Saskatchewan Wheat Pool Inc.'s (TSX:SWP) momentum continued into the first quarter of fiscal 2006 as a result of better grain volumes and margins and stronger contributions from Can-Oat Milling. Larger crop production in Saskatchewan, together with improved margins in Grain Handling and Marketing and Can-Oat Milling, allowed the Pool to cut its net loss for the quarter by 50%.

First Quarter Highlights

• The net loss for the quarter was $7.7 million, less than half the $15.6 million loss recorded in the first three months of fiscal 2005.
• Grain shipments for the quarter were up 16% over the previous year's period reflecting strong demand for non-Board grains and oilseeds.
• Producers delivered 19% more grain to Pool facilities in the first quarter of fiscal 2006 as a result of better harvesting conditions and a larger Saskatchewan crop relative to last year.
• The Pool's market share across the three Prairie provinces was 23.5% in the first quarter of fiscal 2006, up from 22.5% a year earlier.
• The Pool's port terminal volumes were up 32% over the first quarter of fiscal 2005.
• The Pool's retail agri-products operations posted sales increases in all major product lines.
• Can-Oat Milling sales were up 8% reflecting strong demand for oat-based food products.
• Total debt at October 31, 2005 was $178 million, $116 million lower than the $294 million at October 31, 2004.

Chief Executive Officer, Mayo Schmidt commented on the quarter. "The fall is a critical period for farmers as they work to complete harvest and prepare their land for next year's crop. Each year presents different challenges and demands. This fall was no different. The Saskatchewan crop was one of the largest in recent history. Wet weather in late September was threatening the quality of the crop. Our team of experienced professionals partnered with our customers and developed creative solutions to support their operations. It is this expertise and commitment that is at the core of the Pool. It is the foundation upon which we will build value in the future for the benefit of all Pool stakeholders."

On December 7, 2005, Statistics Canada released its estimates of the 2005 crop. Saskatchewan produced 30.6 million tonnes of the six major grains and oilseeds, a 17.4% increase over the previous year and 12.6% above the five-year pre-drought average (fiscal 1997 to 2001). Production out of Alberta was 19.3 million tonnes and was 13.1% above the five-year pre-drought average. Excessive rains in Manitoba impacted their crop, with production estimated at 5.0 million tonnes, a 38.7% decrease over last year and 39.0% below the five-year pre-drought average. Overall, western Canadian production, including special crops is estimated at 55.4 million tonnes, which compares to 53.0 million tonnes in fiscal 2005 and a five-year pre-drought average of 52.5 million.

According to the December 9, 2005, Agricultural and Agri-food Canada (AAFC) estimate and the Canadian Wheat Board (CWB), exports are expected to increase by 20.8% year-over-year. The CWB is projecting to export 11.5 million tonnes of wheat, 3.6 million tonnes of durum and 1.9 million tonnes of barley. Last year, total CWB exports were 14.8 million tonnes, approximately 9% below their target of 16.3 million tonnes. For non-Board or open market grains and oilseeds, exports through licensed facilities are expected to be 7.9 million tonnes compared to 5.8 million tonnes in the previous fiscal year. In total, fiscal 2006 exports are estimated to reach 24.9 million tonnes, up from 20.6 million tonnes in fiscal 2005 and in line with the five-year pre-drought average of 24.9 million tonnes.

Overall the quality of Saskatchewan crops (according to the November 16, 2005 Crop Report published by the provincial government) is much better than the previous year. However, the quality varies depending on the crop. Approximately 43% of spring wheat will make the top two grades this year compared to just 19% in fiscal 2005. An additional 40% will grade as number three compared to 21% a year earlier. The feed portion declined from approximately 60% last year to 17% this year. The higher proportion of milling wheat that will receive a number three grading will limit blending opportunities this year. However, the quality of other commodities is good, particularly canola and peas. 96% of canola will make the top two grades this year versus 60% last year, while 78% of field peas will grade in the top two categories versus 69% last year.

While crop quality is expected to limit the full margin potential in the grain handling business this year, the larger than average crop in Saskatchewan and excellent moisture conditions throughout the Prairies provide the opportunity for the Pool to improve its year-over-year financial performance in fiscal 2006. However, good growing conditions next spring will be a key factor in achieving this objective, since the majority of the company's annual earnings and cash flows are typically generated in the fourth quarter.

"The Pool will focus on three main priorities in fiscal 2006," said Schmidt. "We will implement strategies that promote additional efficiencies within our own operations. We will explore opportunities to grow our earnings base and increase our influence in the marketplace by expanding our products, services and customer relationships. And finally, we will work with industry partners to design solutions that address overall system efficiencies and excess capacity in an effort to develop a sustainable long-term economic model that generates increased value for all stakeholders."

The following provides a detailed discussion of Saskatchewan Wheat Pool Inc.'s results for the first quarter of fiscal 2006 ending October 31, 2005.

1ST QUARTER REPORT - OCTOBER 31, 2005

MANAGEMENT'S DISCUSSION & ANALYSIS

SUMMARY OF CONSOLIDATED RESULTS

Sales and other operating revenues for the first quarter of fiscal 2006 were $274 million, which compares to $229 million in the first quarter of the previous year. All of the Pool's wholly owned businesses posted higher quarterly sales.

The Pool broke even at the EBITDA level (earnings from continuing operations before interest, taxes, and amortization) in the first quarter of fiscal 2006. This represents a $2.8 million improvement over the first quarter of fiscal 2005 when the Pool recorded a loss of $2.1 million that included $0.7 million of positive one-time items. Stronger grain volumes and margins, together with increased contributions from Can-Oat, more than offset a reduction in Agri-products EBITDA and higher corporate expenses.

Amortization for the three months ended October 31, 2005, was $6.8 million up slightly from the $6.4 million in the first quarter last year.

Earnings from continuing operations before interest and taxes, or EBIT, for the first quarter of fiscal 2006 was at a loss of $6.7 million, which compares to a loss of $8.5 million last year. EBIT improved by $2.5 million quarter-over-quarter after excluding $0.7 million of positive one-time items recorded in last year's results.

Interest expense for the quarter was $6.0 million (including $1.0 million non-cash) compared to $9.4 million (including $2.9 million non-cash) in the first three months of fiscal 2005. The reduction reflects lower debt levels.

The corporate tax recovery is $2.8 million higher than that recorded in the first quarter of fiscal 2005. The recovery recorded in the first quarter of last year reflected a valuation allowance associated with uncertainties surrounding fiscal 2005 profitability.

The net loss for the quarter was $7.7 million compared to a first quarter loss of $15.6 million last year. This represents a $9.2 million improvement on a comparative basis after excluding $1.3 million in positive one-time items in the first quarter last year. There were no one-time items in the first quarter of fiscal 2006. The loss per share for the quarter was $0.09 per share. The loss per share in the first quarter of fiscal 2005 was $1.72. The weighted average number of shares outstanding used to calculate the per share amounts was 81.8 million for the first quarter of fiscal 2006 (reflecting the 2005 share consolidation and rights offering) and 12.0 million for the first quarter of fiscal 2005.

SEGMENT RESULTS

Grain Handling and Marketing

Total shipments for the Pool's Grain Handling and Marketing segment increased 16% over last year's first quarter. The Pool's non-Board shipments were 62% higher than in the first three months of last year reflecting improved non-Board grain quality relative to fiscal 2005, which drove increased end-use customer demand. The Pool shipped 1.8 million tonnes in the first quarter of fiscal 2006 compared to 1.5 million tonnes last year. Approximately 57% of the Pool's shipments were CWB grains. Last year, in the first three months, 69% of the shipments were CWB grains.

Producer deliveries into the Pool's primary elevator network were 19% ahead of last year at 1.9 million tonnes. The larger crop in Saskatchewan relative to Alberta and Manitoba was positive for the Pool's overall market share, which was 23.5% in the first quarter of fiscal 2006 versus 22.5% at the same time last year.

Total port terminal volumes at the Pool's Vancouver and Thunder Bay export facilities were 1.2 million tonnes in the first three months of this fiscal year, up 32% from the 0.9 million tonnes shipped a year earlier. Shipments favoured the west coast, with the Pool's Vancouver terminal enjoying the bulk of the additional non-Board grain movement.



Three Months Ended October 31
Volumes
(in thousands of metric tonnes)


                                                              Increase
                                            F2006    F2005   (Decrease)
------------------------------------------------------------------------
Primary elevator receipts                   1,922    1,612          19 %
------------------------------------------------------------------------
Primary elevator shipments
 Board grains                                 999    1,049          (5)%
 Non-Board grains and oilseeds                755      466          62 %
------------------------------------------------------------------------
Total primary elevator shipments            1,754    1,515          16 %
------------------------------------------------------------------------
Terminal operations
 Vancouver                                    830      436          90 %
 Thunder Bay                                  374      478         (22)%
------------------------------------------------------------------------
                                            1,204      914          32 %
 Share of affiliates                          129      109          18 %
------------------------------------------------------------------------
Total terminal operations                   1,333    1,023          30 %
------------------------------------------------------------------------
------------------------------------------------------------------------



In July 2005, the Pool and James Richardson International Limited (JRI) began jointly operating their wholly owned port terminals at the Port of Vancouver under an interim consent agreement of the Competition Bureau. In mid-November, the Bureau filed an application with the Competition Tribunal challenging the joint venture and alleging that it has or is likely to result in a substantial lessening or prevention of competition in the Port of Vancouver. The two companies will continue operating the joint venture, named Pacific Gateway Terminals Limited (PGTL), on a status quo basis during the ongoing proceedings.

Since the venture began operating, the Pool and JRI have improved operating efficiencies, productivity, and throughput potential through effective management of combined space, better rail car utilization and shipping capacity. It is the joint venture's position that it is improving the competitiveness of the Port and providing cost competitive service to customers, while adding value in much needed areas of identity preservation, product traceability, food safety, and railcar and vessel logistics.

The Pool's gross margin during the first quarter was significantly better than last year at $18.63 versus $15.84 per tonne. Gross margin per tonne is defined as sales less cost of sales divided by the tonnes shipped for the period. Last year, severe frost damage and harvest delays forced the Pool to incur additional costs in order to meet its sales commitments. This year, even though harvest was somewhat delayed, particularly in northern regions, there was ample supply available because of an early harvest in southern regions and larger than average carry-over of commodities from fiscal 2005.

Segment EBITDA for the quarter was $5.2 million, which compares to $1.5 million ($0.8 million excluding one-time items) in the first quarter of last year. Increased shipments and better margins were partially offset by higher costs quarter-over-quarter. The Pool has included $3.2 million in this quarter's expenses, which represents the entire cost of its 2006 grain volume insurance program. The program provided a maximum payment of $30 million with partial payments being available if production fell by more than 20%. Based on final production numbers and because of the larger crop in Saskatchewan, no proceeds are expected under the Program. Last year, the Pool did not have volume insurance in place.

The larger than average crop in Saskatchewan will be positive for the Pool because of its dominant position in that province. However, with the large carry-over of grains and oilseeds from last year, the large production this year, combined with historically low commodity prices, it is unlikely that the entire crop will trade in fiscal 2006. The Pool currently expects that year-end carry-over levels at the end of fiscal 2006 will surpass the highs set at the end of 2005.

Margins, while expected to exceed last year, will be influenced by limited blending opportunities of lower quality wheat and lower than normal malt barley selections (70% of normal) caused by rain at harvest time. For example, Saskatchewan Agriculture and Agri-food's current estimate of the quality of the Saskatchewan wheat crop illustrates the variation of milling qualities that will be available to end-use customers this year.



Canadian Red Spring Wheat
Saskatchewan Wheat Quality


--------------------------------------------------------
Grade                          #1 and #2     #3    Feed
--------------------------------------------------------
10-year average                       73%    15%     12%
--------------------------------------------------------
F2004 Actual                          95%     4%      1%
--------------------------------------------------------
F2005 Actual                          19%    21%     60%
--------------------------------------------------------
F2006 Estimate                        43%    40%     17%
--------------------------------------------------------
--------------------------------------------------------


Source: Saskatchewan Agriculture Food and Rural Revitalization - Agricultural Statistics 2003 (Final Crop Report 34, December 3, 2004 and Final Crop Report 32, November 16, 2005)

Wheat that grades in the top three categories is considered milling quality. Overall, the milling quality of the fiscal 2006 Saskatchewan wheat crop is in line with the 10-year average of 88%. While the quality is significantly better than in fiscal 2005, a substantial portion of the milling wheat is in the lower grade category, which may pose some marketing challenges for the CWB. For non-Board commodities like canola, peas, and other special crops, quality was significantly better with the majority grading in the top two categories, in line with the 10-year average.

From an annual perspective, the Pool expects better margins than in fiscal 2005 given the larger crop and stronger export program this year. These margin improvements are expected to be tempered somewhat by increased operating and selling and administrative costs associated with grain volume insurance, increased repair and maintenance expenditures, and general inflationary increases.

Agri-products

The Pool's Agri-products segment generated sales of $54.5 million compared to $52.0 million in the first quarter of fiscal 2005. The Pool's retail operations had a solid first quarter with higher sales in all product lines quarter-over-quarter. These increases more than offset sales decreases through Western Co-operative Fertilizers Limited (WCFL). A breakdown of consolidated sales and operating revenues for the Agri-products segment follows.



Sales and Other Operating Revenues - Agri-products Segment
For the Three Months Ended


                                October 31,     October 31,    Increase
($ millions)                          2005            2004    (Decrease)


Fertilizer products                 $ 38.0          $ 38.7        $(0.7)
Crop protection products               9.5             7.7          1.8
Other                                  7.0             5.6          1.4
                               -----------------------------------------
Total                               $ 54.5          $ 52.0        $ 2.5
                               -----------------------------------------
                               -----------------------------------------



Fertilizer sales through the Pool's retail operations more than doubled the first quarter of fiscal 2005. Favourable weather conditions in October 2005 relative to 2004 allowed farmers in many areas to complete harvest on time, leaving ample time for fall fieldwork. Good moisture levels encouraged farmers to restore nitrogen levels in the soil through the application of anhydrous ammonia (NH3). Last year, harvest delays and extremely wet conditions tempered NH3 sales.

For WCFL, fertilizer sales were down from the first quarter last year, which was an unusually strong quarter for the wholesaler and manufacturer. With the prospects of a bumper crop (prior to the August 21, 2004 frost) many customers filled orders early in anticipation of strong fall demand. Sales in the first three months of this year were much more typical of the fall fertilizer season.

Sales of crop protection products through the Pool's retail operations were 23% higher than the previous year's quarter. A lack of any significant frost this fall, coupled with good moisture conditions resulted in the increased application of dessicants and glyphosates, which are used to advance the crop's maturity in preparation for harvest and for post harvest weed control.

Improvements also occurred in other sales, such as agriculture equipment, seed, and equipment rentals and services. Bin sales increased during the fall as farmers sought storage for the larger than average crop in Saskatchewan. Equipment rentals and service revenue strengthened as a result of the increased application of NH3 fertilizer.

Agri-products segment EBITDA for the quarter was a loss of $4.8 million, which compares to a loss of $3.4 million recorded in last year's first quarter. EBIT was a loss of $7.5 million versus a loss of $6.0 million last year. Higher bad debt allowance, which increased due to stronger sales and extended terms to producer customers, was the primary factor for the decrease. Lower supplier rebate revenue in crop protection products this year and heavy competition that pressured margins also contributed to the quarter-over-quarter variance.

Looking forward, moisture conditions and subsoil moisture throughout the Prairie grain-growing region are excellent. These factors, coupled with the high yields achieved this fall, which depleted nutrient levels in the soil, are positive for fertilizer usage next spring and for the Pool's retail operations. However, for WCFL, high natural gas prices have driven fertilizer prices up and that is expected to negatively impact its margins for the full year.

From a producer perspective, it is too soon to determine how higher crop input costs and lower commodity prices will ultimately impact their seeding decisions and agri-product demands in the spring. However, traditionally if conditions are favourable going into the seeding period and there is the opportunity to produce a high yielding, quality crop, farmers will commit the necessary input costs.

Agri-food Processing

The Agri-food Processing segment generated sales for the quarter of $29.4 million, down by approximately 5% from the first three months of fiscal 2005. Can-Oat Milling sales were up 8% to $23.2 million from $21.5 million last year, while Prairie Malt sales were down to $6.2 million from $9.5 million a year earlier.

The sales improvements at Can-Oat reflect stronger sales of finished products, including both flakes and bran, driven by increased demand and growth in the consumption of food products containing oats. At Prairie Malt, lower sales volumes due to the timing of customer shipments coupled with lower sales values were the primary factors for their quarter-over-quarter variance.

Segment EBITDA for the quarter was $5.2 million, up from $3.8 million in the prior year with Can-Oat nearly doubling its quarter-over-quarter contribution. Stronger sales margins primarily associated with improved mark-to-market gains on open sales contracts relative to last year more than offset competitive pressures, production challenges and lower by-product revenues for the oat miller. Prairie Malt's contribution for the quarter was down because of lower sales and lower margins that are being impacted by excess industry capacity and the strengthening Canadian dollar.

From an operating perspective for fiscal 2006, Can-Oat will be adjusting its processes to deal with the Manitoba oat crop, the quality of which is at an all-time low. Total provincial oat production is estimated to be at 40% of normal, only half of which would meet Can-Oat's quality standards. Saskatchewan's crop quality is better than the five-year average, however, much of it is high in moisture, which can impact milling yields.

Capital expenditures at Can-Oat this year are expected to increase by an estimated $1.3 million for hull burning equipment that will reduce its natural gas usage and annual energy costs by more than 60% beginning in the fall of 2006. Long-term positive industry dynamics in the oat ingredient market and Can-Oat's strong market position have prompted it to evaluate a number of expansion options to support future growth.

Corporate Information

Corporate costs for the quarter were $5.6 million versus $4.0 million in the first quarter of fiscal 2005. Approximately half of the increase was associated with corporate capital taxes that the Pool now pays as a result of continuing under the Canada Business Corporations Act in March of 2005. The remainder primarily reflects additional wages and benefits for positions that were vacant last year and have since been filled.

The Pool expects corporate costs for fiscal 2006 to increase over fiscal 2005. This will be driven by new regulatory compliance requirements with respect to internal controls, additional costs associated with the common voting share structure, including printing and distribution costs, the filling of vacant positions, and general inflationary increases.

Annual interest costs will decline from 2005 levels as a result of the $100 million term debt repayment that was made in June 2005. The reduction will be partly offset by an August 1, 2005 interest rate increase of 4% per annum on $150 million of Senior Subordinated Notes that were issued during the company's 2003 restructuring. The company is currently considering what refinancing options may be available in the coming months to further reduce its interest payment obligations. Should the Pool choose to redeem the Notes in advance of their maturity date, certain premiums of 4% declining to 2% effective January 1, 2006 would be required.

On the labour front, a number of collective agreements representing approximately 900 Pool and AgPro employees will be expiring over the coming months, including:


No significant developments have occurred with respect to the issues facing the jointly sponsored GSU/SWP pension plan. Since our last report, the Pool and the Grain Services Union have held additional meetings in an attempt to identify an equitable and permanent solution to the plan's solvency deficit. The meetings were unsuccessful. The Plan's Trustees have also met to consider their next steps. A formal valuation at December 31, 2005 will be conducted to determine the extent of the solvency deficit. This valuation is expected to be completed by March 31, 2006, and will be filed with the Office of the Superintendent of Financial Institutions (OSFI), the federal pension regulator.

Complete release: http://cnrp.ccnmatthews.com/client/saskatchewan_wheat/release.jsp