and long-term fixed interest income type securities, including a long term first mortgage and a short-term fixed term GIC that matures February 2017. The board's responsibility as fund administrator includes:

• establishing or approving all policies as required
• approving payments from the fund
• reviewing, adopting and monitoring the strategic planning process
• approving the annual audited financial statements of the fund
• reviewing and approving the board's operating budget
• ensuring policies and processes are in place for the identification of risks and reviewing and approving risk management strategies
• ensuring that an actuarial review of the fund is conducted when required

As part of its ongoing efforts to ensure the solvency of the fund, the MOU requires the board to undertake an actuarial review, at any time, in order to ensure the actuarial soundness of the funds. The board had an actuarial study completed in July 2015 by Ernst & Young. The conclusion of the review was that the fund is in a strong financial position and that a fund balance of approximately $5.3M would cover net claims with 85% confidence.

In December 2014, industry stakeholders, because of record high cattle prices, wrote a letter to the ministry requesting that the check-off fee be increased from 5 cents per head to 10 cents per head. The board supported this request and an actuarial study was completed which supported the fee increase. A fee increase from five cents to ten cents was approved by the minister and became effective Feb 1, 2016.

Claims investigation and adjudication

The process begins when the seller files a claim with the board or indicates an intention to file a claim. Once a complaint is received an application form is sent to the seller. Once the claim application is received it is investigated by the Regulatory Compliance Unit in the Food Safety and Traceability Programs Branch. When the investigation is completed an investigative report is given to the board. The board conducts an in-depth analysis, which may involve legal services, and either makes a final decision or offers an opportunity for the parties to make submissions or attend a hearing before making its final decision.

If the board offers an opportunity for a hearing, and a hearing is requested by one of the parties, a notice of hearing is mailed to the parties stating the time, date and location of the hearing. The board works to adjudicate cases within 60 days of receiving the file from the investigators. Where a hearing is held, it may take longer to make a decision. After the claims adjudication process is completed, the board sends a decision letter to the claimants and buyer.

Appendix 1 shows the history of claims to the fund up to March 31, 2016.

Recovery of money owed

The board, through legal counsel and the administrator, work to recover money owed to the board. Since inception, the board has paid out $10,752,997.64 and has recovered $3,568,194 for a 33.2% recovery rate. As per the MOU, in 2010/11 a recovery policy was developed and is currently in force. The recovery policy states that the board will make every reasonable attempt to recover monies that is owed to the board. Its objectives are to utilize both ministry and external legal staff in recovering as much outstanding debt as is reasonably achievable using a variety of tools and options. There is currently one active debt recovery file. It is not known at this time what yield, if any, that file will produce.

4. Analysis of operational and financial performance

The board administers the compensation fund established under the FPPA. Should a licensed dealer or producer default, the board adjudicates any claim(s) and determines the payment (if any) to be made from the fund.

A total of 13 claims were received by the board in 2015/16 fiscal. The detail of the claims adjudicated is as follows:

• Seven claims were paid in full totaling $341,759.85.
• Four claims were denied in the amount of $760,492.02.
• Two claims were partially denied in the amount of $38,679.09.
• Two claims were partially paid in the amount of $67,246.41.

The board took an average of 48 days from when the investigative reports were received to make a decision on the claims. This was twelve days less than the goal set in the business plan.

The balance of the fund at the beginning of the fiscal year was $7,367,550 and at the end of fiscal 2015/16 it was $7,103,567. The thirteen claims had no significant impact on the fund.

Fund performance and investment strategy

The board's main objective when managing investment capital is to safeguard its ability to remain as a going concern so that it can continue to deliver financial protection to qualified livestock sellers. Investment income is one important source of revenue for the fund.

The investment strategy flows from the investment guidelines set out in the MOU, which includes some investments allowed under repealed provisions of the Trustee Act. When short or medium term investments mature, research is done on the variety of rates available. If it appears that interest rates are generally rising then a shorter maturity date would be chosen to take advantage of potentially higher rates at maturity. If rates appear to be falling then a longer maturity would be selected.

Over the last seven years, the ability to invest in a high security first mortgage at 5% produced returns in excess of $55,000 more per year than any other options available on the market that the board can invest in under its guidelines.

The fund's asset mix is made up of

Cash, short and medium term investments

Cash and short term investment holdings at year end were $1,992,268. Of this total $449,434 was cash and $1,542,834 short term investments. Short term investments consist of a financial instrument that matures in February 2017 and earns 1.41% per annum.

Long term investment

The fund's long-term investments at the end of the fiscal year was $5,111,299. This consist of a financial instrument that matures in February 2018 and earns 1.60% per annum and real estate in the form of a $4 million first mortgage on development lands in the city of Kitchener bearing interest at 5% payable semiannually. The $4 million mortgage is 56% of total assets and 60% of total investments. Since 2004, when the board made its initial investment in real estate, the portfolio has generated an average annual return of 4.06%. The year prior the portfolio's yield was 3.22%.

The board's strategic investment mix was instrumental in minimizing the impact of the economic downturn on its investments. The board considers its investment in real estate to be a safe investment that has generated great returns with little to no risk. Diversification among different assets, such as the mortgage, is the board's key strategy to reduce risk.

Board revenues

Interest income on investments

Interest income on these investments totaled $241,410 for 2015/16. In 2014/15 investment income was $254,063 and in 2013/14 it was $245,792. The small decrease between 2015/16, 2014/15 and 2013/14 was due primarily to a small decrease in total fund investment, caused by an increase in claim payouts, and a small decrease in short term rates.

Contributions

The amount of money flowing into the fund from check-off fees was $109,267, compared to $110,083 in 2014/15; a decrease of $816.

Board expenses

The board is authorized to use the producer fund to:

• Pay valid claims (which are recoverable from the defaulter).
• Offset the cost of determining financial responsibility (one component of licensing)^{footnote 4[4]}.
• Pay board expenses.
• Pay for professional, technical or other assistance to or on behalf of the board.

Total board administration expense (excluding claims payment) in 2015/16 was $227,524 (this was $8,726 under budget primarily due to less administrative support needed). The total includes the costs incurred in the determination of financial responsibility of livestock dealers, the actuarial study and other board administration support.

Financial position

As at March 31, 2016, the fund balance stood at $7,103,567. This is a decrease of $263,983 from March 31, 2015. See Appendix 3: audited financial statements.

The table below shows the budget to actual and the variance for 2013/14 fiscal, 2014/15 fiscal and the 2015/16 fiscal.

5. Discussion of performance targets

In its 2015-2018 business plan the board identified key priorities for action. What follows is a brief summary of key accomplishments regarding each of these priorities in the 2015/16 fiscal year. The table below shows the targets achieved/not achieved and actions to be taken.

Appendix 1: history of claims up to March 31, 2016

Appendix 2: history of claims recovered

Appendix 3: Audited financial statements

Management's responsibility for financial reporting

The accompanying financial statements have been prepared by management in accordance with Canadian public sector accounting standards. Management is responsible for the accuracy, integrity and objectivity of the information contained in the financial statements. The financial statements include some amounts that are necessarily based on management's best estimates and have been made using careful judgement.

In discharging its responsibility for the integrity and fairness of the financial statements, management maintains financial and management control systems and practices designed to provide reasonable assurance that transactions are authorized, assets are safeguarded, and proper records are maintained. The systems include formal policies and procedures and an organizational structure that provides for appropriate delegation of authority and segregation of responsibilities.

The board of directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control. The board meets regularly to oversee the financial activities of the Agency and annually reviews the financial statements.

The financial statements have been audited by the auditor general of Ontario. The auditor general's responsibility is to express an opinion on whether the financial statements are fairly presented in accordance with Canadian Public Sector Accounting Standards. The independent auditor's report outlines the scope of the auditor general's examination and opinion.

Larry Witzel, chair

Jim Wideman, administrator

August 31, 2016

Independent auditor's report

To the Livestock Financial Protection Board and to the Minister of Agriculture, Food and Rural Affairs,

I have audited the accompanying financial statements of the Livestock Financial Protection Board (fund for livestock producers), which comprise the statement of financial position as at March 31, 2016 and the statements of operations and fund balance and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility for the financial statements

Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian public sector accounting standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with Canadian generally accepted auditing standards. Those standards require that I comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

I believe that the audit evidence I have obtained is sufficient and appropriate to provide a basis for my audit opinion.

Opinion

In my opinion, the financial statements present fairly, in all material respects, the financial position of the Livestock Financial Protection Board (fund for livestock producers) as at March 31, 2016 and the results of its operations and its cash flows for the year then ended in accordance with Canadian public sector accounting standards.

Susan Klein, CPA, CA, LPA
Assistant auditor general

Toronto, Ontario
August 31, 2016

Statement of Financial Position as at March 31, 2016

Commitment (Note 6)

See accompanying notes to financial statements.

On behalf of the board:

Original signed by Larry Witzel, chair and Paul Sharpe, board member

Statements of operations and fund balance for the year ended March 31, 2016

See accompanying notes to financial statements.

Fund for livestock producers statement of cash flows for the year ended March 31, 2016

See accompanying notes to financial statements.

Notes to financial statements — March 31, 2016

1. Establishment of the board (fund)

The Farm Products Payments Act designated the Livestock Financial Protection Board (board) as the board to administer the fund for livestock producers (the fund). The fund was established effective June 12, 1982, by regulation made under the Farm Products Payments Act. In amounts stipulated by this regulation, fees based on livestock sales are paid into the fund.

The purpose of the fund is to protect livestock producers against loss through default in payment by a dealer. Effective July 1 2011, producers are reimbursed 95% of an approved claim for any defaults in payments by dealers. The fund seeks recovery from the defaulted dealers of any such claims paid.

Effective February 1, 2016, Ontario Regulation 321/11 was amended to increase fees from five cents to ten cents/head to ensure continued financial stability of the fund.

2. Significant accounting policies

(A) Basis of accounting

The financial statements are prepared by management in accordance with Canadian Public Sector Accounting Standards, including the standards for government not-for-profit organizations.

(B) Financial instruments

The fund's financial instruments consist of cash. short-term investments and long-term investments which are measured at cost or amortized cost.

(C) Revenue recognition

All transactions are recorded on the accrual basis except for fees from producers and claim recoveries which are recorded when received due to the inherent uncertainty regarding the amount and timing of revenue earned.

(D) Expenses

Expenses are recorded on an accrual basis, net of recoverable sales tax.

3. Investments

Short-term investments consist of a financial instrument issued by the Canadian chartered bank that matures in February 2017 and earns 1.41% per annum.

Long term investments consist of two financial instruments. First is a financial instrument issued by a domestic financial institution that matures in February 2018 and earns 1.60% per annum. The second investment is a $4 million first mortgage on development lands in the city of Kitchener, Ontario bearing interest at 5% per annum, payable semi­annually. The mortgage, originally signed December 10, 2004 was renewed with a principal due in full on December 10, 2017 with interest paid semi annually. In the event of the sale or any other conveyance of all or part of the lands, at the option of the fund, the principal and accrued interest shall be immediately due and payable. At any time, the mortgagor can pay all or any part of the principal without notice or penalty.

4. Financial instruments risk management

The board's main objective when managing investment capital is to safeguard its ability to remain as a going concern so that it can continue to deliver financial protection to the livestock producers in Ontario. The fund's investments are to ensure security, liquidity, and maximization of investment income. The board has restrictions in place so that only authorized investments that met these objectives are undertaken.

The nature of the fund's operations means that it is exposed to a variety of financial risks, which includes credit risk, liquidity and interest rate risk. The fund's risk management approach is to minimize the potential adverse effects from these risks on its financial performance. Financial risk management is carried out by the board in accordance with its investment policy as prescribed by a Memorandum of Understanding between the board and the Minister of Agriculture, Food and Rural Affairs. The board identifies, evaluates and mitigates financial risks.

i. Credit risk

Credit risk is the risk that other parties fail to perform as contracted. The fund minimizes credit risk by placing investments only with major Canadian chartered banks and in a fully secured mortgage. At March 31, 2016, all cash and investments were held with major Canadian chartered banks.

ii. Liquidity risk

Liquidity risk is the risk that the fund may not have cash available to satisfy financial liabilities as they fall due. The board seeks to limit its liquidity risk by actively monitoring and managing its available cash reserves to ensure that it is able to satisfy financial liabilities as they fall due. Cash that is surplus to working capital requirements is managed by the board and invested in short-term and long-term bankers' acceptances with major Canadian chartered banks as well as in a fully secured mortgage.

iii. Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market price. Market risk comprises of three types of risk: currency risk, interest rate risk and other price risk. Currently the fund is exposed only to interest rate risk.

iv. Interest rate risk

Interest rate risk refers to the adverse consequences of interest rate changes on the funds' cash flows, financial position and its operations. Due to the nature of the funds' financial instruments, their carrying value approximates fair value and as a result the fund is not exposed to significant interest rate risk. Mortgage instrument where fair value differs from cost is a fixed rate debt instrument which minimizes interest rate changes.

5. Related parties transactions

The Minister of Agriculture, Food and Rural Affairs (minister) and the Livestock Financial Protection Board entered into an agreement, as of April 1, 2010, with the Ontario Beef Cattle Financial Protection Program Inc. (not a related party) to assess the financial responsibility of livestock dealers and to provide administrative and secretariat support to the fund. The service delivery contract expired December 31, 2015 and the minister, the board and the Ontario Beef Cattle Financial Protection Program Inc. entered into a new three year agreement effective January 1, 2016.

The fund paid the Ontario Beef Cattle Financial Protection Inc. approximately $185,000 in fiscal 2016 ($179,000 in fiscal 2015). These costs are included in administrative expenses in the statement of operations and fund balance.

Certain administrative expenses incurred by the board, such as investigative and legal service costs, were absorbed by the Ministry of Agriculture, Food and Rural Affairs and were not included in the statement of operations and fund balance.

6. Commitment

The board has a contract with the Ontario Beef Cattle Financial Protection Program Inc. as noted above. Contractual commitments are as follows: